GUNG HAY FAT CHOY
HAOLE MKA HIKI HO
It has been over 26 years since I left Hawaii to work the “mainland” as we Hawaiians refer to this part of America, so forgive me if my spelling is incorrect. It says, Happy New Year!
2009 IN REVIEW
This being December 31, 2009, I will spend this letter reviewing the past year per my letters and give you a forecast of the new decade of 2010.
December 30, 2008 I stated that the banks were holding onto their “bail out” funds from the Federal Reserve programs. That has remained to be the case throughout 2009. That lack or reluctance of banks to lend from the reserves created by the Federal Reserve ‘ investment in banks or from the TARP program has remained. I stated then that banks had “free” money at 0% and they would invest at 3% and make the spread to repair their balance sheets and take no risk in providing loans to the American Economy. That has been the case as the major “too big to fail” banks have repaid the investment of the FED. The key to these reserves and their ability to finance the expansion will be dealt with in 2010 forecast forward.
January 10, 20009 I wrote,
• “About a month ago I wrote you on the interest rate situation, TBills and Tbonds, mortgage rates and other related items. Today we have seen much of what I stated begin to see fruit. Interest rates have risen on Tbills and Tbonds. On December 18, 2008 the 30-year TBonds hit a low yield of 2.546% return, on January 6, 2009 the yield rose to 3.06%. Mortgage rates declined and money became available for mortgages.”….
• “2009 and where do we go? The first thing to remember is that money in circulation is inflationary. Sooner or later the money from TARP and the Bailouts will be taken off the balance sheets in the form of Tbills and Tbonds and go into the economic system. When it does it will cause prices to rise. If you haven’t notices, the price of gas is now up 10-15 cents a gallon and oil is up over $10 a barrel.”
On February 12, I wrote that I expected growth to come from “Platform” companies. I was wrong in that point. Growth has come from economizing of companies. Economy has come from lay offs and cutting on expenses. In reality there has been no growth but a rebound in earnings due to cutting of costs. That has not bided well for the American Worker.
The key to 2009 and our rebound is found in the April 4th letter. Confidence and a return of the acceptance of “risk” sums it all up. Homes sold quickly ion March and April after almost nothing from the prior 6 months.
By Mid-Year (June/July) not only were homes selling in our area, they were closing escrow. The fear I had in late spring was that all the offers that took the homes to pending would have closing problems as new underwriting terms were instituted. Buyers in Woodside, Palo Alto, Portola Valley and Menlo Park had money and good credit. The only slow down was in the time it took to close a transaction, 30 to 45 days were now the norm.
Fall 2009 brought about an 11% jump in homes sales, an increase of 7.2% in existing homes sales and the first time in 5 years that home sales increased 4 months in a row. Inventories began to decline, but unemployment in Silicon Valley continued to rise.
As leaves began to fall and pumpkins began to have smiles on their toothy or tooth-less faces homes sales continued to rise; but also so had commodity prices. The US$ was falling and offshore investors were looking for hedges for their dollar reserves and gold and commodities became a store of value. With that came the realization that the offshore investor was now becoming a noticeable factor in Silicon Valley as realtors were giving tours to visiting Asian Buyers.
While everyone planned for Thanksgiving the disparity between new homes sales and existing home sales became evident. The prices to build new homes had escalated due to the rise in commodity prices and existing homes were selling for less than construction cost to replace them.
As Santa approached and retailers looked to keep their stores open another year, housing starts continued to fall and inventories of homes for sale declined.
In summary, 2009 was not a bad year. The inventory of homes that all feared would cause a collapse in housing and a new depression did not occur. Sellers became more confident of the future and pulled homes from the market when the price did not confirm to what they felt their home was worth. Buyers on the other hand had confidence and the return to normal was beginning to occur. Existing homebuyers remodeled and obtained financing at historically low rates with substantial down payments. The buyer of the multi-million dollar property now came up with enough of a down payment to qualify and obtain a low interest small mortgage. A major change from the past, but in reality a return to way things were done in the not too distant past. Interest rates remained low and slowly more mortgages were available from numerous sources other than “too big to fail” banks.
