In August the sale of unit #421 at The Palms (555 4th Street) closed escrow with a reported contract price or $700,000, purchased for $789,000 in 2006. The sale was “subject to lender’s approval,” however, so perhaps not a “real” comp.
Then again, as a plugged-in tipster notes 555 4th Street #521 has been on the market for seven months and the price reduced five times. Now asking $699,000 after a month at $749,000, and once again, purchased for $789,000 in 2006.
Perhaps the real(ity) is so.
∙ Listing: 555 4th Street #521 (2/2) – $699,000 [MLS]
∙ The Palms (555 4th St.): Secondary Market Slowdown And Short Sale [SocketSite]
∙ To Comp Or Not To Comp, The Question Of More Than The Day [SocketSite]
#313 is also a 2/2, short sale, and listed at $650K. Purchased in February of last year for $800K.
Let’s not forget about #401, also a 2/2. In Escrow now, the listing price had dropped from $679k to $599k.
“Perhaps the reality is so. But probably just at The Palms.”
What are you implying?
Once baseball season starts in April, this place will see an immediate increase of 50-75K in instant equity. Too bad the seller couldn’t hold out a bit longer.
What do you guys think is a fair price for Unit #530, 1/1 at 580 Sq Ft. It’s a foreclosure asking 409K.
“baseball season”? LOL, it takes a special breed to be a realtor….
I think DealMaster is the funniest poster in this site these days.
Really, DealMaster? Maybe you should put your money where your mouth is…and buy one.
Awww, The Palms is the new trainwreck of SOMA.
Following in the footsteps of The Beacon.
Soma Grand should be next ….
No surprise there’s so many short sales in the building. The building is just horrible especially all the units who face the courtyard. They are practically 7 feet away across from the neighbors. Ridiculous lights and Palms trees trying to look like it belongs down in Miami. Horrible architecture. Btw, What ever happened to the planned restaurant on the ground level?
Shocking how some SOMA buildings are relatively strong while others are sinking away with the market. Compare The Palms to The Brannan or The Beacon to 200 Brannan. All within blocks away from each other but miles from perception of value.
I actually really like this building, and I think it is one of the more youthful, fresh buildings in SOMA. I have never been inside, but I really like the clean lines, the colors, and the palm trees on the sidewalk. I think it would make an awesome rental property.
I think it would make an awesome rental property.
Wow, what a statement. I would definitely buy it to rent it out if it were priced at 100X monthly rent and if I had a feel rents would continue to go up.
But,
1 – This could rent for 2800-3200?
2 – The rental business is currently undercut by a) the economy and b) failed flips/developments offered as rentals.
Therefore my final offer would not even be close to half the 700K wish price. Heck, as a landlord, I would even have to pay property taxes and HOAs which would cut my rent income by more than 1/3!!!
Yeah, this looks like Miami OK.
Is that Carrera or Calcatta De Oro on the floor?
@ condoshopper:
My 2 cents on #530. There are no studios listed on craigslist, but the Palms 1-bedrooms are renting for around $2,500 – $2,600/month. Let’s say $2,000/month to rent a studio, then.
From that, deduct HOAs of $420 and property taxes of $384 for equivalent mortgage of $1,200. But we need to factor in the interest deduction. Very simplistic, but I just gross the payment up by 25% to $1,500 (of course you’d need to run your own stats through Turbo Tax to see what the deduction is worth to you).
With a 30-year fixed at 5.65%, the implied mortgage amount is about $260K. Divide this by .8 for your 20% down payment, and it backs into a rent-equivalent price of $325K.
This is admittedly sloppy math – interest deduction is crude, ignores maintenance costs and the prospect of rents coming down, etc. But I think $325K is in the range for a fair value here. I’m sure others will opine if I’m wrong.
Dude,
Your calculation clearly misses out on the goodwill value of the “pride of homeownership”, for one thing. Secondly, the owner can expect an appreciation rate of 7-10% in annual rent increases which cannot be said of other asset classes during this down market. Furthermore, as rates are set to come down to 4.5%, I think this unit is at or near its market value.
Owning a place clearly misses out on the “freedom of renting,” which is an intangible benefit that lets me move every year if I so choose, allowing me to experience new neighborhoods, etc. And being able to paint a wall is offset by the convenience of not having to fix/replace stuff when it breaks. So let’s say the intangible benefits of owning are negated by the freedom of renting.
Secondly, 7-10% rent increases in the current economy is an extremely aggressive assumption. Most folks believe rents will stay flat next year, and may even fall as layoffs mount, the economy gets worse, and more inventory comes on line.
