Emotion, Speculation, And Hopes For Increased Values
Readers suggested a topic on investing. “Can anyone suggest a good reason why gold drops by over 1% a day, ALMOST EVERY DAY? Apparently gold and the stock and housing markets have gone their separate ways. And gold is dangerously close to the 52-week low of $1,322/oz. If it breaches that, what is the next resistance level? Can bonds do terribly if everyone and his dog knows they are going to do terribly? And where would you put your money instead?”
“Good investments: Stocks, Houses, Dollars under the mattress. Bad investments: Bonds, Gold, Bitcoin. Does that about sum up the status quo investing environment?”
A reply, “REITS.”
One said, “They are buying dividend stocks and have run them up. Way up.”
The Toronto Star in Canada. “Adam Frank and his girlfriend MaryAnne, both 29, knew they wouldn’t become homeowners overnight. The two were realistic and grounded in their approach. The couple knew buying a house in Toronto could put them over the edge. When the time came to stop renting and finally buy their first home, the couple opted for a condo.”
“‘We knew what the costs were going to be and we were comfortable with them,’ says Frank. ‘We were renting for three years. We just both knew it was time to invest.’”
Investing in a condo is appealing as these properties generally come with a lower price tag. Royal LePage reports the price of the average condo in Toronto was $356,865. Jennifer Tomic from Toronto knows home ownership is for her. The thirty-seven-year-old is eager stop renting and get into the market. She’s been approved for a mortgage, but doesn’t want a condo. Because of high costs, she’s holding out.”
“‘Trying to find an affordable house on your own is really hard. I’ve tried to recruit my friends to go in on a mortgage with me,’ Tomic says. ‘It’s a business transaction, but trying to find someone willing to invest is hard. I just don’t feel like I have enough money.’”
The Signal in California. “One of my coworkers found himself working for KB Homes during the middle of the residential real estate boom, putting together the analyses or so-called ‘land packages’ for the acquisition of property for the building of tract homes. This amounted to a painstaking and complex process where the analysts would take the price of the land, gross it up for the estimated costs of grading, infrastructure and fees, factor in the costs of tract building based on design, and then add in KB’s desired profit margin to come up with a price for the eventual sale of the proposed homes.”
“The company hit some type of internal crisis in late 2003. Based upon its cost estimates, the analysts found that no family earning the mean income in Los Angeles County could afford one of their homes. So how did KB keep selling homes, in fact hitting a sales record in the first quarter of 2006? Everyone lucid knows the answer.”
“Investors, hungry for yield in an era of what seemed extremely low interest rates, gobbled up subprime, Alt A and other exotic mortgage products, putting families in homes they could not possibly afford when teaser interest rates reset, and leaving them with little choice when the values of these homes would not support conventional mortgages after the coming bust.”
“Add to this rampant speculation the scale of which no one probably captured and the nation cooked up a ticking time bomb. My favorite anecdote relates to a coworker who learned that the lady he hired from time to time to deep clean his second home in Palm Desert once personally owned (and lost) five residences in that area.”
“The subsequent bust and the required de-leveraging caused the Great Recession that began in 2007, and ‘ended’ about two years later.”
“Have we turned the proverbial corner? Recent headlines in the Mighty Signal quote real estate industry folks absolutely giddy and nearly giggly with the state of the market in Santa Clarita, with a dearth of homes available for sale and (again anecdotal) tales of hungry buyers consulting with real estate agents so that homes have multiple offers the minute they hit the MLS.”
“In about 2005 a community columnist/financial planner wrote that houses cost too much in the area, and, indeed, the nation. He based this on something called the ‘rental equilibrium’ rule, explained thusly: Like KB homes, an investor will pay a certain price for a residence if they can expect to collect rental income that covers the cost of carrying that home and allows a reasonable profit. Once the price of homes exceeds this equilibrium, the reasonable people abandon the market, leaving only those driven by emotion, speculation, and hopes for increased values.”
“Perhaps the recent signs of life show that people can finally make a rational economic decision buying rather than renting, and if one can maintain prices within a certain range more sustainable factors can drive the housing market forward, like people moving from rental to home ownership and younger people forming their own households, something also delayed by the Great Recession. After five long years of suffering, anything would seem like a boom!”
‘in late 2003…Based upon its cost estimates, the analysts found that no family earning the mean income in Los Angeles County could afford one of their homes. So how did KB keep selling homes, in fact hitting a sales record in the first quarter of 2006?’
It was in 2003 that subprime lending exploded. And we now know that even prime loans made in the years after were not sound because of the prices. What do we have going on today? A push for lower lending standards. Why is that? IMO, it’s to keep the shell game going. Once on this path, restraint is unthinkable. The central banks and governments have bet everything on stocks and house prices going up. Every month, we get further out on the limb, and every month the idea of stopping becomes more painful to contemplate.
Despite subprime lending nearly causing the complete collapse of the global financial system in 2008, it is already back in vogue, in part due to the high-profile players who profited handsomely from the financial wreckage that was inflicted on the U.S. household sector.
Penny Pritzker’s Subprime Problem
By Rick Newman
May 3, 2013
Penny Pritzker sits with Google chairman Eric Schmidt at a forum at the White House in 2009, while she still worked for Pritzker Realty, the company she created after leaving Superior Bank.
Penny Pritzker sits with Google chairman Eric Schmidt at a forum at the White House in 2009, while she still worked for Pritzker Realty, the company she created after leaving Superior Bank.
The 2008 financial meltdown, fueled by excessive subprime lending, snared many Wall Street titans. But well before that, subprime lending tripped up a billionaire heiress who is now poised to be President Barack Obama’s next Commerce Secretary.
