World Shift (relocated from another of my blogs, written 12/21/2007

The world stands at the edge of a cataclysmic financial abyss, and no i am not talking about the current housing and liquidity crisis, i am talking of something a little further away and somewhat grayer (excuse the pun).

The financial timebomb that is the graying population of the industrialized world.

We live longer, live better, consume more and expend more. If you sit down and read the social security/ welfare document sent each year to every tax paying american, you will also see that the US welfare system is budgeting to run out of money within the next 20-30 years!

yes

thats correct, they admit their funds will have run dry and they will not be able to provide for anyone after that time without a drastic increase in taxes (probably to a scandanavian style 60%) Why is this, because the baby boomers will mature, the first of them passed 59 1/2 in 2005 and thus over the next 10-15 years there will be more people claiming social security pensions than people working and paying into the system, creating an insurmountable deficit.

What do i propose or advocate as a solution, don't just throw stones, give solutions, provide answers that spark debate and could ultimately lead to some kind of resolution. So lets try this, Romania "i believe" recently told its populace they would not be paying for their retirement, people had to plan for it themselves! I think that the social security system is somewhat archaic and grotesquely mismanaged and rather that continue it, make everyone more that 25 years out responsible for their own retirements!!! These people must take financial responsibility and accountability now and start saving.

Several things that need to happen to help society survive;

The government find ways to become more financially efficient and stop or even reverse inflation.

reduce dependency on oil as it is a finite supply and prices will continue to rise even on the exaggeration on the speed of reduction of this decreasing supply. Like Diamonds, it isnt as scarce as prices would indicate, but neither is its supply going to last out our lifetimes!

My solution will have several consequences, many of which i think are inevitable either way, that will be interesting;

The first being that as a collective generation, those that come after the baby boomers will probably be poorer than their parents!

The second that property values will fall significantly as more housing stock is returned to the open market with less inhabitants!

Immigration will increase from countries such as China and India that will become overly populous and lower more affordable prices will draw people in. These countries will ultimately come to resemble Japan and Tokyo in terms of density and expense.

Our generation will have significantly fewer children than our parents as we will simply not be able to afford them.

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Credit Rating Agencies - The One Business That The Government Should Run

I am not a fan of the government running businesses and I am even less of a fan of the rating agencies, who are even less able to demonstrate any degree of competence whatsoever.

Here is the problem, they are in the business of providing ratings and they charge the company for the pleasure... do they make a sale or give a good rating?

When you speak to them they have actuarial style tables that investments have to fit into to be rated and then they charge you between $50-250,000 for the rating. In my opinion if you get ratings from three agencies which is pretty normal you end up with $150-750,000 in fees which significantly reduces your yield unless you put together huge funds/ portfolios or deals to justify the costs. The bigger and more complex the deal the less opportunity they have to truly vet an investment or even to be able to understand it. With offshore structures, tax mitigation strategy and complex structures the people scrutinizing the deals are not exactly a location for the cream of the investment, financial acumen gene pool.

The government would have no bonus structure, no side interest and therefore may hopefully have a little less bias if no greater understanding of the deals. Truly what we need is a more astute investor assessing the validity of deals, the problem is that deals are not clearly explained and defined. This would end the perpetual cycle which currently occurs where companies spend huge amounts of money on a rating and cook every figure they know the agency will look at to make sure they get the right rating. (the consultants specializing in this cost about another $50-150,000) The government would be able to avoid so much of this situation..........



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Why commerical and retail real estate arent the bargin they seem to be

With commercial and retail yields rising dramatically in the last several months people have started to dive in and buy at 8-10%.

Why do I not think this is a good idea?

This market didn't just dry up so quickly as a result of the capital markets failure as you might initially think, what has really hit this market is that the economy is so unstable that one cannot guarantee the liquidity of any companies. With major banks collapsing, nothing is safe, a bank portfolio was always considered about as safe as treasuries and had yields to match. I personally wouldn't want to own the definitive bank property in Bear Stearn's HQ in Manhattan re renting a couple of hundred thousand square feet........

That doesn't mean to say that in 18-24 months this wont be a great strategy, once we have seen alot of major companies file for bankruptcy and reorganization the shake up should leave for some great opportunities

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Why the Euro might be the place to be

The markets have certainly been in freefall, right now we sit in a lull before the next wave of storms arrive, there is no imminent sign of recovery and the US bailout seems so cretinous there is little chance of it helping the consumer in any way.

