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Sovereign Wealth Fund Buying Foreclosed Homes

According to the New York Post’s Teri Buhl, a sovereign wealth fund is preparing to acquire tens of thousands of foreclosed American homes. This past weekend Buhl wrote:

There’s a new land grab starting in America.

Foreign money, which up to now has focused its attention on investing in iconic commercial real estate - like Barneys New York and the Chrysler Building - is now moving to scoop up tens of thousands of discounted foreclosed homes across the country.

One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned.

The search, which is being carried out, in part, by Field Check Group mortgage consultant Mark Hanson, who was retained by the broker, Steve Iversen, is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee.

Neither Iversen nor Hanson would disclose the name of the client, but sources told The Post it’s a sovereign fund.

The unidentified fund joins individual US investors, hedge funds and Wall Street banks in kicking the tires of REO homes, which have fallen in value so much that they are now tempting investments.

Don’t be surprised if housing bulls jump all over this one and say it will help bring about a bottom to the U.S. residential real estate slump.

“California Dreaming”

Source:

“Lost Sovereignty”
Teri Buhl
New York Post, August 10, 2008

Weekend Videos

Just got back to blogging late Friday evening. Had to entertain my relatives from Canada who are in. Like the Irish a couple of weeks ago, they shopped liked it was Christmas in July to take advantage of the weaker dollar. I know one thing for sure. Foreigners sure love our “strong dollar” policy…

“Oil Crisis”
Becky Quick
CNBC, July 18, 2008

From the CNBC website:

The House may vote on releasing oil from the strategic petroleum reserve, with Senate Majority Leader Harry Reid and CNBC’s Becky Quick.

You can view the 3 minute 18 second video here.

Note to Congress- there is no quick-fix for the energy crisis. I’m starting to consider donating funds to Jim Puplava’s proposed program, “No Congressman Left Behind.”

Apparently, it’s a non-issue now anyway, seeing that after oil prices suffered their biggest weekly drop ever, Yahoo! Finance asks tonight, “So is it time to declare the energy bubble popped?” By the way, the Associated Press is reporting that terrorists are trying to enter the United States with European Union passports. Good thing Congress wants to deplete oil stockpiles meant for a national emergency. Like a major terrorist attack, for example. If you think 9/11 was a one-off event, I have a bridge that spans the East River out in NYC that I can sell you for a really good price…

“Is government clueless about economy”
Jim Jubak
MSN Money, July 18, 2008

From the MSN Money website:

Washington is talking us into a deeper crisis. Neither the President nor Congress gets it: When you owe as much as the US does, keeping your overseas creditors happy is the most important thing, says Jim Jubak.

You can view the 4 minute 7 second video here.

Jubak said in the segment:

The Saudi government has gone into serious discussions about taking its currency off the dollar peg.

“Christmas In July”
The Dandy Warhols, “Little Drummer Boy” (1995)
YouTube Video Link

Banks May Write Down Additional $300 Billion

Yesterday, global strategy consulting firm Oliver Wyman said in a new study that an additional $300 billion in write-downs related to the U.S. subprime mortgage meltdown may be announced by banks before the crisis is over. Back on January 18 I noted that write-downs had already surpassed $100 billion. In a press release picked up by Yahoo! Finance yesterday, John Colas, Managing Director and head of the North American Corporate Strategy Practice at Oliver Wyman, said:

The credit crisis is unlikely to resolve itself before the end of this year. We also see strong likelihood of price corrections in emerging markets and this combination will extend the value loss and turbulence witnessed in 2007.

The management consultancy said in its “State of the Financial Services Industry” report:

We expect a stormy 2008. While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting.

These other disruptions include:
• A significant slowdown in European real estate markets, especially in Spain and the UK
• The continued weakening of the U.S. dollar
• A collapse in commodity prices
• A fall in Chinese and Indian stocks

The financial services industry should expect “turbulent conditions for 2008 and beyond.” Oliver Wyman predicted that American banks are especially at risk. From its 2008 report:

North American financial services firms will have a tough year. Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves.

In North America last year, the financial sector lost 13% in market value, second only to Japan. In contrast to the United States, the value of financial companies in Canada grew 12%.

For the first time since 2002, the global market value of the industry fell, according to the annual report. Controlling for exchange rates, the industry lost 7% of its market value last year. While $300 to $400 billion was gained in red-hot emerging markets last year, financial institutions lost more than $1 trillion in mature economies.

