>From care-worn, to carefree to careless...sic transit gloria money.
Wednesday was St. Valentine's Day. It put us in as dewy-eyed and sentimental
a state of mind as we ever get these days.
We remembered happier times - when we walked arm-in-arm along the banks of
the Thames, when a pound and a dollar were almost the same price, and when
we could
buy shares at 5 times earnings.
We were younger then, but far from carefree. In fact, a young man frets a
lot more than an older one. He has more to fret about. As a man ages, he
realises that the fretting is largely a waste of time; that most things
don't really matter...and that he can't do much about those that do matter,
anyway.
But money is a special case. As the years go, most of the soucis people once
had about financial matters cease to matter to them. Then, all of a sudden,
they start to matter again.
In the early 1980s, you could buy a nice apartment in central London for
$200,000. That's dollars, dear reader - American dollars! That was before
the dollar headed down against sterling...and before London property took
flight.
When the dollar fell after 1985, investors were alarmed...then resigned.
After the initial panic at the falling greenback, Americans got used to it.
Now, with the dollar worth only about half as many pounds as it was a
quarter of a century ago, no one worries about it. It doesn't seem to
matter.
But mattering matters. Worrying is under-valued.
On Monday of this week came news that the U.S. trade deficit hit a new
record last year - $763.6 billion, but did it matter? It didn't seem to.
People have become accustomed to record trade deficits. Each year brings
another one, like a new calendar. Nobody thinks anything of it.
It used to be that the trade deficit numbers would set off alarums - like
the buildup of carbon monoxide in a mine shaft. Investors would have heard
the whistle and rushed up for fresh air. They would have sold off the
high-deficit currency in favour of one that was safer, the one with a trade
surplus. The result? The trade imbalance would right itself automatically.
But now, people pay no attention. All the carbon monoxide in the air simply
makes them drowsy. And the deficits keep mounting up.
But the less we care about things, the more we will eventually have to care
about. Had investors panicked on news of last year's trade deficit, they
wouldn't have so much to panic about this year. Today, the trade deficit is
$47 billion higher. And still they don't panic.
Among the many panic-free things are the money supply figures. A little blip
up used to send the bond market into fits of hysteria. Investors (the
so-called 'bond
vigilantes') would dump their bonds, sending yields upwards. Higher yields
chilled economic activity, which had the effect of reducing both money
supply increases and consumer price inflation. Problem solved.
But who pays any attention to money supply numbers any more? No one. They're
as irrelevant as a monk at a mobster's convention. But simply because they
don't seem to matter anymore, they matter more than ever. All over the
world, the traditional measures of money are increasing 2 to 3 times faster
than the economies they feed. New forms of money - supplied by the financial
intermediaries - are increasing even faster. All this unchecked new money
makes each unit of old money just a little shakier.
Take family finances, for instance. We learned recently that the average
person in Britain had debt equal to
1.4 times his income - or a total of £1.3 trillion worth. Last year, there
were 17,000 repossessions in the country...and currently 400 people go broke
every day. One estimate told us that more than half the nation would be out
of cash less than 3 weeks after losing a job. These figures are even worse
in America, where private debt to private income just reached a new record
high of 1.75 times.
It wasn't always so. As recently as the 1980s, people still cared about how
much debt they carried. As the bills mounted up, bill-payers reacted. They
cut back spending and increased savings. As if by magic, the problem
corrected itself. Less spending led to less debt.
What people took for absurd in a more level-headed era, they now take for
assured. They go from being care- worn, to being carefree, to becoming
careless. Last week, we reported on the latest U.S. government budget.
We remember when Republican politicians could hardly show their mugs in
public after allowing a budget deficit. They felt personally responsible for
it. They looked upon it as a stain on the national credit record...a blemish
on the nation's escutcheon.
Deficits were a burden on the taxpayers...a threat to
the dollar.
Now, a Republican president proposes the most insouciant spending in history
and who objects?
'Deficits don't matter,' is the accepted maths. You might as well howl up a
rainspout in Azerbaijan as deny that solemn truth.
In the old days, when deficits still mattered, the old knees jerked up
against them. Senators railed.
Congressmen ranted. Every dime of deficit spending was yielded up as if it
were a foot of no-man's land; every conservative imagined himself Petain
holding Verdun against the Huns. And as long as they still had a little
deficit-fighting fire in their bellies, deficits weren't allowed to sprout,
let alone grow.
People used to worry about paying too much for stocks, too. A quarter
century ago, you could have bought almost any stock listed in New York or
London for less than 10 times earnings. Now, you struggle to find one that
is less than 20 times earnings. When the price of shares still mattered,
investors bucked and bridled as shares rose. They had seen what had happened
to stocks in the 1970s. They didn't want to be saddled with over-priced
shares again. But the longer shares rose without serious interruption, the
less high prices bothered them. They stopped thinking that stocks might
fall; instead, they couldn't stop thinking how much they would rise. And now
there's only more to think about. The Dow represents much more capital at
12,000 than it did at 1,200.
