I'd like to start off with a quick movie
review of the latest rendition of Charles Dickens’s A Christmas
Carol, which I saw with the family this past weekend. I thought I'd
mention it because this being the holiday season, many of you may be
thinking of taking the movie in. And, for many, I would recommend doing
so. But with some caveats.
First and foremost, as you are probably aware,
despite its festive title, Dickens’s opus to the season is a ghost
story. And the new version, starring Jim Carrey, makes full use of the
latest cinematic techniques – including 3-D – to do the genre proud.
Even so, as we settled into our plush theater
seats – best described as the velvet-covered rocker style – I couldn’t
help but notice the audience was largely dominated by younger children.
An audience that included, I might add, one particularly vigorous young
boy who quickly set about using the back of my plush chair as one might
use quadriceps-strengthening equipment down at the gym.
While I am typically patient with children,
having a couple of my own, after serving as a counterbalance to his leg
exercises for the better part of five minutes during the opening scenes
of the movie, I was forced to cast a sharp look in his direction, but
that just seemed to encourage him to redouble his fitness program.
Well, let me tell you – when Marley's howling
ghost came crashing through the door of Scrooge’s dark and lonely
sleeping chambers, followed shortly by a scene where the bottom of
Marley's jaw broke off, requiring him to flap the broken mandible in
order to speak – a scene so horrifying that I myself had my eyes
shielded – the only squeak out of the little pip behind me was a fearful
sobbing.
Soon thereafter, the more sensitive parents in
the crowd were seen leading their terrified charges out of the theater
and, I imagine, back to the cashier's counter to demand a refund.
As for myself, I thought the production
quality was exceptional, albeit a bit over the top, and Jim Carrey
should win an Academy Award. As for the rest of the family, my wife
liked the show, but reported that all the 3-D flying about made her
nauseous. As for the kids, I’m happy to report that their night terrors
have subsided and they are again sleeping well.
To sum it up, I give the show a thumbs up –
but as you cast about for family entertainment this holiday season,
don't make the mistake of thinking it's a kids show.
And now, with the caffeine properly
circulating through my cranium, it’s on to specters of other
description.
Ghosts of Inflation Past
At the risk of sounding insincere, or even
obsequious, I will restate my long-held contention that our subscribers
are, on the whole, far more intelligent than the broader population.
In fact, I can say without hesitation that,
with one exception, every subscriber I've ever met possessed the clear
hallmarks of intelligence.
(The one exception was a guy at one of our
early summits who was running hither and fro telling everybody how he
had mortgaged his house in order to put all of his money into a motley
collection of junior resource shares. When I tried to point out that,
like hot pepper, a dash of juniors goes a long way in a portfolio, he
waved away my cautionary remarks and proceeded to extol the wisdom of
his “all-in” approach, followed by glowing detail of how he was going to
spend all his new-found wealth. Regretfully, soon thereafter the market
did one of its periodic belly flops, in all likelihood wiping the fellow
out.)
In any event, one of the signs of intelligence
is to constantly examine arguments that run counter to your own. In that
regard, there is a small but determined body of our dear readers who
believe that while our call on gold will end up a winner (as, of course,
it already has), we are viewing the big picture incorrectly.
Specifically, they exhort, there is no way at
all, under any circumstances whatsoever, that the current crisis can
resolve itself in inflation. Instead, it will be a depression or a
deflation that will bring the world to its knees.
While we’ll be the last to dismiss any
arguments out of hand and actually go out of our way to review
well-formed critiques of our positions, there are times when it is hard
not to roll one’s eyes or shake one’s head upon being presented the
latest "evidence" that the deflation argument must be right. Especially
because, more often than not, this evidence is provided in exquisite
detail stretching out over many pages.
How, I wonder, will the deflationists
rationalize the following headlines from Bloomberg from just this week?
U.K. Inflation Outpaces Estimates
On Monday the Office of National
Statistics released a report on U.K. consumer prices that found
inflation to be higher than anticipated by analysts,
reports Bloomberg. In October, consumer prices were 1.5% higher than
their 2008 level, compared with 1.1% in September.
Canada Inflation Rises for First
Time in Five Months
Nov. 18 (Bloomberg) -- Canada’s inflation
rate rose above zero for the first time five months, ending the
longest period of falling prices since 1953, as a drop in gasoline
prices linked to a global recession ebbed.