2010 FORECAST
The key to 2010 is, or was, the key to 2009, THE RETURN OF RISK ACCEPTANCE.
We all became complacent with the various investments available prior to the fall of Lehman Brothers. If it had “insured” we invested. Money Market funds were well proven and many failed to consider the downside as ever a possibility. It had the makings of a fall. Fall it did and the repercussion was the lack of faith in anything other than U.S. Government Bonds, ergo, 0% on U.S. Treasury Bills. 2009 brought faith back into the investor mentality. Investors are need in a capitalistic system in order for the system to grow. Without investors it is a barren wilderness. Individual Investors can only go so far until the need of Institutional Investors are required. To understand Institutional Investors you must understand the “Prudent Man Principal”. Institutional Investors are fiduciaries. They are legally liable for the lost of funds placed in their care through the failure to follow the “Prudent Man Principal”. Prudence was waiting to repair one’s own house then waiting to determine if the system would survive. So it has, we did not fall and the system survived.
What justifies that comment, mergers and acquisitions are the answer. This will be one source of growth in 2010. Corporations that held large amounts of cash or had pristine credit ratings began to buy. With the purchase of companies, shareholders’ were liquefied. That liquidity will come back into the capitalistic system. It will come back in equity or debt, but come back it will. Whether the investor puts the money in a savings account or directly into the system the funds go back into the economy.
Where else will money come from to expand our growth? The “too big to fail banks” will be a major source. For most of 2009 the cry heard from economist was that bank reserves created by Tax Payer money was not flowing back into the economy. That is easy to understand. For all that one knows and hates about banks and bankers, they do know lending and interest rates and risk. They don’t know squat about running an investment bank or a trading operation, but they do know interest rates and risk of return of capital. With “insured” and “guaranteed” now only in the hands of the U. S. Government, banks can make sensible decisions on lending money. Here I go by my dear departed Father’s comments to me as a very young boy, “use your common sense”. Would a bank lend money long term at the historically lowest rate to waiting long term to regain it when inflation through the debasement of our currency through deficit funding was evident? Stupid, a fiduciary mistake and it could put them not only out of a job but next to Madoff making license plates.
I expect that interest rates will increase from 2010 forward. I expect a slow growth in lending from banks as they balance foreclosures, REO’s and Short Sales as they pray commercial loans remain balanced in their portfolios. I expect “median home prices” to increase. The increase will not come from increase values of homes, but from the sale of high-end homes; where to fore, the median home prices were composed of foreclosures, REO’s and Short Sales. I expect investors to begin to look at existing homes to buy at a discount, remodel and flip. I expect the new group of venture funds to be blind pool real estate funds composed of local (U.S.) investors and offshore investors. I expect offshore investors to continue to move their assets into the United States in the form of real estate investments. I expect that it will take a long time for the Dow Jones, S&P and NASDQ to regain their old highs for many years, 10 or more. I expect a picket fence of stock market indices, up and down, to frustrate inventors and that will drive them to real estate as a store of value. I expect the United States to dominate Technology and Innovation and that dominance will continue to draw students to the United States for education and training to help their countries and eventually lead them to relocate to the U.S.
The greatest fear I have is what I fear we may have in the next few years, STAGFLATION! That will be a return to Jimmy Carter and a stagnate economy with inflation. It was great for real estate and it was great for small growth companies and their development, but it was horrible for the U.S. economy. While I didn’t vote for the Kid with the Big Ears, I truly hope he can provide to the U.S. what I and those of my generation felt Jack Kennedy was going to provide. Good Luck Barry, do your best and that is all that you can hope for, with a little luck from above.
Happy New Year to All, and to All a Good Night.
POP!
Cindy come sit next to me by the fire while we watch the Ball Fall in Times Square.
