Real Estate – A Global View

After a few months long hiatus from writing, it was time to come back…

Martin Armstrong was very kind to ask me to share my views on global real estate. The links to the report are below. First comes Martin’s highly insightful piece on now unfortunately mostly forgotten real estate booms and busts of the 18th and 19th century USA, followed by my review of real estate opportunities around the world (as well as places to avoid).

Real Estate – The Global View 


Petra’s Readings

Links to interesting articles I have read over the past few days that you might also enjoy…

Barron’s mid-year roundtable: Buy Low, Stay Nimble

Avoiding Losses Is One of the Keys to Managing Money

Everything You’ve Heard About Fossil Fuels May Be Wrong

Modern Portfolio Theory Is Harming Your Portfolio

Checklist: How to Spot a Bubble in Real Time

Free Book Downloads! National Academies Press Offers More Than 4,000 Titles

‘I’ve Got Nothing to Hide’ and Other Misunderstandings of Privacy

The Onion: Nation Down To Last Hundred Grown-Ups: ‘Mature Adults Could Be Gone Within 50 Years,’ Experts Say (funny… and true)

Dunning-Kruger effect

Guest post by Cantillon

On occasion it can be remarkably frustrating putting the case for an investment thesis to an unreceptive audience based on its intrinsic and rational merits.  Over time one perhaps learns that the approach one takes to forming an insight into likely prospective market developments is simply not compatible in the general case with the best way of persuading people of the correctness of that view.  Markets have their own intrinsic logic, and people have their own logic and the different logics do not play nicely together.  Indeed it could hardly be any other way, for were that to be the case we would see many more incidences of consistent investment success than we actually do see.

It is interesting how people do not generally seem to learn from their mistakes in the market.  If in July 2008 they listened to the hawkish rhetoric from the ECB and were swept up in the general climate of inflationary fear and as a result remained positive on inflation hedges and negative on European fixed income with unfortunate financial repercussions, then in May 2011 with perhaps a very similar setup it seems that they are quite content to make the same mistake.  And then as commodity prices correct, inflationary expectations ebb, and European fixed income rallies they say “well, the facts change”.  But the facts changed in an absolutely predictable, and predicted way that could be identified based on the initial conditions before the moment of hysteria started to exhaust itself due to natural forces.  And I wager that, once again, many commentators and economists will learn little from this experience, and what they learn will be the wrong thing.

But the world is so noisy, and our culture so unreflective and reactive that often being needlessly wrong has little adverse career impact.  In fact it is much better not to upset people with then-unconventional (and therefore unsound-seeming) ideas though they may yet become conventional wisdom with the passage of years; the path to success for most is to reinforce the audience’s self-esteem by uttering the conventional and acceptable platitudes and bromides of the time, paying lip-service to originality and the importance of recognizing reality, but without actually letting such a dangerous creature into the room.

In this context, I find it worth reminding oneself of the Dunning-Kruger effect.

The Dunning–Kruger effect is a cognitive bias in which unskilled people make poor decisions and reach erroneous conclusions, but their incompetence denies them the metacognitive ability to appreciate their mistakes.[1] The unskilled therefore suffer from illusory superiority, rating their ability as above average, much higher than it actually is, while the highly skilled underrate their own abilities, suffering from illusory inferiority. Actual competence may weaken self-confidence, as competent individuals may falsely assume that others have an equivalent understanding. As Kruger and Dunning conclude, “the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others”

Perhaps one must therefore adopt the rules appropriate to the domain one is working in.  Form one’s market view based on relevant considerations; communicate it informed by the rules developed by authors of antiquity. And reserve most conversations about the nitty gritty behind the view for the elect who have proven their competence and discernment in previous interactions.

Time to sell real assets for USD cash

Guest post by Cantillon

In recent years it has become very fashionable amongst the want-to-be contrarian crowd to focus on the relative valuation of gold to other assets – particularly vs equities.  There are clearly long swings of relative equity appreciation and then of relative gold appreciation – the latter being not terribly happy ones economically, socially, politically and geopolitically.  The argument has been made that since in previous cycles the value of the Dow to Gold reached an extreme of 1.5 to 2, that this is a reasonable expectation for what can be achieved in the present or most recent cycle of relative Gold appreciation.

Possibly this may yet be proven right, but it is interesting to note that we have  close-to-hysterical public sentiment regarding the perceived consequences for commodities of QE (the Glenn Beck special was really quite amazing, as has been the widespread public chatter over a supposed large dealer short in the precious metals) and objectively still-negative big picture sentiment towards equities (consumer confidence in the dumps, Obama approval rating very low with Osama bounce almost erased, net AAII relatively oversold, and a generally grumpy public mood).

