Eric Fry on investments, and real estate in particular
- Today's investor faces the triple terror of a richly priced
post-bubble stock market, a bubble-like bond market and a
bubble-like housing market.
- "Once you get to below 4% on the 10-year note, and you've
got the beginning of a bull market in government - explicitly
aimed at reflation - you ain't going to get double-digit
returns in bonds," says PIMCO's Paul McCulley. And it's true,
the current custodians of the US dollar are promising to
print as many as necessary to reflate the conomy.
- "Because modern central banks date from the 17th century,"
says James Grant, "virtually every monetary policy has been
tried before, many more than once. Inflation has been given
an especially thorough test run."
- A central bank that promises reflation is like a spouse
that promises infidelity...The promise is a guarantee. And
that guarantee is trouble for bondholders, as Grant
illustrates: "We should try to imagine ourselves in the
shoes of a foreign holder of the 10-year Treasury...We have
rubbed our eyes and performed a calculation. If the 10-year
rallied to yield 2.5%, the implied 150 basis-point rally from
the now-prevailing 4% would deliver a 13-point price rise in our
holdings. We are, provisionally, delighted. But the dollar is
not our native currency. We decided it is the part of
prudence to sell some dollars to hedge our exposure. And
we're not alone. Many other people reach the same decision.
The selling snowballs and the dollar exchange rate slips. The
gold price shoots up. Interest rates not under the thumb of
the Fed begin to lift (as do prices of imported merchandise,
reflecting, after a short lag, the weakened dollar exchange
rate). All at once, a latent deflationary crisis becomes an
actual inflationary crisis."
- Very well, if inflation is resurgent, shouldn't real estate
provide a kind of safe haven? Indeed, it may prove to be
exactly that, assuming inflation flourishes like a bamboo
grove. Even so, the housing-bubble contingent is not without
legitimate cause for concern.
- Merrill Lynch economist David Rosenberg notes that
"residential real estate has quickly become the asset class
of choice," making up 31% of household assets versus 23%
three years ago. (Of course, the big jump has as much to do
with falling stock values as with rising home values.) If
home prices hold steady or appreciate, no harm, no foul. But
Rosenberg estimates that a 10% drop in home prices would
shave about $1.4 trillion from household net worth, or
roughly 20% of disposable income...and that WOULD be a
problem!
- Furthermore, as Alan Abelson reports in this week's
Barron's, Rosenberg sees a number of red flags. Namely:
"Inventories of unsold homes are rising quickly and, measured
in months, are now at their highest level since December
1996; The median number of months a home has been on the
market has jumped to 4.8, from 3.8 last fall and the highest
in nearly a year; New home sales have fallen sharply since
the start of the year and are growing at the slowest run rate
since August 2000." |
