September 30, 2011

Weekend Topic Suggestions

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Comment by WMBZ
2011-09-30 03:28:03

Lower Lows in the Cat-Like Real Estate Market
Bill Bonner
Reckoning from Paris, France…

Cash is still king.

Cash is king because non-cash is a commoner and a loser…it’s losing its value. An article in yesterday’s Financial Times, for example, tells that:

“US inflation expectations at lowest point in year.”

In other words, forget inflation. Forget price increases. It’s cash…cash…cash.

Cash on the barrel…cash in hand…cash and carry. You got cash? You da king!

People expect cash to be more valuable. And if we’re right…it will be more valuable.

Stocks, for example, fell yesterday. The Dow dropped 179 points.

And gold. It lost $34.

Another article in yesterday’s financial press told us that “it’s a great real estate market…if you’re rich.”

Why? Because the rich have cash. They’re the kings, queens and jokers too. And now they can use cash to buy other assets at a discount. They get more for their money. When inflation subsides so do prices. And nowhere have they ebbed more than in the real estate market.

A friend sent us an investment opportunity…a 12-unit apartment building in Florida, a block from the beach. What does something like that go for? Well, in the glory days of the bubble in real estate, it might have sold for $3 million. Today, it’s available for $750,000 — with owner financing at 5%.

Let’s see…if you can get $800 per unit per month…whoa…this could be a good deal. Because you can probably cover the cost of operating and maintenance and still get better than a 5% yield. If that is true, over time, you get the building for free.

But the problem with real estate is that every deal is different. Every toilet backs up in its own unique way…and every roof leaks in a different spot. If you don’t know what you’re doing…don’t do your homework…and can’t manage a property, including collecting the rent from people who don’t have much money, you probably won’t do very well.

Here at The Daily Reckoning we prefer the public markets, where the tenants don’t give you hard-luck stories and the paint doesn’t peel. But what we see in the public markets is a lot worse than what we see in the real estate market. Where can you get a yield of 5% outside of housing?

All over the investment world — except for US government debt — yields will probably go up. Cash in king. But cash is probably going to become even more powerful. In real estate, for example, the bad news is not yet fully priced-in. People assume that prices will hit a bottom and then begin going back up again. They figure they just need to buy at the right time and all will be well. But as we keep pointing out, markets are more like cats than like dogs. They play with their prey…killing them slowly while having some fun at it.

Real estate has already been whacked hard. It’s down 30% to 50% depending on where you look. But is that all there is? Is that the end of it? We don’t think so. The trends that worked so happily together to boost real estate to bubble levels have now become surly and uncooperative.

Household income is going down, for example. It is almost back to 1990 levels, erasing 20 years of gains. Who wants to ‘move up’ the real estate ladder when his income is going down?

And the rate of new household formation is going down. Instead of setting up new households of their own, the young…and not so young…are moving back in with mom and dad. The unemployment rate for young people is 20% — near Great Depression levels.

Population pressure is easing. The rate of immigration, for example, is also going down. There are reports of illegal immigrants returning home in such numbers that there are now more leaving than coming. Besides, with so few jobs opening up, who wants to go to all the trouble to sneak into the country?

Most important, the Great Correction is far from over. We’re expecting a long period of stagnation, de-leveraging and depression. Prices don’t go up in a credit contraction. They go down. What we’ve seen so far is probably just the beginning of a long trend that will probably take prices down another 50%.
But wait, we know what you’re thinking. At today’s levels, houses in America are not over-priced. They’re about in line with the very long term trend. They’re about where they should be. And at today’s ultra-low interest rates — mortgages are below 4% — housing is a good deal.

Maybe so. But Mr. Market doesn’t care. Just as he didn’t mind pushing up prices to dizzying heights he also doesn’t mind pushing them down to dreary lows. He’s an equal-opportunity deceiver. First, he made people think that housing always goes up. Now, he’ll make them think that it always goes down. And when he’s finished, you’ll be able to buy a house for about half today’s price.

Of course, then…you won’t want to. Because you will have learned an important lesson that you can pass on to your children: ‘Don’t buy a house. Rent. It’s cheaper.’ Then, perhaps house prices will begin to rise again.

In the meantime…and perhaps for a long time…cash is king.

Comment by combotechie
2011-09-30 06:23:46

(smile)

 
Comment by whyoung
2011-09-30 09:27:44

“In other words, forget inflation. Forget price increases. It’s cash…cash…cash.”