Penny Pritzker, scion of the Hyatt hotel fortune, was a top executive at a holding company that owned Superior Bank, which failed in 2001 and was taken over by the government before being spun off to another bank. Superior paid the government $460 million to offset claims against the FDIC’s bank insurance fund. Yet the failure also left about 1,400 depositors out about $15 million, mainly because they left money in the bank above the federally insured limit, which was $100,000 at the time.
Superior’s failure left a lot of unanswered questions that Pritzker will probably have to address now, as part of her confirmation hearings in the Senate – and there’s a detailed paper trail providing plenty of ammunition for critics. Pritzker, who was Obama’s top fundraiser during the 2008 presidential campaign, has previously blamed the bank’s failure on inaccurate audits and inattentive regulators. But there’s a lot of evidence that Superior’s poor lending practices are what sunk the bank.
Superior Bank was privately owned by the interests of two wealthy families: the Pritzkers, and the Dwormans of New York, whose fortune came from real estate. Penny Pritzker was chairwoman of the bank from 1991 to 1994, then a board member at the bank’s holding company. The Chicago Sun-Times reported that Pritzker took a “leadership role” in the late 1990s as the bank tried to expand its profitability with an aggressive push into subprime lending.
It’s important to note that subprime lending – loans granted to buyers with weak credit – is a normal part of banking. Such borrowers typically pay higher interest rates to account for the higher risk of lending to them, which is perfectly appropriate. Problems have typically developed only when banks underestimate the riskiness of such loans and fail to prepare for higher-than-normal loss rates.
That’s what happened at Superior.
In testimony before the Senate Banking Committee in 2001, financial expert Bert Ely argued, “it appears that Superior became a dumping ground for low-quality, and possibly predacious, mortgages.” He also contended that Superior aggressively sought deposits beyond the insured limits – even when it was on the verge of failure – and that it filed “flawed and clearly erroneous” reports on its financial condition with federal regulators. Ely also faulted regulators for failing to recognize and correct Superior’s shoddy practices in time to prevent the bank’s failure.
…
About the Pritzker family - they spent $millions to campaign for Obama. At least in 2008 and very likely in 2013
http://blogs.suntimes.com/sweet/2008/08/the_power_of_penny_pritzker_bl.html
But as Rio, Polly, and Alpha Slob would say, Pritzkers are great people because they are “P-R-O-G-R-E-S-S-I-V-E.”
I still have not heard from one reasonable person how we can get back to bubble prices, and stay there, without some sort of massive wage inflation. How in the hell does the PTB think they can magically make bubble prices stick? We saw what happens. We were just there for christ’s sake!
‘how we can get back to bubble prices, and stay there’
We touched on this a bit in last weeks WE topic discussion. Boy oh boy, did the media forget all the talk from 2008-09. Remember how every politician and UHS were saying stuff like, “those prices were an illusion” “it was unsustainable”? Now I read articles with experts differing about how long it will take to get back to the peak. And house prices (as measured by the median, which is flawed) are at peak levels in parts of the US, Canada, China and New Zealand. What are they saying in San Francisco this morning? I bet it isn’t “well, we’re back, no higher please.” Most of the market participants likely believe it’s going to the moon!
It’s easy to understand why Bay Aryans want to believe this can go on forever. It’s less understandable how these people in the government and central banks can see this and not have doubts. Is Bernanke just stupid? Does he not care?
My personal theory is it’s an indication of how bad things really are. These people know it, and are so desperate to stay in power they will do anything, consequences be damned.
“Is Bernanke just stupid? Does he not care?”
I suspect that pretending to miss the obvious is part of his job description.
Oh yeah, they’ve made it clear it is impossible for them to identify a bubble before it bursts. No matter that central bankers in New Zealand and Hong Kong, and the King in Saudi Arabia, are openly trying to lower house prices.
“…openly trying to lower house prices.”
Easier said than done, I guess:
China Home Prices Climb as Buyers Defy Government Curbs
By Bloomberg News - May 17, 2013 8:02 PM PT
China’s new home prices rose in all but two cities in April, with housing values accelerating in key centers including Beijing and Shanghai as buyers defied the government’s latest round of property measures.
Prices climbed in 68 of the 70 cities the government tracked last month from a year earlier, the National Bureau of Statistics said in a statement today. The same number of cities posted gains in March, the most since September 2011.
Thirty-five provincial-level cities have issued details of property curbs by an April 1 deadline in response to the central government’s measures imposed in March. Only the capital city of Beijing issued the toughest measures, raising the down payment on second homes and strictly enforcing a 20 percent capital gains tax on existing homes, according to Centaline Property Agency Ltd., the country’s biggest real estate agency.
“Home prices continued to climb because the direct impact of the curbs is hitting on home sales, while it’ll take several more months to slow the prices,” said Lan Shen, a Shanghai-based economist at Standard Chartered Plc. “Policies haven’t been strictly enforced on the local level.”
The southern business city of Guangzhou recorded the biggest increase at 14 percent from a year earlier, and those in Beijing jumped 10 percent. Home prices in Shanghai climbed 8.5 percent, and all the cities that recorded gains had their biggest advances since the government changed its methodology for the data in January 2011.
…
‘Easier said than done’
Well, I don’t know how serious they are. In the spring of 2005 I had a post describing how the Chinese government was cracking down to stop house prices from rising. There are some things being reported which show staggering imbalances in China, so I’m guessing they are worried about putting the brakes on behind the scenes. A lot of this anti-bubble talk might just be for public consumption, because the average person there is angry about house prices. Same in Hong Kong and New Zealand.