Right now I think the strongest trend is to sell Great British Pounds, the country is in a tailspin from which it may not recover;

1) A considerable amount of banking interest in London is no longer UK owned so expect these banks to consolidate back to their core countries taking jobs with them and leaving London as a secondary financial center

2) Expect Germany to pick up a lot of the slack as a financial center based upon the strength of the Euro in the next few years

3) Watch for China and India's emergence as banking hubs

4) The property market has a lot further to fall

5) What little manufacturing there is left is likely to falter due to overregulation and over zealous implementation of regulation making the UK even more uncompetitive

6) No major wars on the horizon to boost government spending, p.s the Americans screwed the UK on a lot of Iraq, Afghan contracts etc so not too much input there (George Bush/ Dick Cheney and their self interest team were pretty thorough there) So once you have divested yourself of GBP think Euro not Dollar.

7) The UK became a tertiary and services based economy with little or no productive output (industry/ agriculture) as such I have always stated they were enroute to becoming the new third world as a continuation of the cycle. How will people in the UK make, create or produce anything to save their economy?

Why not the Dollar:

1) Once Obama fever has passed people are going to realize there is little or nothing he can do to help, he is an ultra "popularist" president with Fort Myers town meetings etc which help for sound bites but the DJ and Henrietta Hughes plight in Florida don't solve anything in the Macro economy. We may even see a repeat of a lot of the Clinton Era's disastrous bills.

2) The stimulus package seems to put a lot of emphasis on tax cuts, which means without sales the government income is reduced, the deficit is increased and the country goes bankrupt. Furthermore this doesn’t actually stimulate the economy like putting cash and sales into the system, which a war and government injection into private businesses does. (We have used that one up)

3) The government has never been able to run anything well especially businesses as the politicians have no idea what they are saying doing or talking about - why Bloomberg wasn’t drafted in to run the distributions to the banks and the bailout is beyond me, he is one of the only self made people in government. When the government starts making cars as they did in England you know it is the beginning of the end, the only salvation for the car companies is to crush the unions once and for all as they are the primary component to be blamed for its current position. Thatcher beat the Unions in the UK to great benefit, I would love to see Obama try and do the same but he doesn’t have the integrity or strength of character to do so as he is so desperate to be popular he wont be willing to make any hard decisions he is already working on this second term campaign and his legacy as to how he will be noted in history aside from being the first black president.

4) Interest rates have to rise, expect to see true underlying inflation of 10-18% within five years Bernanke is compounding on mistakes already in place rather than bottoming out and letting us move forwards.

5) If the government prevents the foreclosures they are artificially propping up the market and supporting financial imprudence, I should have gone out and bought a house twice as expensive as I could of afforded and been rewarded by the government. It makes a mockery of everything. All that does from a banking standpoint is allow banks to keep people who should be fired and policies that need to be changed and the only way to change them is because they are illustrated not to work and maintaining them would be damaging to someone’s bottom line and pocketbook.

So these are a few ideas of why I am not looking at the Dollar either, I would hope to acquire several billion Euro of cash flowing, income producing assets within the next few years, divesting Euro and GBP positions for a Euro resurgence as the first major economic zone to recover.

Visit jonathanrosedevelopment.com for investment opportunities in the safest investment other than government treasuries and in my opinion possibly safer than US & UK government treasuries right now which I don’t trust p.s I sure wouldn’t want more than the insurance limit in any banks right now as they haven’t finished collapsing yet there are just several firms with better accountants right now who have hidden more debt off the balance sheet, I find it hard to believe Bank of America or Wells Fargo are solvent, I would have though HSBC and some of the Swiss, Lichtenstein, Monaco, Belize, BVI, Cayman Banks are a better bet.
On a more micro level:

I expect to see Buffett and Gates take full advantage of their cash stock piles and leverage them for incredible returns - Buffett should pass the hundred billion mark within the next few years.

It will be interesting to see how Microsoft’s new store concept works out, seems like an imitation of Apple at the worst time possible so expect to see it bomb.... Their products just don’t work together too well any more and they rely on barriers to entry and buyout assimilation to keep competitors out..... MSFT stock to drop further

I still think Google is the biggest phony of the dot com era out there, whilst I wouldn’t dream of using anyone else for search I still don’t believe their revenue streams. I expect to see a $100 share price within the next couple of years

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Reflation, you have heard of inflation and deflation, now meet reflation

Reflation is going to occur throughout 2010 and will be the final nail in the coffin of the US economy, it will be caused by massive inflation of 6% per annum after the governments artifical lowering. It will be coupled with huge job losses, the collapse of the US dollar and will signal the beginning of the next great depression.

