Everywhere we go…everywhere we look…we see towers of money, property, derivatives, debt and credit. Towers in the stock market. Towers in the housing market. Towers stacked upon towers.
So today, we take the unprecedented step of issuing a “Crash Alert.” Not that we have any special information or insight on the subject. We are just looking out the window.
‘Man is a thinking, expectant being,’ says recent Nobel Laureate Edmund Phelps. The economist should have inserted an ‘or’ in the middle of the sentence. Man tends to expect…or think. Rarely does he do both at the same time.
Right now, all over the planet, men – that is men and women with money – expect the good times to continue. They’ve watched their property investments soar. They’ve watched their stock market investments reach new, record highs. And they’re sure that central banks have mastered the art of maintaining stability. ‘Things are good,’ they say to themselves, ‘and they’re going to stay that way.’
Travel is said to broaden one’s perspective. But traveling around the world today tends to focus your attention, rather than scatter it. Almost no matter where you go, people are all the same. Whether you are in New York, London, Bombay, or Sydney you will find stocks and property higher than ever…and investors hoisted up so high by their inflated assets that their feet no longer touch the ground. In that high, thin air, their brains cease to work.
There are only two ways to get rich – accumulation or speculation. Either you earn the money and save it; or you get very, very lucky. Traditionally, the vast majority of the world’s wealth – both individual and national – has been made by accumulation. Wednesday’s Australian Financial Review, for example, tells us that Chinese wages have doubled in the last five years. But while wages have gone up, the Chinese continue to be fanatical savers, with savings rates twice those of the world average.
Ben Bernanke and Hank Paulson are traveling in China now, trying to talk the Chinese into raising their own currency against the dollar. They might do better to close their mouths and open their eyes. The dollar will fall soon enough, however much they prop it up. Besides, they might learn something. While the rest of the world squanders its money on Chinese-made trifles, the Chinese themselves build wealth the old fashioned way: they spend less than they make. The difference becomes ‘retained earnings’ for a corporation or ‘savings’ for a family. The greater the savings, generally, the richer the family…the business…or the nation.
Meanwhile, in the rest of the world, it is as if a tidal wave of liquidity and New Era thinking has washed over the globe’s burgs, metropolises, and hamlets. People have gotten so lucky they think they’ll never need to save again. Even supposedly sophisticated investors have given up on the tried-and-true method of building wealth; they all must feel very lucky.
In the stock market, dividend yields are tiny…even non-existent for many stocks. Corporate profits may be at all-time highs, but an investor expecting to accumulate his way to wealth by buying stocks and collecting dividends is not thinking at all. His dividends will not even equal the rate of consumer price inflation.
Still, Barron’s group of eight market seers, sees nothing not to like. Instead, they look into the future and see the S&P going up – by an average guess of 8%.
Nor is anyone, except us, worried about a sudden downturn in stocks. The VIX, with measures stock market anxiety, is near record lows.
In the property market, too, the proud towers continue to go up. In India we learned that several cities were putting up so much new space, that at present take-up rates, there was enough new supply for 20 years. And in New York, a single apartment building just sold for the highest price ever paid – $1.8 billion. This news comes only a few months after Sam Zell sold out his New York holdings for a $3 billion profit, in the biggest, most important property transaction since the Louisiana Purchase. The buyers, a subgroup of BlackRock, Inc., led by Tishman Speyer paid $5.4 billion.
Owning property is not like owning T-bills. You have about 10% per year in taxes, maintenance and operational expenses. But the BlackRock group must not be thinking any more than the typical investor. Five percent of $5.4 billion is $270,000. And the projects’ estimated rental income is only about $170,000 per year. They’re not even covering their interest cost – to say nothing of their operating expenses.
What are they thinking? The same thing apartment buyers in Bombay are thinking. The same thing stock buyers in Sydney are thinking. The same thing ‘art’ buyers at Christies in London are thinking. They’re all thinking that asset prices go up. They’re all thinking that they can get rich by speculating on capital gains rather than accumulating earnings. They’re all thinking that prices go up all the time…or often enough so you don’t really have to worry about them going down if you take a long-term perspective.
They’re all thinking that these towers of debt, credit, and cash…can get higher and higher. And now comes a report claiming as much:
“A report issued by CB Richard Ellis’ research department shows that developing countries make up half of the 20 fastest growing markets for office space costs. The Global Markets Rents survey, issued semi-annually, surveyed 176 markets throughout the world.
“Of the markets surveyed, only 20 saw a decrease in occupancy costs, while 150 saw increases. Abu Dhabi saw the largest increase in occupancy cost jumping 92.8% to $52.82 per square foot. Ward Caswell, U.S. director of research for CBRE, says these findings are a great sign. Six months ago, ‘For the first time we were seeing all the top global markets in an upswing at the same time,’ he says. ‘We are seeing that continue and in a lot of the places accelerate.'”
And while England and Japan were the most expensive markets, with London’s West End, posting $212.03 per square foot and second ranked Tokyo costing $145.68, some markets have shot up drastically in the ranks. Mumbai, India is now ranked seventh in the most expensive markets. The city climbed from $41 to $106 average price per square foot in the last year.
Our friend Rick Rule tells this story: “A woman goes into a grocery store and finds she can get tuna fish at half the price she paid a week ago. She is happy, and decides to take advantage of it by buying twice as much. She stocks up and gets twice as much for her money. Her husband, meanwhile, goes into his stock brokerage down the street. He finds the same stocks he bought a week ago now selling for twice as much. He too gets excited. He decides to stock up too…but only gets half as much stock for his money. Which one of them is doing the right thing?” Rick asks.
Right now stocks and property are at record levels all over the world. An investor has to take stock of himself. Should he buy more…or sell? The pundits, commentators, the Cramers and Kudlows, are all positive. In the face of such jolly sentiment, it’s hard for an investor to keep his wits about him. If he can’t count on his natural gloominess to pull him through, he’ll have to think.
And of course, no investor wants to do that.
But if he were to think, he might want to think of Yogi Berra’s comment on a restaurant: “Oh, nobody goes there any more; it’s too crowded.” Right now, everyone is crowding into these towering eateries. The food and service – that is, the yield an investor might reasonably expect – have already slumped to near-record lows.
Just wait until someone yells ‘fire!’