I’m wondering about altered shopping habits and their impact…

Yesterday I had an interesting chat with a guy in line at one of my favorite local thrift stores. He said “Don’t tell anybody, but I don’t buy anything new anymore except food.”

Made me realize I buy very little new anymore as well…
(I’m currently on a mission to replace my muffin and other baking pans with decades old Ecko and Mirro pans that are without that so-called non-stick coating that starts to come off after a not very many uses… The older ones are just plain better IMHO. My mother has pans she’s used since I was a kid and I’m searching for the equivalent of those.)

Took some twenty-something friends shopping on Long Island a few weeks ago and they wanted to cruise the mall. I realized I hadn’t set foot in the mall in literally years.

My point is, I just don’t miss regular retail stores very much.
I can get a shopping-fix for a few bucks (cash only), acquire stuff that I know will last (much of it old “made in America”) or (in the case of the 5/$1.00 paperbacks) pass on after use and have my money go to support charity…

So I’m not willing (or possibly able) to stifle my consuming impulses, but I can profoundly alter them, not only without being deprived but feeling happier.

Comment by palmetto
2011-09-30 09:58:46

Were we separated at birth? I do almost all my shopping second hand. I get twitchy at Wal-Mart and other retail stores. Part of it is the fun of shopping second hand. For this reason I find the retail stores tedious.

He said “Don’t tell anybody, but I don’t buy anything new anymore except food.”

Except I draw the line at underwear. Haven’t been able to bring myself to buy it at a thrift store. I do buy shoes at the thrifts, second hand stores and garage and estate sales, but you have to be careful you don’t get someone else’s fungus. I alway wipe down the inside of the shoes with hydrogen peroxide.

And the other thing that bothers me is the public hygiene of some of our, er, uh, guests from south of the border. Specifically the men, not so much the women. I frequently observe them in the thrift stores picking their noses (and we’re not talking a little swipe here, we’re talking deep and vigorous nostril excavation to the point of almost poking out an eyeball) and then pawing the clothing on the racks or other items. It’s a real gross-out and kind of kills off my enthusiasm. Must be some sort of cultural foible, because with the exception of little kids, this is not the sort of thing I see most people doing in public.

Comment by whyoung
2011-09-30 11:07:57

“Were we separated at birth?”

Possibly…

I attribute some of my attitude to having older parents with pack rat genes and some attitudes reinforced by the Great Depression.

Would spend Saturdays at garage and estate sales with mom and vacations cruising antique shops with both, it was lots of fun. (Dad liked odd-ball mechanical things and had a collection of odd tools and kitchen gadgets… you’ve never seen a mechanical marvel until you’ve seen a Victorian/Edwardian crank powered raisin seeder, apple peeler or cherry pitter.)

(Comments wont nest below this level)
 
 
Comment by whyoung
2011-09-30 11:17:22

P.S. Agree about the underwear.

But when it comes to clothing/textiles a nice does of oxyclean is a wonderful thing. (Recently scored a couple of those vintage printed table cloths at a garage sale, lady sold them to me for almost nothing as she wasn’t able to get some stains out and though they were only good for cutting up for crafts… an overnight soak and they’re great.)

And I admit I am helpless when it comes to my reading addiction… got to have a couple of paperbacks for commuting reading every week or I get twitchy. (Another thing I blame on my bibliophile parents.)

 
 
Comment by Arizona Slim
2011-09-30 09:54:42

But the problem with real estate is that every deal is different. Every toilet backs up in its own unique way…and every roof leaks in a different spot. If you don’t know what you’re doing…don’t do your homework…and can’t manage a property, including collecting the rent from people who don’t have much money, you probably won’t do very well.

Bingo!

This is precisely why I think we’re going to see many of our current all-cash investors heading for the exits in a few years. They’re going to learn (the hard way) about the realities of landlording.

It’s not an easy road to riches.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 17:23:34

“People expect cash to be more valuable. And if we’re right…it will be more valuable.”

Where is the deflation-paranoid, dollar-devaluing Bernanke Fed in this narrative?

Comment by combotechie
2011-10-01 07:05:54

He’s trying to reload but he’s running out of ammo.

 
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 04:57:47

Alpha-sloth was making fun yesterday about the differences between microeconomics and macroeconomics.