Stock Markets Fall Around The Globe

Returning to work on Monday is hardly ever fun. Losing a ton of money makes it even worse. While American financial markets were closed in remembrance of Martin Luther King, Jr., stock markets around the world were being hammered.

Indexes in Japan, China, Hong Kong, India, South Korea, and Singapore fell at least 3%. Indian stocks were punished severely, dropping nearly 11% at one point in the trading session before finishing off more than 7%. The Australian and New Zealand stock markets have now experienced losing sessions for 11 and 13 days, respectively.

Photo from DailyHaHa.com

The carnage in equities spread to Europe. The pan-European Dow Jones Stoxx 600 index ended down 5.4% at 309.67. At one point earlier in the trading session, the index earlier reached a low of 308.69, which was the largest one-day percentage drop since the September 11 terrorist attacks. The index has lost around 23% from its mid-2007 high of 400.99. The French CAC-40 index ended the day down 6.8% to 4,744.45. The German DAX 30 index was down 7.2% to 790.19. The U.K. FTSE 100 index declined 5.5% to 5,578.20.

Making its way to the Americas, the global sell-off spread to Canada and Latin America. The S&P/Toronto Stock Exchange composite index sank 4.7% to end the day at 12,132.14. Brazil’s Bovespa fell 6.6% to 53.694, and Mexico’s Bolsa index declined 4.8% to 25,444.

According to MarketWatch today, losses from financials were largely to blame after U.S. bond insurers came under attack by a ratings agency, and the proposed economic stimulus plan from President Bush failed to convince investors that it would be enough to prevent a recession in the United States. The stock sell-off occurred after the worst weekly performance on Wall Street for five years.

All eyes are now turned to Wall Street, which resumes trading Tuesday. As of this afternoon, the Dow Jones Industrial Average futures contract was down 520 points to 11,586, the Nasdaq futures were down 76.25 to 1,773.25, and the Standard & Poor’s 500 futures had fallen 60.3 to 1,265. According to MarketWatch:

If futures contracts traded on a day when U.S. stocks weren’t even due to open are anything near accurate, then markets will be in for a major decline on Tuesday, with concerns about bond insurers and the health of financial institutions dragging markets lower.

Former Fed Chair Volcker Critical Of U.S. Central Bank

Former Federal Reserve Chairman Paul Volcker was recently interviewed by the New York Times Magazine for a story it will be running Sunday. Reuters was able to obtain the text in advance of the publication, and reported Wednesday that Volcker thinks the Federal Reserve is to blame for asset markets being blown into bubbles, and says that current Fed chief Ben Bernanke is in a tough spot. The Times quoted Volcker as saying:

Too many bubbles have been going on for too long… The Fed is not really in control of the situation.

Reuters interpreted this statement as “seemingly clear criticism” by Volcker of both Bernanke and his predecessor, Alan Greenspan. Critics of the Fed blame the ultra-low interest rate policies of the final Greenspan years for fueling a U.S. housing bubble. Greenspan has also been criticized for being very aggressive in cutting interest rates when growth was threatened, but slower to raise them when it picked up and the risks flipped toward higher inflation, according to the news agency. Volcker, on the other hand, is credited with ending the rampant inflation of the 1970s by aggressively tightening monetary policy (for which he was greatly criticized in some quarters at the time).

Back on June 20 I talked about “Tall Paul,” who was Federal Reserve Chairman from 1979 to 1987. In that post, I mentioned that at a dinner hosted by the Concord Coalition in New York in November 2006, Volcker predicted that the United States’ dependence on foreign money raises the risk of a crisis in the dollar as soon as the next two and a half years. He said:

It’s incredible people have gone on so long holding dollars… At some point, you will get a situation where people have had enough.

On April 10, 2005, Volcker talked about the U.S. economy in the Washington Post, and warned readers:

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks— call them what you will… What really concerns me is that there seems to be so little willingness or capacity to do much about it…

He added:

As a nation we are consuming and investing about 6 percent more than we are producing. The difficulty is that this seemingly comfortable pattern can’t go on indefinitely… I don’t know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

Finally, Volcker speculated:

I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

Father of Reaganomics: Nothing Can Be Done To Save Economy

This morning I came across an interesting article by Paul Craig Roberts in the Coastal Post. Who is Dr. Roberts? He is an economist who served as an Assistant Secretary of the Treasury in the Reagan Administration, and is known as the “Father of Reaganomics.” Outside of the public sector, he was a former editor and columnist for the Wall Street Journal and Business Week.

