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Beware of Int’l Financiers and Global Dirigisme

Beware of Int’l Financiers and Global Dirigisme.

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Citi Fails Fed Stress Test … The REAL Story Washington's Blog

Citi Fails Fed Stress Test … The REAL Story Washington’s Blog.

“Too Big To Fail” … Fails

Bloomberg reports that Citigroup has failed the Fed’s new round of stress tests:

Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.

Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.

In reality, Citi flat lined” – went totally bust – in 2008.  It was insolvent.

And former FDIC chief Sheila Bair said that the whole bailout thing was really focused on bringing a very dead Citi back from the grave.

Indeed, the big banks – including Citi – have repeatedly gone bankrupt.

For example, the New York Times wrote in 2009:

Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup.

So why did the U.S. government give Citi a passing grade in previous stress tests?

Because they were rigged to give all of the students an “A”.

Time Magazine called then Secretary Treasury Tim Geithner a “con man” and the stress tests a “confidence game” because those tests were so inaccurate.

But the bigger story is that absolutely nothing was done to address the causes of the 2008 financial crisis, or to fix the system:

  • The faulty incentive system – huge bonuses that encourage reckless risk-taking by bankers – arestill here
  • Another big problem – shadow banking – has only gotten worse

Indeed, the only the government has done is to try to cover up the problems that created the 2008 crisis in the first place … and to throw huge amounts of money at the fattest of the fatcats.

Remember, Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future.

Indeed, professor of law and economics (and chief S&L prosecutor) William Black notes that we’ve known of this dynamic for “hundreds of years”.  (Actually, the government has ignored severalthousand years of economic wisdom.)

Heck of a job, guys …

A First Look at a New Report on Crony Capitalism – Trillions in Corporate Welfare | A Lightning War for Liberty

A First Look at a New Report on Crony Capitalism – Trillions in Corporate Welfare | A Lightning War for Liberty.

Posted on March 26, 2014

One of the primary topics on this website since it was launched has been the extremely destructive and explosive rise of crony capitalism throughout the USA. It is crony capitalism, as opposed to free markets, that has led to the gross inequality in American society we have today. Cronyism for the super wealthy starts at the very top with the Federal Reserve System, which consists of topdown economic central planners who manipulate the money supply and hence interest rates for the benefit of the financial oligarch class. It then trickles down through lobbyist money into the halls of Washington D.C., and ultimately filters down to local governments and then the average person on the street gaming welfare or disability.

As such, we now live in a culture of corruption and theft that is pervasive throughout society. One thing that bothers me to no end is when fake Republicans focus their criticism on struggling people who need welfare or food stamps to survive. They have this absurd notion that the whole welfare system doesn’t start with the multinational corporations and Central Banks at the top. In reality, it is at the top where the cancer starts, and that’s where we should focus in order to achieve real change.

That’s where a new report from Open the Books on corporate welfare comes in. In a preview of the publication, the organization notes:

If Republicans are going to get truly serious about cutting government spending, they are going to have to snip the umbilical cord from the Treasury to corporate America.  You can’t reform welfare programs for the poor until you’ve gotten Daddy Warbucks off the dole. Voters will insist on that — as well they should.

So why hasn’t it happened? Why hasn’t the GOP pledged to end corporate welfare as we know it?

Part of the explanation is that too many have gotten confused about the difference between free-market capitalism and crony capitalism.

Federal_Contract_Spending_Spirals

And part of the problem is corporate welfare that is so well hidden from public view in the budget that no one has really measured how big this mountain of giveaway cash to the Fortune 500 really is. Finding out is like trying to break into the CIA.

Until now. Open the Books, an Illinois-based watchdog group, has been scrupulously monitoring all federal grants, loans, direct payments and insurance subsidies flowing to individuals and companies.

It’s an attempt to force federal agencies to release information on where the $4 trillion budget is really spent — and Open the Books will release a new report on corporate welfare payments to the Fortune 100 companies from 2000 to 2012.

