The definition of "Inflation" is when the "value" and "price" of some of the most widely held and most used assets fall dramatically in price... NOT!!! Well then, why are all the financial rags, blogging pundits and mainstream media outlets crowing about inflation? Mr. and Mrs. Editor, stand up and stick that "S" on your chest. That's right, not Superman, but "Stagflaton Man".
Here's a quiz for you. An ages old correlation that has pretty much remained rock solid is now upon us. Real estate has been highly correlated to inflation and has acted as an inflation hedge for a very long time. This makes sense, since hard assets that both throw off income and have an actual demand for physical use (in other words, they have have intrinsic value) that hold when fiat currencies assimilate toilet paper in both value and use as input prices skyrocket. The question du jour is, "What happens when you have a glut of unused real estate supply abound in a tight credit environment, a guaranteed increase in rates AND higher input prices?". Of course the smart people out there (in other words nearly everyone with the impetus to read BoomBustBlog) are then forced to challenge the thesis, "So is this time different? After all Reggie, you have been bearish on real estate."
The short answer is, no this time is not different. It rarely ever - if ever - different this time. The key is the terminology. You see, many in the media are throwing around the word "inflation", and understandably so as they see prices (particularly staples, commodity and input prices) and money injected into the system go up appreciably. The problem is that the core real assets are not only in a deflationary cycle, but in a downright depression - reference In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse. How can you have inflationary input prices and deflationary real asset prices amid stagnant employment? The answer is STAGLFATION! I have been calling for stagflation since 2008, and it definitely seems as if I called it correctly. Keep in mind that this will be one of the corner stone topics discussed in the ING Real Estate Valuation seminar in Amsterdam on April 8th, which has now sold out its capacity of 250 seats -see www.seminar.ingref.com. Amsterdam is a very interesting city to have such a discussion, for the pundits there are calling for a 25% office vacancy rate at a time of increasing inflationary pressures. On top of that, they have actually called in the world's leading real estate bear as the keynote speaker! It should be fun. I actually have an implementable solution to this mess. I wouldn't necessarily call it light at the end of the tunnel, but it is a way of pricing, valuing and transacting in these depreciating, illiquid assets correctly. Something that is currently lacking. Let's dig in, shall we...
The ING real estate valuation seminar in Amsterdam that I have been invited to as the key note speaker (see www.seminar.ingref.com) with a capacity of several hundred seats, is now sold out. This is, of course, no surprise being that we're in a global real estate depression and I've been declaring a rate storm emanating from insolvencies and potential haircuts in Europe that will spike CRE cap rates. It is not these bombastic declarations which make the seminar interesting. It's probably not even that I have been correct about each and every past declaration. It's most likely that my proclamations of European insolvencies are coming to fore in lockstep fashion in the here and now, and right before everybody's eyes. No, I am not that smart, I don't have a crystal ball, nor do I employ tarot cards. My secret is that I'm realistic as hell and tend to look at things for what they are - no the way I want them to be, nor they way they use to be, but the way they are. With that being said, there is significant risk to those who are exposed to rate sensitive assets, with bonds, real assets and the debt behind them standing at the forefront.
What I plan on doing at the seminar is not only outlining the specific issues in REALISTIC detail, as I routinely do on my blog. I will introduce real world solutions to the risks swallowed by those who are exposed to the European (not so) slow train wreck. Yes, that's right. Not just bitching about the problems, but proffering real, actionable solutions. Till then, though...
I made specific warnings of insolvency: Portugal, Ireland and Greece - complete with hundreds of pages of analysis for my site's subscribers. Thus far, two of the three have been bailed out and the third (Portugal) is about to tap out as its yields go vertical after revealing what BoomBustBloggers already knew...
Yesterday, I made it clear that "It Looks Like Ireland Is About To Get Those Leprechaun Clippers Ready – Haircuts, Here We Come!" Today, in the news we see that...
Anglo Irish Bank said its net loss widened to a record €17.65 billion last year, reflecting the heavy discounts on the transfer of its bad property loans to the government's asset-management agency.
The government is considering folding EBS Building Society, the fifth-largest, into Allied Irish Banks Plc (ALBK), the second- largest, according to two people with knowledge of the situation. An announcement may come today after the central bank publishes the results of bank stress tests at 4:30 p.m. in Dublin, said the people, who declined to be identified because the matter isn’t yet public....
Ireland’s banks were reliant on the European Central Bank for 88.7 billion euros of funding at the end of last month, the Irish central bank said today. They may have borrowed as much as an additional 70.1 billion euros in exceptional liquidity from the Irish central bank, according to figures on March 11.
The government may have to inject 27.5 billion euros extra into the banks in total, according to a survey of 10 analysts and economists by Bloomberg News.
This would exhaust about 80 percent of the bank fund set up last year as part of Ireland’s bailout by the European Union and International Monetary Fund. The fund includes 17.5 billion euros from Ireland’s own resources....
Ireland has been one of the weakest points in the EU from a financial standpoint, and is well positioned to quickly and efficiently transmit contagion to its economic and geographic neighbors. I have been warning about Ireland for well over a year now and things are unraveling pretty much as I anticipated. Our modeling and research should have left all interested parties quite prepared. Going through the BoomBustBlog warnings in chronological order as excerpted from the Pan-European Sovereign Debt Crisis series...
- Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
- Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
- Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
- Beware of the Potential Irish Ponzi Scheme!
- Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor!
Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations
Note: Tune into Bloomberg TV at 1:12 pm EST to see me discuss the ins and outs of real estate Hopium on the "Fast Forward With Lisa Murphy" segment.
Struggle is not only Good it is necessary for a healthy, functional market! The Market Wants to Fly on its own!
Let's start this post off with a popular parable.
Once an academic and self proclaimed (albeit not necessarily mistaken) intellectual was playing outdoors and found a most exquisite caterpillar whose colors and patterns gave it a most fantastic presence. He carefully picked it up and took it home to show his colleagues and peers. Together, they studied this caterpillar and wrote papers and hyper-intellectual dissertations on it. They even went so far as to name it. They called it, "Keynesian!" and vowed to each other that they would take great care of it.
The intellectual spent the considerable resources available to him as the chairman of the most powerful hedge fund cum central bank in the world to cater to, and study this Creature called Keynesian. Every day he watched the caterpillar and brought it new plants to eat. One day the caterpillar climbed up the stick and started acting strangely. The academic worriedly called international colleagues and together they came to the understanding that the caterpillar was creating a cocoon. The academic explained to his colleagues how the caterpillar was going to go through a metamorphosis and to become a butterfly.
With all due respect to that Nassim Taleb dude who popularized the term "Black Swasn", Black Swan events are both overrated and the term is sloppily bandied about by those who may not be putting the requisite thought into just how utilitarian the knowledge of Black Swans actually are. Since you can't accurately predict, nor back test against, nor adequately hedge against such events, exactly what good is a Black Swan discussion. Well, I can answer that question. Black Swan events do maximum damage when the economic cycle is at its weakest. In Reggie Middleton's Economic Circle of Life (think the Lion King) it is the right portion of the circle in which Black Swan events do the most damage.
Actually, it is not the Black Swan events themselves that do the damage but said event do serve as the catalyst that either bust a bubble that was waiting to pop anyway, or break a structure that was hobbling along on one leg as it was - where we happen to be now in many places of the developed world - sans rampant propaganda, misinformation and disinformation from less than disinterested sources.
I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the "Peak" phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality...
Summary: I said it! Bill Gross said it (and put his money where his mouth was by selling off all US treasuries)! Common sense says it... Central Bank manipulated interest rates are too low. They will rise. What happens when they rise during a supply glut of real estate, foreclosure issues and a slow economy??? Put it this way... What made the markets crash in 2008: unemployment, slow economy, snow... Or real estate prices getting in touch with reality?
As I sit back and contemplate the content and delivery style that would be best suited for my upcoming keynote speech at the ING Real Estate Valuation Conference in Amsterdam (this is my first presentation to a large group where English is not the primary language), I am bombarded with news bits and bytes that confirm what I've been modeling, warning, fearing and preparing for - for nearly 2 years. That is almost 23 months to the date. What is it, you ask? It is the market's return to the adherence of fundamentals and global macro forces versus following the whims of the concerted efforts of central banks around the world to openly manipulate real asset, equity and bond markets on a global basis.
Really, sit back and think about it. Put some thought into figuring out how difficult it is to successfully manipulate real estate (commercial and residential), stock and bond markets in just one major country. Then give the same thought to how difficult it would be to do the same in nearly all of the developed nations who participated in this crisis. The mere attempt to do so has loaded them up with debt at a time of marginal if not negative GDP and economic upside, a disgruntled populace ripe to ripple from the causes of social unrest rising from the rife economic conditions that the aftermath of incessant bubble blowing has wrought, and last but not least - fundamentally overvalued investment markets.
For the past two years, and particularly over the last couple of months, I have been harping on the coming interest rate volatility storm. Things are now moving in lockstep, precisely as I have forecast. In the news this morning from the mainstream media...
Moody's rating agency downgraded Greece's sovereign debt on Monday from B1 to Ba1 and assigned it a negative outlook, citing significant risks to its fiscal restructuring program.
Moody's now has the lowest rating for Greece of all the major credit agencies and is the first to classify Greek government debt as 'highly speculative'.
"The fiscal consolidation measures and structural reforms that are needed to stabilize the country's debt metrics remain very ambitious and are subject to significant implementation risks," Moody's said in a statement. It added that it saw risks that conditions attached to continuing financial aid after 2013 will reflect solvency criteria that the country may not satisfy, and result in a restructuring of existing debt.
"At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody's today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves," it said.
So, the Greek officials threaten to "regulate" those who FINALLY come out with the truth. Did you guys ever see that movie called the "Adjustment Bureau"? The Greek government wants the truth "Adjusted", and will even go so far as to do it themselves - see the Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! excerpt below.
Check out the screen shots below from Bloomberg.com yesterday. Whoa!!! What happened? How did we get here? Let's just keep in mind that what may look like analytical/intellectual superiority on my part in comparison with to the literal army of Wall Street analysts and pundits may actually simple end up being intellectual honesty and a dearth of truth destroying conflicts of interests. Then again, it does make me feel good to say that I may be smart, doesn't it?