Tuesday, March 27, 2007

Every asset is a bubble

I read a blog entry today by Cramer that I couldn't agree with more. It's the reason that in my earlier blog entries, I couldn't find safe yield for my cash. He writes:

"Everything's a bubble. Mortgages? Bubble. Private equity? Bubble. Buybacks that lever companies? Bubble. Copper? Bubble. Corn? Bubble. Farm land? Bubble. Ethanol? Bubble. Solar? Bubble. Tech without earnings? Bubble. Office real estate? Bubble. Brokerage trading profits? Bubble. Hedge fund creation? Bubble. Derivative creation? Bubble. ETF explosion? Bubble. China stock market? Bubble. Blackstone? Bubble. "

To this, I'd add lots of other assets, including gold and residential real estate. When I searched for non-bubble categories last year, the only ones I came up with were German and Japanese residential real estate, which there are no investment vehicles for. Owning your own business is also not a bubble.

I can vouch for the fact that private equity is a bubble. I am coming across lots of private equity offerings now. This was a true wealth generator for the rich the last 8-10 years, generating 30% annual returns, available only to those with over 10-20 million of investable assets. Wall Street is now packaging them and marketing them to the next tier down.

I totally agree with Cramer. Bubbles have been around for many YEARS now. Will they pop? Probably. But when they pop, we will be too scared to invest in them. I only know of two people who timed the 2002 market low perfectly.

It seems to me most retail investors are invested somewhat in gold or hoarding a huge amount of cash (which many have borrowed against their home). But if you're afraid of bubbles, you would have missed out on the entire stock market bull run from 1981. Or like me, you would have waited 12 years to buy a house before throwing in the towel. When I bought my house, I was 100% sure I bought at the top. Years later, my home's unleveraged value is up 25-30%.

What can we do? Keeping cash under the mattress is guaranteed to make us poor in 20 years. We have no choice but to play the bubbles and limit the downside. Use protection.

Life is short. If your family needs more space than in your apartment, don't avoid buying the house if you can afford it. Get a predictable fixed mortgage, follow the conventional mortgage rules instead of what the loan officer sells you. You've already saved a bundle with the housing correction. You could wait until the market bottoms next year, or the year after, or in 5 years. But you and your children will also be a year, or two years, or 5 years older. Builders are welcoming low-ball offers these days.


techguy in los altos said...

How do we get our hands on German and Japanese real estate? ;)
Any good REITS that are assessible from the US?

In the spirit of looking for non-bubble assets or investments: I am trying to get my hands on Yen, as I believe this will appreciate against the US dollar overtime. I have had positions in the Canadian, Aussie and NZD from the beginning and they have all done very well.

Any thoughts of where else to look?

Speaking of housing:
I bought a nice place (Bay area) in Oct 2000, and had to sell late 2004 for family reasons; lost 35% of the equity (that's a lot in the Bay area).

In my case, it was very unique and the timing was bad; buying at the dotcom peak.

Rags 2 Riches said...

techguy, what a coincidence, I bought my house in Oct 2000 also. I watched the price drop 15% in 3-4 years, but it recovered really fast. The price drops were really sensitive to location and price range.

My friend bought his home in 2001 for $3.4M, put in $400K of upgrades, and watched it drop to below $2M at the bottom. I think it's worth in the high 2's now. He knew it would drop before he bought it, but wanted it anyway for his family.

Another friend bought a home for $500k at the same time, and it's worth almost $800k now, it never dropped.

I asked a couple of big institutions about German and Japanese real estate - there weren't any good REITS available in the US, too bad. Maybe in the near future.

I haven't found anything else. I received an offering for Silver Lake III Private Equity. Silver Lake I and II (each offering was 4 years apart) both generated 30+% annual returns. It looks to me like private equity and real estate were the big gravy trains the last several years, but I have the feeling the easy money's been made.

I'm sure within each asset class there are investable areas that are not in a bubble. It just takes a lot of time trying to dig them up. I've certainly thought about waiting for the fallout from real estate and then picking through the bones once it's all over.

Rags 2 Riches said...

P.S. you've probably seen charts showing when ARMs reset over the next few years. There are huge numbers of ARMs resetting throughout 2007.

techguy in Los Altos said...

Per your comment; "I'm sure within each asset class there are investable areas that are not in a bubble. It just takes a lot of time trying to dig them up. I've certainly thought about waiting for the fallout from real estate and then picking through the bones once it's all over."

Per my previous mortgage broker, he sees ARMs getting real ugly in 2008 for the Bay Area. Where interest payments will be unbearable for a larger percentage... Pulling from savings/401K to make payment, then family members, then you're on the street.

The thought of forming a private equity group to buy-up a bundle of these defaults come to mind. Frankly I don't know where to start but would love to work off a case study from the early 90s. I can also tap into a few of the local tax/legal contacts to see where they can lead me...

Your thoughts?

techguy in Los Altos said...

Here's a recent Asia Real Estate fund by RMR.
Symbol is RAF

Focused more on Asia , but majority of the commerical real estate in JAPAN.

Thought you might be interested!