Finally, if rates do go to 4.5%, my analysis does change slightly. It increases the loan amount to around $300K, which backs into an equivalent value of $370K. So #530 is still $40K overpriced if you can get a mortgage at 4.5%.
Dude, condoshopper, agree completely with your valuation on unit #530.
The only kicker is that the rents may be heading down soon. Although if I was paying $2000 for a studio, I will consider paying $300-325K to buy. In 5-10 years, the place may not sell for any more than that, but I’m willing to assume it wouldn’t sell for any less either. So if you end up having to sell, you only stand to lose sales commissions, closing costs etc. and not your whole down payment.
They started by trying to sell unit #530 for $499K… down 90K so far. They’re already half way there… although it needs only one guy to come along to set a higher comp.
Wasn’t life so much simpler when home prices only went up?
With respect to the last two posts about #580, I think this places is somewhere in the middle. $325,000 is a bit low because it doesn’t take into account the long term changes (such as rent increase), but it DealMaster there is no way those increases make the current price ok.
I mean seriously, you can pick up a resale two bedroom at the Infinity for about $750 per square foot and this place is selling at $705. THAT IS CRAZY!!
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Who in the hell has $30,000 a year to spend on RENT for a 1 bedroom?? Who are these people? Where are they coming from? Where do they work?
“Your calculation clearly misses out on the goodwill value of the “pride of homeownership”, for one thing. Secondly, the owner can expect an appreciation rate of 7-10% in annual rent increases which cannot be said of other asset classes during this down market.”
I’ve said it before and it bears repeating: DealMaster is the best comedy act on SS.
“Who in the hell has $30,000 a year to spend on RENT for a 1 bedroom??”
That seems to be the going rate from what I’ve seen, +/- $200/month. I’d wager most people renting 1-bedrooms are couples, so you have 2 incomes. Most singles are probably in studios or sharing 2/2 apartments. Not that bad when you split it.
But given the asking price for the same place at the Palms is $569K (#644), a bigger question is who has $115K in cash down PLUS $40,000 a year to spend on BUYING a 1-bedroom?
We are a mid 20s DINK who pay that much for rent in SOMA…we wanted in-unit washer/dryer, gym, parking etc as well as the option to walk to work downtown without having to muni rather than more space in another neighborhood. The couple that previously rented our condo was unmarried, living together, probably similar situation.
The buy vs. rent calculation in our building was insane, it was a no-brainer to rent.
Re: “Finally, if rates do go to 4.5%, my analysis does change slightly. It increases the loan amount to around $300K, which backs into an equivalent value of $370K. So #530 is still $40K overpriced if you can get a mortgage at 4.5%.”
….and what hapens when inflation(from trillions of dollars flooding the system)kicks in? What does one do if they bought in a 4.5% market and try to sell in a 7% market?
…but most people think interest rates can never go!
“What does one do if they bought in a 4.5% market and try to sell in a 7% market?”
Finally, some sense. The inflationists always miss this. Some of the big Government worshippers think the Great Father will extend low rates by directive to “help” the poor owners (because they’re voters, you see – hehehehe). Pull the other one. What’s the ratio of stimulus check dollars sent to individuals to spend voluntarily as they wish versus the number of dollars given (or pledged) to banksters and “systemic crisis” corporations? Maybe 50-1 already?
Once they’ve got the “crisis” ringfenced (meaning the big banks are no longer threatened with insolvency – and we are basically there) they’ll let the population absorb the losses. Count on it 🙂
But more seriously (not that I don’t mean what I wrote above – I do), in an inflationary world, mortgage rates will likely go higher than 10%. People who bought houses at 4.5% rates will see a huge downward price adjustment in the house.
To answer your question, “what does one do?”: I’m guessing they have a few choices. They could enjoy the property for the next 10-15 years at their nice low interest rate. Over time, rents will rise enough to make this not look so bad, as they will be enjoying a very low financing rate, but on an overvalued asset. Who knows how long this would take. Maybe 3 years in most of the US at these prices, 5-8 for SF? We’re all just guessing.
If they have to sell, they’re out of luck. 🙁 They get to absorb the loss. That’s why I am betting that the USG will not roll out any “no downpayment” programs. If it does, I’ll be all over that deal, trying to figure out how to buy 10-20 properties, and so will anyone else with brains.
There is a third possibility. If the property was near to cash flow positive (as a hypothetical rental) when it was purchased at 4.5%, then the property could be rented out. It probably wouldn’t provide a reasonable return in the early years, but as inflation takes hold, I bet rents will rise enough to make this not such a bad bet. You would make your return primarily on cash flow, not price appreciation.