Just today, I was struck by the FT publishing an admiring profile entitled “Angus Murray: believer in real assets”. Mr Murray is the CEO of a $500mm asset management company that offers a wide range of offerings including commodities, emerging market equities, and post-war art organized around a unifying thesis that a devaluation of money is under way, and that inflation is significantly understated based on the official data.  He believes that in addition to the end of imported disinflation from the emerging world, the increase in the money supply seen in recent years will lead to acceleration in this devaluation of money from here.  He recommends a portfolio of 40% emerging markets equities (since he is sure that returns will be poor on developed world equities) and 60% precious metals.

Now I do appreciate the evils of monetary inflation – I first read Milton Friedman and Hayek in 1989; have worked at the Cato Institute, where I read many books by the Supply Siders and journal contributions by the late 70s/early 80s advocates of restoring the gold standard; I persuaded Sir Samuel Brittan (then editor of the FT) to review David Glasner’s book on free banking in the FT; in summer 1999 I asked a member of the Austrian seminar at NYU if we were not at a moment very like in the 1920s (monetary inflation hidden by productivity growth and imported disinflation).  And I have been a long-term commodities bull since shortly after I first heard Jim Rogers speak in London at the Institute for Economic Affairs on the launch of his first book.  In summer 2003 I expressed very strongly to my boss, head of an investment company with substantial assets, that it was a momentous trade at that juncture to take the free money from the Fed and buy hard assets. So I do appreciate the longer-term arguments in favor of precious metals and against equities.  I just don’t think making money in the markets is as easy as some otherwise very smart people seem to believe.  Secular investment trends have a habit of expiring just when one is finally able to persuade a reasonable number of people of the merits of one’s argument and to be recognized for that.

To step back for a bit – the chart below shows what is easy to forget – that it’s really a paper asset vs commodities cycle: taking a view on stocks vs gold is similar to taking a view on stocks vs crude over the long run.  Crude sentiment and positioning is extreme, and reading the media/bank research response to the selloff reveals astonishing complacency.  Even my deflationist friends (“the US is like Japan, only much worse”) are bullish crude based on a supposed structural supply-demand imbalance.  Reading notes of the recent Skybridge hedge fund conference – held one week after the silver crashlet -  (with some heavy hitters incl Burbank, Steve Cohen and others)  showed participants very worried about ‘black’ swans involving commodity prices taking off to the upside, but there was not one mention that prices could go significantly lower, let alone break Mar 2009 lows in some commodities with adverse consequences for more leveraged producers.  The legendary Mark Fisher, author of the “Logical Trader” put forth what seemed to me to be a nonsensical argument: up till now there has been no fear premium; since there now is starting to be one, one ought to earn this by buying every dip or selling put spreads. At the risk of not paying sufficient respect to those more experienced, to me this shows a complete failure to grasp the intensity of the present mania for hard assets (and therefore scope for a substantial mess when it reverses).

Five factors come to mind that might lead to substantially weaker commodity prices on a 6mo – 2.5 yr horizon

  • Falling resource intensity of Chinese growth – possibly we are quite far up the S curve of industrialization.  Plenty left to go in other regions, of course.
  • Slowing growth in the emerging world as lagged response to rate hikes and rising inflation in the developed world with  tighter US policy – fiscal and monetary – leading to strong dollar.
  • Unanticipated increase in supply from the Arab world, at least temporarily, as a consequence of the Arab Spring.
  • Dawning realization that high commodity prices of past years have in fact led to large increase in supply (at least in some areas) – with a long lag.  We mistook delay in supply response for no response. (Particularly significant with regards to Shale Oil, which by some estimates could lead to an increase in supply of 3mm odd barrels per day by 2015).
  • Ebbing of inflationary psychology amongst producers, consumers, investors and speculators.  Maybe people are just tired of being bullish.

If I am right about commodities, it’s hard to expect that Gold doesn’t also experience a substantial correction – although no doubt it would hold up a bit better than copper or crude.

Of course the other leg to the trade is that consumer confidence, consumer spending, job growth, credit growth and house prices are all at a juncture where much lower gas prices (up 50% from August low last year!) could kick start the next leg of the recovery and the next leg in an equity market rally.