Over that period, the 100 received $1.2 trillion in payments from the federal government.

That number does not include the hundreds of billions of dollars in housing, bank and auto company bailouts in 2008 and 2009, because those payments and where they went are kept mostly invisible in the federal agency books.

As suspected, the biggest welfare queens in the U.S. are the super wealthy themselves, but they’d rather you focus on some single mother on welfare simply trying to survive.

The full report can be downloaded here.

In Liberty,
Michael Krieger

The Anatomy Of Panic: How A Rumor Mutated Into A Three-Day Chinese Bank Run | Zero Hedge

The Anatomy Of Panic: How A Rumor Mutated Into A Three-Day Chinese Bank Run | Zero Hedge.

Yesterday we showed the end result of what happens in a China, in which bankruptcy and default are suddenly all too real outcomes for the country’s hundreds of millions of depositors, when the risk of losing all of one’s money held in an insolvent bank becomes a tangible possibility in “What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors.” Today, we look in detail at all the discrete elements that culminated with hundreds of Chinese residents lining up in front of a bank in Yancheng and rushing to withdraw their money only to find their money not available (at least until the regional government was forced to step in with a bail out to avoid an even greater panic).Why is this a useful exercise? Because since we will certainly see many more example of it in the near future, it pays to be prepared. Or least it certainly prevents one from losing all of their money…

This is what happened, and when it happened, it happened quick. From Reuters:

The rumour spread quickly. A small rural lender in eastern China had turned down a customer’s request to withdraw 200,000 yuan ($32,200). Bankers and local officials say it never happened, but true or not the rumour was all it took to spark a run on a bank as the story passed quickly from person to person, among depositors, bystanders and even bank employees.

Savers feared the bank in Yancheng, a city in Sheyang county, had run out of money and soon hundreds of customers had rushed to its doors demanding the withdrawal of their money despite assurances from regulators and the central bank that their money was safe.

 

The panic in a corner of the coastal Jiangsu province north of Shanghai, while isolated, struck a raw nerve and won national airplay, possibly reflecting public anxiety over China’s financial system after the country’s first domestic bond default this month shattered assumptions the government would always step in to prevent institutions from collapsing.

 

Rumours also find especially fertile ground here after the failure last January of some less-regulated rural credit co-operatives.

And since nothing beats a first person account here is just that, courtesy of Jin Wenjun who saw the drama unfold.

He started to notice more people than usual arriving at the Jiangsu Sheyang Rural Commercial Bank next door to his liquor store on Monday afternoon. By evening there were hundreds spilling out into the courtyard in front of the bank in this rural town near a high-tech park surrounded by rice and rape fields.

Bank officials tried to assure the depositors that there was enough money to go around, but the crowd kept growing.

In response, local officials and bank managers kept branches open 24 hours a day and trucked in cash by armoured vehicle to satisfy hundreds of customers, some of whom brought large baskets to carry their cash out of the bank.

Jin found himself at the bank branch just after midnight to withdraw 95,000 yuan for his friend from a village 20 kms (12 miles) away.

“He was uncomfortable. It was late and he couldn’t wait, so he left me his ID card to withdraw his cash,” Jin said.

By Tuesday, the crisis of confidence had engulfed another bank, the nearby Rural Commercial Bank of Huanghai.

“One person passed on the news to 10 people, 10 people passed it to 100, and that turned into something pretty terrifying,” said Miao Dongmei, a customer of the Sheyang bank who owns an infant supply store across the street from the first branch to be hit by the run.

Claiming to be a Yancheng resident, one user of Sina Weibo’s Twitter-like service repeated the story on Monday about the failed 200,000 yuan withdrawal, adding that “rumours are the bank is going bankrupt.”

When later contacted by Reuters online, he said he had heard the rumour from his mother when she came back from town. Huanghai and Jiangsu Sheyang banks declined to comment.

China’s banks are tightly controlled by the state and bank bankruptcies are virtually unheard of, so the crisis has baffled many outsiders.