There’s a whole lot of stupid over in China. Thank god I don’t live in that dreadful pit.
“[After the first Gulf War] Some people said, ‘Why didn’t you guys take care of Saddam when you had a chance? Why didn’t you go to Baghdad?’” says Bush advisor James Baker. “Nobody asks me that question anymore.” — http://www.pbs.org/wgbh/americanexperience/features/introduction/bush-introduction/
Had Bernanke done nothing and let the financial sector take the losses and we had the Great Recession that we had, people would have pilloried him. There were many poorly understood theories on the table which needed to be tested.
Well… I have a suspicion that when the chapter closes on this episode, no one will ask the central bank to intervene like this again.
“I have a suspicion that when the chapter closes on this episode, no one will ask the central bank to intervene like this again.”
Even the REIC constituents who made out like bandits? You know…the ones who pay those ginormous campaign contributions to whichever politicians are currently in power?
Had Bernanke done nothing and let the financial sector take the losses and we had the Great Recession that we had, different people would have pilloried him.
I suspect that many here who pillory him now would not be in the group that would have pilloried him in your scenario.
‘Surging credit has kept China’s real estate-sector humming in the teeth of a renewed attempt by the government to bring prices under control, supporting short-term economic growth but risking a destabilizing correction in prices down the line. ‘While there has been some moderation in April, there are still many cities with rising prices,’ Liu Jianwei, an official with China’s National Bureau of Statistics, said in a statement. ‘Expectations that prices will continue to rise haven’t been eliminated.’
‘Behind the continued climb in home values, a massive increase in lending starting in the second half of 2012 and extending into the first four months of 2013. Total credit, including bank loans and other forms of finance, rose 64.7% year-over-year in the first four months of 2013, according to government statistics, with a substantial chunk flowing into the real-estate sector.’
‘It’s monetary policy, not administrative controls, that determine what’s happening in China’s housing,’ said Jinsong Du, a real-estate analyst at Credit Suisse. ‘When China loosened credit in the second half of 2012, it was inevitable that transactions would rise, and that made it inevitable prices would rise.’
‘Behind the continued climb in home values, a massive increase in lending starting in the second half of 2012 and extending into the first four months of 2013. Total credit, including bank loans and other forms of finance, rose 64.7% year-over-year in the first four months of 2013, according to government statistics, with a substantial chunk flowing into the real-estate sector.
“Beijing resident Cao Chenggang is counting his luck that he completed the purchase of his home just before the new measures came in. But Mr. Cao worried that the new tax would make it more difficult for his girlfriend to buy a house. ‘You won’t find a single person who’s satisfied with this situation,’ he said.’
http://online.wsj.com/article/SB10001424127887324787004578492601311903868.html
Neuromance wrote:
Whac-A-Bubble wrote:
One school of thought is that the global central banks can, working together, hold economic conditions - certain indicators - within ranges they desire.
Another is that they can exert a strong influence on economic conditions but market forces ultimately will determine economic conditions.
If it’s the latter, and the Uncle Feds of the world are simply introducing massive distortions and stresses in the market which ultimately will damage the system, then the political influencer class, if it feels it suffered a net loss from the policies, will advise against them.
However, if it’s the former, then the Reverse Robin Hood (RRH) policies will continue for some time to come.
And specifically, by Reverse Robin Hood (RRH) policies, I mean policies which reduce the purchasing power and wealth of the populace at large, and increase the wealth of the financial sector.
More specifically, inflation, which erodes the purchasing power of Joe SixPack. And the relentless enticements to take on more and more debt, which erodes J6P’s wealth.
Inflation and debt = RRH policies.
The PTB doesn’t care whether or not the prices stick. THEY already know the exact moment when each inflection point will occur. You and I are the only ones who sweat it.
I’m a smart guy; I guess I should start putting my skills to learn how to rig the system. I’ve always stayed in the sidelines because I am ‘too honest’ and don’t like to take advantage of people or abuse the system. Shame on my parents for teaching me to be honest!
I haven’t lost any money. I moved like 70% of my 401k to bonds expecting a drop in stocks in the near future. And I have been saving cash for years now. However, working a decent FT job and living under your means doesn’t seem enough to be successful nowadays. You gotta abuse the system!
‘doesn’t seem enough to be successful nowadays. You gotta abuse the system’
Seems like several posters here are saying something like this these days. If you have a good job and are saving money, what more do you want? Does being successful mean making a lot of easy money?
Plus one, Ben. Plus two, actually.
1. Save your money because in a deflationary environment cash rules.
2. If you have a good job then keep it. A good job will allow you to earn good money. And earning good money will allow you to do a lot more of number 1.
I’m totally in your camp. I’d rather be relatively poorer and more financially stable than engage in foolish gambles.
I guess what I meant to say was that back in the day being a doctor, engineer or lawyer meant you were doing very well and could have a prosperous life for you and how family (ie, my maternal grandfather was a doctor and he sent 10 out of 11 kids to college and lived a great life). Nowadays, it seems the only who can truly enjoy the best are the one who invest in stock, gamble with housing, become politicians/lobbyists, etc. All those are professions are about tricking the system and abusing others.
“Nowadays, it seems the only who can truly enjoy the best are the one who invest in stock, gamble with housing, become politicians/lobbyists, etc.”
There is a huge media bias towards trumpeting winners and ignoring losers in the casino gambling financial arena.
Very much this. For every successful actor out there, there are tens of thousands who spend their lives waiting tables.
