Market Perspective

Investing in an Uncertain World – Destroying American Banks

Posted by on Oct 14, 2011 in Ned Massie, Perspective | 0 comments

If you wanted to cause significant damage to a capitalistic society or even destroy it, the target has to be the banking system.  Capitalism only thrives when banks are able to lend money, a critical form of capital, to entrepreneurs and businesses. To clearly see the impact, study the economy of a third world country.  That study will show that you can have a population that wants to work hard and consumers that would like to buy goods and services, but if capital markets do not exist or cannot function… nothing happens. Closer to home, relive the Savings and Loan crisis with me.  President Jimmy Carter decided to reform the banking industry, which he did in 1978.  He changed a lot of rules concerning the savings and loan industry, expanding their ability to lend.  They followed the new rules and eight years later the savings and loan (S&L) industry collapsed. The government intervention that time was called the Resolution Trust Corporation (RTC) which took over the failed S&L’s.  The RTC was so effective that by the time they completed their work, there were no S&L’s. Fast forward to 1999 when the Community Reinvestment Act of 1999 was being debated.  Because Clinton wanted to distract everyone from his impeachment, he set the expansion of home ownership as a goal for his administration. One of his brilliant ideas was to force banks to make loans to those that did not meet the existing criteria for obtaining a loan.  Representative Barney Frank appeared on television and stated that those opposed to requiring banks to make such loans was because “Republicans are opposed to poor folks owning cars and homes”.  No mention was made of the valid concern that the loans would not be repaid. The requirement of CRA ’99 was that banks would make loans to unqualified borrowers in an amount equal to 5% of each bank’s total assets.  However, banks typically have capital equal to 10% of their total assets.  Further, if a bank’s capital gets down to 8% or less of total assets, that bank “fails”. Easy math suggests that CRA ’99 set the stage for American banks to fail en mass.  However, some politicians are never confused by such details as whether an unqualified borrower will repay their loan and if not, will that cause banks to fail. To them, social policy rules! Can’t you just hear the politicians say “Who cares about long-term impacts of government regulation, we have an election cycle to worry about.” But, there is one more piece of the puzzle that needed to be put in place.  One more change needed to achieve the political goal of Clinton.  Fannie Mae is next on our agenda. In the meantime, to combat the impact of bad policy on your net worth, talk with us about investing in a tract of land.  We will enjoy helping you find a great tract of land that will be a better long term investment than a bar of gold....

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Investing in an Uncertain World – Destroying the American Housing Industry

Posted by on Oct 6, 2011 in Ned Massie, Perspective | 0 comments

The new housing industry is approximately 27% of the American economy.  It is impossible to have a strong economy in the USA without the participation of the new housing industry. New housing is not just single family homes.  It also includes multifamily housing.  In fact, when the housing starts number is reported each month, that number reflects the total starts for both single family and multifamily. The USA is blessed to have a growing population.  That has been one of our characteristics for hundreds of years.  While the sources of growth have periodically shifted between births and immigration, the constant increase in population has provided economic growth. A review of other countries that are not enjoying economic growth today demonstrates that it is massively difficult to have declining population and economic growth.  Population growth is good. Recognizing that “owners” have a different perspective than “tenants”, our government wisely has created incentives for Americans to buy their homes.  To facilitate that result, over the years since the Great Depression, a variety of government agencies and entities evolved to facilitate home ownership. One of the Government Sponsored Entities (GSE) that was created is The Federal National Mortgage Association (FMNA) often referred to as Fannie Mae.  Fannie Mae and her sister GSE’s were created to buy home loans from banks and mortgage brokers with the intent of selling them as an income producing asset to investors such as insurance companies. These loan packages were attractive because they were conservatively under-written and carried an implied Federal Government guarantee which made them AAA financial investments.  Recognizing that the American taxpayer had some potential obligation, Fannie Mae was always VERY conservative in its criteria for the loans. In 1999, to achieve his political goal of increasing home ownership, Clinton appointed his friend, Franklin Raines, to be CEO of Fannie Mae.  Within a few months of his appointment, Fannie Mae changed the loan criteria so that it would begin buying the loans of unqualified borrowers – what we now call subprime loans. But once they were bought by Fannie Mae, packaged together, and sold to investors those subprime loans carried a AAA rating!  This is like the fairy tale of spinning gold out of straw… and just as real. The good news for Franklin Raines is that he received bonuses equal to tens of millions of dollars before he left Fannie Mae and no one has asked him to return that money.  The bad news is we American Taxpayers got nailed with the problem of collection on those loans and making good on the guarantees. Remember what we said in an earlier article – if you want to cause significant damage to a capitalistic society or even destroy it, the target has to be the banking system.  Capitalism only thrives when banks are able to lend money, a critical form of capital, to entrepreneurs and businesses. Today, the entire housing industry is operating on fumes.  The ripple effects are impacting the entire economy including the land market. In the meantime, to combat the impact of bad policy on your net worth, talk with us about investing in land.  The best investments are made at the bottom of an economic cycle, not the top.  We will enjoy helping you find a great land investment that will provide...

