Mortimer Zuckerman, co-founder of Boston Properties Inc., the largest U.S. office real estate investment trust, said the U.S. economy is in a recession and there’s no sign of a recovery.
“We are looking at the worst set of macroeconomic conditions since the Great Depression,” Zuckerman said in an interview with Bloomberg Television.
Yesterday, the dollar fell to a new record low. It was down to $1.55 against the euro.
Oil rose to hit the $1.10 market…then backed off slightly. The commodities index rose three points and bonds edged higher.
As you recall, we didn’t like the action on Wall Street on Tuesday. Following the announcement of Ben Bernanke’s plan to feed an additional $200 billion into the banking system, stocks rose strongly. Gold rose only modestly. We thought it should be the other way around.
And now, something else worries us: investment advisors have turned bearish, in a big way. All over the world, they’ve come to think stock market prices will fall. Only in Brazil do they expect prices to go up.
Oddly, the U.S. stock market is one of the world’s best performers so far this year, which is to say, it is down less than most. The S&P has lost only 7%. India, Hong Kong and Shanghai are down more than twice as much.
The pros are almost always wrong; when they are bearish, it usually means stocks will rise.
Yesterday, U.S. stocks lost a little. Gold gained a little – plus $4.50…to close over $980. Nothing was decided.
It is tempting to look at this market and come to a simple conclusion: the economy is declining…the feds are trying to stop the decline with more cash and credit. Therefore, the dollar must go down and gold and commodities must go up. That is our basic view of things; it’s why we stick with our formula – sell stocks on rallies, buy gold on weakness.
But it’s not going to be a smooth ride. Commodities are notoriously cyclical – based on short-term supply and demand considerations – whereas cycles in the credit market are extremely long-term. Bond yields have been falling since 1981 – 27 years. They seem to us to have bottomed out, but it may be a long, long time before the 10-year Government Bond yields 15% again. Selling U.S. bonds may the best thing you can do for the long run…but in the short run, you could regret it, as people may rush into U.S. bonds – the world’s safest credit, in dollar terms – as a way of avoiding the risk in the credit market.
Yesterday, the Financial Times told us that three more hedge funds were in trouble. Global Opportunities halted redemptions. Drake Management said it was shutting down one of its funds. And Blue River will close down after losses of more than 80%.
And here, we pause a moment…what went wrong, we wonder? One of the funds to go belly up was called “Absolute Return and Low Volatility.” Gee…what could go wrong with that? But apparently, the absolute return went negative…and the volatility got out of control. How could that happen? Aren’t these people supposed to be whiz kids? Can’t they do projections of volatility and expected rates of return? Isn’t the whole point of a hedge fund to HEDGE against these extraordinary losses?
In addition to the normal sturm and drang of markets, we are witnessing a fascinating and entertaining morality tale…in which the gods are giving the boot to the entire financial industry. (More about this tomorrow…)
Back to our point… As we write this, gold futures hit $1,000 an ounce before pulling back. Gold at $1,000 will probably seem a bargain sometime in the future, but in the months ahead, it could be a source of irritation. Corn, wheat…and industrial commodities…could be an even bigger disappointment. Supply and demand are always balanced on the sharp fulcrum of prices. Even a slight fall-off in demand, caused by a worldwide slowdown, could have a devastating effect on prices – even though we may be in a commodities super-cycle that will last for many years…and even though the dollar is going down.
In the case of U.S. stocks, it looks to us that they are not a good place for your money – long-term. We would be especially eager to get rid of high fliers, such as Google. But we would also be prepared for a rally in stocks in the weeks ahead.
On the other hand, we have the opposite outlook for stocks in emerging market. The United States now has a hugely disproportionate share of the world’s equity value – about a third. Since the rest of the world is growing much faster than the United States and Europe, you could expect equity values in the rest of the world to rise too. So, relatively speaking, emerging markets should do better than the United States or Europe over the long run. Still, stocks in emerging markets could be disasters in the short run.
Where does this leave you? What to do?
*** If you want to get rich, the thing to do is to take a big position, leverage it up, and stick with it. If we were making that kind of gamble, we would choose gold stocks. Most likely, you’ll make a fortune as gold reaches $2,500…or $3,000.
But we don’t want to get rich; we just don’t want to lose money. So, we buy gold without leverage. If it goes down…we don’t really care. We will still have our gold…and we can still tell ourselves that it is sure to rise “in the long run.”
Most people will want to stick to a more traditional formula. Usually, you want to keep about a third of your money in equities…a third in property…and a third in gold, precious metals and other tangibles. You spread money around because you never know what will happen. You may be dead certain that the price of gold will go up…but Mr. Market doesn’t care what you think. He’ll do what he wants…when he wants.
What stocks should you own? We like Japanese stocks, because they seem like the safest, cheapest in the developed world. Our old friend Marc Faber likes tobacco, beverages, food retailers, pharmaceuticals, electric utilities, and gold, silver and platinum mining companies – in the United States and elsewhere. He notes that Wal-Mart is holding up well, because it sells so many non-discretionary items, such as food, healthcare items and gasoline. Even in a slump, people still have to eat.
And what real estate should you own? Marc has an opinion on this subject too:
“My favorite asset class,” he writes, “remains real estate in emerging economies. In most emerging economies, mortgage debt as a percentage of GDP is low; and with rising standards of living, home ownership and the living space per capita will increase. What is interesting is that, whereas the US accounts for 31% of global stock market capitalization, (down from over 50% in 2000!), it accounts for 47% of an index of 321 property companies around the world…. Whereas global investors have allocated significant capital to equities and bonds in emerging economies, they are grossly underweight real estate in those economies.”
*** “I don’t know where the bottom is,” continued Mr. Zuckerman, “the federal government’s going to have to do a lot more to contain what I think is the potential of a perfect storm.”
Employers are cutting jobs and demand for housing is tumbling. On March 7, the Labor Department said payrolls fell by 63,000 in February, the most in five years, after a revised decline of 22,000 in January.
“The most dangerous part in my judgment is what is going on in the housing world, where we’re now running foreclosures at the rate of 2 million a year, where 9 million homes, according to the government, just slightly under 9 million homes, have either no equity in them or negative equity,” he said.
“That will go up to 15 million if housing prices continue to go down this year as they’ve done last year,” Zuckerman added.
“We are clearly heading down.”
Zuckerman said that both the Federal Reserve and the government need to take more action to stem rising foreclosures. He said that the Federal Reserve’s move yesterday to lend, in return for mortgage debt, $200 billion of Treasuries to the securities firms that trade directly with the central bank, was not enough.
Has the Fed not done enough? Rumor has it that they are preparing to cut a full 100 basis points off the key rate this month. Plus, they’re taking the banks’ bad credits – as much as $200 billion of them – in collateral. What more could they do?
Our guess is that they have done more than enough already. The science of modern central banking is largely humbug – like the science of modern portfolio management. But that is what is being put to the test now. If Bernanke can rescue the U.S. economy, he will be a hero. If he messes up, he will be a schmuck.
Our guess is that he will be a schmuck. Because the theory behind his intervention is as unsound as phrenology.
More to come…
Markets and Money