Though I have to concur with Brett’s opinions on this. Asset price inflation has taken over as the #1 goal of our govt/central bank. This seriously harms those who must earn their money from wages or other fixed income sources (like retirees who’ve been hammered this past decade). These inflationary policies have destroyed the purchasing power of Joe Sixpack in favor of “building wealth” for those who don’t work for a living (the very wealthy who make almost all of their money from investment income).
It is a problem. When I passed the CPA exam, I thought that field would have a bright future. But the personal computer and continuing flood of accounting graduates have cut accountant incomes quite a bit. Regrets? I have a few.
My SIL’s ex-husband is a CPA. A decade ago he was making so much money (except for a stint of unemployment in the early-2000s recession) that they were tempted to move up three times over the 2000-2006 period to increasingly large houses in ever more desirable areas. SIL urged us to buy a home as well on numerous occasions as the obvious path to household prosperity.
Roughly concurrent with the 2008 economic crash came the collapse of their marriage and foreclosure on the third Utah house they bought in short succession, at a California price tag.
Now SIL is destitute and raising the kids on her own while her ex-husband is unemployed and possibly unemployable, at least at anywhere near what he used to earn when he was younger and the economy was booming.
I think the story may be different depending on your specialty. A good friend is one step below partner at a major CPA firm. I think their specialty is revenue recognition (or something to that effect). She is ALWAYS slammed with work, and frequently complains that they can’t find qualified people to hire.
Another medium sized firm we know well just went through a round of layoffs because they overhired. They are a more traditional tax/audit firm.
And Whac, your comment about trumpeting winners and ignoring losers is VERY apt. ISTR reading that if you take out the return for Google and Facebook over the past couple of decades, venture capital is on an overall basis a net money loser, but people think that Venture is a sure winner because successes like Instagram and Facebook and Google get all the press.
The reality is that it is a big casino. One of the winners on Facebook had their prior two (or maybe three) funds as big losers. Apparently Kleiner Perkins just had a meeting with investors about their poor performance (they were investors in Fisker).
At the end of the day, I think this is gambling that I’m OK with…while all the investors in failed enterprises lose money on the specific losing bets, at the end of the day, the winners help grow the US economy as a whole and create jobs.
We should all be glad that the VC industry exists, and don’t be too envious of the VCs or their investors–some get lucky, lots don’t. But overall, the rest of us are the beneficiaries of the capital that is invested.
Given all this, is venture investment malinvestment? That is incredibly hard to say. However, I would much rather have a thriving VC industry than not…it attracts brains to our country who sometimes give up on creating the next Google, but end up adding a lot to existing enterprise here.
How is he unemployable?
“At the end of the day, I think this is gambling that I’m OK with…while all the investors in failed enterprises lose money on the specific losing bets, at the end of the day, the winners help grow the US economy as a whole and create jobs.”
I’m fine with it, too, provided the gamblers are not too-big-to-fail and don’t expect the U.S. tax base, monetary base, or whatever, to make them whole in case their gambles don’t pan out.
I’d go so far as to suggest that the difference between productive venture capitalism and unproductive investment banking is the free U.S. taxpayer backed too-big-to-fail insurance policy which Wall Street’s Megabank, Inc enjoys but (so far as I am aware) the Kleiner Perkins and other Silicon Valley VC firms do not. Free government-provided insurance encourages foolish gambles, while knowing that you stand to lose money if your venture doesn’t pan out discourages them.
“How is he unemployable?”
I qualified that statement with “possibly” because on the face of it, he should be employable, as he is a bright, handsome guy from a good family with lots of work experience at good firms. The sad reality is that he has struggled to find work since the onset of the Great Recession, as he is a fifty-something accountant competing with thirty-something accountants who are willing to work crazy hours for less pay. His last gig was a temp position over a few months time, and the latest I have heard has been that he did not yet find another position after that one ended. My guess is that he will eventually find another opportunity in his field, but at less pay and prestige than at the peak of his career.
Most traditional VC firms that I know get no such government handouts and are not too big to fail (they fail all the time)…yet Dodd Frank is effecting their business negatively…
Rental Watch wrote:
Complexity breeds loopholes. It’s just that simple.
If they sincerely wanted to address the causes of the Great Recession, they would have done two things:
1) Separate consumer deposits totally from financial company’s gambling operations.
2) Force lenders to retain repayment risk. So that when a loan fails, they lose more money than they make. Period.
But to the Political Influencer Class, there’s big money in continuing the failed system. So Dodd Frank becomes a Rube Goldberg exercise designed to mislead the public while continuing the previous system. A classic example of running in circles to make it seem like one is doing something. All while assiduously avoiding the core causes, because they are quite lucrative to the political contributors.
I would alter #2:
2. Make it illegal to opine on the credit quality of a debt instrument if more than 5% of the money was lent to borrowers who didn’t prove income and ability to repay at the highest possible interest rate under the loan.
The biggest problem was banks lending to people without documented evidence of their ability to repay…and those mortgages could be resold easily into the market because of Moody’s/S&P/Fitch slapping a “AAA” rating on the trash.
If the same loans were made with my #2 coming into effect, they would be unrated, and thus very little interest from institutional investors. Only investors who did their own homework would buy the debt–and it would be priced accordingly (much higher rate).
I somehow am lost in how 401k and IRA investors in stocks are gaming the system.
I hope Combo’s “deflationary environment” continues since I have done very well in equities during this great deflation.