(Since first drafting the above rather longer term take, I realize that I suppose I should include the brewing mess in Europe.  No matter how much support core Europe can be persuaded to give to the periphery, there is no way for the periphery to recover competitiveness without maintaining very much lower inflation than the core for some years.  And of course of late they have actually continued to experience inflation.  Germany’s higher rate of growth in productivity simply makes the extent of the problem worse.  So the only way we can possibly avoid an unraveling is with EUR/USD very much lower, and substantially higher German inflation over time.  Once we get there, German exporters are likely to see a surge in profitability, since they are already profitable at the present high exchange rate.  Of course wages are likely to grow under such circumstances and we should see rents and house prices rise also.  I think the best case scenario is that we have a messy few months ahead for the periphery; and this isn’t by any means the most likely or only case.  Weaker global growth, weaker risk appetite and a strengthening dollar would of course tend to hurt commodity-related plays much more than US equities).

I do not want to discuss it in much length at this juncture, but I am not sure that art – of whatever period – will be such a rewarding place to hide.  In the old days, before art was considered a legitimate asset class, it was always the case that art and collectibles would perform very impressively just as the surge in liquidity was coming to an end.  The boosters of this market suggest that things are different this time.  I am not so sure.

Regarding breakeven inflation – that subject deserves an entire post of its own.  But I think that the present focus on inflation is overcooked in the near-term.  Stabilization in commodity prices will bring headline inflation back down closer to core.  And if we do see commodity prices fall, as I expect, the current short-term panic that we see should ebb.  I don’t think that changes the longer-term picture though that we are indeed early in a cycle of rising inflation (that began shortly after the tremendous outbreak of complacency and self-congratulation amongst central bankers as they recognized the ‘Great Moderation’).  Even a horrible central banker can bring down inflation progressively over each cycle with little effort if imported goods are falling and there is a period of modest productivity growth at home; at the best of times, and in the best of cultures, it is much more challenging to decide to impose short-term pain in order to achieve a long-term benefit of low inflation and belief by people in price stability.  Since World War Two we have grown rather accustomed to comfort, and I wonder how much suffering we will need to endure before we realize the cost of not recognizing what must be done and executing it rather than ignoring the painful aspect of the situation and hoping it will go away.

The point is that I think liquidity flows into asset prices early into an inflation.  This is fun for the wealthy (who benefit from asset prices going up) and less so for the poor (who see their cost of living go up without a compensating increase in wealth).  Later we may see a period that is less fun for everyone – assets go down, but the cost of living goes up.

Many of the ‘hard asset’ bulls seem to have forgotten that a rising cost of living does not imply hard assets go up in price – particularly if it is a rising nominal rate environment.  There is a prevalent belief that assets and commodities will rise so long as real rates are negative and credit growth exceeds nominal GDP growth.  There may be some truth to this over decades, but if one incurs the minor unpleasantness (discomfort again!) of getting hold of the data and studying it, it becomes evident very quickly that this belief is misplaced on a shorter-term horizon.  Industrial commodities tend to peak (or at least experience their most positive phase) when credit growth is at its height.  If credit growth falls, even if it is from say 30% to 20%, that is outright negative for commodities in the short run.

I do think that one buys the dip in breakeven inflation.  This is a tremendous trading environment for people involved in these markets.  Sadly it seems to me that many investors have a misplaced exposure to this asset class – for example holding inflation-linked bonds on an outright/unhedged basis.  Not exactly the ideal trade in an environment of rising real rates!

Here is a picture of a long-term perspective on the Dow/Gold and Dow/Crude ratios – it shows very well my earlier point that hard asset bulls – even Gold bulls – are making a much bigger bet on industrial commodities (crude included) that they might realize.

Dow/Gold and Dow/Crude Ratios

Dow-Gold-Crude chart

With regard to the outlook for equities here – I do think that there are many US equities that are at attractive valuations and will perform well on a longer-term basis.  Sentiment about the economy is very negative, and should improve if gasoline prices come down as I expect.  But would prefer not to run a large outright long trading position in US stocks, given various risks I see to growth and to risk appetite in the shorter-term.

Petra’s Readings

Links to interesting articles I have read over the past few days that you might also enjoy…

Ray Dalio: The Billionaire Who Expounds Truth

More Dalio: Pursuing Self-Interest in Harmony With the Laws of the Universe and Contributing to Evolution Is Universally Rewarded

John Paulson’s View on Markets

What Exactly is Dow Theory?

Dylan Grice On The Coming Japanese Hyperinflation

Peter Thiel: We’re in a Bubble and It’s Not the Internet. It’s Higher Education

What does one TRILLION dollars look like?

10 Fascinating Facts About The World’s Richest People

Top 20 Countries in All Science Fields

The 16 Greatest Cities In Human History

California vs. Arizona (funny… and true)

Merry Christmas! (& Petra’s Readings)

Merry Christmas and a Happy and Prosperous New Year!

