Saturday, November 15, 2014

Tilman Fertitta Discusses The Coming U.S. Real Estate Crash

Billionaire Tilman Fertitta, the sole owner of one of the largest restaurant corporations, discusses the coming crash in the U.S. real estate market.

Waiting For The Match As Bank Of Japan Dumps Gasoline On Household Savings

I came across the graphic below this week in an article written by Grant Williams. It shows that Japanese households now hold 53.1% of their financial assets in cash or cash deposits.

For those living outside of Japan, particularly in the United States, this probably sounds insane. However, you must remember the Japanese people have experienced 25 years of relentless deflation. Deflation means the cash you own today purchases more goods tomorrow. The value of your money is increasing.

Until late 2012, the Japanese stock and real estate markets experienced 23 years of declines. Imagine stocks and real estate peaking this year in the United States and declining for the next 23 years. What percentage of their assets would Americans hold in stocks and real estate in 2037? Probably close to 0%. Just like the Japanese today.

The sad part of this story is just as the Japanese have put their entire life savings into cash, the Bank of Japan (their central bank) has declared war on those savings. Most of their citizens will see the purchasing power of their savings decimated in the years ahead. The Bank of Japan has promised to unleash an unlimited amount of QE (and have kept their promise so far) until inflation reaches 2% and beyond.

At what point will psychology shift for the Japanese households holding this mountain of cash? When will they realized the value of the purchasing power is slipping away like sand beneath their feet.

More importantly for investors globally; where will this ocean of capital move? My guess is that it will move into stocks (both foreign and domestic) and precious metals. With interest rates sitting close to 0% for Japanese government bonds they now provide the same returns as cash with far more risk.

For more see: How The Japanese Economy & Financial System Will Implode

Marc Faber More Bearish On U.S. Stocks At Higher Prices: CNBC Confused

Marc Faber tells CNBC he has become more bearish on U.S. stocks as they have risen in price over the last two years.

The CNBC host asks him to confirm this strange analysis because she hears from everyone else coming on the network (those that make money by selling U.S. stocks to investors) that stocks only become more attractive as their price rises.

Here is the go to chart for financial network talking heads in the United States:

QE has driven U.S. stock prices, not profits:

24% Of Millennials Expect Student Debt Forgiveness

I think there was a subtle shift that occurred as America watched the debt markets collapse in 2008. It became clear watching the response to the crisis that Americans who borrowed responsibly ended up being punished and paying for those that borrowed recklessly (this was a worldwide phenomenon but the U.S. subprime crisis took center stage).

Some Americans bought a home in the early 2000's, refinanced and took about $100,000 out in 2003, then refinanced and took another $100,000 out in 2005. They used the money to buy lavish goods, travel, and live the good life. Their mortgage was sitting at 100% of their home's value, but who cared? They knew in two years it would rise another $100,000 and they could take that money out and spend it.

Then home prices collapsed, and they walked away handing the keys to the bank. Those that contributed large down payments, did not borrow against their home and continued to make payments on a home that may have been underwater ended up being the losers.

Flash forward to today where the same exact scenario is occurring in the world of student loans. Any young person with a pulse has the ability to borrow an unlimited amount of government backed (tax payer) funds for college tuition, housing, books, food, clothes, partying, etc. Why would they do this? A poll released this week from the Junior Acheivement and PwC US showed that:

24% of Millennials Expect Student Debt Forgiveness.

Part of this assumption is already baked into the cake. The Consumer Financial Protection Bureau estimates that 25% of the U.S. workforce is employed by a public service employer and many may be eligible for existing student loan repayment benefits, including Public Service Loan Forgiveness.

The youth in America has learned the biggest losers are those that act responsibly. All debts will eventually either be forgiven or purchased by the Federal Reserve because it takes simple math to see that if interest rates begin to rise (or there is not a buyer ready to roll the existing loan) it will quickly become impossible to service the close to $60 trillion in total U.S. debt.

h/t CNBC

Thursday, November 13, 2014

Competition: The Key To The Coming U.S. Corporate Profit Mean Reversion

Advisor Perspectives released a great article this week with the following quotes and chart. Can corporate profits move higher relative to the size of the overall economy...forever? The stock market has priced in that scenario, but two of the greatest investors in history believe mean reversion will eventually arrive.

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” 

– Jeremy Grantham 

You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.” 

– Warren E. Buffett

Wednesday, November 12, 2014

Can Money Buy You Happiness?

Excellent article in the Wall Street Journal this week titled: Can Money Buy You Happiness?

"In short, this latest research suggests, wealth alone doesn’t provide any guarantee of a good life. What matters a lot more than a big income is how people spend it. For instance, giving money away makes people a lot happier than lavishing it on themselves. And when they do spend money on themselves, people are a lot happier when they use it for experiences like travel than for material goods.

In a study published earlier this year, he found that people think material purchases offer better value for the money because experiences are fleeting, and material goods last longer. So, although they’ll occasionally splurge on a big vacation or concert tickets, when they’re in more money-conscious mode, they stick to material goods. But in fact, Prof. Howell found that when people looked back at their purchases, they realized that experiences actually provided better value."

Tuesday, November 11, 2014

Update On The Uranium Sector

The uranium market received welcome news on Friday when Japan announced they have approved turning on 2 of their nuclear reactors within the fleet of 48, which has been dormant since the Fukushima disaster in 2011. Some analysts expect half of their nuclear fleet will be turned back on in the years ahead.

The new demand for uranium, which power the nuclear reactors, comes alongside additional nuclear plant builds around the world. China, India, Korea and Russia currently have 70 plants under construction.

The largest uranium mining ETF "URA" bottomed on Friday at 11.16 and has risen to 14.20 as I write this morning. I began discussing the opportunity in this sector back in May of this year, and I have been steadily adding to positions over the past few months. For more see:

Opportunity In The Uranium Sector

Monday, November 10, 2014

Peak "Cheap" Oil

The key word being "cheap." There will always be oil available in the future, the questions is how much it will cost to extract it from the ground.