Buy low, sell high. If you cannot time the market (99.99% of all HBBers are expert timers, but not you and not me) you may as well play by the Fed’s rules and go along for the ride in the stock market for one bucket of assets. For another bucket, take a look at what assets are declining in price but are valuable enough to big institutions in the world. You got it: Gold (sorry to Whac). Central banks are buying gold instead of Nike Jordan shoes. Physical metal buyers are gobbling up gold all over. ETFs are falling because of the chicanery by the central banks.
I would stay out of Series I bonds and TIPs until at least the fixed interest rate on those go up above 1%. It’s been years since that happened. If you have Series I bonds with fixed rates above 1% hang onto them.
If I was smart I would have bought up all the Series I bonds and gold that I could in the years 1998 through 2002.
Back in 2001 to 2002 I bought some Series I Savings Bonds on a regular basis. At the time, the 3.75% to 5.23% coupons seemed so small…the weighted average of the whole set is about 4.5%.
Looking back, I agree with Bill in that now I’m sorry that I didn’t buy more back then and continue the regular purchases.
I also remember commenting to a colleague in 2001 about refinancing to a 6% 15 year fixed rate mortgage. My comment at the time was that, “it’s not going to go any lower than that.”
Right now bonds don’t look very attractive to me with the coupons as low as they are. That said, my regular, periodic investment vehicle right now is a Vanguard Fund of index funds (VASGX) with an 80% equity - 20% fixed income asset allocation.
I augment this with regular periodic investments into a REIT index fund (VGSIX) and a Small Cap Index fund (NAESX).
Dollar cost averaging into Index Funds seems to me to be the best way to participate in the financial markets.
I’m a big fan of Vanguard.
“Gold (sorry to Whac).”
No need to apologize. I own none, but am happy for you if you figure out how to make a fortune buying the dip on gold right about the time the MSM declares it to be yet another collapsed bubble.
For me “being successful” means making and saving enough to be able to quit your job with enough cushion to find another, all in an effort to ultimately be reliant upon no one else, but at the same time have enough to help others in need from time to time.
I don’t think this means making easy money. I often say that investing should be considered a “get rich slow” scheme, which is why you need to start early and be consistent with investing.
I frankly think the only way to get to my endpoint up above is to not just save cash (since during certain points in the cycle, the Fed can take away your return, and try to foist inflation upon you–with varying success), but to invest in a variety stable, cash flow producing businesses (either through private or public investment).
Does being successful mean making a lot of easy money?
I think the modern definition means having enough saved by the time you retire that you can live just as good for the rest of your life as you did while you were working. Under zirp I’m not sure that’s possible without a big score somewhere along the line. Hence all the nickels and steamrollers lately. Baby needs a new pair of shoes.
“I’m a smart guy;”
But you’re incredulously gullible.
And you are unfailingly rude.
And you my friend are a BS artist or just don’t have a nose for BS.
Which is it?
I’m not your friend.
Sure you are.
Did I say perfect or smart?
Did I say perfect or gullible?
“They are buying dividend stocks and have run them up. Way up.”
Any potential investment becomes a bad choice after the price reaches bubble territory.
If you want to vomit in your mouth a little, watch all the shilling going on at CNBC right now. They are trying to talk every last person into the market. Why would someone get in now? I guess maybe because the market could go to 20k before a massive blowoff.
I could hardly care less. I’m looking for the buying opportunities they are creating through all the shilling, and gradually reallocating my portfolio to exploit them.
As of Friday’s close, gold is down 39.7% from its top. Or to look at another way, gold is 71% of its peak price.
Yet S&P at its all time high.
Buying a few quarter ounce gold coins every month or two somehow
is less frightening than buying more of the stocks.
“Perhaps the recent signs of life show that people can finally make a rational economic decision buying rather than renting, and if one can maintain prices within a certain range more sustainable factors can drive the housing market forward, like people moving from rental to home ownership and younger people forming their own households, something also delayed by the Great Recession. After five long years of suffering, anything would seem like a boom!”
How exactly are older people whose wealth was destroyed by the Great Recession and younger people strapped with joblessness, underemployment and $1 trillion in college debt supposed to keep driving echo bubble home prices skyward?
Got delusion?
I guess the people who tell me they lost ground during the GR or since 2000 must have invested every last penny in 1999 at one time into stocks?
In 2000 a colleague and his wife both worked at the same company I worked when I was a wage slave. He told me they were putting off retirement because of the stock crash.
Bozos! If you depend on stocks to stay high when you retire, you took too much of a risk and should have been into T-bills.
Be fearful when the others are greedy. Be greedy when the others are fearful.
Buy Treasurys when others buy stocks, and vice versa.
How exactly are older people whose wealth was destroyed by the Great Recession and younger people strapped with joblessness, underemployment and $1 trillion in college debt supposed to keep driving echo bubble home prices skyward?
I’m beginning to wonder if there were just enough people who stayed OUT of the 2003-2007 melee who entered the housing market thinking they were getting in at bargain prices. Combine that with the recycled buyers who stayed and saved before walking but are back in the market. Combine that with the real homeowner’s (the banks) decision to keep houses off the market and, while not a perfect one, a good enough storm forms to create an echo bubble.
I’m beginning to wonder if there were just enough people who stayed OUT of the 2003-2007 melee who entered the housing market thinking they were getting in at bargain prices.
I think it’s more that the timing has successfully been stretched out enough that it’s the same people whose wealth “was destroyed” earlier who are back for another pull at the slots.
Are retirees tapping IRAs too soon?