I thought of another one: Apparently at least some macroeconomists in key policy positions have an undying faith that incredibly stupid policies, such as a standing commitment to bail out too-big-to-fail financial entities under all circumstances, will fail to produce catastrophic results, such as a plethora of too-big-to-fail financial entities that need bailing out.

What is it about “free” (taxpayer-funded) too-big-to-fail bailout insurance that makes macroeconomists believe it is a good policy?

Comment by alpha-sloth
2011-09-30 20:25:55

What’s the differen$e between micro- and macro-economics?

Comment by combotechie
2011-10-01 07:11:07

In macro economics on can pretend he has a solution but in micro economics he can’t.

 
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 05:22:01

If Operation Twist is supposed to be so good for stocks, how come the market tanked last week on its announcement? Could it be the underlying reasons used to justify adopting the policy overwhelmed its touted effect?

MARKETS
SEPTEMBER 30, 2011

Fed’s Twist May Prompt Bigger Turn
By MATT PHILLIPS

“Operation Twist” might be more powerful than many investors expect.

As the Federal Reserve Bank of New York prepares to release on Friday new details about the central bank’s rate-lowering program, some bond-market strategists have done their own back-of-the-envelope assessment already.

Investors are in suspense over the impact of the Fed’s ‘Operation Twist’

Their conclusion: Operation Twist could in some ways do as much—or more—for the bond market than its predecessor, known as QE2. The program also could prove to be a boost for stocks.

Economic Ripples

The Fed’s latest effort to boost the economy is designed to ripple through markets. Here is one potential script:

A fund manager sells 30-year Treasurys to the Fed.
Now he has cash, but needs to use it to buy something with a better yield and/or similar risk characteristics.
He snaps up some 30- year mortgage bonds.
The seller of those bonds now has cash and may buy corporate bonds.
The seller of the corporate bonds now has cash and may buy ‘junk’ bonds or even stocks.

Comment by combotechie
2011-09-30 06:36:08

Or he may just sit on the cash.

 
Comment by CarrieAnn
2011-09-30 07:10:43

haw ha ha ha haw haw haw ha ha ha ha

He snaps up some 30- year mortgage bonds.

And I’m quite sure the bundle is purely triple A rated. Yeah, good luck w/that one.

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 05:27:19

Is too-big-to-fail alive and well in the euro zone?

EUROPE NEWS
SEPTEMBER 30, 2011

German Vote Bolsters Rescue

Merkel Government Backs Bigger Bailout Fund, but Obstacles Loom in Debt Crisis
BY WILLIAM BOSTON, MARCUS WALKER AND MARY M. LANE

BERLIN—Europe cleared a major hurdle toward boosting the firepower of its bailout fund after Germany agreed to increase its contribution—yet even supporters of the measures warned further moves will likely be necessary to quell the euro zone’s debt crisis.

Germany’s parliament approved legislation to increase the euro-zone bailout fund’s lending capacity to €440 billion ($596 billion) from around €250 billion, and to make the fund more flexible. German Chancellor Angela Merkel managed to scrape together enough votes from her fractious coalition to pass the legislation on the strength of her own parliamentary majority, narrowly escaping the embarrassment of relying on …

Comment by liz pendens
2011-09-30 07:29:50

Borrowing against bailout money is a game changer.

Game on!!!

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 05:32:49

OPINION
SEPTEMBER 30, 2011

Where Are the Bond Vigilantes?

During the Clinton administration, interest rates served to discipline government spending. That vital check is now missing.
By RONALD MCKINNON

In past decades, tense political disputes over actual or projected fiscal deficits induced sharp increases in interest rates—particularly on long-term bonds. The threat of economic disruption by the so-called bond market vigilantes demanding higher interest rates served to focus both Democratic and Republican protagonists so they could more easily agree on some deficit-closing measures.

…Even with great financial disorder in the stock and commodity markets since late July 2011, today’s 10-year Treasury bond rate has plunged below 2%. The bond market vigilantes have disappeared.

Without the vigilantes in 2011, the federal government faces no immediate market discipline for balancing its runaway fiscal deficits. Indeed, after President Obama finally received congressional approval to raise the debt ceiling on Aug. 2, followed by Standard & Poor’s downgrade of Treasury bonds from AAA to AA+ on Aug. 5, the interest rate on 10-year Treasurys declined even further.

