From care-worn, to carefree, to careless…sic transit gloria money.
With spring right around the corner in London, we’ve been in a dewy-eyed and sentimental a state of mind as we ever get these days.
We remembered happier times – when we walked arm-in-arm along the banks of the Thames, when a pound and a dollar were almost the same price, and when we could buy shares at five times earnings.
We were younger then, but far from carefree. In fact, a young man frets a lot more than an older one. He has more to fret about. As a man ages, he realizes that the fretting is largely a waste of time; that most things don’t really matter…and that he can’t do much about those that do matter, anyway.
But money is a special case. As the years go by, most of the cares people once had about financial matters cease to matter to them. Then, all of a sudden, they start to matter again.
In the early 1980s, you could buy a nice apartment in central London for $200,000. That’s dollars, dear reader – American dollars! That was before the dollar headed down against sterling…and before London property took flight.
When the dollar fell after 1985, investors were alarmed…then resigned. After the initial panic at the falling greenback, Americans got used to it. Now, with the dollar worth only about half as many pounds as it was a quarter of a century ago, no one worries about it. It doesn’t seem to matter.
But mattering matters. Worrying is under-valued.
Recently it was announced that the U.S. trade deficit hit a new record last year – $763.6 billion. But did it matter? It didn’t seem to. People have become accustomed to record trade deficits. Each year brings another one, like a new calendar. Nobody thinks anything of it.
It used to be that the trade deficit numbers would set off alarms – like the buildup of carbon monoxide in a mine shaft. Investors would have heard the whistle and rushed up for fresh air. They would have sold off the high-deficit currency in favor of one that was safer, the one with a trade surplus. The result? The trade imbalance would right itself automatically. But now, people pay no attention. All the carbon monoxide in the air simply makes them drowsy. And the deficits keep mounting up.
But the less we care about things, the more we will eventually have to care about. Had investors panicked on news of last year’s trade deficit, they wouldn’t have so much to panic about this year. Today, the trade deficit is $47 billion higher. And still they don’t panic.
Among the many panic-free things are the money supply figures. A little blip up used to send the bond market into fits of hysteria. Investors (the so-called ‘bond vigilantes’) would dump their bonds, sending yields upwards. Higher yields chilled economic activity, which had the effect of reducing both money supply increases and consumer price inflation. Problem solved.
But who pays any attention to money supply numbers any more? No one. They’re as irrelevant as a monk at a mobster’s convention. But simply because they don’t seem to matter anymore, they matter more than ever. All over the world, the traditional measures of money are increasing two to three times faster than the economies they feed. New forms of money – supplied by the financial intermediaries – are increasing even faster. All this unchecked new money makes each unit of old money just a little shakier.
Take family finances, for instance. We learned recently that the average person in Britain had debt equal to 1.4 times his income – or a total of 1.3 trillion pounds worth. Last year, there were 17,000 repossessions in the country…and currently 400 people go broke every day. One estimate told us that more than half the nation would be out of cash less than three weeks after losing a job. These figures are even worse in America, where private debt to private income just reached a new record high of 1.75 times.
It wasn’t always so. As recently as the 1980s, people still cared about how much debt they carried. As the bills mounted up, bill-payers reacted. They cut back spending and increased savings. As if by magic, the problem corrected itself. Less spending led to less debt.
What people took for absurd in a more levelheaded era, they now take for assured. They go from being care-worn, to being carefree, to becoming careless. Recently, we reported on the latest U.S. government budget. We remember when Republican politicians could hardly show their mugs in public after allowing a budget deficit. They felt personally responsible for it. They looked upon it as a stain on the national credit record…a blemish on the nation’s escutcheon. Deficits were a burden on the taxpayers…a threat to the dollar.
Now, a Republican president proposes the most insouciant spending in history and who objects? ‘Deficits don’t matter,’ is the accepted math. You might as well howl up a rainspout in Azerbaijan as deny that solemn truth.
In the old days, when deficits still mattered, the old knees jerked up against them. Senators railed. Congressmen ranted. Every dime of deficit spending was yielded up as if it were a foot of no-man’s land; every conservative imagined himself Petain holding Verdun against the Huns. And as long as they still had a little deficit-fighting fire in their bellies, deficits weren’t allowed to sprout, let alone grow.
People used to worry about paying too much for stocks, too. A quarter century ago, you could have bought almost any stock listed in New York or London for less than 10 times earnings. Now, you struggle to find one that is less than 20 times earnings. When the price of shares still mattered, investors bucked and bridled as shares rose. They had seen what had happened to stocks in the 1970s. They didn’t want to be saddled with over-priced shares again. But the longer shares rose without serious interruption, the less high prices bothered them. They stopped thinking that stocks might fall; instead, they couldn’t stop thinking about how much they would rise. And now there’s only more to think about. The Dow represents much more capital at 12,000 than it did at 1,200.
We see the same spirit in the property market. Just this week, the Gherkin Building – a landmark architectural masterpiece, shaped like a bullet – set a new record for London, selling for $1.2 billion.
As recently as seven years ago, people still bought REIT’s for yield. Sam Zell’s empire, Equity Office Properties, for example, sold at only half its current price. At that price, investors could get a yield over 7%. But in the great real estate boom of the 2000-2007 period, even a 7% yield began to seem paltry. Property itself was going up by 20% per year…even more in many areas. London and New York – the two big rock candy mountains of the financial industry – hit record after record.
As prices rose, worries receded. People do not pay to worry. And if they’re going to worry they’re not going to pay. Just look at the prices; property investors must be more carefree than ever.
EOP enjoyed a net operating income of $2.04 billion in 2006. If the final deal cost Blackstone $40 billion, the ‘cap rate’ of the business would be very near to 5% – or the equivalent of 20 times earnings. But however good it is in 2007, it was twice as good in 2000. EOP was twice as expensive in ’07 as it was in ’00. Its yield today is barely a third of what it was back then.
If investors still fretted, they’d worry that paying twice as much would cut the returns in half. Or worse. Then again, if they still fretted…they never would have done the deal; and they wouldn’t have so much more to fret about in the future.
Markets and Money