May 17, 2013, 4:54 PM
By Matthew Heimer
After you reach the age of 70 ½, you’re obligated to make a “required minimum withdrawal” (or RMD) each year from any traditional IRAs you hold (though certain exceptions apply, of course). Prior to that, whether you tap the accounts is up to you – and many retirees with the means to do so opt to avoid withdrawals for as long as possible, so their investments can keep growing tax-free. But a new study released this week by the nonprofit Employee Benefit Research Institute underscores the fact that many people don’t have that luxury.
The study relied on data from the University of Michigan’s Health and Retirement Survey, covering more than 12,000 households with ages ranging from 61 to 79. Among those aged 61 to 70 – the ones who weren’t required to make withdrawals – the percentage that took money out ranged from 29% to 48%, with people not surprisingly being more likely to make withdrawals if they were in a lower-income tranche.
More significant, however, is how much the younger retirees are pulling out, in both percentage and dollar terms. Retirees in this group withdrew between 11.5% and 17.4% of their total balance annually – a rate that would exhaust their savings fairly quickly if they sustained it. They also tended to withdraw more money each year than retirees over 70, and to spend a larger share of their withdrawals on regular living expenses. (Older retirees, in contrast, often transferred their RMD withdrawals into other savings vehicles.)
…
The difference between being born before or at the beginning of the Baby Boom vs. being born in the second half of the BB and after. That, combined with the asset price inflation since the early 70s (with housing constituting the majority of a worker’s wages), explains why some are struggling in retirement while others are able to live on relatively little money.
Too much bull?
May 10, 2013, 7:01 a.m. EDT
It’s not just stocks; everything is overvalued
Commentary: Bull markets can persist a long time, but not forever
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) — Stock markets are hitting new highs almost every day, leading to some tense debates about how much higher stock values can go.
Of course, anyone who’s been watching the markets over the past 15 years knows that stock markets can get extremely overvalued and stay that way for a long time. And they can get undervalued, too.
Profits are very high, but so are stock prices. The price/earnings ratio is at levels previously seen only right before a crash.
In the short run, equities are worth what people will pay for them, and that depends as much on psychology as it does on fundamental economic values. In the short run, investors can rely on expected capital gains to justify almost any price; all you need to do is find someone willing to pay more than you did.
But over longer periods, stocks can’t be worth much more than can be justified by their underlying economic returns.
Unfortunately for market timers, the long run can be very long way away. Like 20 or 30 years.
The fundamental bullish argument for equities goes something like this: All the stars are aligned for a bull market. Interest rates are very low and are likely to stay low for a while, which means corporations’ cost of capital is low. The economic recovery is bound to strengthen, which means sales and profits should rise.
The psychological case is also bullish. Investors are desperate for higher returns than they can get from safe, boring bonds that pay almost nothing. For most investors, that means buying equities.
Recently, researchers at the New York Fed concluded that equities will likely produce high returns for the next five years, in large part because bond yields are so low.
There are lots of bulls out there, telling the same story: Don’t fight the Fed. If Ben Bernanke and Mario Draghi are willing to keep pumping billions into the market, you’d be a fool to go against them.
How much is market really worth?
Major indexes are striking nearly daily record highs. But with earnings growth slowing sharply, are stocks overvalued?
The bullish case is a strong one. But it doesn’t mean that equities aren’t overvalued, perhaps massively so. The same may be true for all asset classes, argues David Levy, chairman of the Jerome Levy Forecasting Center.
“From surging bank stock prices to rising Manhattan coop values, all present bull markets are zero-interest-rate bull markets,” Levy wrote recently. These bull markets are occurring in an environment of high private-sector debts and limited growth potential, and therefore are “intrinsically speculative, limited in their potential, fragile and ultimately capable of severe declines.”
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We should have taken Combo’s advice in March of 2009 and stay 100% in cash.
Nobody could have seen three rounds of QE coming (but maybe you did?)…
I was anticipating a real wind down of the military industrial complex (world cop business) with Obama’s first term. The BRAC of the 1990s was a big wind down of defense, but it did not affect the stock market in a bad way. So I thought it foollish to be more than 60% cash, T-bills.
Sooner or later there WILL be a wind down of militarism and an end to the “Patriot” act and restoration of our bill of rights.
Buy stocks now, or get priced out forever.
ft dot com
On Wall Street
May 17, 2013 5:36 pm
Those partying with easy money of QE will suffer the hangover
By Michael Mackenzie in New York
The equity market rally is putting a disciplined investment approach to the test.
The adage “don’t chase a rally” is a core principle of investing, but such advice counts for little at the moment. As equities advance further into record territory, the S&P 500 this year has already risen nearly 17 per cent.
After spending much of April unable to break through 1,600, the S&P has mainly been a one-way bet in May, rising towards 1,670 this week.
This is an equity market that rallies most trading days and shrugs aside disappointing economic news with limited price corrections. A case in point was the modest pullback on Thursday after a series of weak data, led by monthly inflation easing the most in four years. That pullback was yet another blip as the market closed at a record high on Friday.
The performance of equities is truly eye opening, and it’s a rally being fuelled by the Federal Reserve’s easy money policy of quantitative easing, all the while downplaying the fundamental and technical basics that ultimately must underpin financial markets.
An uneven recovery in the economy and modest sales growth at the corporate level are being brushed aside for now by the power of central bank liquidity. The equity rally has also occurred without significant fund flows into the market that would confirm investors are back in a big way, let alone justify the big rise in prices since January.
All of which places both private and professional investors in a quandary, particularly for those that have missed the rally so far and have spare cash earning next to nothing.
At this juncture do you chase the rally and place your faith in not fighting the central bank? For history buffs, the S&P is currently tracking very closely its performance from 1995, a year when the benchmark ultimately rose 34 per cent.
