 Victor uses CQG software and real time data feed for market quotes, charts and news at the office, at home and on the road. General Comments on the Capital Markets We went to dinner the other evening with friends, and while awaiting their arrival we stood outside the door of a new restaurant here in Suffolk, Virginia and overhead a conversation that marked the top of the equity and the real estate markets. Listening to a very earnest, well dressed, young gentleman talking with an equally earnest, well dressed and rather "handsome" young lady, we heard the young man tell her that If I just continue to buy five or six houses each year, putting no money down, I think I can make, conservatively 30-35% annually on each. That's even better than I've been getting on my stock trading. Even if there is a recession I know I can make 5-10% on my real estate, and I don't think my blue chip high tech stocks will do badly either. We wanted to wander over, physically shake him and then tell this earnest, well dressed young man that he had no bloody idea how bad things can become in a recession; that housing prices can and do fall; that recessions are called recessions for a reason; that he was utterly without understanding of how the economy in Suffolk, or in Virginia, or along the eastern seaboard, or the nation or the globe for that matter, functions. He had no sense of the seriousness of his situation. He was completely oblivious to the risks he was exposed to; to the dangerous, swampy waters he was treading upon as highly leveraged as he was. He was, we are convinced, the very epitome of the highly leveraged but stunningly naive investor that exists out there these days. He was the ringing bell that marked the top in these very important markets. We shall never forget what we heard. It was as important as a conversation we had in December of 1999 with a local bank branch office manager here in Suffolk. Our clients will remember that we wrote about that conversation with fear and trepidation, for the bank manager had asked us if it was "OK" to buy stocks then. She had witnessed an unprecedented number of "community leaders" in the preceding two months borrowing money on their signatures to buy stocks. Her bank had lent it to them. She said that her branch had never made that many signature loans in such as short period of time as it had made in October-November-December of that year. She knew that all of the loans were being put to use in the stock market. She knew that the borrowers were the city's lawyers, real estate developers, doctors et al, and she wondered if it was too late to do as they had been doing. We knew at that very moment that the bell was ringing to end the bull market in stocks. The earnest, well dressed young man in the restaurant two evenings ago was yet another "bell ringer." Attention must be paid. Attention must very much be paid!
Bubbles All Around Us Summary and Investment Conclusion The world may be in the middle of the biggest bubble in history. The bubble (e.g., property, stock, commodities) could exceed 50% of global GDP in value. The key cause of the bubble is that the major central banks failed to lower inflation targets to account for the combination of productivity acceleration due to IT and the new upward stickiness in wages due to the influx of three billion people into the global economy since the mid-1990s. The major central banks mistakenly released too much money in the past decade, justifying it with the low inflation relative to the recent past. The monetary excesses have led to the rapid expansion of asset valuation relative to income. The global economy has become dependent on the demand spillover from asset inflation. The global bubble economy has unusually been resilient despite the rising Fed funds rate because: 1) the increasing use of leverage in financial markets is temporarily offsetting the liquidity impact of the Fed raising interest rates, and 2) some bubbles could prop up each other. The persistence of these bubbles expands the excesses in the global economy and makes the eventual correction more painful. The end of the global bubble economy may be near. Mr. Greenspan recently recognized the role of the Fed's monetary policy in the US housing boom, its associated consumption boom and the US savings shortfall. The Fed may be in a campaign to pop the bubble. The global economy could experience a big downturn or many years of slow growth to correct the past excesses.