Consumer Prices in US Increased 0.3%
in October
Nov. 18 (Bloomberg) -- The cost of living in
the U.S. rose more than forecast in October as Americans paid more for
fuel, while so-called core prices held at a pace that supports the
Federal Reserve’s forecast for tame inflation.
The 0.3 percent rise in the consumer-price
index followed a 0.2 percent increase in September, figures from the
Labor Department showed today in Washington. Excluding food and energy
costs, the core index rose 0.2 percent for a second month.
India Must Raise Rates ‘Fairly Soon’
to Tame Prices, OECD Says
Nov. 19 (Bloomberg) -- India’s central bank
must tighten its monetary policy “fairly soon” to rein in inflation,
the Organization for Economic Cooperation and Development said.
“Given the magnitude of easing and the speed
at which inflation has bounced back, monetary policy will need to be
tightened fairly soon,” the Paris-based OECD said about India in a
report released today.
Now, I am certain – as certain as I am that
the sun will rise tomorrow – that I’ll receive a flurry of deflationist
dissertations explaining away the rising tide of inflation. And I’ll
continue to read those dissertations – and pass on the better ones to
other members of the team for further evaluation and consideration.
However, I must confess to becoming a bit hardened against the
deflationists’ case, but only because everywhere I look, all I see are
governments trying to outdo each other with stimulus in all its many
guises. Which is to say, pursuing policies that can only be deemed
highly inflationary.
To provide just one fairly startling example,
China's M2 is reportedly growing at a year-over-year rate of 30%! That's
not just stimulus, that’s shock treatment.
It seems obvious to us that such policies,
left unchecked – as they are so far – must ultimately resolve in price
inflation. And apparently it is becoming equally obvious to an
increasing number of large and small investors – central banks even –
who are recalling gold as an effective hedge against that inflation.
If we are right, the reemergence of inflation
on the global scene will not be a one-act play, but rather a mini-series
that builds over the next several years to a grand finale when dealing
with price inflation will become the next big crisis.
Speaking of Dear Readers
In the mailbox this week, one reader took us
to task for relating stories from the period immediately following the
tearing down of the Berlin wall. The gist of those stories was that the
recently liberated citizens of communist East Germany had trouble
adjusting to the demands of the free market. In his letter, the dear
reader related how, in 1995, he worked with East Germans and found them
as hard working as anyone. And he goes on to call us right-wing nuts and
wonder how we can publish such drivel.
To which I feel compelled to note that 1995
was roughly six years after the wall came down and our stories took
place. It doesn’t surprise me, therefore, that by then the East Germans
had learned something of how to cope in a capitalist economy. Humans are
nothing if not resourceful, when forced to it.
As for why we publish such drivel, by
understanding past mistakes you can attempt to avoid repeating them. Or,
if helpless to prevent those mistakes from being repeated – the case
with most of us – we can learn to recognize the signs that the train is
about to leave the track and take appropriate measures. As investors,
that fundamental analysis has served us very well indeed.
On the topic of repeating mistakes, I found
the following quote from an article in Politico this week particularly
telling.
Speaker Nancy Pelosi said Tuesday that she
hopes to move on a jobs bill next month but cautioned against rushing
in before Democrats have found the “right initiative” to deal with
what’s proved to be a very stubborn, deep recession for workers.
“I would hope so, but I don’t know, I don’t
know,” Pelosi told POLITICO, when asked if the House will act before
the end of the year. “This is a very systematic job challenge that we
have. So we have to do something at the right time, the right
initiative. This is a deep recession. ... It’s a joblessness that is
quite challenging.”
With health care behind them for the moment,
House Democrats are feeling strong political pressure to refocus on
the economy. But as Pelosi’s tone suggests, there is also a greater
respect for the depth of the unemployment, which has persisted despite
the massive stimulus bill last winter.
“It’s urgent, but it’s deliberative,” said
one Democratic leadership aide.
Now, call me a Scrooge (please, don’t call me
a right- or left-wing anything), but the very idea that our economy has
reached the point where the solution to unemployment must emanate from
the halls of Congress, and more particularly from the minds of statists
such as Nancy Pelosi, is enough to make me want to cover my eyes in
fright.
This idea that the free market is now
dependent on political dictates highlights, at least to me, the
disconnect between the America of today and the America of years past.