Tuesday, January 12, 2010
Gold Sweet Gold
Gary’s Market Commentary
• Unemployment unexpectedly drop
• Commodity prices break led by Gold
• Dollar rallies
• What is the real value of a dollar
• Who has all the money and where will growth come from
• Results for November: new listings declining, inventory declining, closed sales declining, days on the market increasing.
The decline in unemployment to 10% was a complete surprise. It put the US$ in a turn around and gold and commodities in a sell of. Of course it was not unexpected as many analyst were calling for a halt in the decline in the US$ and a break in commodity prices especially that of gold. As we come to the end of the year, hedge funds, traders and investors will want to lock in their gains. Clear the decks take profits and lets take home our 20% of the profits, say the Hedge Fund Managers. It will be a big payday for the hedge fund industry. Of course, none of that will accrue to poor Mr., Mrs. and Miss America as they wonder: will they lose their home, keep their job or find a new one.
The rally in the US$ is good for our real estate market. As many wonder about the inventory of foreclosed homes and the potential for a commercial real estate bust; having buyers over seas with US$ to invest is a good omen.
As I stated in my past letters gold and commodities had nothing to do with supply and demand rather it had to do with the store of value. The US$ is basically a worthless security. It represents the “full faith and credit” of the United States of America. There is no Gold backing, no Silver backing; just paper that measures your labor. I recall the term a “fiat” currency from Economics in college. It is a transfer from your hard work and a measurement that allows you to buy something of hard value; like a home, a piece of jewelry, a car, commodities like gold and silver or a security that provides you a return of investment measured in income of equity growth, and goods and services.
Prior to August 15, 1971 the dollar was backed by gold or at least partially. The convertibility of US$ to Gold was in the hands of governments. Then on that date Richard M. Nixon ended the convertibility. The stock market ended its bull cycle in November 1972 and declined to a low and loss not seen since the Great Depression. Inflation soared, commodities soared, gold eventually stopped somewhere around $800 an oz.; but most importantly, real estate became a “store of value”. The foreign investors relied on their local government to convert the amassed US$ into gold put their faith in gold on the open market, commodities and U.S. Real Estate.
Many of you may not realize that the US$ was a gold backed currency for years. It was the Gold backing that helped move the U.S. out of the Great Depression. Yes, the U.S. Government spent billions to get us out and up and it was not until WWII that we really spent enough to get out. Did you know it was not inflationary? The spending from the time of FDR’s election until the end of WWII was financed with Gold at Fort Knox. All the dollars that were created and in circulation were Gold backed. Gold was $20.67 for years until FDR discovered that all he had to do is revalue Gold to $35 per oz. and our currency in circulation could expand by 69%! In fact FDR would joke after taking his breakfast and with cigarette and coffee decide whether to increase Gold another dollar or two.
So where are we today; and is it any different? Not really and yes it is different.
Not really is that the expansion of the US$ during the 60’s was from the Great Society of LBJ and the Viet Nam War. The expansion and deficit funding along with an imbalance in trade created another deficit, a trade deficit. Nations which began to accumulate US$ from their trade imbalance cashed the dollars in for Gold. There was not enough Gold in Fort Knox to cover the US$ in float, so Nixon ended the exchangeability. Too many dollars chasing too little goods resulted in inflation. The U.S. could have funded the Great Society and Viet Nam if there was a positive trade balance in favor of the United States! There was not a favorable balance and inflation was created when convertibility ended. What happened next was that “smart Money” realized that even hard assets, as in Gold and Silver, could become over priced and the next hard asset was Real Estate. What is the key to buying Real Estate? It is LOCATION, LOCATION, and LOCATION. Where is the safest most secure most equal place in the world to live? IT is the United States. So where is LOCATION, LOCATION, LOCATION located? It was then the United States. San Francisco, New York, Los Angeles, Honolulu took off, and then farmland took off as wheat, corn and soybean prices escalated.