Feeling cheerful, bright and breezy........

Sorry for doom and gloom but it is almost impossible for the situation to change whilst the banks and government are artificially stemming the growing tide of foreclosures, whilst the Autoworkers Union is left intact in any form and whilst people continue to listen to the clueless rating agencies that can do basic maths and have no real understanding of business.

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Looking Back - Predictions from 07 - did they materialize

I am reading through some of the older blogs i have on this site, it is interesting reading as we are now a year on and can look at the accuracy of the predictions:

Tuesday Sept 11th 2007

Banks:
Don’t be surprised to see a bank failure or something close spark the next stock market crash, QIV may well be the cause of financial illiquidity of a medium sized banking institution
Expect to see more mortgage originators file for bankruptcy (possibly even Countrywide to clear off some debts)
Countrywide pretty much went, Wachovia and WAMU too

Real Estate:
The real estate bubble is bursting, expect to see significant price decreases and increased foreclosure over the next several years
Foreclosures should hit over 1m

Prediction:
i am predicting a 500+ (probably 1-2,000 point drop) towards the end of October...caused by a liquidity short fall by a major bank, Countrywide becoming insolvent (or admitting it is) a major house builder filing for bankruptcy or someone finding out that the banks are carrying in excess of $250Bn of off balance sheet debt that they need to do something about and can't!!!
Bailout is $750Bn and climbing, market has lost closer to 9,000 points, too many house builders have gone to name

Wednesday September 12th 2007

P.S The car industry will be the next to suffer as dealers give away cars with huge incentives and ultra low financing (even Honda the most frugal of all companies) to clear inventories ready for 2008 models!!!
GM, Ford and Chrysler are after $75Bn in goverment money to stay afloat, GM and Ford have both said they will run out of money in late 08 or 09

P.P.S By the way if you haven't realized all this spells the way for a recession of "Great Depression" portions
It has arrived

Sunday October 21st 2007

It is only a few month since I was discussing the impact of credit card and consumer debt on the economy and that everyone saying American Express etc would not be impacted by the sub prime meltdown was crazy. If you aren't paying your mortgage and are establishing bad credit , why would you pay your credit card bill. If you are going to go bankrupt as a method to protect any money you do have, why not throw the cards in it.
Amex was at around $70 and is now $24

Sunday November 4th 2007

1) Bank stocks look cheap, buy them now!!!I say don't bother, they still haven't priced in the full extent of the crash yet as no one realizes how bad it will be.
I hope you didnt buy bank stocks

4) Oil at over $100 a barrel.I think this is price gouging, whilst supply is not indefinite, $65-70 per barrel is a real figure.
Wow oil is now around $65 a barrel

Monday December 3rd 2007

Firstly, we live in an age where Google (goog) is quoted at some $681 at time of writing which gives the company a valuation of approximately $213Bn. This is for a company that if my memory serves me correctly has about $11Bn of revenue and $4Bn profit.Do I use google every day, resoundingly YES,Do i think that Google has a fantastic search algorithm, again YES,Do i believe that the company is worth 20 times its revenue and more than 50 times its profit, one second, did i just say 50 times their profit...something must be wrong with my calculator, maybe i have time warped back to 1999 and we are pre millennium and euphoric with Greenspans low interest rates!!!
Wow google is now at $314

Monday December 10th 2007

These companies stock will in my estimation drop a minimum of 60% during 08 – I am expecting to see a $10-$13 GM share price during 2008. I am further expecting to see their Bonds drop down to a B- or junk bond rating.
GM is now at $3

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SIV's rear their ugly head agin in the most unexpected of places

SIV's are blamed by many as the cause of the current economic crisis. With companies placing undesirable assets off their balance sheets they could report profits and other good news whilst hiding the truth. Thus today i was shocked to hear that SIV's have once again reared their ugly head in the most unusual of contexts.....

The US governments financial system has always been propped up by the hot air of the treasury requesting blank checks be filled by the federal reserve (who has no money in essence) and therefore driving inflation. Now with AIG's guidance and assistance the government is creating SIV's to carry AIG's bad debts and high risk credit swaps etc. What does this mean, well essentially they are washing AIG clean and hiding the dirty laundry for the US taxpayer to pick up, if they have any intention of balancing the books at any time.

There are a few extra tidbits for those interested:

1) expect oil to rise in price to around $80 a barrel once the markets are ressurrected, making now a great time to buy.