What initially caught my eye was the title of the article- “The Impending Destruction Of The U.S. Economy.” No use beating around the bush. But he did manage to beat up the Bush administration and other policymakers in Washington for their mishandling of the U.S. economy. Dr. Roberts wrote:

Hubris and arrogance are too ensconced in Washington for policymakers to be aware of the economic policy trap in which they have placed the U.S. economy. If the subprime mortgage meltdown is half as bad as predicted, low U.S. interest rates will be required in order to contain the crisis. But if the dollar’s plight is half as bad as predicted, high U.S. interest rates will be required if foreigners are to continue to hold dollars and to finance U.S. budget and trade deficits.

Which will Washington sacrifice, the domestic financial system and overextended homeowners or its ability to finance deficits?

The answer seems obvious. Everything will be sacrificed in order to protect Washington’s ability to borrow abroad. Without this, Washington cannot conduct its wars of aggression, and Americans cannot continue to consume $800 billion dollars more each year than the economy produces.

Nice job, Washington!

However, this line of credit is threatened. According to Roberts:

No country wants to hold a depreciating asset, and no country wants to acquire more depreciating assets. In order to reassure itself, Wall Street claims that foreign countries are locked into accumulating dollars in order to protect the value of their existing dollar holdings. But this is utter nonsense. The U.S. dollar has lost 60 percent of its value during the current administration. Obviously, countries are not locked into accumulating dollars…

Japan and China - indeed, the entire world - realize that they cannot continue forever to give Americans real goods and services in exchange for depreciating paper dollars. China is endeavoring to turn its development inward and to rely on its potentially huge domestic market. Japan is pinning hopes on participating in Asia’s economic development.

The dollar’s decline has resulted from foreigners accumulating new dollars at a lower rate. They still accumulate dollars, but fewer…

Foreigners have continued to accumulate dollars in the expectation that sooner or later Washington would address its trade and budget deficits. However, now these deficits seem to have passed the point of no return.

Faced with the realization that the twin deficits will not be addressed, will foreigners finally stop accumulating dollars and/or significantly reduce dollar holdings, causing a dollar crash?

Dr. Roberts explained why the twin deficits could no longer be fixed:

The sharp decline in the dollar has not closed the trade deficit by increasing exports and decreasing imports. Offshoring prevents the possibility of exports reducing the trade deficit, and Americans are now dependent on imports (including offshored production) for which there are no longer any domestically produced alternatives. The U.S. trade deficit will close when foreigners cease to finance it.

The budget deficit cannot be closed by taxation without driving up unemployment and poverty…

In the 21st century, the U.S. economy has been driven by consumers going deeper in debt. Consumption fueled by increases in indebtedness received its greatest boost from Fed chairman Alan Greenspan’s low interest rate policy. Greenspan covered up the adverse effects of offshoring on the U.S. economy by engineering a housing boom. The boom created employment in construction and financial firms and pushed up home prices, thus creating equity for consumers to spend to keep consumer demand growing.

This source of U.S. economic growth is exhausted and imploding. The full consequences of the housing bust remain to be realized. American consumers lack discretionary income and can pay higher taxes only by reducing their consumption. The service industries, which have provided the only source of new jobs in the 21st century, are already experiencing falling demand. A tax increase would cause widespread distress.

The old-school Republican had this to say about our precarious position:

Superpower America is a ship of fools in denial of their plight. While offshoring kills American economic prospects, “free-market economists” sing its praises. While war imposes enormous costs on a bankrupt country, neoconservatives call for more war and Republicans and Democrats appropriate war funds, abroad….

We have arrived at the point where it is no longer bold to say that nothing now can be done. Unless the rest of the world decides to underwrite our economic rescue, the chips will fall where they may.

Morgan Stanley Asia’s Chairman Issues U.S. Recession Warning

Morgan Stanley Asia’s chairman, Stephen Roach, spoke to Sky News earlier today while visiting Australia and warned that while the U.S. economy is entering a recession, the Federal Reserve, along with the rest of the world, doesn’t appear to grasp its significance. While the Fed cut interest rates the last time they met, Roach feels their work is far from done. He said:

They will move again, most assuredly. The US is going into a recession, they’ve a lot more work to do. They could cut their policy short term interest rate by one to 1.5 percentage points over the next nine to 12 months.

During the interview, Roach spoke about the indifference of the global economy to the prospect of an economic recession in the United States. He warned:

There is a view that the world has somehow decoupled from the American growth engine. I think that view will turn out to be dead wrong and this is a global event with consequences for Asia and Australia.

