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.

 

EB-5 PROGRAM COULD END THIS WEEK

EB-5 PROGRAM COULD END THIS WEEK

The much-publicized EB-5 “Immigrant Investor” program is set to expire this week, putting billions of dollars for commercial development at risk.

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EB-5 gives visas to foreign investors who invest $500k in projects that create at least 10 American jobs. When the program first passed in 1990, it required investors to spend $1M but was later adjusted to allow investors to spend half in rural or high-unemployment areas, CNBC reports.

Its popularity has soared in recent years—sparked in large part by Chinese investors, who account for around 90% of all EB-5 visas granted—causing it to hit its visa limit of 10,000 per year in 2013 for the first time. (In 2007, only 700 visas were issued.)

The US Citizenship and Immigration Service estimates that EB-5 has brought in more than $2M and created more than 77,000 jobs, although those numbers are up for debate.

But some are concerned that more EB-5 money is being spent on projects in wealthy areas like New York City’s Hudson Yards or San Francisco’s Hunter’s Point Shipyard.

This week the Securities and Exchange Commission announced enforcement actions against lawyers charged with defrauding the system. A developer was also charged with using $6M from Chinese investors for a building conversion that never happened.

But on the flip side, EB-5 money has been beneficial, with projects like Washington DC’s Uline Arena (pictured), which is being converted into an office and retail center, as part of a project to rejuvenate the entire area.

Angelique Brunner, president of EB5 Capital, says the program needs more regulation so it can focus on the reason it was created, which was to spark economic development in distressed areas. One possible solution is a bipartisan proposal spearheaded by Judiciary Committee Chairman Chuck Grassley and Ranking Member Patrick Leahy. The proposal would increase the minimum investment in rural and high-unemployment areas to $800k and would reserve 4,000 of the 10,000 EB-5 visas for rural and high-unemployment areas. [CNBC]

 

Source: EB-5 Program Could End This Week – Commercial Real Estate

CIM to Build Tallest Condo Tower in West | Los Angeles Business Journal

CIM to Build Tallest Condo Tower in West | Los Angeles Business Journal

CIM Group of Los Angeles appears set to build the tallest residential tower west of the Mississippi River. CIM has closed on a $14.5 million purchase of nearly 2 acres in downtown Austin, Texas, the Austin American-Statesman reports.

Downtown Austin, TX

Along with Constructive Ventures and Aspen Heights, the Mid-Wilshire L.A. real estate company plans to build a 58-story tower. It not only would be Austin’s tallest building, according to the newspaper, the $300 million tower would be the tallest residential building in the West.

The tower, with 370 planned condos, could break ground early next year, the Statesman reports. The site was acquired from the City of Austin.

Source: CIM to Build Tallest Condo Tower in West | Los Angeles Business Journal

BIG DEMAND FOR NET LEASE PROPERTIES

BIG DEMAND FOR NET LEASE PROPERTIES
By Natalie Dolce

LOS ANGELES—Why are sale-leasebacks and build-to-suit deals so popular? According to Andrew White, CCIM, managing director of the western region at Gladstone Commercial REIT, and a moderator at the recent RealShare Net Lease Westconference here, the answer is because “Cap rate spread to treasury is still high.”stnllogos

The “Opportunities” panel discussed the opportunities in sale-leasebacks and the advantages of build-to-suit developments. Panelist Peter Deltondo, director of Marcus & Millichap Net Leased Retail Group, said that the most aggressive capital he is seeing in this space is from the 1031 buyers. “Most of them are coming out of the apartment sector and they are paying the most aggressive cap rates.” Continue reading “BIG DEMAND FOR NET LEASE PROPERTIES”

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/?

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”