2) expect gold to continue to rise in value as any collapse in the US dolar and currency markets in general will cause a flight to quality and this is the truest mark of quality.

3) expect to see the US dollar collapse some time in the next 12 months making the Euro the currency of choice

4) expect to see Ford file for bankrupcty in the USA, years of trade union power have created an unviable model and weighted the company down with a health and pension burden it cannot meet.

5) I have been saying it for a while, expect to see GMAC die the death, GM will get bailed out some how i am sure.

6) watch for AMEX to devalue and possible go bankrupt. Creating a bank has allowed them access to fed funds which may save them but remember they are the highest risk of the credit card companies as they make their own loans by owning both sides of the transaction instead of just being middle men.

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Stock Chasing for double digit returns

Some hedge funds must be doing well, the higher risk player who havent been using more conservative assets like MBS must be doing well in the current market as must those hedge funds that properly hedged, I personally have been getting high double digit returns just chasing stocks of damaged goods banks and inurance companies that get bought out.

Following WB to their lows and buying in has proven to be a very interesting strategy as you watch the stock increase in value exponentially within a matter of days with take over rumors. Cents on the Dollar WB is now back at a healthy $6 plus so the question is who is next to fall and how well will they rebound.

Wels Fargo has to have a pretty shakey balance sheey if they cant sell the shares they are issuing to pay for a Wachovia takeover so look for them to take a tumble.

Goldmans looks a super safe bet as always their accounting department knows how to weather pretty much any storm and move underperforming assets off the balance sheet. Lloyd Blankfeld was declaring profits whilst everyone else wrote down in 2007, I stated it was suspicious and I dont think i was proven wrong. Plus Buffet is a great benefactor to have behind any company.

Oil is going to contnue to drop as the speculators who have been overinflating prices run out of balance sheet to back their speculation, $90 a barrel or less would seem reasonable.

General Motors and Ford should be softening up pretty fast as they have low and constantly falling sales in the current economy and how their finance divisions will hold up will be a wonder to behold.

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The Problem With Modern Politics - "politicians the lowest and slowest form of whit"

The problem faced by joe public in the modern political arena, is knowing what candidates stand for, what they represent and what they really intend to do on coming to power. The absolute inability of political candidates to answer any simple question with any degree of honesty, accuracy or most importantly detail is unbelieveable. Contrite statement and sound bites fill speeches, retoric stands at the fore and promises of something different are all thrown with great gustow but no detail of how anything will actually change and if the president has an power to bring about those changes are few and far between.

I have yet to hear Obama Bin Laden give any concrete or firm details on how he will improve healthcare or taxation, how he will get us out of Iraq or how his open diplomacy policy with a country like Iran will happen and how he has any capability of understanding what is actually happening. He has been groomed for a role and his primary qualification is going to be his ability to say and do nothing that can be held against him, simply because he hasnt been doing it very long and has never really done anything about anything. Seeing the sucess of this plan, John McCain has decided emulation is the best for of flattery and has appointed a VP with the same credentials of having done little or nothing and knowing even less about the world and its current issues. His only advantage is she only gets to be president if he dies, giving the American people some hope where Obama leaves non.

The governmental interference in the bailout has been a clear example of how no one in the public wants an uneducated and unknowledgable group of politicians to interfere in the free market economy and now they further claim to have the desire to meddle further and ensure the current meltdown never happens again. The problem is they still have no idea what has happened and the plan they have proposed helps no tax payer only shareholders of banks who would have gone down in flames.

Where will the money come from for the bailout if not taxation, last time i checked that was the only way the government generates income to pay for its promises Had the government simply paid off part of the "current" the mortgages in the USA they would have spent less money and fueled the us taxpayer to avert a recession by providing free capital and freed up further consumer overspending. The non current defaulting mortgages would have been foreclosed upon and the banks would return the overheating and overpriced real estate market to parity due to oversupply. The banks would have generated liquidity and the problem ould have been better solved than its current guise where much of the money will end up overseas and helping the wealthy who carried stocks in the companies in question.

Free market economics would have eliminated banking inefficiency and helped us clean out the trash effectively. Part of the problem is banks are being bought and the banks buying them are issuing new shares to do so. they are also issuing enough shares to try and generate the capital to cover their own illiquidity and bail themselves out with their own write downs, should those shares not get bought and rescue deals will die a sudden and firey death. Furthermore the bad assets are still out there and while the new bigger banks write them down along with their own write downs we get a continuing cycle of bank insolvency. The only sensible part of the entire bail out bill is the increase in the FDIC insurance to $250,000 which has long needed to change to a real figure. So long as you can find anyone with cash assets anymore..........