The head of Morgan Stanley Asia also told Sky News that he didn’t believe growing demand from India and China will be able to “save the global economy.” He explained:

The US is a US$9.5 trillion consumer. China is a US$1 trillion consumer. India’s a US$650 billion consumer. Mathematically, it is almost impossible for the young dynamic consumers of China and India to fill the void that would be left by what is likely to be a significant shortfall of US consumer demand.

Back in a November 2 post, I discussed Roach’s views on “decoupling,” which he shared in a speech given in Mumbai, India:

I think the thing that worries me the most, and this is where I would really underscore the point for you in India, is that equity markets in this region, including your own, are discounting this optimistic, rosy scenario called decoupling. There is the strong belief that because the US has slowed so far, and Asia hasn’t, that any further slowdown will leave Asia unscathed. Think about it for a second. The slowing that’s occurred in the US right now has been in homebuilding activity. It’s America’s least global sector. You stop building a house in America, there’s almost no impact on Asian exports to the US. The slowing that will be coming over the next year will be in the consumer demand sector, which is America’s most global sector. So, we are going to see the US slowdown go from a domestically driven to a globally driven slowdown. I am sorry, as bullish as I am about Asia, Asia will not be an oasis of prosperity in a softer global demand climate. To the extent that emerging market equities are buyers of the global decoupling thesis, including in your own market right here, I think there could be a significant correction in emerging market equities that certainly could hit the Indian stock market quite hard.

Roach is well-known on Wall Street as a perennial “bear” on the U.S. economy. In November 2004 (while still Morgan Stanley’s chief economist), he attended a meeting with a select group of fund managers and shocked the audience with his observation that the U.S. had no better than a 10% chance of avoiding an economic “Armageddon.”

Gold: Barbarous Relic Or Investment Superstar? Part 2

In part one of a three-part series on gold, I noted that the price of the metal has risen significantly in the past year, despite all the arguments leveled against gold by its detractors. Meanwhile, the metal looks to be headed for its seventh straight annual gain. Gold bulls point to the following as having a significant impact on its price in 2007:

U.S. Dollar Weakness- The U.S. currency is down four out of the last five years, and has dropped almost 11% so far this year based on the Federal Reserve’s U.S. Trade-Weighted Major Currency Index. This autumn it’s been at its weakest against the euro since the European currency started trading in 1999, the lowest against the Canadian dollar since it was floated in 1950, and at a 26-year low versus the British pound. The end of the U.S. housing boom, the subprime mortgage crisis, and a credit crunch, in conjunction with forecasts for a slowing U.S. economy, have weighed down the U.S. currency. The increased threats from dollar diversification by countries holding large numbers of greenbacks in their foreign currency reserves, sovereign wealth funds looking to exchange their dollars for other assets, and more nations looking to decouple their currencies from the U.S. dollar have only made matters worse for the world’s reserve currency. Assuming the existence of a strategic inverse relationship between gold and the greenback, investors have poured money into the precious metal and related investment vehicles. Validating such actions have been forecasts by legendary investors such as Warren Buffett, Jim Rogers, and George Soros, who all predict that the U.S. dollar is going lower. Back on October 25, Buffett was quoted by CNBC as saying, “We are still negative on the dollar. We bought stocks in companies that are earning their money in other currencies.” On November 15, Rogers told Bloomberg that, “If you have dollars, I urge you to get out. That’s not a currency to own.” Finally, on June 2, AME Info reported that Soros said, “A slowdown in the United States will be transmitted to the rest of the world via a weaker dollar.”

Geopolitical Risk- The continuing stalemate between the West and Iran over its nuclear program, political instability in Pakistan, and Turkey’s spat with Iraq are just some of the more recent geopolitical risks that have driven the price of gold higher. The ever-present danger from Al-Qaeda should not be forgotten either. Consider the following warning from Michael Scheuer, a 22-year veteran of the Central Intelligence Agency (CIA), where for 6 years he was in charge of the search for Al-Qaeda leader Osama bin Laden. When asked by Radio Free Europe/Radio Liberty earlier this year if he expected more attacks on the United States or in the West on the scale of September 11, 2001, Scheuer’s response was:

Oh, I think greater than 9/11. I don’t think it will happen in Europe, but I do think it will happen in the United States. Bin Laden has been very clear that each of Al-Qaeda’s attacks on America will be greater than the last, and I think the only reason we haven’t seen an attack so far is that he doesn’t have that attack prepared. But when he does, he will use it. And try to get us out of the way, which of course is his main goal.

