The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery
The Daily Reckoning
Wednesday, December 30, 2009
Joel Bowman, reporting from Taipei, Taiwan...
Not all real estate opportunities were created equal. Some, like an island getaway on Dubai's "The World" development, for instance, promised investors the heavens...then delivered a fast-eroding, debt- shackled inferno. Others, thankfully, have fared better during the past few years...including a few slices of paradise that are still relatively untouched.
Over the next couple of days, so as not to be a total wet blanket on your New Year's Eve celebrations, we're going to bring you a couple of upbeat essays from our friends atInternational Living.
For the past couple of decades, this savvy group of peripatetic, bargain-hunting gypsies has scoured the earth, ferreting out opportunities for readers with enough intestinal fortitude to dream beyond their own backyard and 30-year mortgage. They were buying absolute beachfront lots in Nicaragua before people started calling it "the next Costa Rica," touting remote European getaways long before New York Times readers knew how to correctly pronounce "Cinque Terre," and singing South America's praises back when most speculators were looking no further south than Florida and Southern California for the "hot bargains."
Now, if spending your days in a hammock, slung between a couple of palms on a breezy beach does not excite you, perhaps you'd like to keep all your eggs in the US property basket instead. Here's what's going on there...
Reports Ian Mathias from Agora Financial's Baltimore HQ in yesterday's issue ofThe 5-Minute Forecast...
"One good reason to guard your finances in 2010: The Federal Reserve's balance sheet has quietly ballooned back to near-record highs. The Fed announced yesterday that it's balance sheet expanded to $2.22 trillion last week, it's grossest level in nearly a year and just a hair from an all time high. Hmmm... if Mr. Bernanke assures us the recession is 'very likely over,' then why is the Fed balance sheet in crisis mode? What are they worried about? Here's the answer:
"The Federal Reserve went from a non-existent player in the mortgage backed security market a year ago to owning $904 billion of the stuff today. The 'private' bank has clearly moved its aim from the financial sector to housing, loading up on MBS, debt spilling out of Fannie Mae and Freddie Mac and Treasury bonds (a handy way to suppress mortgage rates).
"Coupled with the Treasury's black check to Fannie and Freddie, we're detecting a trend."
But you promised you wouldn't get too gloomy, readers exclaim...not on the last couple of days of a bumble-and-burst decade! Well, go grab a cup of coffee and settle in to a little place the gods really smiled on this last decade...a place called Brazil...The Daily Reckoning PRESENTS: Oh...what was that? Sorry, your editor started reading today's column and thought he felt the sand between his toes already. Please, join us...
The 4 Best Real Estate Investments for 2010
by Ronan McMahon, International Living
Next year is going to be the most exciting one real estate investors have seen in a decade. I've got my eye on four spots, in particular - diverse opportunities around the globe, each of which represents an excellent value play.
First up, Brazil. I'll show you a way to capitalize on that nation's continuing boom, particularly along the Northeast coast. That region boasts some of the world's most glorious beaches. With big infrastructure projects on the horizon, it's an area where the already- increasing property prices are going to spike in the months to come.
Back in 2007, I wrote of Brazil's Northeast: "Until I discovered this region, I had become resigned to the thought that cheap and relatively accessible beachfront was a thing of the past... As far as I'm concerned, Forteleza is the best beachfront buy on the planet right now. An opportunity like this doesn't happen often. When it does, you need to be ready to move...and to move fast."
Those who did move fast have seen the value of their investments increase by 30% to 40%, sometimes more. And the good news is: The best is yet to come. Since I made that prediction two years ago, Brazil has been chosen to host the Soccer World Cup in 2014 and the Olympic Games in 2016.
News outlets recently reported that Brazil is sitting on 12 billion barrels of oil - this in a nation that was already energy independent before this discovery. Credit-rating agencies have upgraded Brazil to "investment grade." And Brazil has led Latin America's recovery, with a projected 5% growth next year. As I write, Brazil's stock market, the BOVESPA, is up 81% for the year-to-date.
The best opportunities still remain in this nation's Northeast - in Fortaleza and along the surrounding coast. Last year, Fortaleza was Brazil's #1 domestic tourism destination. The city hosted 3 million Brazilian tourists and 250,000 foreign tourists. In fact, it has been number one for three out of the last four years. This is where Brazil's wealthy come to relax on the beach. 