Since Alexander Hamilton established the market for U.S. Treasury bonds in 1790, they have been the fulcrum for the bond market as a whole. Risk premia on other classes of bonds are all measured as so many basis points above Treasurys at all terms to maturity. If their yields are artificially depressed, so too are those on private bonds. The more interest rates are compressed toward zero, the less useful the market becomes in reflecting risk and allocating private capital, as well as in disciplining the government.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 05:35:36

Since first seeing this Op-ed last night, I have been trying to figure out what, if anything, in Cochrane’s critique does not apply equally to U.S. bailout policy?

OPINION
SEPTEMBER 29, 2011, 7:00 P.M. ET

Last Chance to Save the Euro
A Greek default won’t destroy Europe’s currency. Bailouts will.
BY JOHN H. COCHRANE

The European debt discussions always paint the alternatives as either bail out countries (really, bail out their bondholders) or break up the euro. In fact, the euro and the European economic union would be stronger if countries can default. For that reason, I advocated letting Greece go a year and a half ago when the crisis first erupted.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 05:39:09

Are politicians threatening the Fed’s independence? Or is the touted independence a straw man description of current political reality?

OPINION
SEPTEMBER 29, 2011, 11:46 A.M. ET

Politicians Are Threatening the Fed’s Independence

Stripping the regional bank presidents of their votes would make the system a weak creature of Washington.
BY FREDERIC S. MISHKIN

Who says bipartisanship in Washington is dead? Although Republicans and Democrats can’t agree on how to tame budget deficits, both want to weaken the Federal Reserve’s independence, which bodes ill for the economy.

First let’s look at the Republicans. Republican presidential candidates have been regularly beating up on Ben Bernanke and the Federal Reserve, with Texas Gov. Rick Perry even going so far as to label the Fed’s recent expansionary policies as close to “treasonous.” Such rhetoric might be expected during a presidential campaign, but in an unusual step GOP congressional leaders issued a letter at the onset of the …

 
Comment by BN
2011-09-30 08:30:47

Flathead robbery suspect identified as Bigfork builder

By GWEN FLORIO of the Missoulian | Posted: Friday, September 30, 2011 6:30 am | No Comments Posted

A Bigfork contractor being held in the Flathead County jail is a suspect in a two-year string of bank robberies around the region involving a motorcycle-helmeted bandit who zoomed away on a dirt bike or four-wheeler.

Steve Norred, 55, is awaiting an initial appearance in Flathead County Justice Court in connection with Wednesday’s midafternoon robbery of the Glacier Bank in Lakeside by a man who fled on a red dirt bike.

Norred was arrested Wednesday night by Flathead County sheriff’s deputies at a traffic stop south of Bigfork, and is likely to make his initial appearance in Flathead County District Court on Friday.

“Obviously we’re very, very pleased,” said Flathead County Sheriff Chuck Curry. “This has been an ongoing case for a very long time covering a pretty wide area.”

Debbie Dujanovic, spokeswoman for the Salt Lake City office of the FBI, which is investigating the case with the sheriff’s office, said the same man is a suspect in five other robberies.

The arrest of one of its own in the highly publicized heists reverberated throughout Bigfork on Thursday. Curry, however, said he wasn’t surprised that the suspect is a local resident, given the location of the banks robbed. Others were a little shocked by the name of the man arrested.

“Stevie … the motorcycle bandit? That’s just crazy,” said Ken Mack, manager of Sliter’s Ace Hardware in Bigfork. Mack said Norred has bought homebuilding materials at Ace for about a decade now. “He’s nice, polite whenever he comes in. … I wouldn’t think he’d do anything like that.”

Mike Roessmann, owner of Snow Country Construction Inc., said his company recently broke ground on a project that Norred also had sought. The recession has struck hard at the Flathead Valley in general and its building industry in particular.

“I don’t think he’s had much work for the last few years,” Roessmann said. “I think it’s part of the problem with the way things are economically. Desperate times make for desperate measures. But I wouldn’t have thought it of him.”

The heists began on Sept. 6, 2009, at Muralt’s Truck Stop in Missoula. A little over a year later, on Sept. 24, the First Intersate Bank in Bigfork was robbed by a short man who wore a black motorcycle helmet with duct tape on the left side and on the front above the visor.

The Glacier Bank in Lakeside - the same one robbed Wednesday - was hit Nov. 10, 2010, by a short man in his 50s who fled on a motorcycle after displaying a weapon and demanding cash.

On April 5, the First Valley Bank in Seeley Lake was robbed by a man in a black ski mask and black sunglasses who rode away on a four-wheeler.