Stephen Walker, director of global mining research at RBC Capital Markets, said last week that increasing geopolitical risk, combined with combined with rising economic uncertainty, “should continue to provide incentives for investors to increase their exposure to gold as a safe haven.”

Supply and Demand- Last Friday, the Telegraph (UK) announced:

The era of ‘peak gold’ has arrived. Try as they might, miners cannot find enough ore at viable costs to replace their fast-depleting reserves, even if they dig miles into the centre of the earth.

The global mine supply of gold peaked in 2002, and has fallen every year since. Last year alone, the mine supply of gold fell 15%. Also in 2006, South Africa, the world’s single-largest gold producer, produced its lowest amount of gold since 1922 with overall output down 72% since its 1970 peak. It should be noted that no major new mine production is expected in the near-term either.

On the demand side, RBC Capital Markets noted last Wednesday that demand is rising as consumption increases in China, India, and the Middle East. On Thursday, a study by precious metals consultant GFMS Ltd. showed that global gold demand in the third quarter rose 19% year-on-year on the back of robust inflows into bullion investment funds and improved jewelry consumption. The report revealed that the increase in investment demand replaced jewelry buying as the major source of growth for the third quarter. Demand grew sharply in India, China, Turkey, and the Middle East, while it slowed in the United States.

Outside of U.S. dollar weakness, geopolitical risk, and supply/demand factors, gold bulls say that some of the drawbacks which Bloomberg’s Michael Sesit spelled out in part one are actually advantages to owning the precious metal. Critics of gold like to point out that it “doesn’t earn a return.” Michael J. Kosares, President and Founder of Centennial Precious Metals, Inc., argued in his book The ABCs of Gold Investing, that:

Those who criticize gold because it fails to offer a return do not really understand gold’s position as the fixed North Star of asset value around which all other assets rotate. Gold is a stand-alone asset. It relies on no individual or institution for value. Gold investors prefer it this way. In the ultimate sense, this is what money is and what money should be.

Another criticism directed at gold, said Sesit, is “the world’s biggest holders of gold, major central banks, aren’t overly eager to keep owning it.” If so, gold bulls ask why central banks hesitate to unload the metal. In 2006, net central bank sales amounted to just 319 tons, less than half of the 659 tons recorded in the previous year.

Love it or hate it, bulls and bears, gold is here to stay. In the final part of this series, I will talk about where this precious metal may go from here.

(Part 3 will be posted on Wednesday)

Storm Brewing For U.S. Commercial Real Estate Sector?

A lot of media attention has been focused on the plight of the U.S. residential real estate market. But where is the U.S. commercial real estate sector headed? Will it follow housing’s lead down? By all appearances, commercial real estate has performed admirably. New York-based real estate research firm Real Capital Analytics noted commercial property sales hit $401 billion through October 18, outpacing last year’s $359 billion total. The U.S. Commerce Department said construction spending on office buildings, shopping centers, and other private, non-residential projects jumped 15.2% in August. The commercial sector has been immune to the residential mortgage mess because for the most part, buyers and sellers are more sophisticated, and they have more financial flexibility and resources to ride out credit market turmoil, experts told the Associated Press on October 22. Bernard Baumohl, managing director of New Jersey-based Economic Outlook Group, said, “It’s a different animal than the nonresidential construction business with the direct relationship between banks and business leaders, not banks and homeowners.” The National Association of Realtors’ chief economist Lawrence Yun spoke at this past weekend’s NAR convention in Las Vegas and said, “Despite some initial concerns, there have been no serious capital problems for institutional-grade properties, and most of the commercial market is performing well even though some private transactions have been cancelled or postponed.” Fundamentals remain strong with rising rents and occupancy levels expected to continue, especially in metropolitan areas. Yun said, “Vacancy rates should be gradually declining in the overall office, industrial, retail and multifamily sectors during 2008, reflecting the underlying demand for space in a growing economy. Areas with strong job growth will see the healthiest commercial markets.” Also, commercial markets are not in oversupply mode. “There’s plenty of excess capital that wants into real estate, especially in metro areas,” said Dan Fasulo, managing director of Real Capital Analytics. Finally, Yun noted that foreign investors, attracted by the weakened U.S. dollar, are pouring funds into the U.S. commercial sector. “Foreign investors are looking for good returns in a historically stable economy, and account for nearly 10 percent of total investment in U.S. commercial real estate sectors.”