No chance IMO that rental strategy will work in SF on typical condo and SFH situations today (excluding the TIC-rehabber “specialists”, the scammers who game the affordable housing subsidies, condo conversion “lottery tickets”, etc.). The rent/buy is too out of whack, and rents and prices will fall for a while. But I do think this could be a sensible strategy in some markets that truly have crashed already. FWIW, I am interested in this avenue right now.
I agree with Satchel in one large extent, all this summers sponsored government intervention is going to cause huge downstream side effects and unintended consequences.
However, they might as well offer mortgages at the tbond rate since the anency mortgage debt is going to be guaranteed by the government anwway. the spread between agency debt and treasury is the biggest scam out there right now. so why not just offer it at 4% or 3%? It really doesn’t matter.
Now, if the dollar starts tot fail and we start to offer our debt in other currecnies mortgages will go up to 10%–or maybe even more. It’s gonna be interesting.
Mortgage rates may shoot up, but salaries aren’t going anywhere for a while until the unemployed get hired. That means rents won’t follow other prices up and so home prices will fall as the rent vs buy gets further out of whack.
If you buy when rates are 4.5%, but you have to put 25% down, you are in essence locking in that 4.5% interest rate on your downpayment for the duration of the time you own the place.
The better strategy is to wait until rates go way up, but prices come down. Then you lock in a higher interest rate on your downpayment. You also have a property tax benefit that stays with you. And you can refinance when rates decline and reap the benefits of that as well.
That is, IMHO what people did in the 80s and why housing availability became so poor but rents stayed pretty low starting in the 90s (dot com bubble execpted): so many people had refinanced by the 90s that they never sold their homes: they just rented them out – it was profitable to do so.
We could be approaching the perfect storm for housing prices: no one has jobs, but the world stops lending to us, and interest rates shoot up to the sky.
I think coop’s idea about offering mortgages tied to treasury rates makes a lot of sense, and if implemented sensibly, could really help the situation.
(Bernanke doesn’t have the sense enough to understand what he is doing. He’s just a tool of the banksters.)
But, a program rolled out by the USG that worked something like this would make sense IMHO: the USG offers mortgages at treasuries + 100-150 bps. The only sorts of mortgages that are offered are fully-amortizing 15 and 30 year mortgages. Qualification standards are strict – NO exceptions. 25% down with seasoned cash, and no more than 31% DTI (with 3 years’ worth of 1040s as proof) for the full doc option. 50% down, no income verification, for the stated income option (anyone who has saved and is willing to risk 50% of the price is a good bet).
No limit on the amount of any individual mortgage, as it would be well-qualified by the income verification process and/or well-cushioned by substantial downpayment requirements.
The USG could hire some out of work mortgage bond structurers at 1/10th their previous salaries to help the USG duration match their exposure with issuance of new treasuries.
Do all this through an entirely new agency, and shut down the abominations of Fannie and Freddie (put them into run-off mode).
A program like this demonstrates to foreign lenders that the US is serious, and the well-collateralized (by houses purchased by people with skin in the game and who can actually afford them) new issuance of treasuries required to get the program started would pose no funding issue. The USG at all costs must avoid an external accounts crisis or we get into an inflationary depression instantly a la Indonesia 1997-98 or Russia 1998-99 because of the imbalance of our current account.
Such a program ensures that the housing finance market doesn’t shut down entirely, although there will be tremendous pain in the early stages as price discovery proceeds unfettered by the siren song of potential bailouts. Would Obama really be prepared for “shared sacrifice”? I think he’s got a golden opportunity to take the medicine now, because the current path makes reelection prospects in 4 years very dicey.
More importantly, as opposed to the idiocy of offering below-market effective financing that is being tossed around (4.5%, no doubt with all sorts of relaxed downpayment requirements, gaming of the Fannie/Freddie jumbo caps etc.), such a program would be punitive enough that the private market could begin to offer easier terms for good risk candidates. That is why the GSEs must die, and this program must be run direct as a government “bank”. If the fraudsters think they will be able to pass bad loans off to their Barney Fwank-regulated buddies, guess what? They’ll write bad loans.
Last, the punitive nature of the government program makes the USG lender of “last resort” not first, just as those 19th century commentators like Bagehot said was necessary: lend freely against (only) good collateral, (only) at a penalty rate. Ultimately, as the economy rights itself, and house prices reach sensible equilibrium, the terms of the government program will look too harsh in comparison with what the private lenders wil be offering, and the program could die – as Fannie should have after WWII (it’s senseless to think that the regulation “failed” – it was designed to fail.
There is of course no chance that this will be undertaken.
I like this proposal LMRIM. The only additional requirement that I would add is that this direct lending program should be for owner-occupied homes. It is fine if people move after they get the loan, but I don’t think this program should be there to bail out speculators.