Yet in Sheyang, fears of a bank collapse resonate.

In recent years, this corner of hard-strapped Jiangsu province has experienced a boom in the number of loan guarantee, or ‘danbao’, companies and rural capital co-operatives.

These often shadowy private financial institutions promised higher returns on deposits than banks, but many have since failed.

Qu Guohua, a spiky haired former migrant worker in his 50s, nearly lost 30,000 yuan in a credit guarantee scheme that went up in flames.

What saved him one day in January 2013 was a tip-off from a friend at a rural co-operative just down the street from the loan guarantee company where he had his money.

He told me the other one was going to go out of business and I better go get my money quick,” he said.

Qu managed to get his cash, but others behind him in line were not so lucky, he said.

That helps explain why lines formed so quickly once the rumours started circulating this week. Luck has it, he deposited the cash in a bank next door: Sheyang Rural Commercial Bank.

Banks are different than credit co-operatives and guarantee companies in that they are regulated by China’s banking watchdog and subject to strict capital requirements.

On Wednesday, officials’ painstaking efforts to drive that message home were in full swing.

Bank managers stacked piles of yuan behind teller windows in full sight of customers to try to reassure them that they had plenty of cash on hand. Local officials used leaflets, radio and television to try to calm nerves.

Near one of the troubled banks, a branch of the China Commercial Bank – one of China’s ‘Big Four’ state-owned banks – was running a ticker message on an electronic board over the entrance stating: “Sheyang Rural Commercial Bank is a legal financial organisation approved by the state, just like us”.

While small groups of depositors still gathered at several bank branches in and around this part of Yancheng, some arriving by motorbike, others by three-wheeled motor vehicles common in the Chinese countryside, there were signs that the banks’ efforts were bearing fruit.

Jin said he did not panic when the rumours were spreading and on Wednesday, like many others, he made a deposit.

Others, like Qu, are holding their nerve. On a visit to see his hospitalised daughter, he decided to nip into a local bank where he still has about 10,000 yuan – just for a look.

“I’m not nervous about my money in the bank. It’s protected by national law.

* * *

The same international law that “protected” the Cyprus banking system?

In the meantime, perhaps one should ask: why is it that people everywhere around the globe are so jittery, be it Chinese bank depositors, or E*trade baby high frequency “investors” in US stocks?Is it because everyone sense that fundamentally the system is more broke and insolvent than ever?

* * *

In short, the US has a stock market, which everyone knows is fake and manipulated, but as long as it keeps going higher, it is “safe” to put even more cash into epically overvalued equities. And since everyone is confident they can pull their money before everyone else does, the downswings are sharp and violent (and usually require the Plunge Protection Team to get involved and halt them), and in many ways a complete one-sided panic.

Just like in China. Only in China, instead of being stuck behind their computers, people actually have to go out on the street and withdraw their physical cash before everyone else does.

The problem, of course, is that once the lies and the illusions end, and they will, there will not be enough physical claims to satisfy everyone, be it due to a deposit or equity flight. Because in a fractional reserve system already stretched to the max and leveraged to record levels, one thing is certain: once the upward momentum dies, only devastation and guaranteed 90%+ losses for most, await.

Greek Government, And Bailout Deal, On Verge Of Collapse Due To Definition Of "Fresh Milk" | Zero Hedge

Greek Government, And Bailout Deal, On Verge Of Collapse Due To Definition Of “Fresh Milk” | Zero Hedge.

The Greek economic collapse, depression and bankruptcy has seen many odd things in its brief and often times violent history (in those days when the violent elements were not on strike), but this surely is the first time when one of the countless Greek bailouts may be on the rocks due to the disagreement over the definition of “fresh milk.” No, really. Reuters explains that Greece’s government risks another rebellion over bailout terms this week after milk producers lobbied against a move to free up prices as part of efforts to make the economy more competitive. Basically, for Greeks, milk is fresh if it is 5 days old or less, yet according to the always fascinating codex of the Troika, “fresh” can be labeled anything that is as old as 11 days…. including the salmonella bacteria it contains. What’s worse, is that the “spoiled milk” scandal, far from a joke, has swept over the country, and now even threatens to topple the government.