Yet, some think the U.S. commercial real estate market is headed for a downturn. A report released Wednesday by the MIT Center for Real Estate suggests that the commercial sector may already be in transition. Prices in the third quarter were down 2.5%, the first drop in 4 years. MIT is suggesting that the new data signals not only the end of the 5-year boom for U.S. commercial real estate, but that weakness in the housing market is spilling over into commercial real estate as well. The center’s director, David Geltner, said in a prepared statement:

The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets.

A new report from McGraw-Hill Construction also points to a slowdown in the sector, with commercial construction spending forecast to fall 6% next year from 2007’s record level.

Then there is the issue of commercial mortgage-backed securities, or CMBS. On November 12, the Financial Times (UK) said yields on commercial mortgage-backed securities have soared to levels not seen since the late 1990s, “indicating that they are seen as riskier.” The Federal Reserve notes that CMBS makes up 27% of the $3 trillion in commercial and multifamily development mortgage loans still outstanding, up from 4% in 1990. As the Financial Times explained:

Securitisation has allowed riskier, more leveraged purchases because the lenders originating the loans did not have to carry them on their balance sheets. As lenders rushed to cash in on the boom in the US commercial real estate market in the six to 12 months before the credit squeeze hit in July, underwriting standards declined and upped the risk of defaults, people in the industry said… In the third quarter, the average loan was 118 per cent of the property value, according to Moody’s, which includes expectations of properties’ incomes over several years in their calculations.

Sally Gordon, Moody’s head of commercial property research, told the Financial Times that level of leverage is “really kind of creepy.” In addition, consider the following from Monday’s edition:

Recent loans often assumed that the real estate market would get stronger, and there were a growing proportion of floating rate loans being issued. Even since the squeeze, loan-to-value ratios have barely fallen, while interest-only loans have actually risen, according to Reis, a real estate data firm. Some have already suffered the effects of fears over the kind of loans they are securitising, and have struggled to sell the bonds they are issuing. Wachovia, the biggest issuer of commercial mortgage securities in the US, according to Commercial Mortgage Alert, was hit by a $488m loss in the last quarter in the value of commercial mortgage securities that it could not sell.

Regardless, the recent performance of the U.S. commercial real estate sector may stall anyway as the U.S. economy sputters. “Commercial typically follows the national economy,” said Lawrence Yun at the National Association of Realtors’ industry conference.

Sovereign Wealth Funds Buying Up Gold, Other Commodities

No surprise here. Late Monday night the Financial Times (UK) reported:

State-owned sovereign wealth funds are beginning to diversify their investments into commodities, potentially having a significant impact on international raw material prices because of their immense resources.

Sovereign wealth funds, or SWFs, are investment vehicles backed by governments in the Middle East, China, Russia, and elsewhere. According to The Times (UK) from October 28:

Sovereign funds have been around since 1953, when the Kuwait Investment Authority (KIA) was established to benefit future generations of Kuwaitis when the oil stopped flowing. But it is only since the turn of the millennium that the power of sovereign funds has mushroomed. The rising price of oil and gas has prompted Middle East countries to look for new ways to invest their piles of cash. Russia has money to spare as energy prices have soared. At the same time, funds in Singapore, and more particularly China, have been boosted by income from huge trade surpluses.

The Financial Times is reporting that the total investment of SWFs in natural resources is still below 5% of their total allocations. Still, Katherine Spector, head of energy strategy at JPMorgan in New York, noted that, “While macro-data on sovereign money is elusive, anecdotally we see meaningful flows into commodities from the Middle East, Europe and Asia.” The Deutsche Bank said with worldwide state reserves above $3 trillion, any movement into the relatively small commodities markets could influence prices. The International Monetary Fund (IMF) estimates that total investments by sovereign funds have reached $2 trillion and are forecast to hit $12 trillion by 2012.

On the reasons for SWFs buying up commodities, a senior banker interviewed by the Financial Times said, “They want to use commodities, and particularly gold, as a hedge against the US dollar weakness,” adding that the investments were mainly streaming in from the Middle East and Asia. Another banker stated, “They want commodities exposure exactly for the same reason as other institutional investors- diversification.”

