SAM ZELL EXPOUNDS ON THE ECONOMY, WARNS OF RECESSION

SAM ZELL EXPOUNDS ON THE ECONOMY, WARNS OF RECESSION

Sam Zell was recently interviewed on Bloomberg’s “GO” TV.  The beginning of the post are some selected quotes from the interview.  I also provide a link to the full transcript.

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By Mike “Mish” Shedlock

Wednesday morning, Sam Zell, billionaire chairman at Equity Group Investments, spoke with Stephanie Ruhle and David Westin on Bloomberg’s “GO” TV.

Zell discussed a wide variety of topics from the Federal Reserve rate hike, the risk of a near-term recession, real estate, energy, and various foreign investment ideas. The interview was before the Fed announcement.

I put a spotlight on some interesting Zell ideas. Everything below is a selected quote except for two comments by me in braces[].

Twenty-Two Ideas

  1. Economy: High probability that we’re looking at a recession in the next 12 months.
  2. Rate Hike: Interest rate hike is probably 6 or 8 months too late. I think that the economy is closer to falling over than it is to going up.
  3. US Dollar: Devalued currencies make it very difficult for the US to compete internationally.
  4. World Trade:  World trade is slowing. Currencies continue to be manipulated. You’re looking at the beginnings of layoffs in multinational companies. Weakness is going to be pervasive.
  5. Global Deflation: You can’t put aside China. You can’t put aside Europe. If China’s numbers turn out not to be as accurate as we think, China could go into a recession. That’s about as deflationary a scenario as you could possibly come up with. And one that would for sure impact growth and affect Janet Yellen’s decision.
  6. Fed Tools: “Uh” …  [as in the Fed has none]
  7. Asset Prices: Assets will get cheaper.
  8. Cash: With zero interest rates the penalty for holding cash is not very significant.
  9. Stock Market: Nothing cheap. A number of falling knives that have been obfuscated by Amazon and Facebook et cetera. If you take out those stocks, the stock market isn’t doing real well.
  10. Mexico:  Mexico is terrific. I think there’s extraordinary opportunity there.
  11. China: I don’t think China is growing as fast as it reports to be. And I think that the world has a significant deflationary risk coming from a slowdown in China which I think would impact the cost of goods all over the world.
  12. Brazil: Brazil is obviously suffering significantly. On the other hand, as an investor I’m always looking at where nobody else is willing to go. We’re there already and under the right set of circumstances wouldn’t have any problem investing in Brazil today. I just think you can’t lose sight of the fact that this is a country with 180 million people. It’s still growing. It’s self-sufficient in water, oil, food. It’s an extraordinarily badly managed you know entity. But the extraordinary part hasn’t changed. I’m somewhat of an optimist and I think this whole process will be a cleansing process.
  13. Oil: It’s not so much prices as it is specific opportunities. What makes the opportunity is the distress of the situation.
  14. Natural Gas: I’m probably more focused on gas than oil. And it’s, you know, it’s a little bit like real estate. I mean we made a fortune because we bought real estate at a discount to replacement cost. Well we’re buying gas in the ground, gas that’s been drilled. People have spent $10 million a well, we’re buying wells at dramatically less than that. So it’s the same kind of creating a competitive advantage by virtue of your entry price.
  15. Real Estate: It’s very hard not to be a seller. And so we’re in effect fulfilling in some respects our longer term strategy in AQR where we’re liquidating the remaining garden apartments we have.  I’m not a big fan of buying at these cap rates.
  16. Blackstone: Blackstone is just buying brick and mortar. And they’ve been able to raise staggering amounts of money. And they’ve got to put that money to work. That’s something we’ve never wanted to be in a position of having so much capital that it affects our decision-making on an ongoing basis.
  17. Currencies: I’m very concerned about what’s happening in currencies. I think that you know Bretton Woods in 1948 was the allies coming together and saying we can’t recover in the world without growing free trade. We can’t create growing free trade without stable currencies. So let’s make sure we have stable currencies. That worked for a long time. Now we have very unstable currencies. World trade is slowing.
  18. Dodd-Frank: I’ve never known of a single situation in my life where reduction in liquidity was a plus. And effectively Dodd-Frank has dramatically reduced liquidity and that’s a big negative. And that’s something we haven’t dealt with yet.
  19. Politics: The American people are extraordinarily angry. The American people are extraordinarily depressed. The last time we had anything like this in my opinion was 1979. [To a statement regarding Trump’s popularity Zell responded]:  It’s because you guys are sitting here in New York City and you’re not in Des Moines. And you’re not in Boulder and you’re not all over the country. And you’re not seeing the enormous disparity that has existed between you know the coasts and the rest of the country. We have a lot of very unhappy people and I think this election is reflecting it. And I think it will be very dangerous.
  20. Flat Tax: I think if I were given a straight choice I would be in favor of a simple flat tax.
  21. Government Bonds: I’m not a big lender of money to governments period.
  22. Climate Change: The level of certainty of exactly what is happening has a lack of humility and arrogance to it that scares me. As far as I’m concerned, conventional wisdom is my greatest enemy. And this strikes me as an awful lot of conventional wisdom.