From Reuters:

The country’s international lenders want it to ditch rules, such as limiting the shelf life of fresh milk to five days, that effectively deter importers.

But Greek dairy producers and lawmakers representing farming constituencies are fighting the move to call milk up to 11 days old ‘fresh’ – the latest in a long line of last-minute disruptions to Greece’s bailout reviews with the European Union and International Monetary Fund.

Six lawmakers from within the ruling coalition – three from Prime Minister Antonis Samaras’s New Democracy party and three from the Socialist PASOK – have opposed the proposal that will be submitted to parliament on Friday as part of an omnibus reform bill that Greece must pass to secure bailout aid.

If they vote against it, Samaras and PASOK leader Evangelos Venizelos could be forced to expel them, further reducing the government’s slim majority of just 153 seats in the 300-seat assembly.

In other words, there is a possibility that Samaras’ government, which nearly brought down the Eurozone after the summer of 2012 elections were almost won by the “anti-bailout” Samaras, will have no choice but to expel enough people from his party to leave it without an absolute 50%+1 majority, and potentially lead to a government collapse! All because of the definition of fresh milk.

Yup: it sure sounds like the European “Union.”

The bill – which will pave for the way for up to 10 billion euros ($14 billion) of aid – is expected to pass after last-minute wrangling, but the row has highlighted how powerful lobbies can undermine the country’s bailout lifeline.

You don’t need to be an expert to understand that extending the shelf life is aimed at allowing milk from abroad to be labelled as fresh,” PASOK lawmaker Mihalis Kassis told Greek radio at the weekend. “If that’s a prerequisite by the (EU/IMF) troika then we deserve what we get.”

The controversy has captured headlines and days of debate on Greek television, overshadowing expectations that the country will soon be able to raise money on bond markets again.

“It is unfair and saddening, at a time when Greece is spreading its wings to emerge from a rut, that there is such dissonance,” Samaras said during a trip to Brussels on Friday.

MPs drowning in a glass of milk!” the daily Ethnos wrote on its front page on Saturday. “Spoiled milk” proclaimed the center-left Eleftherotypia newspaper’s headline.

Why are foreign exporters so interested in penetrating the Greek milk market? Simple: prices. “Greece is the only country in Europe that has legislation to determine the shelf life of fresh milk and the price, at around 1.30 euros per litre, is among the highest in the EU. The Paris-based Organisation for Economic Co-operation and Development (OECD) says Greeks paid about a third more for dairy produce than the EU average in 2012.”

One would think that the Greeks would welcome the competition from abroad, and that the lower price would be a good thing. Well, if cow farms and milkmen account for a substantial portion of the Greek GDP, not to mention employment pool, which apparently in Greece they do, it becomes clear why the nation which is now a complete and utter economic disaster quarantine area, would be leery of allowing any foreign influence to raise its already laughter inducing unemployment rate.

So aside from that, the Grecovery is on pace.

China's Yuan Drops Most In A Week As Property Developers Tumble | Zero Hedge

China’s Yuan Drops Most In A Week As Property Developers Tumble | Zero Hedge.

When we left China last night, it was all shits and giggles that bad news is great news and a Chinese stimulus plan will be here any minute to save the day. Having realized the sad fact that is not going to happen (as we explained here most recently) and the specter of banks runs looming, this evening’s session has seen property developer stocks tumble – retracing all of last night’s losses – the Yuan plunges by the most in a week back above 6.2150. Copper is holding in for now at the magic $300 level but corporate bond prices are falling once again (worst run in 4 months).

The Yuan is dumping at its fastest rate in a week…erasing all the hope-strewn gains from yesterday

Property Developers are taking it on the chin…

 

And it’s no wonder, as Bloomberg notes…

Chinese developers’ gross margins declined by a weighted average 294 bps last year.