Wall Street Superstar Predicts Worst Recession Since 1930s

The New York Sun interviewed hedge fund superstar Jim Melcher on Monday, who is “worried about a recession. Not a normal one, but a very bad one. The worst since the 1930s. I expect we’ll see clear signs of it in six months with a dramatic slowdown in the gross domestic product.” Melcher heads Balestra Capital, a $350 million New York-based hedge fund which has increased in value by 175% as of the interview. Melcher is known for his uncanny ability to spot nearly every market meltdown over the past 25 years, including the stock market crashes of 1987 and 2000, the bond woes of 1994, and the emerging market crisis of 1998.

According to the Sun:

Mr. Melcher, a market bear, had some pretty discouraging words. ‘What I think is not good for the country, but good for me.’ he says. His basic advice to the country’s roughly 80 million stock players: Run for the hills — the worst is far from over… Our bear figures the next six to 12 months will be awful for investors as the market goes down ‘pretty substantially.’ His frightening outlook calls for an additional 20% to 30% decline from current levels. A drop of that magnitude would put the Dow down in a range of roughly 9,100 to 10,400.

Global equity markets will not be immune from the carnage either:

Given his grim expectations, he says there is no equity market in the world he would play right now. ‘When the American market goes down, other equity markets around the world should follow,’ he says.

The hedge fund operator added that the downturn in housing is far from over, credit markets continue to deteriorate, consumption is slowing, and unemployment will rise sharply. Higher inflation is around the corner as the Fed and central banks around the globe debase their currencies. Finally, Melcher is worried about the prospect of foreign investors pulling their money out of American assets due to the falling dollar, the credit crisis, and a slowing economy.

The New York Sun reporter asked Jim Melcher, “Is the world coming to an end?” He replied, “I don’t think so, but as I mentioned, the ingredients are in place for the worst kind of a recession, which means it’s the wrong time to own stocks.”

China Fires Another Salvo At Dollar

It’s open season on the greenback again. Earlier last week, Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress, said that China should shift more of its $1.43 trillion of currency reserves into “stronger currencies,” such as the euro, to offset “weak” currencies like the dollar. Xu Jian, a central bank vice director, added that the dollar is “losing its status as the world currency.” According to the Shanghai Securities News on Friday, Tang Shuangning, one of China’s “senior financial figures,” is also suggesting that China cut the proportion of dollars in its foreign exchange reserves.

The chairman of China Everbright Group, a major state-controlled financial conglomerate, talked about cutting the ratio of dollars in China’s $1.43 trillion of reserves at a financial industry forum in Beijing last Thursday. The suggestion came as part of a series of steps he proposed to resolve China’s balance of payments problems, the Shanghai Securities News said. Tang Shuangning is a former vice chairman of the China Banking Regulatory Commission, but does not have direct authority over foreign exchange policy in his present position.

Future Home Values: Gloom To Doom

In my September 20 post, I talked about how Yale economics professor Robert Shiller had recently appeared on CNBC and told Maria Bartiromo that U.S. home values could decline 50% in cities that have boomed a lot in real inflation-corrected terms. He suspected that the fall in prices would take place over a number of years, and that likely areas to feel the brunt of the decline would include California, Arizona, and Florida (Miami).

Back on October 29, I talked about how the Associated Press was reporting that many private economists were forecasting U.S. home prices would fall by around 10% before bottoming out in late 2008. David Wyss, chief economist at Standard & Poor’s, predicted that prices would decline by 11%. Mark Zandi, chief economist at Moody’s Economy.com, envisioned that median existing home prices would fall 10.4% (while using the same methodology as the National Association of Realtors). These gloomy forecasts were made in the wake of an American housing boom that ended in late 2005, where median existing home prices increased 54%.

Today, that gloom turned to doom when a Fortune article entitled “Real estate: Buy, sell, or hold?” appeared on CNN Money. Fortune, in conjunction with Moody’s Economy.com, calculated home prices in major housing markets five years out, and concluded that future values would fall by double digits.

What kind of price declines are we talking about? CNN Money lists “25 real estate markets poised to fall,” but here’s sampling based on the bubble areas that Shiller identified:

Miami, -32.2%
Las Vegas, -26.4%
Sacramento, -26.0%
Los Angeles, -24.1%
Phoenix, -23.5%
San Diego, -23.5%

Wow. Home prices in the “classic” cities, as Fortune calls them, are also projected to fall, but not by much:

New York, -14%
San Francisco, -10%
Boston, -5%
Chicago, -4%

With the almighty dollar dropping like a rock against other currencies, don’t be surprised when you hear the following someday on the nightly news:

“Yesterday, a 13-year-old boy from Manchester, England, moved into his Malibu beach home, which he purchased with money earned from running errands for his mum…”

Wall Street’s Player Haters?