Then, a recession would take care of itself with a quick liquidation of
bad investments and bad ideas, allowing for true value discovery and for
the nation to get smartly back to work.
Now, however, we apparently need Congress to
pull the right levers to revive the economy. Of course, while we wait to
see what scheme they’ll come up with next, investors, entrepreneurs, and
business managers of all stripes are left in a state of confusion,
uncertainty, and hesitation.
There is an old saying, “Lead, follow, or get
out of the way.” Having experienced the outcome of the government’s
leadership, I think it’s time they either follow or, better yet, just
get out of the way.
Unfortunately, there’s no chance of that
happening anytime soon. Quite the opposite; with each new leg in the
crisis, expect the government to slap in another brick in the wall – the
wall that separates the free-market economy from getting on with
business.
Speaking of which, following is a quick take
on commercial vs. residential real estate from our own Jake Weber…
The Case-Shiller Index pegs the peak in
national home prices in the summer of 2006, followed by a 34-month, 32%
slide in prices. With the help of an $8,000 tax credit, the housing
decline appears to have stabilized – that’s if you consider reliance on
government subsidies a sign of stability.
Commercial property prices, on the other hand,
didn’t peak until October of 2007. Prices have since fallen further and
faster than residential, suffering a 34% haircut just in the last eleven
months. But the foundation of commercial real estate is just beginning
to crumble:
-
According to Deutsche Bank, $2 trillion in
commercial mortgages will mature between now and 2013 in CMBS, banks
and life insurance company portfolios, of which they estimate 64-72%
($400-$450 billion) of loans wouldn’t qualify to refinance were they
to survive to maturity.
-
The total delinquency rate was 4.1% at the
end of Q2 2009, a 120% increase from March 2009 and a 450% rise since
October 2008.
-
Transaction volume is down from a peak of
$133.2 billion in Q2 2007 to $4.8 billion Q2 2009.
-
According to a Wall Street Journal analysis
of regulatory filings, more than 2,600 banks and thrifts have
commercial real estate loan portfolios that exceed 300% of total
risk-based capital, the capital used as a cushion to cover losses.
Regulators consider the 300% level a red flag for the banks’ health.
Rather than forcing banks to accept losses,
regulators have permitted lenders to carry commercial loans on their
books at pre-crash values, pushing the problem down the road
in a strategy dubbed “Delay and Pray.” Banks can do their
best to disguise their books, but there’s no hiding from the grim future
for commercial real estate.
Delaying and praying may be the bankers’
strategy, but in the investing world those that delay will pay.
Instead, keep your investments out of harm’s way and invest
ahead of the trends with
The Casey Report. Get started now by accepting our no-risk,
100% money-back offer by
clicking here.
David again. Despite the
residential real estate blip shown in the chart above, a blip due in
equal parts to the seasonal selling season, foreclosed properties
selling cheap, and government incentives for first-time buyers, the
residential market is far from out of the woods.
Today, for example, it was announced that one
out of every six FHA mortgages was late by at least one payment in the
third quarter. And that foreclosures had reached the highest level in
three decades. Almost more concerning, prime fixed-rate mortgages – the
good stuff – has seen delinquencies rise to 5.8% and foreclosures to
1.95%, another three-decade high.
And the real “fun” in commercial is just
getting started. On that topic, an article today on the CoStar Group
website (a good site for monitoring developments in commercial real
estate), discusses the growing delinquencies in commercial
mortgage-backed securities (CMBS) – billions of dollars of which now
live in the portfolios of mutual funds and financial institutions here,
there, and everywhere. According to CoStar, in October office
delinquencies alone increased by over $550 billion.
Read the full article here.
And with that, I’ll sign off for the day.
Glancing at the screens as I do, I see that the DJIA is off 135 points.
But not to worry – T. Geithner, the Goldman Sachs Secretary of the
Treasury, assured us today that the U.S. economy will expand this
quarter and continue to do so into the next year. While he’s probably
right, given the open spigots on spending, it’s really just rearranging
the deck chairs on the Titanic at this point.
Meanwhile, gold has pulled back from
yesterday’s elevated levels – as we expect it will do on big down days –
at least for awhile. But it’s still holding tough at $1,141.
We live in interesting times, a theme we’ll
continue to explore tomorrow.
David Galland
Managing Director
Casey Research