What you are proposing is very similar to FDR’s Home Owners’ Loan Corporation. The HOLC only offered loans for three years, then ran itself out, finally closing at a small profit (to the taxpayer) in 1951.
I actually expect something like this to be proposed early next year. Maybe the “shut down FNM and FRE” part of your proposal is unlikely, but the rest is not.
Well clearly the whole agency debt thing is nonsense. having this large of a spread is a big waste of money for the USG.
My honest gut–Fannie/Freddie 100% nationalixed by q2 next year. Mortages set with a spread—above treasuries just like in satchel’s plan.
That said, one of these friggen days–those treasuries are going to start to fall and yield are gonna go through the roof. at that point –it won’t really matter.
btw–I like the 50% no doc and 25% doc income plan satchel has. that’s the way it should be.
You’re all ignoring the effect of a massive collapse in the price of oil. That’s a bigger stimulus than any government plan could ever be. High oil prices constitute a massive transfer of wealth from industrialized nations whose savings rate is close to zero to oil-producing nations whose savings rates are 50% or higher. It effectively removes hundreds of billions from circulation. Now that trend is reversing dramatically, and it will matter. A lot.
Satchel’s idea is a good one, since it makes the hypersavers an offer they can’t refuse in order to recapitalize the financial system — a modern-day “War Bond” if you will (someone else can check if that’s a good analogy or not).
If that doesn’t repatriate Satchel’s gold bars, nothing will 🙂
Great fiscal solution LMSiM, but, as you note, not a great political solution.
You forgot to include sources of cash for people to siphon off and give to A)favored political causes so that they can “sterilize” their otherwise dirty profits (“I know FM/FM make obscene amounts of money, but they do give 0.0001% to ACORN”) and B) the politicians who regulate them.
They will only give that cash away in order to protect C)their own obscene profits, so you need to have that in their too.
Thus, the mortgage rates need to be Treasuries + A) + B) + C).
Next, you need to protect the home builders and real estate sales people, because they spend lots of money on campaign contributions and have a lot of votes. So you’ll need to modify your downpayment requirements a bit, or no one will be able to afford a home. I’m thinking 5% down for full doc instead of your 25% (are you nuts: no one can afford that) and maybe 20-30% down for no doc: can’t have sales volumes reduced for any real amount of time!
Now up the interest rates to include the risk of default with those sub par down payments, and you pretty much have what we have now.
Jimmy- how long will oil be so cheap? It’s only because the world economy is so poor that it is so cheap, nothing else. As soon as things start leveraging, oil will go back up, economies will collapse again, and the circle of life continues.
Of course you’re right, tipster. It’s not a workable solution politically, most especially because that is the only governmental involvement I would like to see in the housing market. (We need to get rid of FHA, FHASecure, Hope for Homeowners, all new Fannie/Freddie origination, etc.)
It would only be an interim solution until the private markets recover some balance, a modest emergency concession that even a die-hard small government guy would have to make in view of the tremendous mess that has been created by governmental involvement in home finance over the past 80 years.
The beauty of a system like I propose is that there is no need for involvement by political pinheads regarding who gets the mortgages, how big the program is, etc. Set the guidelines, make them unchangeable, and the market will sort out the rest (including rate of homeownership, price of housing, who “wins” and who “loses”, racial disparity of homeownership, etc. – all the “hot” buttons). The distortions introduced by the tax code (primarily the deductibility of home mortgage interest by owner-occupied residences) should also be eliminated as well, as long as we are all dreaming….
US treasury rates would discipline the program and rise or fall partly on the basis of the broader market’s “fair value” estimate of the collateral of the United States (productivity outlook, taxation ability, and value of the residential real estate market). There would be no need to distinguish between owner-occupied or speculator, refi, etc. Everyone’s “green” is as good as anyone else’s when it comes to cash downpayments and income verification (a system of honest current appraisal would have to be created, especially for determing equity levels for refis – it’s less of an issue for new purchases where infinitely smarter purchasers are actually risking 25-50% of their own hard earned dollars – and I’m guessing a relatively low level function like appraisal is suitable for a salaried government bureacrat). BTW, the program would have to extend to non-owner occupied. Otherwise, who would rent the houses to all the people who are going to get kicked out of their houses when the other “bailout” programs stop?
Politicos would never go for it, as you note. Among all the other reasons you cite, they prefer controlling the “outcome”, not the process. No historical evidence of unintended consequences will ever convince the government “religionists” that planning deosn’t work. Promises to control outcomes constitute one of the political class’s major sources of control over an infantilized population that has traded liberty for the false promise of government benificence.