Most developers have forecast a recovery. Further declines in prices could present a threat.

Chinese developers that have reported 2013 results have set an average 2014 sales growth target of 16%, about half last year’s 30% rate. This is likely recognition of a need for better inventory management and of a more challenging sales environment. Developers will also probably curb construction because of slowdowns in some tier two and three cities.

Longfor Properties summed up the attitude among major Chinese and Hong Kong property developers in its company filings… .“In 2014, the Group’s key operating focus will be inventory clearance and cost control… For the coming 6-12 months period, we wil strive to reduce the leve of unsold inventory, hereby gradually improving our sale through rate.”

But apart from that… China’s fixed and the world economy will be back to normal as soon as the US weather clears up…

What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors | Zero Hedge

What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors | Zero Hedge.

Curious what the real, and not pre-spun for public consumption, sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.

Reuters explains:

Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday. The semi-official China News Service quoted the bank’s chairman, Zang Zhengzhi, as saying it would ensure payments to all the depositors. The report did not say how the rumour originated.

Chen Dequn, a resident in Yandong, just outside Yancheng, said she saw a crowd of about 70 to 80 people gathering in a branch of Sheyang Rural Commercial Bank in her town on Tuesday.

“At the moment there are about 70 or 80 people in there. Normally there’d only be about 10,” she told Reuters by telephone.

Officials at another small bank, Rural Commercial Bank of Huanghai, said they had faced similar rushes by depositors, triggered by rumours of insolvency at Sheyang. “We will be holding an emergency meeting tonight,” an official at the bank’s administration office told Reuters, but declined to comment further.

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure it keeps sufficient cash on hand to meet demand.

Why the jitteriness? Because until now, bank failures in China have been unknown, as Chinese banks are considered to operate under an implicit guarantee from the government. That is changing. Which is why the rumor mill is on overdrive:

“It’s true that these rumours exist, but actually (the bank going bankrupt) is impossible. It’s a completely different situation from the problem with the cooperatives,” said Zhang Chaoyang, an official at the propaganda department of the Communist Party committee in Tinghu district, where the bank branch is located.

And Bear Stearns is fine…

Zhang was referring to an incident that rattled depositors in Yancheng in January, when some rural cooperatives — which are not subject to the supervision of the bank regulator — ran out of cash and locked their doors. Local officials say several co-op bosses fled after committing fraud.

China’s central bank governor said this month that deposit rates are likely to liberalised in one to two years – the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

It is widely expected to introduce a deposit insurance scheme before freeing up deposit rates, to protect savers in case a liberalised market puts major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually. Is China’s debt nightmare a province called Jiangsu?

Why are bank runs like these only set to accelerate? Simple – unlike the US China has zero deposit insurance. Reuters expplains:

The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.

In the meantime, there are always helpful investor relations people willing to explain calmly just what is going on:

When contacted by Reuters by phone on Tuesday, an official at the Jiangsu Sheyang Rural Commercial Bank branch hung up, saying she was busy.

Others were even more helpful:

An official at the administrative office at Jiangsu Sheyang Rural Commercial Bank said the bank would publish a statement shortly. On its website, the bank says it is capitalised at 525 million yuan and had total deposits of 12 billion yuan as of end-February,

Officials at the Jiangsu branch offices of the China Banking Regulatory Commission (CBRC) declined to comment. The Yancheng branch of CBRC and the propaganda offices in Yancheng city and Sheyang county did not answer calls seeking comment.

Busy or not, for now, the banks may have survived following yet more capital infusions from the local government, but what happens when the default wave that has claimed solar, coal, and real estate developers finally impacts a deposit-holding institution? How will China – which has far more total deposits within its banking system than in the US (since the US banks fund themselves mostly using ultra-short term, overnight shadow funding) – survive a nationwide bank run we wonder?

Russia offers India crude oil supplies, stakes in blocks – Economic Times

Russia offers India crude oil supplies, stakes in blocks – Economic Times.