What the politicians who created the imbalances missed back in the 60’s and 70’s was that the U.S. was no longer the cheapest and most competitive source of production in the world. The U.S. was losing the competitive edge. The Baby Boomers wanted it now and did not want Dad’s Cadillac, they wanted a BMW, a Mercedes, and Brooks Brothers was passé. The inheritance of the Baby Boom Generation from the Depression Generation’s frugality was spend, spend, “been there, seen that, got that”. A strong dollar and a change in spending attitude by cheap goods overseas was a part of the increasing imbalance of trade.
Today all the ills of the past are coming home. The imbalance of trade, deficit spending, lack of government regulation has created a weaker dollar. The crisis of September 2008, the failure of Lehman Brothers, the breaking of the “buck” by a Money Market Fund created a crisis of faith.
Looking back, where did the excess US$ go in the past and today? They went into Gold, commodities, and real estate. Who owns all those excess US$? China reportedly holds US$2.7 trillion. What backs the Yuan? It is the same thing that backed the U.S.$, competitive and cheap productivity and products. What was the first location the newly rich in China placed their bounty? Hong Kong was the first LOCATION. Today it is said that Hong Kong demands $US 1000 per square foot! Where will and where are those excess US$ looking now? The same place they went in the past, San Francisco, Los Angeles and New York City.
I believe that waiting to buy real estate will be a regret many look back on and regret their failure to act. The US$ you hold is worth only what it can buy. The yield on US Treasuries are lest than the historic inflation rate, the stock market is up over 60%, Gold is up over 50%. So where is the historic store of value that has not risen? You know the answer it is REAL ESTATE. The US Government is subsidizing the purchase of real estate; interest rates on mortgage have never been lower. Waiting will be your error.
The November report on Atherton, Menlo Park, Palo Alto, Portola Valley and Woodside show a decline in inventor, sales and new listings. Sooner or later you will see a “POP” in prices brought on by a “POP” in demand. We, Jim, Craig and I are waiting to help and negotiate for you now. Call us today and arrange a viewing and tour!
• Unemployment unexpectedly drop
• Commodity prices break led by Gold
• Dollar rallies
• What is the real value of a dollar
• Who has all the money and where will growth come from
• Results for November: new listings declining, inventory declining, closed sales declining, days on the market increasing.
The decline in unemployment to 10% was a complete surprise. It put the US$ in a turn around and gold and commodities in a sell of. Of course it was not unexpected as many analyst were calling for a halt in the decline in the US$ and a break in commodity prices especially that of gold. As we come to the end of the year, hedge funds, traders and investors will want to lock in their gains. Clear the decks take profits and lets take home our 20% of the profits, say the Hedge Fund Managers. It will be a big payday for the hedge fund industry. Of course, none of that will accrue to poor Mr., Mrs. and Miss America as they wonder: will they lose their home, keep their job or find a new one.
The rally in the US$ is good for our real estate market. As many wonder about the inventory of foreclosed homes and the potential for a commercial real estate bust; having buyers over seas with US$ to invest is a good omen.
As I stated in my past letters gold and commodities had nothing to do with supply and demand rather it had to do with the store of value. The US$ is basically a worthless security. It represents the “full faith and credit” of the United States of America. There is no Gold backing, no Silver backing; just paper that measures your labor. I recall the term a “fiat” currency from Economics in college. It is a transfer from your hard work and a measurement that allows you to buy something of hard value; like a home, a piece of jewelry, a car, commodities like gold and silver or a security that provides you a return of investment measured in income of equity growth, and goods and services.
Prior to August 15, 1971 the dollar was backed by gold or at least partially. The convertibility of US$ to Gold was in the hands of governments. Then on that date Richard M. Nixon ended the convertibility. The stock market ended its bull cycle in November 1972 and declined to a low and loss not seen since the Great Depression. Inflation soared, commodities soared, gold eventually stopped somewhere around $800 an oz.; but most importantly, real estate became a “store of value”. The foreign investors relied on their local government to convert the amassed US$ into gold put their faith in gold on the open market, commodities and U.S. Real Estate.
