Month: May 2010

Felix Zulauf Gives Rare Interview

Most likely, you have not heard of Felix Zulauf.  He is one of the top money managers in the world.  He is the owner of Zulauf Asset Management in Switzerland.  Mr. Zulauf  manages money for some of the wealthiest people in the world.  He rarely gives interviews.  He did recently give an interview to King World News.

Mr. Zulauf confirms what I have believed, and often written about here, that the current debt of the US (and other countries) is not sustainable.  As a result, we are entering a deflationary period, and will likely experience a financial crisis greater than any we have experienced in the past.  He feels that our monetary system will break down and we will likely have to issue new currency.  He recommends owning gold, real estate and other hard assets rather than currency.

If you want to listen to what I consider a very enlightening and informative interview, please listen to this brief interview of Felix Zulauf.

Go here and then just click on the purple mp3 button just above his biography on the left hand side.

So Where are the “Good” Deals?

I have investors ask me every week to send them information on the “good’ deals.  You know, the deals where they can buy properties substantially below replacement cost, with an 9%-10% cap rate and 10% cash on cash returns.  After all, there must be a lot of properties that banks have foreclosed on and want to dispose of at bargain prices just to get them off their books.

Wrong.

This is not 1989-1994 where there was an RTC to force banks to take action when loans are delinquent.  Banks are not foreclosing.  There are really very few REO properties banks are trying to sell.  Investors are holding on to their cash waiting for the opportunities that I don’t think will ever materialize.

There as an article in the Wall Street Journal yesterday that illustrates this point completely.  It is about “Distressed Property” funds.  Private equity funds formed by the major investment banks to take advantage of the great bargains that were going to emerge in commercial and multifamily properties.  Those funds are returning billions of dollars to investors because there are no properties to buy that meet the investment criteria. Continue reading “So Where are the “Good” Deals?” →

The Bears Come Forth – A Major Crash Coming?

Barry Ritholtz writes a blog post that predicts doom and gloom… soon.

“I am on an email list that is from a group of  smart hedgies and strategists. The discussions range far and wide, and while I sometimes disagree with the conclusions, but I always find the conversation provocative.

Lately, they’ve been emailing a collection of warnings of various fund managers and strategists:

• Long time Dow Theorist Richard Russell set out this dire warning:

“Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.”

• Reuters reported that well regarded hedge fund manager Seth Klarman “sees few bargains in the current environment and predicted on Tuesday that the stock market could suffer another lost decade without any gains.” Klarman is concerned that we could see “another 10 years of zero returns.” He has 30 percent of assets at his $22 billion Baupost Group in cash, he said. (His firm started in 1982 with $27 million and has averaged 20 percent annual gains ever since).

• Raoul Pal of Global Macro Investor got even more specific warning in his newsletter: Crash Is Coming In Two Days-To-Two Weeks. He sees as an “archetypal crash pattern — a sharp decline followed by a failed rally followed by a collapse.”

• But as Art Cashin of UBS pointed out in his morning missive, stark bear warnings are not restricted to equities. He cites Nouriel Roubini warned on the U.S. Treasury Market:

“Bond market vigilantes have already woken up in Greece, in Spain, in Portugal, in Ireland, in Iceland, and soon enough they could wake up in the U.K., in Japan, in the United States, if we keep on running very large fiscal deficits,” Roubini said at an event at the London School of Economics yesterday. “The chances are, they are going to wake up in the United States in the next three years and say, ‘this is unsustainable.”

• Lastly, I was tickled by this tongue in cheek warning about Gold from Jeremy Grantham: The GMO chair guaranteed that Gold will crash. Why the gold crash? Because he just bought some . . .”

I hate to be the bearer of bad news, but when you get a preponderance of professional financial types agreeing that the market is headed in a particular direction, they are either right, and we should pay attention, or they may be wrong, and seeing the wrong signals. In my view, there are too many professionals who do this for a living who see a crash coming, for different reasons, that my bet is that it will happen. This might be a good time to do some stock liquidation and hold cash. It might also be a good time to move some of that capital out of stocks and bonds into hard assets like gold or real estate. Keep in mind that real estate generates cash flow where gold does not. Something to think about.

Past the Point of No Return?

Casey Research has an article, “The U.S. Government is About to Get Hit with the ‘Perfect Storm’ of Debt. Anyone concerned about the financial health of the US, and the world, should read the article.  Here is an excerpt:

Hearing President Obama’s economic peptalks, you might be under the impression that the U.S. needs to keep spending for just a little while longer to stimulate the economy – but then will swear off big deficits.