We see the same spirit in the property market. Just this week the Gherkin
Building - a landmark architectural masterpiece, shaped like a bullet - set
a new record for London, selling for $1.2 billion.
As recently as 7 years ago, people still bought REIT's for yield. Sam Zell's
empire, Equity Office Properties, for example, sold at only half its current
price. At that price, investors could get a yield over 7%. But in the great
real estate boom of the 2000-2007 period, even a 7% yield began to seem
paltry. Property itself was going up by 20% per year...even more in many
areas.
London and New York - the two big rock candy mountains of the financial
industry - hit record after record.
As prices rose, worries receded. People do not pay to worry. And if they're
going to worry they're not going to pay. Just look at the prices; property
investors must be more carefree than ever.
EOP enjoyed net operating income of $2.04 billion in 2006. If the final deal
cost Blackstone $40 billion, the "cap rate' of the business would be very
near to 5%
- or the equivalent of 20 times earnings. But however good it is in 2007, it
was twice as good in 2000. EOP was twice as expensive in '07 as it was in
'00. Its yield today is barely a third of what it was back then.
If investors still fretted, they'd worry that paying twice as much would cut
the returns in half. Or worse.
Then again, if they still fretted...they never would have done the deal; and
they wouldn't have so much more to fret about in the future.
Regards,
Bill Bonner
The Daily Reckoning
Bill Bonner in Paris:
It's the Battle of the Bubbles, dear reader. No, we're not talking about
hedge fund managers out on the town, squirting each other with Dom Perignon.
This is different...but it still might be fun to watch.
Everything is hunky dory, of course. Nothing to worry about. Really. Ben
Bernanke just said so. Who wouldn't believe the world's most powerful
central banker on a matter of money?
Bernanke told Congress on Wednesday that he saw no compelling reason to
tinker with interest rates; why should he, when everything is going so
swimmingly? On
Thursday, all three Dow indices hit new all-time highs.
Frankly, we're getting a little tired of the whole thing. All this happy
moderation, we mean. We'd like to see a little action...a little
clarification...a little vindication.
Do you see what we're getting at, dear reader?
Everything is going along just fine - except for everything that matters.
But what matters most is what appears not to matter at all. (More below...)
And right now, what appears not to matter are two related things. First, the
bubble in US residential housing is steadily losing air. And second, the
bubble in worldwide liquidity is getting bigger than ever.
Foreclosures in the Denver area, we found out yesterday, are running at 5
times the level of 2003.
According to the local news from Denver, there are whole neighbourhoods that
are sinking under foreclosure. In some of them, as many as one in four
houses are in foreclosure. Imagine if you owned one of those that wasn't?
You couldn't expect to sell for a reasonable price - if you could sell at
all.
Sub-prime lenders are taking a beating. HSBC, which decided to get into the
mortgage lending business on the wrong end - where the customers didn't have
any money - recently issued the first profit warning in the company's
history. And the firm has been around since before John Wilkes Booth put a
bullet through Abe Lincoln's head. Century Financial also announced
extraordinary charges resulting from bad mortgage loans. And the sub-prime
lending firm Ownit actually went bust, after realising that its customers
neither owned it nor could pay for it.
The great residential property money machine is on the fritz. Normally and
naturally we could expect an economic slump in the US. It is a consumer
society, after all. Consumers have come to rely on rising house prices in
order to continue spending at the rate to which they have become accustomed.
No rising house prices = no equity to 'take out' = no money to spend.
We just read about a Ms. Lehn in Minneapolis who is facing 20 years in the
state pen. Her crime? She decided to 'take out' equity before there was any
equity to take out. She defrauded lenders into lending more than the actual
sales price, thereby liberating future equity for use currently.
She hasn't been sentenced yet, and it's none of our business, but we urge
the judge to go easy on Ms. Lehn.
For what did she do that the whole nation did not?
Except for lying on a few documents? Homeowners as well as the feds
themselves have all been taking from the future, by running up debts that
will have to be paid out of money that hasn't been earned yet.
As the bubble deflates, you would expect that it would be harder to pay
those debts...and that a lot of people won't be able to do so. Thus, real
estate agents might want to consider their career opportunities in a new
light. Instead of becoming waiters, they might want to get into
foreclosures, work-outs, debt management, and bankruptcy - all sure to be
growth industries.
But wait. The other big trend that people don't think matters takes us in
the opposite direction. While the U.S. housing bubble loses air, the
worldwide bubble in liquidity gets huge new gusts of it.