Right now, there's a shortage of hotel rooms and short-term rentals. Developable land is limited. And that spells opportunity for investors.
Brazil is a middle-class country today. This fact, combined with the incoming tide of foreign investment, would be enough for Fortaleza to make my list of top investment destinations. But there are two other major driving forces at play, which make this country an even more impressive bet.
First is the "World Cup Effect." The big buzz in Fortaleza (and the surrounding areas) is the huge investment in tourism and infrastructure on the horizon. The government is spending 9.8 billion reais ($5.5 billion) in Fortaleza in the lead up to the 2014 soccer World Cup. Infrastructure projects will take up 63.3% of this spending. In June this year, Fortaleza's governor released a list of projects that will be delivered for the 2014 games.
They include 850 million reais to be spent on tourism projects - gentrification of urban areas and the installation of attractions like the state aquarium. And large amounts will also go toward improved Internet access, better equipment for the police, hospital upgrades, and so on.
Transport infrastructure, with a 6 billion reais spend, is the big winner. The government is committed to projects that will encourage and facilitate the economic development of the region.
So the Fortaleza area is going to see a major upgrade in road (there will be a new ring road), rail (a metro system), bridge, port, and airport infrastructure. This will make certain areas more accessible and desirable, which will, in turn, drive up real estate prices.
The second important force at play is called Minha Casa, Minha Vida - My House, My Life. This government program has the mandate to make home ownership affordable to Brazil's lower and middle classes. The My House, My Life program has 60 billion reais ($33.7 billion) in the kitty. The program has helped one million Brazilians become homeowners in 2009. A similar impact is expected in 2010. That's a lot of new demand.
The program operates through a system of subsidies with Caixa Economica Federal, (Brazil's government-owned savings and mortgage bank) at the heart. Developers of qualifying projects receive a subsidy and a tax break. In return for this supply-side incentive, they agree to offer units for sale at an agreed-upon and competitive rate. The government subsidy varies according to the applicant's income. Earn up to three times the minimum wage and you can own a home worth up to 50,000 reais by making payments equal to just 10% of your income. Earn three to six times the minimum wage and you can buy a home costing up to 130,000 reais. This is the bracket where I expect to see the most activity, growth, and further upward mobility. And you can profit from that in several ways. 
First, there's already a shortage of quality office space in Fortaleza. All this economic activity is going to accentuate this problem. To profit from Fortaleza's development and growth, here's what you need to do:
Buy office space in the Aldeota area.
Buy small units preconstruction in the boardwalk area. These will be perfect for short-terms rental. There are few remaining developable sites in this area.
In addition, buy preconstruction condos targeted at the local market in areas along the planned metro line. Look, in particular, to the area around the stadium.
Check in tomorrow, when I'll tell about three other hot real estate locations for 2010...
Regards,
Ronan McMahon
for The Daily Reckoning
Joel's Note: For more boots-on-ground real estate bargains and traveling tips and insights from the International Living team - who report from, well...scattered around the whole wide world, last we checked - feel free to follow this link.
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And now over to Bill Bonner, who has today's reckoning from London, England...
The days really are dwindling down to a very precious few. Tomorrow is Near Year's Eve. And on Friday begins a new year...
What's ahead?
We were right all along. Sort of. Kind of. It must have been two years ago that we looked into the future and thought we saw where we were headed.
"Japan...then Zimbabwe..."
The de-leveraging process began in 2007. It's already been going on for more than two years. This is just what happened in Japan after the bubble burst in '89. And as in Japan, US authorities acted with vigor, with rapidity and like morons. They propped up inefficient firms. They saved the bankers from their just desserts. They prodded and bribed consumers to return to their free spending ways.
And what result did they get? They managed to stretch out and delay the depression. Instead of a quick, sharp depression...they got a slow, retarded one.
Several years ago, we opined that the US would probably not have the sort of long, drawn-out slump Japan has had. Japan had high domestic savings, we pointed out; so the government could afford to waste trillions of dollars fighting the downturn. It simply borrowed its citizens' money and used it to imitate prosperity. People were given jobs on public works projects. GDP held up. Unemployment stayed low.