It was a fascinating 2-hour interview. I stripped off the intro, the rest appears below. It’s well worth a read.

For the full transcript go here.

 

Quiet U.S. Ports Spark Slowdown Fears – WSJ

America’s busiest ports reported a decline in imports during the key peak shipping season for the first time in at least a decade, sparking fears of a broader economic slowdown in the U.S.

The question is, what does a slowdown in economic activity mean to the economy in general, and real estate in particular?

 

Source: Quiet U.S. Ports Spark Slowdown Fears – WSJ

Household Incomes now equal to 1989 Levels – Rising Rents Bring Back Feudalism Society

The Fed surprised markets on Wednesday with their taper head fake.  Was it because the economy is booming?  No.  Was it because household incomes were growing?  Not exactly.  Was it because inflation is non-existent?  Not if we look at rents or medical care.  In fact, going through the Fed’s statement it is largely holding back on the taper because of fear of budget negotiations in Congress.  That is, we are hitting our debt ceiling yet again and the Fed wants some leverage here.  Yet the larger signs all pointed to a taper if we consider that rents are rising at nearly twice the rate of the overall CPI.  Also, the Census figures for 2012 were released and household income adjusting for inflation is now back to levels last seen in 1989.  Lost decade?  Try a lost generation.  Also, recent data highlighted that the wealthiest in our country are capturing most of the income gains and given this trend and the Fed’s taper-less September, the feudalism trade is fully on.

Household income

The Fed is the housing market.  Investors are dominating the market and this is their number one client.  It is no surprise that a moderate rise in rates has essentially clobbered the “normal” home buyers out in the market.  Regular buyers need every piece of help buying a home because household incomes have done this:

MedianHouseholdIncome

The above chart shows a full lost decade (24 years of weak income growth).  Even in real terms, household income has plunged since the recovery started in 2009:

2007: $55,627

2008: $53,644

2009: $53,285

2010: $51,892

2011: $51,100

2012: $51,017

The Fed is largely playing the market and ironically, these moves are likely to continue the wealth disparity in the US further as investors once again plow into the real estate market to chase yields.  For regular households, more income is going to go to housing on the rental front:

Rent vs CPI

Keep in mind that rising rents with falling incomes is not exactly a good combination.  Rents are rising at nearly twice the pace of the overall inflation rate.  This divergence has accelerated since 2012.  The Fed has made a one way bet here.  The Fed is operating under a QE forever scenario.  Take a look at the Fed balance sheet and tell me if you think a taper is in serious consideration:

fed balance sheet

The Fed is largely playing one big confidence game.  The too big to fail are even larger today.  Real estate investors are virtually half the market in 2013.  Even in expensive California nearly one-third of all home sales are going to investors (in Las Vegas it is closer to 60 percent).