Earlier today I talked about how the U.S. dollar sank to new lows partly because of comments made by Chinese officials at a conference in Beijing. One political official, Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress, said that regarding its $1.43 trillion of currency reserves, “We will favor stronger currencies over weaker ones, and will readjust accordingly.” Analysts interpreted this as meaning China should shift more of its $1.43 trillion of currency reserves into “stronger currencies,” such as the euro, to offset “weak” currencies like the dollar. However, they were quick to point out that Siwei’s views probably didn’t reflect official Chinese policy. Or do they?

Two Wall Street Journal blog posts earlier today discussed Cheng Siwei and his comments, and played down the importance of both. In the Journal’s MarketBeat, David Gaffen has this to say about Siwei:

But Mr. Cheng is hardly the Ben Bernanke of China; he’s not even the Alan Greenspan of China – he’s not even a monetary policy official, but a political official. He has been known to rock the markets from time to time — Chinese stocks dropped 4.9% on Jan. 31 after Mr. Cheng suggested there was a bubble in the markets (in which case, perhaps he is the Alan Greenspan of China). Still, he has no direct influence over monetary policy.

Time to play devil’s advocate. H.E. Dr. Cheng Siwei, Vice Chairman, Standing Committee, National People’s Congress, is indeed a political official, with his rank equivalent to deputy prime minister (outranking cabinet ministers) according to the International Herald Tribune of April 4, 2006. Zhang Zuhua, a former official familiar with the inner workings of China’s government, told IHT that, “Cheng Siwei is a scholar and at the same time a national leader.” Dr. Siwei is an economist, and a very influential one at that. Cheng, who received an MBA from UCLA in 1984, is known as the godfather of venture capital in China. Zuhua said that “He often expresses his views as an expert, and doesn’t just give bureaucratic talk.” And what he is “expressing” is that the U.S. dollar is toast. While it’s true that Siwei does not serve as a monetary policy official, it has been noted by the press that changes in Chinese policy are often announced through key think tanks and academies. Professor Siwei is Dean of the School of Management of the Graduate School of the Chinese Academy of Sciences, President of the Association of the Chinese Soft Science Research, Chairman of the editorial board of Management Review, and chief editor of a number of academic journals.

In the Journal’s Real Time Economics today, Carl Weinberg of High Frequency Economics was quoted as saying:

Cheng has no standing whatsoever in the conduct of monetary or currency policy. This would kind of be like Congressman Charlie Rangel giving a speech telling the Fed to hike or cut interest rates… It makes good media but means nothing to the course of monetary policy… China ain’t selling dollars for other currencies.

Once again, it is true that Siwei does not serve as a monetary policy official. However, last time I checked China was a communist, authoritarian nation. Men of political power like Siwei eat monetary and currency policy experts for breakfast (if they choose to, of course). I’ll always remember a quote attributed to Stalin that Professor Diane Koenker at the University of Illinois used to share with her students. “When chopping wood, splinters must fly.” I know who the splinters are. Question is, how much of the axe does Siwei wield as China strives to become an economic superpower?

(By the way, I’m a big fan of the work they do over at High Frequency Economics.)

Marc Chandler of Brown Brothers Harriman also had this to say about Siwei in the RTE blog:

Cheng Siwei… has in the past made errant remarks that have no bearing on policy. It is clear from this commentary record, he is no fan of the U.S. dollar.

Not a fan of the dollar? Probably because he’s lived here (MBA from UCLA in ’84) and is quite familiar with that house of cards we call the U.S. economy. Kind of like Japan’s Admiral Yamamoto living and working in the United States prior to World War Two. He figured out our weaknesses (Pearl Harbor) along with our strengths (“a sleeping giant”). Too bad nobody listened to him back in Tokyo regarding his second observation.

Chandler also added that:

It would not be surprising for some Chinese officials to again rap Cheng Siwei’s knuckles and distance official policy from his statements.

It wouldn’t be surprising at all. I’d be teed-off as well if someone let the cat out of the bag regarding our eventual plans to dump the dollar.

And by the way, it’s being reported that Siwei “distanced himself” from his own comments later in the day. That’s not my take on it. According to Bloomberg today, Cheng told reporters after his speech that, “China will use our income to readjust but that doesn’t necessarily mean we’ll buy more euros.” Where’s the retraction?