But America depends on the kindness of strangers just to pay its ordinary operating expenses. It wouldn't be able to stay on the Japanese road for very long, said we; it couldn't afford it.
We may have been wrong about that. The US has been following the Japanese now for 2 years. The bond market hasn't fallen apart. The dollar hasn't lost its value. The crisis stage seems to have passed...leaving an on-again, off-again funk, just as in Japan.
But wait. The latest numbers we saw showed the need to rollover $2.5 trillion worth of US government debt over the next two years. Add as much as $2 trillion more to cover current deficits. How could so much debt be funded?
Well, in a slump the best thing you can do with your money is not lose it. And the savings rate goes up. What do people do with their savings? They put them in safe Treasury debt. Imagine that the US savings rate goes back up to 10% of GDP...which it very well could, as the depression makes people more and more worried about the future. That's $1.3 trillion per year in available savings. And imagine that holders of US debt want to rollover their positions rather than cash them out. And imagine that foreigners, too, are looking for safe places to put their money....
..could the staggering debts of the US government over the next 5 years be funded? Yes...they could. Could the Japan phase last longer than we thought at first? Yes it could. It could last years...maybe even 10 years. Depression is a long, slow process under the best of circumstances.
As we keep saying, anyone can make a mistake. A colossal blunder, on the other hand, typically requires taxpayer support. It takes taxpayer support, for example, to turn an ordinary, run-of-the-mill depression into a Great Depression. Stall, subsidize, bail out, mislead...hoodwink - use enough tricks, and enough taxpayer money, and you can stretch it out for 20 years or more. In the US, stock prices didn't return to '29 levels until 1956. Interest rates didn't return to '20s levels until 1959 - 30 years later.
Japan's been at it for 20 years already. It already borrowed so much money its government debt rose to nearly 200% of GDP. US government debt is still below 100%...though it is rising quickly.
Of course, we don't have any doubt about where this leads - to bankruptcy. In Japan, the government attempted to save the private sector from bankruptcy by effectively transferring private sector debt to the public sector. The final result will be bankruptcy for both of them.
But that could be years in the future. In the meantime, our goal for 2010 is a modest one. We hope to avoid losing money...and enjoy the show.
And more thoughts...
The Los Angeles Times tells us that mortgage defaults in the prime category rose in the 3rd quarter. If you are wondering what might happen to housing prices in the US...should the depression continue...you might want to keep an eye on the default rate.
Housing prices are down about 30% nationwide. In some areas, they are down much more. But they had been going up for so long...this downswing still seems like an aberration. Hope has momentum...especially in the housing market. Housing prices rose along with inflation for 100 years. Then, they rose much faster than inflation over the last 10 years, ending in 2007. This leaves people with the impression - false - that housing always goes up over the long run. As we have pointed out many times in these Daily Reckonings, housing prices in the nicest neighborhood of Baltimore, where we have our offices, hit their highs, in real terms, in the 1920s. They've been going down ever since. Even after the big run up to 2007, they were still below their '20s peaks. That's a bear market in real estate prices that has lasted, so far, 80 years.
We don' t have reliable numbers - in fact, we don't even have unreliable numbers - but our guess is that property prices in central Rome topped out during the reign of Trajan...or maybe even Augustus. They must have gone down for the next 1700 years, because as late as the 1800s, the most precious real estate of the Roman Empire...around the forum...was being used as a goat pasture. That's still better than say Troy or Ctesiphon - cities that were abandoned and forgotten completely.
Real estate doesn't go up over the long run. Sometimes it goes down...often for a very, very long time.
In the early stages of a depression, people may believe that "prices will come back." They wait. They hope. Sometimes, prices do come back. Sometimes they don't. But if the depression continues, people will give up hope and lose confidence. They will begin to put unwanted properties up for sale - even at much lower prices. And they will begin to default even when they can still make mortgage payments.
There were only 2 million houses in the subprime mortgage sector. There soon may be as many as 30 million houses that are 'underwater.' When those homes stop expecting prices to recover, they will want to get rid of these waterlogged properties. And they can do so easily. They just send the keys to the mortgage company and walk away.
Regards,
Bill Bonner,
for The Daily Reckoning The Daily Reckoning - Special Reports:
Thursday, 31 December 2009
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