As you can tell, I’m not sanguine about what’s going to happen. But I do think things will look up for a little while (maybe the next 3-6 months?) and there may be a tradable rally in here in a number of risk assets. For the first time since end-2002 I am getting excited about instituting new long positions.
In response to Jimmy and oil prices, I actually started trading oil from the long side just last Friday morning 🙂 (I’m sure you remember from your forays into trading I’ve been a big bear on the entire commodities complex except gold for most of 2008 and especially since mid-summer).
I think we’ll get a nice Obama ‘bounce’ in most markets. I’m going long on a few select equities and some commodity related plays (especially oil refiners). Commodities in general should rebound a bit, but things always overcorrect to the downside when a bubble bursts (like it has). Oil could probably hit $80/bbl in late 2009 but that would depend on the real economy starting to pull out of its worldwide bout of deflation. Or, oil could drop to $8/barrel like it did in 1986 and take 15 years to regain its 1983 bubble price.
Hard to reconcile a sudden rebound in oil prices if continued deflation and credit contractions are ongoing especially since oil production is so credit-intensive. I’m optimistic that the Fed’s massive and immediate stimulus package coupled with their rapid reduction of the Fed funds rate to 1% may well have the desired effect and we will avoid the mistakes made in Japan (they took almost 10 years to get to the point we’ve gotten to in under 1 year).
Plus, the USD is still the gold standard for safety and security in troubled times. However bad we think we’ve got it — others are way worse.
summers and geithner will prolly go in the exact opposite direction as that.
what equities are you going long sathcel?
financials/industrials–big build out stuff?
I went long gold a few weeks ago–and short tbonds, and long commodies using options. it hasn’t been super pleasant so far:)
Our firm also believes in the near term threat of real estate inflation, especially that as described in this article:
http://ny.therealdeal.com/articles/los-angeles-investment-by-chinese-accelerates
Once the Chinese begin buying in force, we fear that homes in SF will become increasingly unaffordable to Americans in the greater bay area. As cliched as it sounds, “Buy now or be priced out forever” is no longer a RE slogan, but a real concern to the nationality of our great city.
What ex SF-er says about investing in financials (you can’t really to it because it is controlled by a very few people who can break you in an instant) is just as true for oil.
The Saudis and other oil producing nations treat us as the goose that lays golden eggs. That goose is sick right now and so they aren’t going to be taking any of our gold to try to nurse us back to health. They’ll take that gold when we’re healthy again: for the time being, they are going to make sure we have all the cheap oil we can drink.
On top of that, they are terrified of Obama’s energy independence plan and they are going to try to take his sights off of them.
$40 Oil? How is that even possible? If you don’t realize they are doing that to “manage” our economy, you’re nuts.
LMRIM,
Do you have any insight with respect to the yuan/usd in the coming months?
By the way, you may want to change your name to LMRIMLNTCO (Laughing Millionaire Renter in Marin Living Next to Chinese Owners) 🙂
The analysis doesn’t have to be too in depth. A page or two will suffice.
@DealMaster – In all seriousness I do not think China will be a significant force in SF real estate values. Much like the Japanese in the late 1980s, succesful Asian economies tend to very late to the party 🙂 The nondeliverable foward market for the yuan has gone all squirelly in the last few weeks (especially the last week), and I think a devaluation rather than significant upward adjustment of the currency is more likely.
China economically is a big mess. Their yuan printing activities in the last few years (offerred in exchange for the dollar credits of their exporters) have resulted in off the chart unsterililized money growth, domestic inflation, and consequently a real appreciation of their exchange rate. Not an enviable position to be in when a large trading partner (the US) that also happens to be 25% of world GDP goes into deep recession/possible depression. China’s equity markets have collapsed, their banking sector is shaky (how could it be otherwise in a centrally planned structure?), and the population threatens civil unrest next year. Additionally , although China runs a relatively small trade surplus with the rest of world (they are large importers of raw materials, fo instance), it has perennially run fairly large fiscal deficits, which become problematic as growth slows (as it has).
In other words, a perfect opportunity to start buying Chinese stocks (slowly, and deliberately, and with a long termn view only) because you buy when there is “blood on the streets”, but not a good time to expect the Chinese to start buying US assets. Have you heard about any equity investments by Chinese since their disastrous forays into Bear Stearns, Blackstone, et al.? 🙂
Oh, and DealMaster, thanks again for the comedic cite to that LA Times article in your 6:06pm post above, and for inadvertently demonstrating my point.
That article dates from September 2007, and talks about Chinese “infestors” buying ral estate in LA. Just how much is LA real estate down in the last year? 🙂 As I said, always late to the party – I’ve seen it all first hand in real traing in Asia in the 1990s.