Reconcile all the facts coming out this month:

-Household incomes adjusting for inflation are back to levels last seen in 1989 (24 years ago – a lost generation)

-50 percent of income generated in 2012 is going to the top 10 percent of earners (highest ever since the early 1900s)

-Rents are rising much faster than overall CPI

-Investors are gobbling up an incredibly large share of all real estate purchases

There has been a serious disconnect going on since the recovery hit and these kind of divergent data points suggest we are in a mania like mode.  Investors are largely chasing yield even on many deals that simply do make sense (i.e., cap rates are simply not panning out in many markets).  The Fed taper is merely a magician’s trick.  The Fed can’t taper to any large degree.  It is an end-game in the mortgage market.  The Fed is the housing market.  The Fed is largely focused on helping member banks so it is no surprise that banks are doing exceptionally well and many financial institutions are the largest real estate buyers in the current market.  For now, the investor trade will continue to play out even if people with common sense realize this is simply one giant shell game and the Fed is on its way to a $4 trillion balance sheet.  Doesn’t seen so farfetched that we are entering a modern age of feudalism.

Dr. Housing Bubble
http://www.doctorhousingbubble.com/federal-reserve-taper-household-income-lost-generation/?

The Dollar Losing Ground As The World’s Reserve Currency

Australia and China have announced that they will trade with each other without using the U.S. Dollar.  China and Russia will chip away at the Dollar’s reserve currency status by establishing direct payment in their own currencies with one trading partner after another.  When the world no longer considers the Dollar a necessary reserve currency, we will be in big trouble.  We will no longer be able to endlessly print money and kick the can further down the road.  That will be the end game for the fiat currency system that has been in place since Bretton Woods.

In a previous article by David Stockton on this blog, he makes the following statement about Richard Nixon, which I completely agree with:

“When Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar. That one act — arguably a sin graver than Watergate — meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit.”

The following is an article that appeared in zerohedge.com that demonstrates how the world is changing and how the U.S. Dollar is unlikely to remain the worlds reserve currency.

Continue reading “The Dollar Losing Ground As The World’s Reserve Currency”

Sundown in America – David Stockman

There have been a lot of doom and gloom articles appearing lately.  Should we be concerned?  (GA)

By DAVID A. STOCKMAN
New York Times
Published: March 30, 2013

The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

Continue reading “Sundown in America – David Stockman”

Moderate growth in Apartment sector will continue

By Natalie Dolce,  GlobeSt.com

ENCINO, CA- On a recent apartment webcast, 57% of participants predict that renter demand will get stronger in 2012, while 2% says it will be weaker, with 40% saying it will stay the same. The 2012 Apartment Market Outlook Video Webcast was put on by Marcus & Millichap Real Estate Investment Services, and was generally optimistic in the sector’s “continuation of modest growth in 2012.”

According to William Hughes, managing director of Marcus & Millichap Capital Corp., from a lenders standpoint, the improving apartment fundamentals have supported their level of confidence in the marketplace. “It has been easy to finance core assets all the way down to C assets across the board,” he said. “It becomes a little choppy as you move into tertiary and smaller assets, but even those are being financed by local and regional banks.”   Continue reading “Moderate growth in Apartment sector will continue”

The Worst Housing Crash Since the Great Depression

This is reposted from an article at DoctorHousingBubble.com.

The worst housing crash since the Great Depression just got worse. What happens when home values pop in other bubble metro areas? New home sales fall 82 percent from peak versus 80 percent during the Great Depression

This is likely to be the first ever global economic disaster caused by real estate sponsored by big banks.  During the Great Depression real estate values collapsed as the economy contracted and millions lost their jobs.  That is the typical pattern of real estate bubbles bursting.  Something in the economy creates a vision of a new paradigm and money starts flowing into real estate as a consequence of this euphoria.  This happened inJapan as their economy and stock market frothed over with mania.  There is no time in history that the entire world from the U.S. to Canada to Australia to Spain to China suddenly went into a massive trance and believed that real estate suddenly would carry the weight of every single economy forward.  Of course what we are seeing is the unraveling of this system.  The bubble has burst.  Yet the banking system that relied on real estate as their game of choice in the casino cannot come to terms with reality because it would render them insolvent (which they are by the way).  So instead, the charade continues yet the public is catching on to this mass deception.  What happens when the worst housing crash since the Great Depression gets worse?