Or as an investor do you hold fast and refuse to jump into a market that has risen more than 20 per cent from its low of last November without a significant correction?
“Investors, whose portfolios are lagging behind the S&P and possibly face the loss of clients, may throw in the towel and help drive equity prices higher in the coming weeks.”
A common refrain of late among investors has been to rue not stepping into a market that back in February briefly dropped 2.8 per cent below 1,500 and then eased 3.3 per cent over several days in mid-April below 1,550, before moving onwards and upwards.
The gnawing fear now is that waiting for a sizeable equity correction against the backdrop of QE3 is a forlorn hope. Investors, whose portfolios are lagging behind the S&P and possibly face the loss of clients, may throw in the towel and help drive equity prices higher in the coming weeks.
…
Major cognitive disconnect: On the one hand, the Fed is playing along as though QE3 is fully reversible, and could be summarily ended as soon as the labor market hits the right threshold (e.g. 6.5% unemployment). But a moment’s reflection suggests that ending asset purchases would lead to a crash in any number of markets whose prices are driven up artificially by the ultra-low interest rates which stem from $85 bn a month in QE3 asset purchases.
Somefing’s gotta give, folks!
A few thoughts (if anyone cares to listen)–do your own due diligence!
1. The reason REITs got beaten up during the crash is that they had too much debt, which was maturing too soon relative to what was happening in the banking industry. It was primarily a liquidity problem, not necessarily their ability to make the mortgage payments. Since then, the REITs that I have been tracking have a) reduced their debt levels (raised equity, bought their own debt at a discount, sold assets, etc.), b) fixed a lot of the interest rates on their debt, and c) extended their debt maturities.
So, if we have another financial crisis, they are better suited to withstand the storm.
2. Very few new commercial buildings have been built during the downturn (historically low numbers).
So, as vacancies fall and the economy grows over the next few years, unless more buildings are built very inexpensively, REITs will overall have more pricing power. Since they were forced to lower rents to compete against one another during the worst of the downturn, the increase they have in rents COULD be significant from current levels.
3. The recent run up in REITs has generally pushed their values above net asset value…in other words, if you were to liquidate all assets of the REIT, pay off all debt, and distribute the money to the common stock holders, the payout would be less than the market price of common stock today. Green Street Advisors (a top notch REIT research firm) estimates that currently the premium to NAV is approximately 20%. For perspective, in 2009, they traded at a 40% DISCOUNT to NAV.
So, the market is already factoring in some of the rental growth in #2.
Watch this space carefully…if the REITs are able to increase rents (ie. revenue increases), then they should grow into their current valuations. However, if there is such economic weakness that they won’t be able to increase rents, eventually the market will figure this out, and their values will fall.
For now, I’m not selling any of my REIT holdings (primarily industrial–warehousing and logistics, grocery anchored retail, and discount retailers), because I think these particular product types will do well even in a weak economy, and haven’t had a significant move up in rents (unlike apartments), but I’m keeping a careful eye on how crazy valuations get to see if I shouldn’t just take my marbles and go home…given the income I would be giving up and the taxes I would need to pay though, I think there would need to be another 20% run up before I consider such a thing.
Good luck to all.
“… I think there would need to be another 20% run up before I consider such a thing.”
Given the recent crazy runup in real estate prices, it doesn’t seem out of the question.
It still strikes me as somehow obscene that I earned about a quarter of my annual pretax income by simply reallocating some of my retirement savings into a REIT upon the Fed’s announcement last year that they were planning to prop up the housing market. I’m not exactly complaining, but something doesn’t seem right about it.
I’m guessing though that your Vanguard REIT index holds very close to 0% in anything related to for-sale housing, and in fact will suffer if the Fed is successful (if people going to buy homes weakens apartment rents).
The effect has purely at this point been a flow toward yield (and inflation protected yield at that). If yields stay low, REITs will do well. If yields rise, then REITs will suffer…unless they can raise rates.
The bet on REITs is that the same environment in which yields rise (growth, inflation, etc.) will be an environment in which rents rise.
“The bet on REITs is that the same environment in which yields rise (growth, inflation, etc.) will be an environment in which rents rise.”
Sounds to me like a reasonable bet. I frankly don’t expect rents or yields to rise much over the next several years, as the fundamental recovery is very weak.
“Sounds to me like a reasonable bet.”
Which is exactly why I haven’t sold. My REIT bet started a bit earlier, so I’m pretty darn happy at the moment with my results. That said, they feel like much less of a bargain currently, and while I’m not buying more at current prices, I don’t want to take the tax hit to sell and then need to make up the income some other way…where I think I would need to take a lot more risk for the same return.
Whac, I like your idea on Vanguard’s REIT. It’s a different asset than equities for sure. Something I would consider dollar cost averaging to at some point.
REITs are still stock equities and they behave like stock equities.
One thing to bear in mind is that publicly traded stocks are liquid and continuously priced by the market.
About 10 years ago in grad school we did an exercise with the NAREIT index to calculate its correlation with other asset class indices. The takeaway was that REITs were most closely correlated with mid cap stocks.
For those interested, Google “NCREIF vs. NAREIT returns” to find some articles on the difference between the returns of publicly held real estate (REITs) and privately held institutional real estate (NCREIF).
Bubba–wondering, were you measuring short-term correlations (daily movements)? Or medium/longer term results (monthly/quarterly/annually)?