Ed McCarthy fills us in:
1. Over the last five years, the balance sheets of
the Investment Bank community have expanded exponentially. We include all of
the major foreign Financial Institutions of this calibre as they already are
as much or more investment as they are commercial. In the aggregate,
globally, the total footings of these majors is well over
$7-8 Trillions.
2. Hedge Fund total assets have grown from $300
Billion to approximately $1.4 Trillion and the leverage on top of that is
unknown but, in all probability, at least another 1 ½ to 2 Trillion.
3. Private Equity funds availability has gone to
approximately $1.1 Trillion and the Leverage can be as little as 4 or 5
times cash flow on the deals they are in or as much as 10, 12 or even 15
times.
4. Credit Default Swaps have grown from less than $1
Trillion to $14-16 Trillion in the United States and at least $26 Trillion
globally as last reported by the BIS and probably substantially more. Our
theorem here widens to include a hypothesis. The buyer of a CDS may simply
be taking out default insurance. On the other hand, we cannot but theorise
as was and as continues to be the case in the mortgage industry where, much
more massively but still there, the Government Sponsored Enterprise's (GSEs)
could load up their balance sheets to over $3 Trillion and take on an
equivalent amount in contingent liability through their ability to
Guarantee. The same, in a somewhat different way pertained in the Municipal
Bond Insurance Association (MBIA) and Mortgage Guarantee Insurance
Corporation (MGIC) world.
And thus is the stage set for the Battle of the Bubbles. Will the rush of
money and credit into global markets overwhelm the hiss of air coming out of
America's deflating property? Or will the jagged end of the U.S. housing
wreck prick the big bubble and cause the whole thing to pop?
We don't know...but we still go out every morning and hoist our "Crash
Alert" flag anyway. Just in case.
More news:
--------------------
Robin Mackrill in campaigning mood:
- Okay here's the deal. When you're old and infirm and no-one wants to
know...perhaps not even your so called 'nearest and dearest' - did King Lear
have a pension plan? - don't come to us looking for money.
- What we will do though, is encourage you to help yourself while you can.
That means you putting away some of your hard earned to make sure your
"golden years" don't end up alchemically reversed into leaden ones.
- Such has been and is the UK government message to its aging population. It
does this by using the manipulative carrot of the tax system to encourage
responsible folk to action. If you put in so will we they say, and we'll
make sure your profits are tax free too all the way until the day you
retire. We can't say fairer than that now, can we?!
- What is rarely mentioned is that many years after you have fallen for this
line and completed a lifetime's saving...they'll make sure it's taken away
too. The problem is though, the game's changed. In the old days people were
so knackered by the age of 65 they didn't last long. These days they keep
going and going long after the actuarial mortality tables say their spot in
the turf should be displaying a healthy crop of daisies.
- Not only that they're windsurfing...parachuting and all sorts. The notion
of Grandad sitting in front of the fire, smoking a pipe and wearing his
carpet slippers is one that's gone the way of black and white TVs and
Hillman Imps. We can't afford to fund these action OAPs says the State.
We're not picking up the pieces either says the corporate world we've got
enough problems with what we have. So the buck stops with you, dear reader.
- So like a good citizen you work and save and work and save until, with
luck you have accumulated a large enough pile of money to live on without
having to wrestle with the daily grind. Then, though, a new problem rears
its ugly head. You must give this bag of cash to someone else, in exchange
for a modest but reliable 'income' which will last you to the end of your
days, and perhaps your spouse's too. After that it's gone, swallowed in the
maw of some faceless insurance company.
- Some folk protested this was a swindle and a rotten deal akin to the type
of stunt once favoured by Dick Turpin. Hey, that's a lifetime's savings
you've just grabbed and I didn't even want to give it to you!
- Hope duly appeared with the introduction of shiny new rules in April 2006.
Here was an opportunity to avoid being forced to part with your pension
'pot' lock stock and barrel by age 75 latest. You could continue as
before...and pass on the remainder when you're time is up to those of your
choosing.
- Good news...until the Chancellor stood up last December and said - the
people want to do this and we're not having it! We're losing out and besides
it was only intended for obscure religious sects with tiny followings that
object on religious grounds to being railroaded by the State. And they're
the minority? Less spiritually persuaded types who do this from now on will
be taxed back into the 1970s he declared! The Iron Chancellor duly slapped
an 82% tax rate (maybe even more in some cases, we hear) on those who dared
act on such a heretical idea.
- Some take issue with this backtracking from the newly shiny to the
decidedly tarnished. Surely a middle way can be found? The late Milton
Freidman, no fan of State coercion in any guise, doubtless would have had a
view on the subject. In his book Capitalism and Freedom, he specifically
listed some areas where the (US) government should keep its nose out of, one
such was "compelling people...to spend a specified fraction of their income
on the purchase of a retirement annuity."