Also, what was the level of the Chinese domestic stock market in September 2007? I’m sure you know that it was at an all-time high (around 5500 on the Shanghai exchange), and that it has now fallen about 65% from that level. One of the most sublime wipeouts of wealth and bubbly foolishness I have ever witnessed.
China will have its hands full keeping its people fed and employed and peaceful next year. Don’t lose too much sleep people worrying about the Chinese coming to price you out of your hometown.
LMRIM,
I’m not sure what the date of the article has to do with anything. It’s always a good time to be a buyer in a bear market, no? At least the Chinese still have a surplus. I can’t see any better place right now for a foreigner to spend his money than in CA real estate. The cranky rioters and hungry folk in China aren’t really my typical client base, so I imagine these things won’t affect us much.
@cooper & Jimmy (Bitter Renter) I’ll post something in a day or two about equities/trading, etc. when no one wil care that it is so OT.
@tipster – you’ve got more faith in OPEC’s ability to cooperate with each other than I do!
About “who” is directing it all – there have always been rumors that the CIA “allowed” the runup in oil post-1998 in order to pay the oil sheikdoms back for their cooperation in helping to bankrupt the Soviet Union by annihilating the price of their only source of hard currency in the 1980s. It’s such a crazy theory I love repeating it 🙂 (Bush pere head of the CIA, Bush fils an oilman….)
Seems to mee to be a great unit, at a great value. It is interesting to me that buildings like the Brannan, have such a different value. Amenities and the extras really must make the difference in the buyers’ eyes.
“I can’t see any better place right now for a foreigner to spend his money than in CA real estate.”
??!!
I’ve got nothing against California RE, but why is this the best way for a foreigner to spend their money ? Since foreigners are by definition remote, a RE purchase would be an investment rather than a home. They’re not receiving any direct utility value of shelter, nor pride of ownership, nor stability.
There are thousands of investment vehicles out there. Why would a foreigner choose to buy RE in an unstable unpredictable market ? On top of that a RE purchase is messy and illiquid compared to pure paper transactions.
LMRIM:
where are those bond vigilantes you talked about? the monetary base has gone parabolic!
notgreat,
I don’t think I talk about bond vigilantes too much 🙂 True, the base has gone parabolic, but I think the bond market is correctly anticipating that the increased printing will not be enough to offset the deflationary (in the sense of credit contractionary) falloff in lending and risk preference due to falling asset prices. In other words, similar to the Japanese situation in the mid-1990s through mid-2000s (and continuing), in which high power money in theory exploded but “price inflation” never took hold.
My quibble these days is with people who think the USG can spend enough (and the Fed can “print” enough) to “engineer” 10% (plus or minus a few %) inflation per year in CPI, in order to bail out the real estate and other asset markets. I think if this ever came to pass in an environment in which the US is running an external accounts imbalance, you would quickly see the resurrection of those bond vigilantes and/or a funding/currency crisis.
(You’re the native Russian, right, or am I misremembering posters? Anyway, good to see a post from you.)
a few thoughts:
1) on japan: what you say is true, but didn’t a lot of the money japan printed go outside japan to bid up prices via the yen carry trade? so the new money did create price inflation, just not in japan. with ALL the world’s CBs printing money in unison now, won’t the same thing happen, just on a bigger scale? (now, it could happen that all the new money will go into Treasuries or something, so that’s the tricky part of trying to invest given the inflation being created)
2) my mental model is this: we have ~$50T of debt (private + public) and a 350% debt to GDP ratio, something that cannot be sustained given current income levels. to get back to “normal” levels, roughly half the debt needs to be extinguished, so about $25T. if the debt stays in the private sector, it’ll be defaulted on and we’ll have a deflationary depression a la 1930s. if the debt is backstopped by the govt, it’ll be inflated away (my opinion, not certain). so far the govt/fed have committed to backstopping about $8T of private sector debt (there was a nice chart on sfgate showing this). i don’t see that this is going to be reversed under obama — in fact it’ll likely accelerate. so assuming that all the bad debt is being rolled into one “bad bank” known as the US government, i just don’t see how the USG can *afford* a protracted period of deflation — tax receipts will fall off a cliff, but the debt is still there to be serviced. they’d have to cut entitlements which i think is unlikely. therefore, i think they’ll have to “print until they run out of paper”, but since they’re doing it as part of an international CB effort, maybe the dollar doesn’t get crushed (relatively speaking), but gold does well.
of course i’m probably smoking crack.