I’ve been very surprised during the downturn how correlated REITs have been with financials. I can only guess that it’s because they are included as “financials” officially, which is kind of strange, since financials and REITs should act very differently over medium timeframes. One is based on paper only, the other on hard assets.
I seem to recall that the data sets were daily closing prices.
We are in this mess because life guards get $100,000 pensions.
Austerity will correct the economy if applied in a rifled approach -
We have to get governments to spend like private enterprise.
You cannot get more out of the economy than what you put into it.
Unless your forte is pork. And the system should be jailing them.
Too bad Bernake will retire (be forced out) with markets so high.
55%+ of the Federal Budget goes towards entitlements
19% of the Federal Budget goes towards the military
The Federal Government borrows 46 cents of every dollar it spends
Obama has borrowed more money than every other administration COMBINED and adjusted for inflation.
Your move…
You are right.
And nothing has been fixed.
I missed my true career. At 18 I should have headed down to Huntington Beach and become a lifeguard. I would be retired today with $100k pension, have a nice tan, and have a lot of wonderful memories of getting lucky with bikini girls over the years.
Bill
But five wives later and your pension would belong to them.
Maybe not a bad thing, as up to half right now would be going down the drain to pay government interest.
And your wife is getting the rest anyways.
But imagine the wonderful memories of having a series of five beautiful wives to reflect on into old age…
One wife that actually wants to take care of you in old age would seem superior to five used-to-be-beautiful ex-wives who hate you.
Blah, blah, blah.
If you don’t want to pay child support from your FIVE ex-families, then don’t get divorced and remarried four times, creating abandoned families all along the way. It ain’t that difficult, boys.
Come on, Uncle Fed, I was just kidding around. Been married for two decades, and one family and wife are just about all I can handle. Don’t know how those Mormon polygamists managed back in the day…
Well said, Carl Morris.
Comment by Patrick
2013-05-18 09:58:09
We are in this mess because life guards get $100,000 pensions.
Austerity will correct the economy if applied in a rifled approach -
We have to get governments to spend like private enterprise.
You cannot get more out of the economy than what you put into it.
Unless your forte is pork. And the system should be jailing them.
Too bad Bernake will retire (be forced out) with markets so high.
I certainly hope this is a joke. You can’t possibly be this stupid.
18 May 2013 Last updated at 13:40 ET
Italy coalition: Thousands rally in Rome against cuts
Protester: “We want more representation and rights”
About 100,000 protesters, led by trade unionists, have rallied in the Italian capital Rome against the policies of the new coalition government.
Wielding red flags and placards, they urged the centre-left Prime Minister, Enrico Letta, to scrap austerity measures and focus on job creation.
Public trust in his fragile coalition with the centre-right is dropping, opinion polls suggest.
The country is experiencing its longest recession in more than 40 years.
National debt is now about 127% of annual economic output, second only to Greece in the eurozone.
Unemployment is at a record high of 11.5% - 38% for the under-25s.
An estimated 100,000 people, including many of the young jobless, took part in the protest march, but there were some noteworthy absentees - the leaders of the left-wing Democratic Party, the party of Prime Minister Enrico Letta. The head of the metal worker’s union, Maurizio Landini, taunted the party leadership, accusing them of being afraid of coming out on to the streets.
Mr Letta is faced with an almost impossible task - creating new jobs at a moment when the Italian economy is suffering one of its most serious recessions since the economic boom in the 1950s and 60s. Former Prime Minister Silvio Berlusconi almost daily threatens to withdraw his support from the fragile coalition.
Opinion polls suggest growing support for Mr Berlusconi, despite his dismal economic record, and lower and lower approval ratings for Mr Letta.
Before taking office, Mr Letta vowed to make job creation his priority, but critics are unhappy that he has focused on property tax reform.
The issues of social justice and poverty came up when German Chancellor Angela Merkel had talks with the new Pope at the Vatican on Saturday.
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Did you guys read about the new book of the Bible that was recently discovered? It describes a creature that was created by God, long after he created humans. By the time this creature was created, the Earth was already full of all the other creatures, and there was nowhere for it to live. So he named it the troll, and created the internet for it.
May 19, 2013, 8:00 a.m. EDT
U.S. economy walks uneven path
Housing steps forward, but manufacturing takes step back
By Jeffry Bartash, MarketWatch
Ben Bernanke, chairman of the U.S. Federal Reserve.
WASHINGTON (MarketWatch) — The bubbling U.S. stock market might get more pop this week from positive sales trends in housing, but danger signs lurk in other parts of the economy.
Sales of new and existing homes in April top the list of major economic reports and both are expected to show the housing recovery remains on track. Federal Reserve Chairman Ben Bernanke will get grilled by Congress and U.S. jobless claims should draw extra scrutiny after a surprising spike last week.
The rebound over the past year in home sales and construction after a long slump is one of the reasons many economists expect U.S. growth to reaccelerate later in 2013. Rising sales will spur greater demand for all the things needed to furnish newly purchased homes and higher real-estate values could encourage consumers to spend more freely.
Yet the rapid pace of the rebound in housing could taper off, some economists believe. Lots of homes across the country are still unoccupied in the wake of the Great Recession and the level of foreclosures remains high, said chief economist Robert Brusca of FAO Economics. A recent Federal Reserve study found that foreclosure notices were sent out to some 185,000 homes in the first quarter.
“The housing market will continue to recover but at a slower pace,” he asserted. “It’s not a rocket ship anymore.”
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That’s OK. We don’t need mfg when we can make houses for each other.
http://www.nbcnews.com/business/big-reason-stock-boom-companies-buying-back-stocks-1C9989316
This is an interesting trend to track.