- More recently, actuary Andy Bell of A J Bell takes up the cudgels with
this latest development. Yes, he says by all means take your slice to
compensate for the tax breaks given as and when we drop off our perch...but
82%! That's out of order...and discouraging those with intentions to save.
Oh and by the way can you reassure me of a sneaking suspicion I have long
harboured that compulsion to buy annuities helps keep government borrowing
costs down - given annuities must buy government gilts. Naturally enough, Ed
Balls - a leading candidate as the next Chancellor - denies the charge but
mentions that "HMRC will be consulting with interested parties about the
proposed changes..."
- This is clearly an issue that disturbs the domestic calm in households up
and down the land. And should it rankle with you dear reader, there is a
modest gesture you can make at this moment. There is an online petition via
the No. 10 website that could make your voice heard in the "consulting"
process at the heart of government. It can be accessed via this link:
http://petitions.pm.gov.uk/annuities/
(Pension) power to the people.
-----------------------------------
And more views from Bill:
*** The scientific community seems to be unified in the belief that global
warming is a threat. And not for the first time. This from Porter
Stansberry:
As Dennis Gartman reminded me today, a 1975 Newsweek cover story proclaimed:
The evidence in support of these predictions has now begun to accumulate so
massively that meteorologists are hard-pressed to keep up with it. In
England, farmers have seen their growing season decline by about two weeks
since 1950, with a resultant overall loss in grain production estimated at
up to 100,000 tons annually... Last April, in the most devastating outbreak
of tornadoes ever recorded, 148 twisters killed more than 300 people and
caused half a billion dollars' worth of damage in 13 U.S. states. To
scientists, these seemingly disparate incidents represent the advance signs
of fundamental changes in the world's weather. The central fact is that
after three quarters of a century of extraordinarily mild conditions, the
earth's climate seems to be cooling down. Meteorologists... are almost
unanimous in the view that the trend will reduce agricultural productivity
for the rest of the century. If the climatic change is as profound as some
of the pessimists fear, the resulting famines could be catastrophic."
*** Yesterday, we looked at Japan. We're long Japan, we said. Today comes
word that Japan's economy is expanding at its fastest rate in nearly 3
years...and twice as fast as the US. Japanese stocks, too, are in an upward
trend.
We don't claim to know anything about Japanese companies. It is the yen that
draws us to them. Our guess is that the yen will go up. If that happens, a
yen-denominated stock should go up too.
The yen is perhaps the most un-loved major currency in the world. The only
people who seem to like it at all are those who borrow it; and they do so
only to be able to trade it for some other currency. The yen has become like
the poor boy your daughter gets to take her to the party - so she might meet
someone she really likes!
But the beauty of the investment world is that the nerds and rejects get
their moments of glory too. The yen - disrespected by practically everyone -
must be ready for a little upgrade.
Ian Davis gives us a little background:
"On September 22, 1985, France, West Germany, Japan, the U.S., and the U.K.
all agreed to a radical revaluation of world currencies. On that day, these
countries signed the Plaza Accord, stating that they intended to devalue the
U.S. dollar in relation to the Japanese yen and the German deutsche mark
through intervention in the world currency markets.
Between 1985 and 1987, the yen appreciated by 100% relative to the U.S.
dollar. A similar revaluation could happen again soon.
Today, the yen is even cheaper relative to the U.S.
dollar than it was in 1985. Furthermore, the amount that Japan exports as a
percentage of its GDP is higher today than it was in 1985, before the yen
was revalued.
If this moderation continues apace, you might expect the yen to remain
low...and still enjoy continued reasonable growth in your Japanese stocks.
If the moderation ends in a frenzy, however, the yen could be revalued in a
hurry, as the yen carry trade is unwound.
Speculators owe billions of dollars worth of yen - perhaps even a $1
trillion. When they go to repay, yen will be the big man on the currency
campus.
*** It's time for a vacation. Do you take vacations, dear reader? We never
take full vacations, because we continue to work. But, from time to time, we
lighten up so as to spend more time with the family.
The next two weeks are school holidays in France. So, we'll get on a plane
on Saturday and go down to Latin America. We haven't been to Nicaragua for
more than a year, and not since Danny Ortega was elected president.
It's getting harder and harder to take a real family vacation, simply
because the family has ideas of its own. The two oldest children are
working...one as a ski instructor in West Virginia, the other on a project
in South America. Jules is in college in Boston. Maria is rehearsing for a
new play in London. The two youngest are the only ones we can take with us.
It should be fun, nonetheless. The beach...the tropical nights...the
stars...the gentle breezes. Of course, we'll be thinking of you the whole
time, dear reader.
No comments:
Post a Comment