Reinforcing the point, to address concerns stirred by a Congressional Budget Office (CBO) forecast that the U.S. government will accumulate total deficits in excess of $6 trillion over the next decade, in February President Obama issued an executive order to create a bipartisan fiscal commission. The commission’s task is to deliver recommendations to the president by December 1 for limiting future deficits to 3% of GDP. (The FY 2009 deficit approached 10% of GDP. The FY 2010 deficit will probably go even higher.)

It’s our contention that the president’s fiscal commission is mostly for show; the 3% limit is just a hoop for the clowns to jump through. U.S. government finances are now past the point of no return; the U.S. government lacks not just the will but the ability to close the gap between revenue and expenditure.

At The Casey Report, we like to focus on facts. Unfortunately, when it comes to government debt, the facts aren’t pretty. They show that the country is already sliding towards financial collapse and hyperinflation in a way not dissimilar to the Weimar Republic.

Let’s first look at recent history to see how reliable CBO forecasts have been. In 1999 the CBO issued its 10-year forecast for 2000-2009 (see charts below). It looked as though we were heading into ten years of prosperity that would rescue us from little worries like the trillions in unfunded liabilities of Social Security and Medicare.

As you can see in the charts titled “CBO Revenue Projections 2000 – 2009” and “CBO Outlay Projections 2000 – 2009,” the CBO expected a budget surplus in every year from 2000 to 2009. And not just that, but that the surpluses would grow at an annual rate of more than 13% and would accumulate to $2.5 trillion over the decade.

The article is quite sobering and indicates that it is possible we have reached the point of no return. Continue reading “Past the Point of No Return?” →

Our Unsustainable Debt

Reason Magazine has an article in the June issue about United States debt.

America’s financial situation is unsustainable. In 2009 the federal government spent $3.5 trillion but collected only $2.1 trillion in revenue. The result was a $1.4 trillion deficit, up from $458 billion in 2008. That’s 10 percent of gross domestic product, a level unseen since World War II. Worse, the Congressional Budget Office (CBO) projects that we’ll be drowning in red ink for the foreseeable future, with annual deficits averaging $1 trillion during the next decade.

While these figures are dramatic, they pale in comparison to what the federal government owes foreign and domestic investors. According to the CBO, in 2009 America’s public debt reached $7.5 trillion, or 53 percent of GDP, the highest it has been in 50 years. In 2010 the debt will cross the 60 percent threshold, a level at which many economists believe a country is putting itself in financial peril.

The money used to pay our debt comes from the savings of Americans.  There will soon not be enough money from the savings of Americans which will mean that our government will increasingly have to look to foreign investors to loan us money (buy our bonds).  This is not a good financial situation for the US to be in.  We will not be able to sustain it over time.

Fiscal prudency would require that the US start generating budget surpluses to repay our debt.  Following the course laid out by the current administration the future looks bleak.  This administration has plans to run the US debt up to unprecedented levels rather than reducing it.

Probable result of this activity: significant inflation, weakness of American currency against other currencies, an extraordinarily large amount of our gross national product going to service the huge debt burden, loss of confidence in America, inability of our economy to generate innovative new industries, inability to finance new construction and a host of other economic maladies.

We need to fire Keynes and hire Hayek as soon as possible.

Read the whole article in Reason Magazine.

US Deficit Four Times Higher in Space of One Year

The United States posted an $82.69 billion deficit in April, nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month, the Treasury Department said on Wednesday.

It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast and was striking since April marks the filing deadline for individual income taxes that are the main source of government revenue.
Department officials said that in prior years, there was a surplus during April in 43 out of the past 56 years.

The government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

For the first seven months of fiscal 2010, which ends September 30, the cumulative budget deficit totals $799.68 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009. It was a record level of outlays for an April.
Department officials noted there were five Fridays in April this year, which helped account for higher outlays since most tax refunds are issued on that day.

But for the first seven months of the fiscal year, outlays fell to $1.99 trillion from $2.06 trillion in the comparable period of fiscal 2009, partly because of repayments by banks of bailout funds they received during the financial crisis.

Receipts in April — mostly from income taxes — were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009.

Receipts from individuals, who faced an April 15 filing deadline for paying 2009 taxes, fell to $107.31 billion from $137.67 billion in April 2009.

The U.S. full-year deficit this year is projected at $1.5 trillion on top of a $1.4 trillion shortfall last year.

White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.

From Reuters

World Fiscal Crisis Caused By Excessive Public Employee Benefits

Does this sound familiar? The government is unable to cover payroll in full. A 40 percent tax on cigarettes sets off a flurry of angry text messages among smokers, and opposition groups warn new taxes could unleash a popular revolt. California? No, the Hamas government in Gaza.

Or this: Workers can retire after just 35 years of work at full pension and health benefits. San Francisco? No, Greece. In San Francisco, you can retire after 30 years of work.