Production-driven Asia has benefited tremendously from the global demand boom. Recently, it has also seen over $700 billion in hot money inflow, which is part of the global liquidity bubble. When the global bubble bursts, Asia could fare worst, as a global demand slowdown and hot money leaving may happen together. Indeed, the seeds for another Asian Financial Crisis have been planted, in my view. It will take proactive policy measures, especially ones that stop sudden money outflow, to prevent such a crisis. UPSIDE DOWN IN SAN DIEGO: If the game of price appreciation and ownership via rentals made sense on the Outer Banks, it seemed to make even greater sense on the west coast, where rentals and price appreciation were even higher and trended even more consistently upward..... until recently. Now, the game has turned quite ugly and what was a positive cash flow experience has become, instead, a hugely negative one. Simply put, so many investors in the past several years have fallen for the notion of owning rental property, hoping to make capital gains, that the supply of available rental units has expanded so dramatically that rents have fallen precipitously to the point where it is now utterly impossible for the owner of the rental unit to come even close to meeting his/her mortgage payment.... much less to meet the demands that property always thrusts upon us to keep it in shape. One bedroom condos in San Diego now sell for $650 - 750 thousand dollars. At that price and given current mortgage rates, one would be paying on the order of $3,700/month just to fund the mortgage. To this one must add any monthly maintenance fees that the condo association would mandate, and reasonable insurance costs, driving the total monthly expense toward $5,000/month. On the other hands, monthly rentals for such units are now at or near to $2,500/month... and are falling! The owner, having bet upon price appreciation late in the game, now has no choice; he must see the price of his rental unit rise 3.5% each and every month just to break even. Oh, and we've not even begun to factor in the costs of real estate brokerage. We are left to wonder who it is that really owns the mortgages
made upon such real estate "investments" and we fear, for
the first time in a very long while, about the financial
institutions on both coasts that have lent the money to
late-game entrants into the rental unit game of real estate
speculation. For years when we were asked if there was a
real estate bubble here in the US we argued that there was
not. We argued that perhaps there was some fleeting
speculation in California, or in Boston, or Manhattan, but that
the price of real estate in Indianapolis, or Minneapolis, or
Suffolk, Virginia had not followed hard upon and was far from
a Bubble. We are no longer prepared to make that same
statement. We now know too many doctors, lawyers and
even accountants who own one or two pieces of rental
property too much and are looking for the next illusive buyer
to take it from them and make them whole. At the margin,
the buyer is now reticent we fear, and that is enough to give
us great pause.
It's Not the End Of the Oil Age By Daniel Yergin We're not running out of oil. Not yet. "Shortage" is certainly in the air -- and in the price. Right now the oil market is tight, even tighter than it was on the eve of the 1973 oil crisis. In this high-risk market, "surprises" ranging from political instability to hurricanes could send oil prices spiking higher. Moreover, the specter of an energy shortage is not limited to oil. Natural gas supplies are not keeping pace with growing demand. Even supplies of coal, which generates about half of the country's electricity, are constrained at a time when our electric power system has been tested by an extraordinary heat wave. But it is oil that gets most of the attention. Prices around $60 a barrel, driven by high demand growth, are fueling the fear of imminent shortage -- that the world is going to begin running out of oil in five or 10 years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India. Yet this fear is not borne out by the fundamentals of supply. Our new, field-by-field analysis of production capacity, led by my colleagues Peter Jackson and Robert Esser, is quite at odds with the current view and leads to a strikingly different conclusion: There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand. Where will this growth come from? It is pretty evenly divided between non-OPEC and OPEC. The largest non-OPEC growth is projected for Canada, Kazakhstan, Brazil, Azerbaijan, Angola and Russia. In the OPEC countries, significant growth is expected to occur in Saudi Arabia, Nigeria, Algeria and Libya, among others. Our estimate for growth in Iraq is quite modest -- only 1 million barrels a day -- reflecting the high degree of uncertainty there. In the forecast, the United States remains almost level, with development in the deep-water areas of the Gulf of Mexico compensating for declines elsewhere. While questions can be raised about specific countries, this forecast is not speculative. It is based on what is already unfolding. The oil industry is governed by a "law of long lead times." Much of the new capacity that will become available between now and 2010 is under development. Many of the projects that embody this new capacity were approved in the 2001-03 period, based on price expectations much lower than current prices. 'You've got to find what you love,' Jobs says. Steve Job's Stanford Commencement address delivered on June 12, 2005. I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories. The first story is about connecting the dots. I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out? It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college. And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting. It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example: Global Financial Markets Report by ECR Research - The Netherlands - May 26 Read the full ECR Research Article Highlights of Victor's speech at the World Outlook Conference Vancouver BC February 12, 2005. Thanks to Mike Campbell — and particularly Nina Parente and her team at High Performance Communications for doing all the work they have done to make this 15th annual WOC a huge success. It is an honor to be invited to speak here again this year. |
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