Many of you may not realize that the US$ was a gold backed currency for years. It was the Gold backing that helped move the U.S. out of the Great Depression. Yes, the U.S. Government spent billions to get us out and up and it was not until WWII that we really spent enough to get out. Did you know it was not inflationary? The spending from the time of FDR’s election until the end of WWII was financed with Gold at Fort Knox. All the dollars that were created and in circulation were Gold backed. Gold was $20.67 for years until FDR discovered that all he had to do is revalue Gold to $35 per oz. and our currency in circulation could expand by 69%! In fact FDR would joke after taking his breakfast and with cigarette and coffee decide whether to increase Gold another dollar or two.
So where are we today; and is it any different? Not really and yes it is different.
Not really is that the expansion of the US$ during the 60’s was from the Great Society of LBJ and the Viet Nam War. The expansion and deficit funding along with an imbalance in trade created another deficit, a trade deficit. Nations which began to accumulate US$ from their trade imbalance cashed the dollars in for Gold. There was not enough Gold in Fort Knox to cover the US$ in float, so Nixon ended the exchangeability. Too many dollars chasing too little goods resulted in inflation. The U.S. could have funded the Great Society and Viet Nam if there was a positive trade balance in favor of the United States! There was not a favorable balance and inflation was created when convertibility ended. What happened next was that “smart Money” realized that even hard assets, as in Gold and Silver, could become over priced and the next hard asset was Real Estate. What is the key to buying Real Estate? It is LOCATION, LOCATION, and LOCATION. Where is the safest most secure most equal place in the world to live? IT is the United States. So where is LOCATION, LOCATION, LOCATION located? It was then the United States. San Francisco, New York, Los Angeles, Honolulu took off, and then farmland took off as wheat, corn and soybean prices escalated.
What the politicians who created the imbalances missed back in the 60’s and 70’s was that the U.S. was no longer the cheapest and most competitive source of production in the world. The U.S. was losing the competitive edge. The Baby Boomers wanted it now and did not want Dad’s Cadillac, they wanted a BMW, a Mercedes, and Brooks Brothers was passé. The inheritance of the Baby Boom Generation from the Depression Generation’s frugality was spend, spend, “been there, seen that, got that”. A strong dollar and a change in spending attitude by cheap goods overseas was a part of the increasing imbalance of trade.
Today all the ills of the past are coming home. The imbalance of trade, deficit spending, lack of government regulation has created a weaker dollar. The crisis of September 2008, the failure of Lehman Brothers, the breaking of the “buck” by a Money Market Fund created a crisis of faith.
Looking back, where did the excess US$ go in the past and today? They went into Gold, commodities, and real estate. Who owns all those excess US$? China reportedly holds US$2.7 trillion. What backs the Yuan? It is the same thing that backed the U.S.$, competitive and cheap productivity and products. What was the first location the newly rich in China placed their bounty? Hong Kong was the first LOCATION. Today it is said that Hong Kong demands $US 1000 per square foot! Where will and where are those excess US$ looking now? The same place they went in the past, San Francisco, Los Angeles and New York City.
I believe that waiting to buy real estate will be a regret many look back on and regret their failure to act. The US$ you hold is worth only what it can buy. The yield on US Treasuries are lest than the historic inflation rate, the stock market is up over 60%, Gold is up over 50%. So where is the historic store of value that has not risen? You know the answer it is REAL ESTATE. The US Government is subsidizing the purchase of real estate; interest rates on mortgage have never been lower. Waiting will be your error.
The November report on Atherton, Menlo Park, Palo Alto, Portola Valley and Woodside show a decline in inventor, sales and new listings. Sooner or later you will see a “POP” in prices brought on by a “POP” in demand. We, Jim, Craig and I are waiting to help and negotiate for you now. Call us today and arrange a viewing and tour!
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