3) yep, that’s me ;). thanks for remembering
notgreat,
1) Absolutely right about Japan and the exporting of inflation. Were you trading ASEAN then? (I was) 🙂 Seriously, the “original sin” of the current unprecedented serial bubble blowing IMO is the Japanese implosion and subsequent liquidity rush and carry trades. At some point, we may well find the USD a “funding” currency for better NPV opportunities elsewhere, triggering inflation and asset bubbles elsewhere. (The US as a destination for capital IMHO is done. Dead. Just like Western Europe.) I am making a big bet on Asia going forward, and (potentially) Africa if I can figure out a way to play it.
2) We very much see eye to eye here. I agree roughly with your numbers as well (but they omit the PV of entitlement spending – they’ll be defaulted anyway in large part, so no big omission there). Robert posted some interesting stuff that I’m still puzzling over, but I think the lesson of Japan and US Great Depression experiences is that in periods of mild price deflation/serious asset price deflation/risk aversion, the sovereign ability to expand debt and roll over existing debt is very large – larger than any of us guess. I think this is the way the US will go. Ultimately, we’ll get a lot of inflation so long as our current account gets into some semblance of balance before this commences – otherwise, the rise in interest rates that will accompany high CPI-type inflation combines with a highly leveraged total US balance sheet (350%+ debt/gdp) would trigger the mother of all collapses. Just think how bad this one has gotten, and interest rates are near historic lows!
3) I was back on the East Coast last week, and it turns out that my brother has met and taken in a 24 year old Ukrainian au pair who’s been in the US all of 3 weeks. I spoke a lot of Russian with her, and boy is my Russian poor after all these years! 🙂 (It was never very good I’m afraid, anyway…)
1) haha no, i wasn’t reading ASEAN then. i’m a software engineer, not a trader (so anything i say should be taken in that light). though it seems lately that reading financial blogs and books has become a second job, it’s just too interesting! haha
2) i read a research note from david rosenberg of merill lynch which suggested that roughly $3T of asset allocation (institutional and household) may switch from riskier assets into Treasuries if historical trends return to norm (apparently they’re underweight Treasuries now). this tends to support your view, but for how long? $3T is chump-change the way these guys are spending money — or do you think they can borrow even more than this? in any event, even if they’re able to borrow enough for the next year or two, when they reach the end of that rope, what then? you really think entitlements will be defaulted on, as in repudiated? i tend to think they’re more likely to be paid in debased dollars.
also, they seem to think that even though rates are near historic lows, they’re still not low enough! bernanke is buying mortgages and printing money to do it: http://www.newyorkfed.org/markets/pomo/display/index.cfm?showmore=1. small for now, yes, but he’s following his anti-deflation playbook to a letter so far — and he appears to think he can control (even long term) interest rates so why wouldn’t we take him at his word? and i think he’d love a weaker dollar: brad delong gave a talk at my company recently and said as much (he said the fed as a matter of policy wants to and *should* blow up an export bubble to replace the housing bubble — i kid you not) and apparently he’s in line for a treasury post in the new administration. he was very surprised and disappointed by the dollar’s recent strength in view of this.
3) a 24 year old au pair? as borat would say, great success! i’m actually from the part of the FSU that became ukraine, but my ukrainian not so good.
notgreat,
2) I think the USG might surprise us at just how willing people are to finance large deficits with treasuries in a period of risk aversion, and they always can roll out quantitative easing, just like they did in 1942 when the USG told the Fed to buy war bonds 🙂 Lots of risks, though, for a currency crisis if the external accounts picture stays bad. Only time will tell!
Brad de Long is crazy when he talks about an export bubble. What are we going to export? Toxic paper was our number 1 cash cow for years, and we don’t know how to do anything else! 🙂 Maybe we could crate up the Inland Valley and send it to Szichuan Province.
“you really think entitlements will be defaulted on, as in repudiated? i tend to think they’re more likely to be paid in debased dollars.”
A combination of both. Social security will be partially repudiated (means testing, extending retirement age, changing the indexing of benefit accrual from wage to CPI inflation, etc.) and whatever is paid will be paid with debased dollars.
Medicare will be repudiated in toto by “repaying” promised end of life benefits with debased care.
All just IMO of sourse 🙂
3) That’s funny about your being from YCCP. The au pair told me how all Ukrainians speak Russian but very few Russians can speak Ukrainian there. She seemed really nice and friendly – I’d go back if I were you! Despite so much tragic history, I’ve always really liked almost everyone I’ve met from FSU. When I was in Moscow in 1995-96 for investment trips (intermittent), I remember the happiest guy I ever met in my life. He was the general manager of a potato chip factory just outside one of the outer rings, and he gave the greatest talk about how potato chips are the greatest things for people, for health, for peace (mir) and the final kicker was for “intelligence” (za umstvo)! I almost asked if he would adopt me 🙂 To this day, I still can’t remember anyone looking so happy to be running something.