PTI Mar 24, 2014, 09.41PM IST
(Putin’s trusted lieutenant…)

NEW DELHI: As the US and Europe try to isolate Moscow over its action in Crimea, Russian President Vladimir Putin’s trusted lieutenant Igor Sechin today courted top Indian officials, offering to ship its vast crude oil reserves and stakes in oil and gas acreages.

Sechin, who heads Rosneft, Russia’s biggest oil company, led a delegation of about two-dozen officials to meet Oil Secretary Saurabh Chandra seeking to expand ties with New Delhi.

“India is a very important country for Russia. We have a very efficiently run project with ONGC…now we want to expand our cooperation,” Sechin told PTI after the meeting.

The Russian state oil major offered Oil and Natural Gas Corp (ONGC) a stake in nine offshore oil and gasblocks in the Barents Sea and one in the Black Sea.

“We are (also) looking at supplying crude oil to Indian refineries,” he said, adding that Rosneft produces 200 million tons of crude oil a year.

Moscow is courting India to counter moves by the US and Europe to isolate it for annexing Crimea from Ukraine. Sechin was in Tokyo last week to broaden ties with Japan.

India does not have a firm contract to import crude oil from Russia. It gets a small volumes once in a while from ONGC’s Sakhalin-1 project in Far East Russia.

Indian officials said logistics need to be worked out to import oil from Rosneft’s fields.

“We may have to lay some pipelines to transport the crude. We have decided to form a working group to study how this can progress,” an official said.

Of the blocks offered in the Barents Sea, OVL found five were not lucrative. Of the remaining four, it would like to participate in two. It will decide on the other two once Rosneft makes available data by June.

Rosneft had previously offered ONGC a stake in the Magadan 2 and Magadan 3 exploration blocks in the northern part of the Sea of Okhotsk, which the Indian firm is studying.

The Fallacy of Homeownership

The Fallacy of Homeownership.

Many people have a weird obsession with homeownership.

When it comes to buying a house, they are willing to overlook, or even completely throw out, a bunch of financial values and principles they claim to hold dear.

The unfortunate truth is, for many middle-class folks, buying a house is often a very silly financial decision, especially if they are young (in their 20s or early 30s), or have a low net worth.

A well diversified portfolio

The most mind-boggling thing I’ve come across is that most people who punt the importance and wisdom of home ownership, will also tell you they believe you should have a well diversified investment portfolio.

You know…

“Spread your investments over many asset classes.”

“Don’t put all your eggs in one basket.”

And so on.

Well, for the average middle-class-30-year-old Joe, buying a house is akin to gathering up all his eggs, borrowing another 9 times as many, and putting them all together into one basket.

Not only is the the average middle-class-30-year-old-home-owner Joe way over-invested in exactly one asset class (residential property), he is also completely undiversified within that asset class, since he owns exactly one property, in exactly one area, based in exactly one town, located in exactly one country.

In short, it’s just about the most undiversified investment portfolio a person could dream up and manage to get himself into.

Leverage

Leverage basically comes down to borrowing money to invest in something.

If you invest R1,000,000 in something, but you borrow R900,000 and only use R100,000 of your own money, then you have an investment in which you are leveraged 10:1.

That 10:1 is called the leverage ratio of your investment. And it is 10:1, since the thing you’re investing in is worth 10 times as much as the cash you put in.

Leverage is great if the thing you invested in grows a lot in value over a short period of time, because it allows you to make a lot of money by investing only a small portion of your own cash!

Unfortunately, the reverse is also true.

If the thing you invested in loses value, then it is very easy for you to lose a lot of money – even more than the initial amount you put in!

While Warren Buffet’s ethics may be a stinker, I do agree with his views on employing leverage:

If you’re smart, you don’t need leverage. If you’re dumb, you have no business using it.
Warren Buffet

Even though, over the long-term, returns made on equities outperformed returns made on property, by far, almost no sane person will leverage themselves 10:1 to invest in equities (i.e. shares).