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Investing in an Uncertain World – Eat Gold

Posted by on Oct 26, 2011 in Ned Massie, Perspective | 0 comments

One of my favorite books is “Manias, Panics and Crashes” by Dr. Kindelberger.  Yes, I am an odd duck in that I enjoy reading and thinking about economics.  But this book provides a superb perspective into several facets of our current economic environment. One of those is a framework to decide when an asset is going through a valuation bubble.  Bubbles are always a lot easier to recognize after the bubble bursts.  But to avoid the pain associated with a burst bubble, it would be very helpful to be able to recognize a bubble before it bursts. Dr. Kindelberger’s easy standard is that whenever an asset doubles in price in 12 months, that asset is going through a valuation bubble.  His analysis was that demand never doubles in a year and supply is never cut in half in a year. But, we have all seen assets burst without doubling in value.  There are markets that are relatively small and therefore can be manipulated or distorted relatively easily.  One of those is the gold market. In late August of this year, the gold market declined significantly in just a couple of days after reaching a record price.  While it is too soon to know if the gold market bubble has burst, it could easily have done so. During highly liquid markets, investors and speculators herd together and all chase the same assets looking for “yield”.  In Kindelberger’s book, that mental condition is wonderfully described and the resulting cycle is vividly recounted. But wise investing requires not following the herd.  As another one of my favorite economists shared with me two years ago, “In uncertain times gold is actually a bad investment because if the worst thing happens, you cannot eat a bar of gold”. His recommended investment was agricultural or forest land.  Both are hard assets that retain value in inflationary times.  Even better, on agricultural land one can grow food.  While you cannot eat a tree, timber and timberland values long term tend to exceed the rate of inflation. The best news is with about half of Virginia’s land being in forest, the balance is either crop or pasture land.  Therefore, it is possible to invest in a good piece of rural land that has both timber and cropland. Give us a call.  We will enjoy helping you find a great tract of land that will be a better long term investment than a bar of gold....

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Investing in an Uncertain World – Stagflation is Ugly

Posted by on Sep 28, 2011 in Ned Massie, Perspective | 0 comments

The “Perfect Storm” that we are experiencing is the result of a combination of bad political decisions.  Previously we reviewed the trigger of this Perfect Storm, the Asian financial crisis of 1997 – 1998. In the Clinton Administration, the decision was made to change our tax code to encourage Information Technology business investments.  Since manufacturing jobs was not our future according to our political leaders, the tax code changes put American manufacturers at a disadvantage.  Our political leader’s vision was that all Americans were going to be IT professionals.  Oops. Someone forgot that manufacturing is the basic creation of wealth.  In manufacturing, a variety of parts are assembled and sold when a profit can be made doing so.  By definition, less valued parts are combined into something of greater value than the cost of assembling them, hence wealth is created. Unfortunately, the Clinton Administration was distracted … Monica Lewinsky, impeachment, etc. all apparently were more important to Washington than the economic future of Americans.  Remember the party the Democrats had in the Rose Garden immediately after the vote to impeach Clinton?  Does that seem more like a fraternity act than a serious effort at governing a country? When the 1997-98 Asian financial crisis occurred and those countries devalued their currencies by 80%, their manufacturing costs plummeted as did the price of their finished goods.  American manufacturers could not compete if their manufacturing plants and employees remained based in the USA. The outflow of American manufacturing to Asia, especially China, began in 1999 and accelerated.  The hollowing out of America happened very quickly.  The resulting pain is easy to see today. To date I have not heard a single national political leader voice the fact that we need to return the incentives to the tax code that encouraged American manufacturing in the USA.  But without those jobs, we are destined to continued economic decline. Worse, we are doomed to a stagnant economy and inflation.  That is a condition called “Stagflation” last experienced under another failed President – Jimmy Carter. In “Stagflation” the economy struggles and job growth is almost non-existent but the cost of everything goes up because the buying power of the dollar is reduced due to inflation.  Does that sound familiar?  Hold on, more is coming. So the key question is “How should one invest to combat stagflation?”  The answer is to focus on the effects of inflation and buy hard assets such as land, gold, commodities that will protect your buying power even as the value of the dollar declines. Of those alternatives, land shines.  Give us a call.  We would love to help you...