Here are links to a few interesting articles I have read over the past few days that you might also enjoy…

Global Recovery Status (interactive map)

Difference Between AAII Bullish And Bearish Sentiment Highest Since 2004

Kicking the Can

Why The Status Quo Is Unsustainable

The Real Great Depression (Panic of 1873)

Blue State Armageddon On The Way

In China’s Orbit: After 500 years of Western predominance the world is tilting back to the East

Quantitative Easing Explained (video)

It’s Time to Stand Up for Courage and Conviction

Nigel Farage To European Parliament: “The Euro Game Is Up”

…and a great Eric King interview with Nigel Farage (mp3)

Petra’s Readings

Links to interesting articles I have read over the past few days that you might also enjoy…

Soc Gen On The Art Of Hedging (Tail) Risk

China and the Future of Rare Earth Elements

Welcome To The Subprime Debacle, Part 2

A Conversation with Adam Fergusson: “When Money Dies”

Ready to Be Rich (David Tepper Profile)

Notes from the Ira Sohn Conference

Here’s Where All That Government Spending Is REALLY Going

Obstacle to Deficit Cutting: A Nation on Entitlements

Jim Rogers on Commodities, Gold (interview)

War, Inflation and the Stock Market

‘Scrapers’ Dig Deep for Personal Data on the Web

On Political Correctness, Multiculturalism, and Their Effects

Thomas Woods Jr. Interview – Nullification: How to Resist Federal Tyranny in the 21st Century

Change in tone in equity markets

We begin with the necessary disclaimer. These are one set of possible subjective analyses and do not constitute professional investment advice. No investment decisions should be made on the basis of this information. Financial investment is an inherently risky activity and must be undertaken with a competent investment advisor.

Having said that, as a matter of my personal opinion, it looks as if the equity markets are signaling an important change in tone to the upside. Has the bond theme reached its natural conclusion?

First consider the CRB index, which is weighted towards industrial raw materials.  Here we see a definite surge in activity suggesting that there might be an actual demand for them. It appears that it might be snapping out of a five month long holding pattern…

CRB index

CRB index

Next we see the broker dealers rebounding. These are the guys who directly profit from increased market activity. Somebody is getting rapidly interested in them.

broker dealers

If we look back to Wednesday’s trading, we see the composite market (this chart is a hybrid of the SPX and NASDAQ and seems to give a very nice picture of the meaningful market activity) we see the close above a critical resistance line.

crosses critical threshold

Also,  high tech, which was supposed to be a trouble spot, has sharply rebounded. This may be in anticipation of a new round of financing.

high teechnology

On the other end of the economic balance, the retail sector has powered out of a slump as well.


Even the aerospace and defense sector, which is probably suffering from a military wind-down syndrome, has shown signs of life.

aerospace and defense

And if we look overseas at Thailand, we see a market in simply explosive growth. This in no way is a picture of global slowing.


Overall, it looks as if the equity market is regaining its vigor and a slow but potentially powerful deep rooted recovery may be underway.

Petra’s Readings

Links to interesting articles I have read over the past few days that you might also enjoy…

Jim Rickards Compares The Collapse Of The Roman Empire To The US, Concludes That We Are Far Worse Off

John Mauldin: Are We There Yet?

Untangling Skill and Luck

Asia’s Paradigm Shift

Maywood: A city that sacked its entire staff (and its citizens think services are now better)

The Forgotten Depression of 1920

The Advent of the Cynical Bubble

Three Graphs About China and Cars

How facts backfire: Researchers discover a surprising threat to democracy – our brains

Unfunded Entitlements ‘r’ Us

McKinsey Study Confirms Sellside Analysts Are Conflicted, Slow, Biased And Generally Stupid

When Money Dies: The Nightmare of the Weimar Hyper-Inflation”, by Adam Fergusson (pdf)

Petra’s Readings

Links to interesting articles I have read over the past few days that you might also enjoy…

Remember: In 1930, They Didn’t Know It Was “The Great Depression” Yet

China in Africa – Beijing Does Deals, Not Gifts

The Fallacy of a Drilling Moratorium

All You Need to Know About Public Sector Work (A whistleblower’s shocking account)

The Complete History Of European Sovereign Defaults From 1340-1939

Could Super Solar Flares Take Us Back to 5,000 BC?

Here’s Why You Shouldn’t Listen to Equity Analysts

… and here (if you need further evidence)

What’s The Point of Macro?

China’s Death Grip on Rare Earth Metals

Obama – The Caudillo President

The Green Jobs Myth

Welcome to the Insane Asylum or: How We Learned to Stop Worrying and Love the Big Lie