And the Mullan Trail Bank in St. Regis was robbed May 31 by a “thin and tiny” man wearing a motorcycle helmet with a ski mask under it. He escaped on a small red motorcycle.

“That’s just activity that we don’t normally see in this part of the world,” said Roessmann, the contractor. “That’s a tough go. I hate to hear something like that.”

the Daily Interlake in Kalispell, MT delves into Norred’s financial woes:

On Dec. 11, 2009, Norred and his wife filed for bankruptcy according to documents filed through U.S. Bankruptcy Court in Butte. The Norreds cited more than $2 million in debt ranging from a $31 bill in Milwaukee to an outstanding loan of $519,328 through Citi Residential Lending of Rancho Cucamonga, Calif.

That mortgage amount matches the value of a pair of condominiums Norred reported as having been repossessed or surrendered in 2008. Several others of Norred’s belongings and properties were also listed as having been repossessed or surrendered prior to the bankruptcy filing, including a 2007 Pontiac, two 2007 Dodge vehicles, a 2004 Hummer, a 2003 Glastron boat, a motor and a trailer. He also lost two Bigfork properties.

The total value of everything seized was more than $1 million.

Despite the high value of property and claims involved in the case, Norred reported his household income — including that of his wife — totaled just $44,691 in 2007, $69,901 in 2008 and $53,621.23 in 2009. Throughout that period and earlier, Norred worked as a general contractor, doing business as Steve Norred Construction Inc. from 1996 to 2007, renaming the business Flathead River Construction in 2007.

At the time the filing was made, their average monthly income was reported to be $5,298, roughly $200 less than their monthly expenses. Norred and his wife had $93 in cash and $12 between two checking accounts.

Comment by Arizona Slim
2011-09-30 09:56:29

“I don’t think he’s had much work for the last few years,” Roessmann said. “I think it’s part of the problem with the way things are economically. Desperate times make for desperate measures. But I wouldn’t have thought it of him.

I think we’re going to see a whole lot more of this sort of crime.

 
 
Comment by Captain Credit Crunch
2011-09-30 10:28:33

A Topic Suggestion for the Weekend:

What are the dynamics of the bank’s decision to keep a house off market?

I’d like to explore the underlying factors that go into a bank’s choice of when to sell a house it owns. Particularly, I’d like to try to quantify these things using parameters and various functional forms to explore possible futures.

For example, keeping a loss off its books today might be beneficial even given that depreciation is occurring. However, at some point it could deteriorate to 0 (no upkeep) and eventually the bank will have to realize the loss and then it’s obvious that waiting forever is not the optimal strategy. There is some point in between where it makes the most sense to sell.

Comment by palmetto
2011-09-30 11:44:53

They’ll sell when Greece defaults.

Dammit, Greece, please JUST. DO. IT.

 
Comment by palmetto
2011-09-30 11:47:00

“I’d like to explore the underlying factors that go into a bank’s choice of when to sell a house it owns.”

Good lawd, man, if you want to try to fathom insanity, be my guest. The joke’s on us. There are NO logical reasons for any of what’s been taking place. We keep looking for them, but they don’t exist. There used to be, but those days are gone.

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2011-09-30 23:58:09

Double dip recession in the bag?

September 30, 2011, 1:34 PM ET

ECRI Recession Call: ‘You Haven’t Seen Anything Yet’
By Kathleen Madigan

The U.S. is headed back into recession. That’s the word from the widely respected Economic Cycle Research Institute, which uses economic indicators to put together leading indexes.

On its Web site, ECRI said the U.S. economy is “indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.” (Take that, Federal Reserve Chairman Ben Bernanke and President Barack Obama.)

The forecasting firm relies on dozens of specialized leading indexes to support the warning “If you think this is a bad economy, you haven’t seen anything yet.”

Bloomberg
Commodities Record Biggest Quarterly Slump Since End of 2008
September 30, 2011, 6:06 PM EDT
By Elizabeth Campbell and Maria Kolesnikova

Sept. 30 (Bloomberg) — Commodities posted the biggest quarterly drop since the end of 2008 as bearish data on economies in Europe and China added to concerns that the world will tilt into another recession.

This month, European inflation quickened to the fastest since October 2008 amid the region’s sovereign-debt crisis. German retail sales in August fell the most in more than four years. A gauge of Chinese manufacturing shrank for the straight third month, the longest contraction since 2009.

 
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