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Investing in an Uncertain World – Devaluation Feels Good… Initially

Posted by on Sep 22, 2011 in Ned Massie, Perspective | 0 comments

Our perspective is that we are experiencing a perfect storm caused by the combination of several missteps that occurred in 1996-2000.  Here we can only look at one but will address the others in future articles. One of the major forces and the genesis of the current economic crisis occurred in 1997 when the collapse of the banks in Thailand led to a global bond market crisis.  The crisis ricocheted around the world as various countries, including Mexico, Brazil and Russia defaulted on loans. The epicenter of the problem was in Asia.  Their solution was that almost all of the Asian countries devalued their currencies by 80% in 1998. As a result, the goods Americans paid $5 for in 1997 we could pay $1 for by the end of 1998.  American consumers were ecstatic and the Asian economies soared.  However, our American manufacturers were unable to compete. Hence, American manufacturing moved to Asia, primarily China.  Referred to as the Wal-Mart Effect, China became the place to manufacture products, much of which entered the American economy from a Wal-Mart shelf. The hollowing out of America happened very quickly.  The resulting pain is easy to see today.  But, less obvious are the facts that: If the currency exchange rate is like water in a u-shaped tube, the water will ultimately seek its level on both sides of the u-shaped tube; Manufacturing leads to innovation where the manufacturing occurs. Does that mean we will have inflation of about 500% in order to be equal to where we were in 1997?  This analysis is not attempting to be more than generally accurate and is not intended to be a precise forecast of the future. But I believe a review of the forces suggests both potential challenges and solutions.  On the challenge side, I believe it does illustrate the magnitude of the force for potential inflation. Investing your dollars to combat inflation of this magnitude is critical to your financial future.  After the inflation arrives is too late to start.  The investments need to be made now during the trough of this Great Recession. Call us.  We welcome the opportunity to assist you in buying a quality tract of land to maximize your protection against inflation.  Not all land is created equal and we can help you understand the differences....

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Twelve Reasons to Buy Virginia Timberland as an Investment – Reason Number 12

Posted by on Oct 15, 2012 in Ned Massie, Perspective | 0 comments

Selecting Your Timberland Investment/Timberland Management By now you should realize some of the benefits that make timberland an excellent investment.  The combination of increased demand for wood fiber and stable supply are your friends. The ability of a tract of land to actually grow trees is a critical consideration.  Like any other crop, the soils located on a tract of land can predetermine the volume of timber that can grow and the speed with which it will grow.  This is often referred to as the site index of a tract of land. When you are ready to make a timberland investment, we have the soil maps and other information available in our office so that we can help you find a tract of land that has a very good site index, which will improve your return on your investment.  As a timberland investor, you benefit from that. Additionally, professionally managed timberland is of great benefit to the timberland investor.  Un-managed timberland might be just a marginal investment.  How does one manage timberland? Often we talk with folks whose view is that “all dirt is dirt and all trees are trees”.  However, there is a remarkable difference.  Not all soils are BEST suited for timberland.  Likewise, some timber is pretty but worthless and other tracts of timber have tremendous value.  But even with the very best of soils and a good planting of loblolly pine seedlings, professional management can greatly enhance the return on the investment. We hope that the information we have shared in this series has been beneficial to you in making the decision to invest in timberland.  We believe doing so will make you look brilliant over the next 10 years.  Call us, at Grant Massie Land Company, we love helping our clients look brilliant....

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