@cooper & Jimmy (Bitter Renter) I’ll post something in a day or two about equities/trading, etc. when no one wil care that it is so OT.
The thread is pretty over now, so about your trading questions.
I don’t want to give the idea that I am super bullish US equities. I think we are in a secular bear market that started in 2000 and will continue until 2015-25 (sorry for the wide range!). I stated that at the time in 99-00 (just not on SS :)) I just think that within that overall picture, we are set for a bounce, although not nearly as robust as the one starting in 2002-03.
I trade indexes mostly, so I express bullishness by being short puts when vol is so insanely high like this, and I also have long-standing (dating from 2002-03) “core” US index positions partially hedged through short call positions. Even in 1929-54, after the first 50% wipeout, markets had a +60% bounce (by early 1930).
I don’t think we’ve seen the final bottom in US equities by any means. Bottoms are processes IMO that are not accompanied by VIX readings in the 60s! However, perhaps the final bottom is not that far below what we have recently plumbed (750ish on the S&P). Perhaps 600-700 as a low? Who really knows? Time will tell, but at these high volatility levels, short put strategies generate a lot of “cushion”.
I am bullish Asian equity index exposure, unhedged with regard to fx exposure, especially Japan and India (and beginning to be bullish China stocks), but very slowly and deliberately over a period of time. It’s a long term bet for me. I think the US is toast. Seriously, we’re done. (We’ll get by, of course, but absent a WWII-style event that reshapes the world, forget about it….)
I am not very bullish commodities – a lot of deflation lies ahead of all of us – I just think it will be easier to trade oil from the long side right now (I’m probably early). I just use instruments like USO and DIG – these are not huge positions and liquidity is fine in these up to $100K no problem. I don’t view these as “buy and hold” type positions – I use all the technical trading rules to try to scalp some dollars.
Although I don’t really do specific stocks or sectors in significant size, I do have small bullish bets on the energy (as hinted above), basic materials and banking sectors. I’m still short commercial REITS against my overall bullish stance right now.
I am a lousy gold trader (although I did scalp some of the paper gold instruments like GLD with some success over this past year) and really look at it as insurance positions (as I’m sure you guys know). Physical only, approximately 5% net worth, although I would increase my exposure at lower prices (and I do sort of expect lower prices at some point in the next few months – the oil/gold ratio is off the charts again – this time to the downside 🙂 ).
I hope that helps!
LMRIM:
2) that’s what i’m afraid of — QE resulting in a dollar devaluation. with T rates this low, who’s to say they’re not already doing it…
good points on how they’ll deal w/entitlements, seems very plausible.
agree brad delong is a windbag, though the US is #3 in exports behind germany (i was surprised it was #1) and china.
i’m sure you’ve seen this mises quote:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
i think it captures out current predicament succinctly. the government isn’t letting anyone go broke (well, except lehman), and is forcing lending despite the banks’ unwillingness. seems like a recipe for a currency crisis.
3) i’ve been back (kiev, moscow & st.petersburg), still have relatives there. if you’ve never been to st.petersburg, highly recommended — much more scenic than moscow IMO. funny about the happy potato chip maker guy — russians aren’t typically known for their sunny dispositions, haha
@ cooper & Jimmy (Bitter Renter) –
I thought I was a bear saying (above) that US equities will be in a secular bear market until 2015-25. (By secular bear market, I mean that it won’t regain its nominal 2000 or 2007 highs again on a trend basis until 2015-2025.)
Look at what Tobin’s Q ratio is forecasting today:
“The S&P may plunge another 55 percent to a trough of 400 by 2014, the strategist said.”
“The government’s efforts will eventually fail as ballooning government debt devalues the dollar, causes investors to flee U.S. assets and takes the S&P 500 to its eventual bottom in 2014, Napier said.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKNSK0gYlqB0&refer=home
I like to be a contrarian, and am usually inclined to see doom and gloom forecasts like this as a contrary signal, but I think this time it really is different….
(Nevertheless, even Napier foresees an up to 2 year bounce for markets until the investing public realizes that the Fed and the USG are going to fail at their reflation efforts. There is 100% certainty IMO that they will fail, but I hope Tobin is right that we get the bounce. It’s near impossible to be short here IMO and higher prices would be welcome as a way of increasing the risk/reward again on downside bets against the US economy.)
LMRiM,
Thanks for keeping this thread going and passing on your long-term outlook. There are many of us here who have benefited significantly from your insights over the past year.