The biggest question of the bail out is why the American government is so willing to throw its cash overseas and further derail its highly damaged and fragile economy. Let foreign countries fund their own portion of the debts incurred by their debt. The UK has made one of the worst gaffs when they nationalised "the Bradford and Bingley" keeping all the bad assets for themselves and allowing the Spanish bank "Santander" to asset strip all the best parts. It just goes to show that those with any competence are in business and those without are in politics, maybe they should modify the phrase too "politicians the lowest and slowest form of whit"

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Why the Bail Out won't work

The Roman legions understood failure and the issues that the country currently faces. They understood overstaffing, undermotivation, and they had this fantastic system called decimation where one in ever 10 person in the legion (made up of 100 soilders) is decapitated. Whilst I do not propose death, certainly heads need to role and not just the CEO who everyone seems to be focusing on. The majority of the problem is that during good heady times, people are hired, departments are staffed and mediocrity becomes the norm, during tough rough hard time require departments staffed with exceptional people who look after the bottom line.

So I know that houses arent selling, the market is dead. I know that WAMU is looking for a buyer, they are in big trouble. I know that they own alot of properties now that they dont want that dont generate them any money so I figured they would be willing to sell me one, two, ten, or even a hundred or more properties at 30-40 cents on the dollar. This way they have cash that they so desparately need to pay their staff and I have properties at realistic prices, where rents cover the mortgage without the artificially inflated craziness Greenspans interest rate cutting has generated. 

Well the model is simple, It has been done before and is very effective, however this story went somewhat differently and explains why WAMU will be out of business very soon. The REO department is spread throughout the country, the main office is in Jacksonville, FL. However my quest to find a decision maker encompassed Texas, Newport Beach, CA, Los Angeles, Ca until i finally found the decision maker right back in Jacksonville, Fl. I did speak to her bosses enrouted and that gentleman was at least compentent. He probably could easily have done the entire job himself using the companies outsourcing technique but we will get to that. WAMU had used some smart outsourcing and hired REO World out of Newport beach and there team would make the ultimate decision of which offers were made to the bank, when and how long the property stayed on the market. They too had a manager with a team of staff under him, understandable considerin that they would have to deal with a multitude of brokers and accept offers, which they then assess and forward to the bank. Wow sounds like another guy who could do the job single handedly again.

They in turn had expertly hired a broker who they knew who was nowhere nearby over an hours drive from the property in fact, he had never visited it and in turned hired another broker to co list the property. This woman was actually a secretary who sold maybe one or two houses a year. The decision maker in Jacksonville unfortunately knew non of this....... Lets also think a little about fees, so WAMU pays the consolidation/ asset management house for there services, they also pay the broker about 5-6% which he has to split with his co listing agent - how much work would they be willing to do for what could end up being a few thousand dollars. Meanwhile WAMU has spent at least 10% or more to sell the property ontop of whatever they are loosing in the cents on the dollar deal and opportunity cost. 

So the house is sitting on the market, vacant for a decade now, slowly rotting and dying, depreciating constantly, its half finished, has a whole load of code violations the front door wont even open properly as the steps are too close. All the internal walls need to be torn down, the electric wiring has to be removed as it was never finished and doesnt match the plans, the radiant heating leaks and finding the leaks will be so costly its cheaper to redo the system. However, the decision maker has a valuation from the peak of the market, has never seen the property and as a caveate knows nothing about real estate. This is the kind of utterly pointless employee that has to be shed if the American economy is to recover. 

When will people learn that a proprty is worth what someone will pay fr it, that there is an opportunity cost to having cash tied up in dead assets and that ultimately this whole crash is about property, assets and commodities reestablishing true value rather than an artifically inflated value due to traders, speculators and of course the uninitiated who try to follow in the wake of those who make the real money.  

Altold it is almost irrelevant what I offered and paid for the property the bank looses so much money that when wages are thrown in ontop of losses, opportunity cost etc the assets are probably only worth between 20-30 cents in every dollar. Therefore the government would need around $3 trillion dollars in assets from banks to justify putting in the $800 million required to solve the current problem. Without that the US tax payer gets utterly exploited and will live with the consequences of the banks being able to keep employees they shouldnt employ and unloading their worst assets. This like reducing interest rates in august/ september 2007 will prolong the recession and actually serve to make things worse than letting things reach a natural free market bottom. 

This is why the bail out isnt going to work

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