Thursday, September 9, 2010

Unemployment and Trade

Two important pieces of economic data were released this morning.  The first was weekly unemployment claims, or the number of people who were laid off and showed up to the unemployment office to claim a check.

The number came in at 451,000 for the week.  This does not mean we had a net loss of 451,000 jobs, because the number does not include the number of people that were hired during the week. 

However, anything over 400,000 means we are losing jobs even when you factor in the people that are hired.  The chart below shows how long we have been over 400,000.




The second number was the the trade deficit for the month of July, which came in at $42.8 billion for the month.  To help understand the trade deficit, imagine that you decide to trade baseball cards with a friend.  Your card is worth $10 and his is worth $15.  You swap cards and give him a $5 I.O.U.  You promise to pay him back the $5 in the future.

That is how it works with our country and the others around the world.  We swap goods and the I.O.U. for last month came to $42.8 billion.  We have been running a massive monthly trade deficit every month for many, many years.

This is obviously a tremendous benefit to our country.  Everyone else works hard to produce goods and we exchange those good for pieces of papers called dollars.  The dollars are backed by nothing, and have no intrinsic value.

Over the past 12 months China has wised up to this game.  Instead of taking their dollars and reinvesting it back into America to fund our deficits, they are now buying commodities and companies around the world.  They are exchanging their worthless dollars for assets with real value.

Over the past 12 months they have lowered their dollar holdings by over $100 billion. 

Our deficits are now funded by the Federal Reserve providing banks printed dollars at 0% who then in turn purchase treasury debt at a higher rate.  It is also funded by the Federal Reserve themselves who are just printing money and purchasing debt directly.  The third buyer is now the American public who are selling stocks and piling their savings into treasury bonds. 

After getting slaughtered in the NASDAQ bubble and the real estate bubble, Americans are now piling into the last great bubble: the treasury bond market.  It is horrible to watch the tragedy unfold.

In the meantime China will keep acquiring real assets and building their consumer base internally.  When the dollar collapses China will be left holding all the assets, and America will begin the real financial crisis that has yet to begin.

Wednesday, September 8, 2010

Commercial Real Estate Opportunity

Commercial Mortgage Backed Securities (CMBS) is the term for real estate mortgages that are packaged together and sold to investors, banks, pensions, etc. (Residential mortgages (RMBS) are bundled and packaged the same way)

Data released for the month of August shows all CMBS with a delinquency rate of 8.92%, a new record.

Multifamily (Apartments) - 14.53%

Hotels - 18.92%

Retail - 6.76%

Office - 6.57%

Retail and Office lag multi-family and hotels due to the long term leases in place with their tenants.  Leases usually run 5 years or longer, where multifamily leases run 1 year or less and hotels change nightly.

Why are these numbers important?  Who cares about these investors taking losses on these loans, right?

Here's why:

When a bomb goes off in the financial world investors run for their lives.  It is also very unusual for them to immediately return to the place where they were just burned.

This creates the boom, bust cycle.  It also creates value opportunities for contrarian investors.

Between 2010 - 2014 there are $2.3 trillion in commercial real estate mortgages that will need to be re-financed.  When these loans were made the investors were counting on the CMBS market to refinance the debt.

That market is now non-existent.  The investors have all scurried away.

The majority of these $2.3 trillion in loans are underwater.  There is no possible way they can be refinanced, and no "solution" has been presented thus far by our government or the Federal Reserve on how this problem will be resolved.

The reason I study and work in the commercial real estate industry is because I believe that we will soon enter a government debt crisis in the face of high inflation.

The government who now saves and nationalizes everyone and everything with endless debt, will soon have to choose who it saves.  This is very important to think about as an investor because the government is heavily involved with every market. 

I believe the government will choose to send unemployment checks, pay social security, medicare, and military costs before they save the commercial real estate investors.  They will go after the largest supply of votes.  

If that scenario takes place commercial real estate prices will collapse and tremendous bargains will appear.  They are now artificially propping up the stock market and real estate market.  Will they have the power to hold up commercial real estate too?  Will they have the will?

