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.

Sell Real Estate in 2010 – 69% Capital Gain Tax Increase in 2011

Congress is funding its latest entitlements with a 5.4% surtax on incomes above $500,000 for individuals and above $1 million for joint filers. The surcharge is intended to snag the greatest number of taxpayers to raise some $460.5 billion, and so the House has written it to apply to modified adjusted gross income. That means it includes both capital gains and dividends.

Capital Gain Tax Rates
U. S. Capital Gain Tax Rates

That surtax takes effect on January 1, 2011, or the day the Bush tax rates of 2001 and 2003 expire. Today’s capital gains tax rate of 15% would bounce back to 20% because of the Bush repeal and then to 25.4% with the surtax. That’s a 69% increase, overnight. The last time investors were hit with anything comparable was 1986, when the capital gains rate jumped to 28% from 20%, a 40% increase, as part of the Reagan tax reform that lowered income tax rates.

What this means for investors who are on the fence about selling real estate is plain and simple.  Sell in 2010 and pay a 15% federal tax on your gains, or sell after January 1, 2011 and you could be looking at almost 26%.

The math goes like this: The current 15% fed cap gains tax sunsets this year and will likely go back to at least the 20% rate under Clinton.  Add on the 5.4% health care surcharge and then you are at almost 26%!

The Coming Great Recession of 2011 – 2012

The American Spectator published an article written by James Srodes titled, “The Great Recession of 2011-2012”

Mr. Srodes hits the nail on the head.  He explains why, despite the rosy projections you read in the morning newspaper, we are headed for worse times in the next couple of years.  I don’t want to be a doomsayer, or create a sense of pessimism.  I just think the old adage that to be forewarned is to be forearmed is a good one.

I am not going to summarize the article here.  It is a very well-written and logically presented.  It is important to read it in its entirety.  I suggest you go here and do just that.  And then arrange your finances so that you will still be standing when we hit 2013.

While he writes about all the reasons 2011 and 2012 will be very difficult years financially for most Americans, he doesn’t mention one other factor that will contribute to the downturn.  There are billions of dollars of commercial mortgages that will mature in the next 18 months.  The borrowers will not be able to refinance those loans without contributing substantial cash equity.  As a hypothetical example, a borrower who borrowed $21 Million (70%) on a shopping center that was valued at $30 Million in 2006, will likely now find that he can only refinance 60% of a revalued asset now worth $25 Million.  That means he will only be able to get a new loan of $15 million to pay off a $21 Million loan.  He will either have to come up with $6 Million in additional equity, or run the risk of losing his property.  That bubble is still ahead of us and will make the bursting of the home mortgage bubble seem like a minor glitch.

All the signs are there.  You just have to read them.

Go to the American Spectator and read the whole article.