Deepest fall in new home sales ever

new home sales

There is little demand for new home sales because the public with weak incomes and an economy that is still struggling has little appetite for overpriced homes.  Even if the appetite were there, the incomes are certainly not.  The juice that kept the game going was debt.  As we have seen with the debt ceiling bread and circus we might be reaching a limit in regards to what we can take on without adding on subsequent real growth.  I know when the contraction started occurring some could not envision the correction lasting longer than a year or two.  People have been conditioned to quick changes and have a hard time realizing that the housing market of the 2000s was a historical mania.  That is it.  It is done for a generation just like Tulip mania or any other mass delusion.  The fact that home prices are now inching closer to early 2000 price levels simply does not jive with the religion many believe.  During the Great Depression, new home sales fell 80 percent from peak to trough.  In this crisis we have fallen 82 percent.

The chart above is rather startling but makes sense given that we have 6 million homes lingering in theshadow inventory.  The way banks are leaking out inventory we are bound to have a lost decade (or two) in our books.  Unless something radically changes the policy is to bleed the productive economy for the ill-gotten gains of the big bankers running this country.  This is why after trillions of dollars funneled to the banking sector little has been done in terms of boosting incomes or home prices.  Where do you think the money went?  It certainly didn’t go to adding jobs:

civilian population employment ratio

This is a troubling chart.  The civilian employment-population ratio is a better measure of employment success in our economy.  We are now back to early 1980s levels.  What is more troubling is the jump from the early 1950s on had to two with the rise of two income households.  The two main driving forces for this reversal are a poor economy and demographics.  How can people look at these trends and think things will reverse?  Even if things do change the demographic change is built into the system.  Some point to wealthy immigrants as the catalyst for rising home prices but we are unable at the moment to provide quality jobs to the masses of the unemployed.  Unless we find an age reversing pill this trend is sticking around for years.  There are limits in life even though Hollywood and Wall Street would like to convince people otherwise.

Bubble still going on in many U.S. areas

The general collapse in home values has left many believing that the housing market has reached a trough simply by default.  That may be the case in many states where home values never really had excessive bubbles yet many highly populated metro areas are still in significant bubbles.  When these bubbles burst financial losses will be large yet again and you can expect the financial system to dig deep into the pockets of struggling Americans.  What happens when these places pop as they will?  Let us look at some of those overpriced regions:

most overpriced metro cities in united states

Source:  Fiserv

This data is current and you can see even after major price corrections these areas are overvalued.  On both coasts, these bubbles still rage but California is still the leader in bubble metro areas.  Folks are delusional thinking this is sustainable.  These bubbles will pop.  It can happen quickly or drag out for years.  The above ratios are flat out unsustainable.  Just take a look at the median home price to median income ratio.  This will pop.  In addition, many of these areas have high unemployment rates.  Take a look at San Diego that nearly has a double-digit unemployment rate for the county.

What is important to also note is that these prices have already fallen by 10, 20, and even 30 percent in many cases from their peak.  They are still inflated.  The shadow inventory in these markets is dramatic.  At a certain point reality will need to be faced and when that day comes, you will see prices moving lower.  That is the only way out or we can grow household incomes and double it in the next few years but do you see that happening?  I would love to see evidence that our financial system would reward productive behavior instead of putting all the money into the hands of the banking system that largely operates like a vampire on the productive side of the economy.  We do need banks, but investment banks should be spun off and allowed to make their own non-systemic destabilizing bets.  At the moment the financial system is simply looking for ways to pilfer funds from the majority of Americans.  If they could find a method to profit from slamming Americans lower they would do it.  Many a hedge fund made billions by gambling and speculating on the failure of American homeowners.

So what happens next?  It is an interesting side note that during the typically hot summer selling season with mortgage rates at all-time lows that home sales are weak.  Why?  At a certain point it boils down to income.  Many that have their brains cleansed by the 1984 media machine think that just because many people have luxury cars or dress a certain way they are wealthy.  They are not. The data does not back up this phony studio set and many are starting to realize that the financial Wizard of Oz is more smoke and mirrors than anything real or tangible.  Certainly there is tremendous wealth in the country but not enough to support entire metro areas with inflated prices.  Just because the mainstream press isn’t reporting this next bubble bursting doesn’t mean it won’t happen.  Heck, they didn’t start talking about the most obvious housing bubble in generations until it blew up in their face.