I don't think so, and I plan on being ready when prices fall.

Tuesday, September 7, 2010

Tracking The Smart Money

Michael Lewis' bestselling book "The Big Short" was about the men who saw the housing bust coming and had the foresight to short both real estate debt and the financial banks. 

What was most fascinating to me from the book was how few people saw it coming. It was really only a handful of men that took action.  Those men have now become famous names and investors follow their every move to see where the "smart" money is moving next.

The two biggest names, the "rock stars", to emerge from that period were David Einhorn and John Paulson.  Paulson personally took home $4 billion in earnings in 2007.

Einhorn and Paulson now hold gold as the largest position in their hedge funds.

A name that has been relatively quiet since the crisis is Michael Burry, another featured star in "The Big Short."  He left the money management business after making his riches, but he has recently returned to the game.  Bloomberg sat down with him in the interview below.

His favorite investments?  Gold and farmland.

What is he still very nervous about? Real Estate.



Monday, September 6, 2010

Tectonic Plates Shifting

I heard a great analogy this weekend listening to an interview with financial analyst Jim Rickards.  In the interview he mentioned that the current financial environment is similar to walking on along the surface in California.

To the everyday person things may feel very calm during their afternoon walk.  However, if you were walking with a geologist, he may be able to determine that the plates under the surface were very unstable and that there was the potential for a tremendous earthquake at any moment.

He could not tell the exact moment it would occur, but he knew based on the tectonic plate movement that disaster was almost inevitable.

I imagine this is how astute financial investors felt between 2005 and 2008 as we led up to the credit crisis.  You could use tools, data, and common sense to view that under the surface there was significant pressure building, however, to the average American everything felt normal with no danger in sight.

I feel the same way about the current financial environment we live in today.  Under the surface on a daily basis I see indicators that show a troublesome culmination of pressure building.

As was the case before, these indicators are not visible to the untrained eye.

One of these indicators is the continued credit problems in Europe, something that has essentially been forgotten by the mainstream media.  The spread or "cost" to purchase Greek debt is now back close to the all time highs of just a few months ago.

July data released this weekend shows Greek residents and businesses continue to pull their money out of the country and deposit it into accounts in Switzerland.  (Assuming that is the location based on the recent strength of the Swiss franc)  The same pressures are building in countries like Spain and Portugal.

The investment community, even with the trillion euro lifeline by the IMF, does not believe that the problem is solved.  They are still betting their money that Greece will ultimately default.

This past week, in a very quiet move, the IMF announced the formerly capped lifeline to European countries as now being unlimited.  They see very big trouble on the horizon.  The IMF is the equivalent of America's Federal Reserve, except it is the world's central bank.  By unlimited support, they mean unlimited printed dollars.

On our side of the ocean the danger can be seen in our economic data deteriorating across the board.  This has made the ongoing depression that we entered in December 2007 once again visible to those making investment and hiring decisions.

The major reason that things appear so calm on our surface is the unprecedented level of government support to keep the economy artificially propped up.  Americans can now receive unemployment checks for a total of 99 weeks because of the recently reinstated Emergency Unemployment Claims.

This has been a tremendous boost to the economy as the effects of unemployment have yet to truly be felt.  In addition to this boost we now have close to 20% of American mortgage holders not paying their mortgage.  This former cost now goes directly into their pockets or to the store to purchase a new ipad.

The government has just announced another $50 billion spending bill designed for roads, rails, and runways.  This will be another effort to create additional government jobs.  The government now supports the housing market, too big too fail banks, auto companies, the military, medicare, social security, its army of Federal workers, and sends checks every week to the unemployed.

This is all financed through the issuance of debt every month, and this debt is now in large part purchased by the Federal Reserve.  This scenario, also known as a ponzi scheme, cannot last.

However, on the surface today everything appears calm.  It takes the financial form of a geologist to be able to peer under the surface and view the troubling tectonic movements.

The time to prepare for an earthquake is before it comes, and there is definitely one on its way.