For most people, this is way too nerve wrecking to even consider. If you suggest such a thing, you might be labelled a gambler, or worse, a madman.

And yet, everyday, average middle-class-30-year-old Joes all around me are buying properties in which they are leveraged 10:1 (and even more), without a second thought.

After spending many months thinking about this phenomenon I can only put it down to the fact that the truth doesn’t matter.

It’s just another asset class

In case you think I have a deluded and deep seated mistrust of property that most likely stems from a childhood nightmare of being swallowed by a house, let me just make my position official:

I have zero issues with investing in residential property.

Residential property is just another asset class.

I don’t currently, but I have in the past allocated a portion of my investment portfolio to residential property (both locally and abroad), by buying shares in publicly listed companies whose business it is to buy and rent out houses and flats.

I just don’t view residential property as a magic-unicorn-galloping-over-a-rainbow-of-profits type of investment with which “you can never go wrong”.

I’ve spent a significant portion of my adult life looking for investments like those, but unfortunately I haven’t found one yet.

Liability and Liquidity

If you are still adamant that you want to invest in residential property, then I have a great suggestion for you:

Why don’t you just buy some shares in publicly listed companies whose business it is to buy and rent out residential properties?

If you do some research and choose a good one, chances are that they are better than you at spotting and buying well-priced properties and collecting rent, because that is what the people who work for those companies do for a living.

There are also some other advantages about investing in residential property by buying shares in publicly listed companies.

  • You can have a more diversified investment portfolio: By only buying a few shares you are able to limit your exposure to residential property to a reasonable percentage of your net worth.
  • You have limited liability: If the company goes bust, you will not be liable for any losses. Comparatively, if you buy a property using debt and, for whatever reason, become bankrupt and can’t afford to make the bond payments, then you most likely have quite a few years of hell to look forward to.
  • Shares in publicly listed companies are liquid: If you ever need to do so in a hurry, it will only take you about 5 minutes and a few key-strokes to sell all the shares you hold in almost any publicly listed company. Selling a house, on the other hand, is a ludicrously expensive multi-month administrative nightmare.

Interest rates and timing your property purchase

Residential property is an asset class that is very directly influenced by the cost of borrowing money.

In our society, it is considered a perfectly normal and responsible thing for a person to finance the purchase of a house by getting a 20-year loan from a bank.

In fact, it is considered such a normal thing for the average middle-class-30-year-old Joe to be a debt slave for most of his life, that if you had to suggest to him that he should save up for a house and only purchase it once he had saved up enough money to buy it outright, using cash, he will probably think that you are crazy to even suggest such a thing.

But, I digress.

My point is, the vast majority of residential properties are paid for using borrowed money.

Because of this, when interest rates go up, so do monthly bond payments. When bond payments go up, some people can’t afford to make their bond payments and they are forced to sell their homes, or default on their bond. A few actually do default, resulting in a seizure and forced sale of their properties by the bank.

To summarize: When interest rates go up, property prices fall (or increase very slowly, usually at a rate lower than inflation), because the available supply of residential properties increases, while at the same time the demand for residential properties decreases. Conversely, when interest rates go down, residential property prices usually go up quickly, because more people can afford to take out bigger loans!

The first rule of business is: buy low, sell high.

This is such an obvious concept and yet, in practice, it is very difficult to do, because it usually means doing the exact opposite to what everyone around you is doing.

If you are going to buy a property, for whatever reason, then at least buy it at the best possible time.

And when would that be?

Well, of course, a few months after interest rates hit their peak after having risen quickly for two or three years in a row.

Take a look at the graph below, which shows the prime interest rate in South Africa over the last few decades.

2014 started with interest rates at record lows and just entering an upward cycle.

In my opinion, the present is just about the worst possible time for anyone to be invested in residential property.

