I was in a foul mood with the summer weather suddenly on me when I came across a Newsweek magazine with the title cover America is Back. "Hot damn," I thought. Poor fools never learn. According to Newsweek, we’re out of the woods now. The problems are behind us and it’s time to pop the corks…
But before we break out the champagne, let us consider a few things.
The executive summary of the February 10, 2010, Congressional Oversight's Panel Special Report entitled, "Commercial Real Estate Losses and the Risk to Financial Stability" states:
Between 2010 and 2014 about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present "under water"- that is the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates which now range from 8 percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined by 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.
Well….yes, indeed. That is a little troubling. But it pales in comparison to the looming Real Estate Bubble never seen in history before—forming in China right now, as I write this. It’s a debt fueled bubble on turbo-charge, folks. It’s a classic case of a bubble gone parabolic: the income from the assets can’t possibly support the debt. It’s a “roller-coaster to hell” as Jim Chanos puts it. These problems will reverberate on Wall Street somehow and someway…
Then there are these other pesky, little problems: our monstrous national debt, our staggering national unemployment rate, and our own nasty real estate problem. These are dangerous problems that we will need to overcome…
And we will. But they will have repercussions.
None of this would bother me if markets were discounting these issues with ultra cheap prices. But the problem is the markets aren’t cheap—with almost every single metric showing overvaluation on the indices now (Price to Sales, Price to Book, Price to Earnings). Is getting overly giddy at this point the right thing to do? Well, shucks, of course not kids. SO, it’s best to make plans before the next volcano erupts…
Yes sir. It’s always better to be a net-buyer when there is doom on the covers of magazines—guaranteed. The history of the financial markets and some rudimentary fact-checking will tell you this. When the covers of our great country read America is Doomed it’s simply time to back up the truck…
But when the magazines are showing a brazen giddiness it’s time to get cautious. America will always come through, especially when you least expect it. And that’s when you pick up pennies on the dollars for the true investment gains. If you’re a real investor, we want some blood in the streets; it’s easier to make money when it’s gushing red…
Righty-O. That’s it for now folks.
