Happy New Year everybody. Like everyone else, I am reflecting on last year, and what the new year holds. In my view, it will be a year of divergences and great opportunity. Many people (the sheep and the hyper aware) are convinced that the crash is guaranteed for the U.S. in 2015. But I hold a different view.
As the largest debtor, largest amount of debt denominated in our currency worldwide, and current account deficit holder, we will enjoy incredible advantages when the dollar carry trade unwinds.
Whatever the spark or reason, commodities priced in dollars started to fall, governments and companies connected with these commodities are over leveraged in dollar debt, and now as they default or close the loan, a need for currency dollars to satisfy the credit dollar loans become in great demand, thus a loop forms of higher dollar price, which drives down commodity prices, which drives defaults, which drive dollar demand….you get my point. At the same time in the futures market as prices fall commodity owners start to sell futures to hedge their underlying asset, thus creating a loop of driving prices lower, and since these paper markets dwarf the real market, prices can way overshoot on the downside, which helps with point one above.
So how does this help us? We borrow in the reserve currency, a currency that is appreciating, so net good for us, and brings in investment from abroad from those seeking to protect from their own depreciating currency.
The cost of everything in the U.S. will fall that has a commodity attached to it. I own a solar energy company, and the price of fabricated steel for some of my projects have fallen 20% with many additional services provided to me at that cost. Same with electrical copper wiring, prices are beginning to fall, as well. This brings down the cost of solar, which then competes with Natural Gas, which drives down demand…you get the point. Now multiply that across all industries.
The two most liquid markets in the world is U.S. stocks, and U.S. bonds, and the money will pour in to these markets and create their own feedback loop. I think the moves in both of these markets will be breathtaking.
The next market that will enjoy these gains is real estate. I don’t think a home in CA, within 5 miles of the ocean or has a view stays on the market for more than a week. Investors/citizens are bailing out of Asia with the hope of securing a safe place for their families, and holding something tangible. You can get a 5% cap rate on a 5% annual appreciation, with a appreciating currency, and with rising rents, and that smells like victory. For Americans, forget about all of the talk around rising interest rates. Simply is not going to happen. Thus putting a floor on real estate for the rest of the folks.
Ok, sounds great, sounds pollyanish.
I think what kills the party is when the yield curve inverts, and the whole curve drifts down, depriving the banks of oxygen. They are already constrained in assets and lending constraints, and with Silicon Valley creating Prosper, Loan mart, etc, they are losing consumer lending. In my space with Trust Deeds, we own a very profitable niche lending to corporate home builders. Our investors see double digit returns, and protective equity in the 30-40% range. Losses are infinitesimal (for us, none), and the homebuilders are still making incredible margins. (I will do a post on where the real profit is in real estate). The banks are increasingly reliant on Fed reserve money to leverage, and that has stopped increasing, so they will need to double down in the market to squeeze out profits. They will take it too far, then the party ends.
But that looks like a 2H 2015 event in my mind. Enjoy the year.