Around the world and in the United States, an aging population with higher life expectancy and generous public sector pension and health benefits are bankrupting governments. State benefits plans are $1 trillion underfunded. It’s getting worse.

Since the election of President Barack Obama, the number of federal employees making over $150,000 a year has more than doubled to over 10,000. In San Francisco, one out of every three city workers earns over $100,000, not including pension and health benefits.

In 2009, federal government salaries jumped 2.4 percent, about twice the increase earned by private sector employees. The average salary of a federal worker is now $71,000, about $22,000 more than the average private-sector employee. In San Francisco, the average is $83,000, not including benefits.

How did we reach this point? In the late-1950s, New York City Mayor Robert Wagner signed an executive order authorizing city workers to unionize, and soon other local and state Democrat legislators around the country followed his lead. Then in 1962, President John F. Kennedy granted federal employees the right to collectively bargain.

But that was then. Now governments — Greece, Portugal and Spain in Europe, states like California and cities like San Francisco — are facing the consequence of years of incremental increases in salaries and benefits. California, San Francisco and Washington are postponing the inevitable.

There’s a silver lining. When socialist nations like China, the Eastern bloc and Russia finally cut burdensome public sector jobs, closed state factories and reduced their pension obligations, it unleashed the private sector. That’s the unalterable truth about socialistic policies.

Scarcity of Product And Shortage of Quality Pushes Office Cap Rates Lower

Scarcity of Product And Shortage of Quality Pushes Office Cap Rates Lower

Last year, capitalization rates on large office property sales rocketed from the mid-6 range to the mid-8 range. So far this year, cap rates have reversed course, falling back just as rapidly to mid-7 range. Under ‘normal’ conditions, this would imply that property values are increasing. So why isn’t the commercial real estate industry elated?

Cap rates are a benchmark determined by dividing income by property value. Increasing cap rates typically imply that property values are falling. Last year, no one in commercial real estate doubted that the rapid rise in cap rates reflected an equal rapid decline in property values.

However, this year’s decreasing cap rates, which would normally imply rising property values, are being viewed with some skepticism over whether they reflect a long-term trend in values, or simply a short term phenomenon.

According to Fred B. Córdova III, senior vice president / Investment Services Group for Colliers Asset Resolution Western regional team, the current cap rate phenomenon starts with that fact that there is two to three times more capital (debt and equity) in the market than there is product. That factor alone has pushed values up by 20% in three months, he said.

“There is a flight to quality NOI (net operating income) with a rational ‘governor’ that is price per square foot,” Córdova said. “We are seeing some pricing here in Los Angeles (with cap rates) as low as 5% based on market rates. That said, there is a great deal of anxiety out there as to how far cap rates have fallen in the last six months. Foreign money is leading the charge.”

Continue reading “Scarcity of Product And Shortage of Quality Pushes Office Cap Rates Lower” →

Watch out for the Muni-Bond Bubble

Nicole Gelinas wrote an excellent article in City Journal about the possibility of a coming bubble-burst in the muni-bond market.

The financial crisis has exploded plenty of long-held beliefs, including the idea that mortgage debt is a risk-free investment. But nothing has shaken the articles of faith that underpin another massive debt market: municipal bonds. Investors in municipal bonds don’t have to worry about a thing, the thinking goes, because the states and cities that issue them will do anything to avoid reneging on their obligations—and even if they fail, surely Washington will step in and save investors from big losses.

These are dangerous assumptions. Just as with mortgages, the very fact that investors place unlimited faith in a market could eventually destroy that market. If investors believe that they take no risk, they will lend states and cities far too much—so much that these borrowers won’t be able to repay their obligations while maintaining a reasonable level of public services. The investors, then, could help bankrupt state and local governments—and take massive losses in the process. To avoid that scenario, investors must take a long, hard look at what they’re doing. Where state and local finances are untenable, they should stop throwing good money after bad.

He explains that there is good reason to be concerned about the muni-bond market. Plummeting tax revenues, and lack of will to cut expenditures on the part of local governments can mean a looming insolvency. Yet the rating agencies still consider muni-bonds low risk. “We do not expect that states will default on general-obligation debt, even under the most stressed economic conditions,” analysts at Moody’s, one of the three major credit ratings agencies, wrote in a February 2010 report. As for cities and towns, “we expect very few defaults in this sector given the tools that local governments have at their disposal.” The firm’s chief competitor, Standard and Poor’s, agrees.

They consider the bonds low risk because they feel the municipalities will do whatever they have to in order to avoid default. They also feel that municipalities have an endless source of funds to repay debt. They can always increase taxes to pay bond debt service.

But, can they?

Continue reading “Watch out for the Muni-Bond Bubble” →