Market Perspective

An Economy With A Split Personality

Posted by on Oct 21, 2010 in Ned Massie, Perspective | 0 comments

Almost every small business owner that I know that is still in business is operating on fumes.  That is especially true of folks associated with real estate. But the stock market is doing “very nicely, thank you”.  The talking heads chat about record earnings, international growth, and seem oblivious to the pain of the majority of business and professional folks with whom I speak on a daily basis. Is the problem that I spend my time with the wrong folks?  Do I need to change the people with whom I have done business for years?  What is wrong with this picture? The answer is neither of the above.  Rather, the answer is found by looking at the access to capital…the mother’s milk of business…and the origin of the term “capitalism”.  What a wonderful word… “Capitalism”. Capitalism describes the economic formula wherein businesses invest capital in assets in several forms including human, equipment and real estate in order to produce goods and services (products) needed by society.  Capitalists know they are providing a needed service to society when their investment efforts earn “profits”. Those profits encourage more investments in producing those goods and services until the supply equals demand.  Once that point is reached, profits diminish thereby removing the incentive to produce more. This interaction is the “invisible hand” often referred to in economic literature originating with Adam Smith.  There is no better system for the allocation of resources than capitalism. THE KEY to capitalism is access to capital that can be used to make investments.  Since few are so fortunate as to be able to grow a business out of their spare change, credit is typically required.  The source of credit is banks and for the typical small business comprising 70% of American businesses that means a community bank. For the last year, the federal bank examiners have been forcing the community banks to reduce their loan portfolio, especially the real estate portion of their portfolio.  Examiners have the power and tools to make it exceptionally painful if a community bank does not do that which the examiners want done. So, now you understand the reason for the split personality in the economy.  The publicly traded companies have access to capital from the big banks.  The small business’s source is the community banks that are being forced to shrink their loan portfolio. A reduction in the available credit to 70% of the businesses means the economy will be slow.  A contraction of credit is the definition of a recession. The Fed’s efforts to accelerate the economy by printing money while simultaneously forcing community banks to shrink is dangerous to the value of the American Dollar.  Unfortunately, the most likely outcome will be significant inflation as the resulting economic recovery will resemble a car stuck in a ditch that suddenly gets traction for its tires and lurches out of the ditch uncontrollably. When the bank examiners let the community banks make real estate loans again, the economy will improve.  Perhaps that will occur in mid 2011 to 2012. In the meantime, this is the time you want to hedge your investments for inflation.  Not all land will benefit from inflation to the same degree.  Call us, we would enjoy helping you position your land investment portfolio for the inflation that...

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4 Million Plus Per Year

Posted by on Oct 7, 2010 in Ned Massie, Perspective | 0 comments

In the media there is a great deal of discussion by various talking heads trying to compare Japan in the 1990’s and the United States in 2010. A variety of economists as well as reporters have expressed their opinions on this topic. Listening to all these people, it is very easy to become confused. I have always found that FACTS, when collected and analyzed, often make confusing situations much clearer. There are a lot of things that are comparable between Japan and what it has experienced economically since 1990 and what the United States is experiencing today. You can go through the whole litany of low interest rates creating a real estate bubble, a financial services bubble, a financial panic and then a subsequent economic crash. The list continues because the Japanese central bank and the American central bank both have followed similar courses of action – offering exceptionally low interest rates while helping banks earn their way out of the situation as opposed to simply cleaning the debris off their books. Additionally, both had a variety of bailouts by the respective governments who preferred the pain and agony of a long recession to an abrupt pain from cleansing the economy of the excess. When you are in a position of leadership, one of your goals is to minimize the pain for your constituents, especially those who supported you. It is understandable but as misguided as a parent not disciplining their child. However, in all the discussion by all of the “experts” there is one enormous fact that the “experts” have all ignored – demographics. The demographic trend of Japan is simple – there are not enough babies being born to replace the population of Japan. Hence, the population of Japan is aging and the number of Japanese is declining. Contrast that to the United States where our population has been growing. In fact, the generation known as Gen-Y, which is today between the ages of 10 and 29, is estimated to be the largest generation of Americans ever at approximately 87M. That means that the cohort known as Gen-Y is almost 50% bigger than Gen-X, the generation immediately in front of it, and 10% larger than the Boomers were at their peak. Let me rephrase that information. Currently, there are more than 4 million Americans reaching the age of 22 every year. In fact, that will occur each year for at least the next 22 years. The significance of this is that in order to house them, and assuming that they paired up, we would need to generate at least 2 million housing units per year each year for the next 22 years to meet the demand. In 2010, America is going to build something around 300,000 housing units. Expressed otherwise, that is about 1.7 million housing units less than demand. Now, demand may be deferred and there is no doubt that jobs for these young Americans are important so that they have the financial ability to lease an apartment or buy a house. However, unemployment is 10%, not 100%. So to the question “is the United States going to have a lost decade suffering deflation like Japan?” …the answer is NO. The demand is in place…they have been born each year for the last 22 years. Our...

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An Illiquid Market Has Benefits

Posted by on Sep 10, 2010 in Ned Massie, Perspective | 0 comments

In our analysis dated in November of 2009 called “RE/Set RE/Position RE/Start”, which is available for download on our website, we outlined the four stages of the real estate cycle. For those who have not read the report, the first stage is the Boom, followed by a Decline, followed by an Illiquid Market, followed by Recovery. The real estate market in central and southside Virginia has been in the Illiquid Market phase for approximately 12 months. It was the summer of 2009 that the bank examiners began to force banks not to make loans on real estate, even if they were exceptionally good loans. Even more critical is that the examiners want the banks to reduce the percentage of their loan portfolio that is in real estate loans. It is not the quality of the loan that is critical, it is whether or not it is a real estate loan. Some of the stories in the industry are remarkable illustrations of this misguided attitude. If you asked me to identify the single greatest barrier to a rebounding economy, it is the current attitude of the bank examiners and therefore the bankers. Second would be the lunacy of raising taxes on entrepreneurs, but that is another topic. To an investor, the illiquid real estate market is an absolutely amazing opportunity. The best real estate investments are made in the trough of a real estate cycle, not at the peak. In a trough the prices are “softer” and a buyer has the improved perspective of identifying the real strength in the real estate market. The opposite is true at the peak of a cycle when everyone thinks everything is great…a form of delusion. The current opportunity in the real estate market can best be illustrated by the stock market comparing March of 2009 with the market in the fall of 2009. Most of my investments are in real estate as opposed to the stock market, but in February of 2009, I figured that the stock market was somewhere close to its bottom. I knew that I couldn’t predict the absolute bottom, but I just wanted to get my money invested at somewhere close to the bottom and ride it up as it recovered. In February of ’09, I purchased stock in approximately 10 different companies. The stocks I selected were stocks that would benefit from an economic recovery of a period of several years. I have to admit that in March of 2009 as I looked at my portfolio and realized that all of them had lost value, there was a short-term concern. But I remained convinced that I had bought companies whose stock would benefit from the economic recovery. In September of ’09, I once again looked at my portfolio and realized that all were in the black. In fact, approximately five of the 10 stocks had more than doubled in less than seven months. After thinking about it for a few days, I decided that anything that more than doubled in less than seven months needed to be harvested because that was such a phenomenal annual rate of return that it would be hard to beat. Therefore, I sold half of my portfolio in September of 2009. In the real estate market, there are similar opportunities today. In the...

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