You will know it is the right time to buy your dream home by looking for a few of these signs:

  • Interest rates are starting to stabilize at a high rate, after rising steadily for two or three years in a row.
  • Many people are trying to sell their properties, some in a real panic, because they are struggling to make their monthly bond payments.
  • You hear many tales of properties being foreclosed on, also in neighbourhoods where people are considered to be wealthy.
  • People around you are generally feeling quite negative about owning property.

When the blood is in the streets, my friends, that is the ideal time to buy your dream home.

Paying rent is simply throwing away money every month

I often hear people making this argument. I’m sorry, but that is just a silly thing to say.

Upon purchasing the average middle-class-suburbia home, you’re not only paying a massive amount of TAX to the government, you’re also forking over a significant amount in fees for bond registration, deeds and a bunch of other stupid banalities. Never mind the commission that goes to the estate agent.

Property tax, commission and other fees can easily add up to over 15% of the purchase price of a house. This makes residential property one of the most expensive asset classes to invest in, at least as far as up-front costs are concerned.

Then, once your bond is registered and you are the proud owner of your new home, you’ll be paying interest to a bank, every month, until your bond is paid off.

And don’t forget about maintenance! You know… paint starts peeling, roof start leaking, toilet stops flushing, that type of thing.

Lastly, you’ll also be forking out on a monthly basis for rates & taxes. Which,as property owners in Greece found out just recently, can easily go up by sevenfold in two years, if your government is anything like most governments are.

Safe-haven investment my ass.

Except for squatting on someone else’s land, there’s no such thing as living for free.

So are you saying no one should ever own a house?

No, of course not.

I’m saying people should save up for their family homes and buy them cash.

The saving part should be done by building a well diversified investment porfolio and the home buying part should be treated as an expense, rather than the purchase of an asset.

I know… in the world we live in I’m very much on my own in suggesting such a boring and outdated thing.

But I’ve looked at the facts, and even though I’m well aware that the truth doesn’t matter, I also know that nothing matters to anybody until it matters to everybody – and by then it’s too late.

If you disagree or find a flaw in my logic, please leave a comment below. I’d love to be proven wrong, and I’m willing and eager to consider any counter arguments.

Obama Demands Russia Leave G-8; June Summit Cancelled While Ukraine Deploys Army Along Borders | Zero Hedge

Obama Demands Russia Leave G-8; June Summit Cancelled While Ukraine Deploys Army Along Borders | Zero Hedge.

UK Prime Minister David Cameron stated that it is “absolutely clear” that the G-8 Summit scheduled for June in Sochi, Russia will not go ahead. But it is President Obama that appears to be pressing the hardest for major changes:

  • OBAMA SAID TO PRESS ALLIES TO SUSPEND RUSSIA FROM G8: WSJ

This comes at a time when Ukraine forces are being withdrawn from Crimea and deployed to North, South, and East borders of the region.  Meanwhile, Ukraine is taking its soldiers pulled from Crimea and deploying them along all other borders.

  • UKRAINE’S PARUBIY: PRIORITY IS TO PROTECT BORDERS, LEAVE CRIMEA
  • UKRAINE DEPLOYS ARMY TO NORTH, SOUTH, EAST BORDERS: PARUBIY
  • UKRAINE HAS MOBILIZED MORE THAN 10,000 PEOPLE, PARUBIY SAYS

David Cameron says G-8 Summit Scrapped…

There will be no G8 summit in Russia this year, David Cameron said in a further ign of efforts to isolate Moscow over the Ukraine crisis.

The Prime Minister said it was “absolutely clear” the meeting could not go ahead.

Speaking in The Hague ahead of a meeting of G7 leaders, he said: “We should be clear there’s not going to be a G8  summit this year in Russia. That’s absolutely clear.”

Preparations for the planned June summit in Sochi had already been suspended as a result of Russia’s actions in neighbouring Ukraine.

And Obama is calling for Russia to be kicked out of the G-8.

  • OBAMA SAID TO PRESS ALLIES TO SUSPEND RUSSIA FROM G8: WSJ
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