Three Industries I'm Bearish On For 2014

As we start 2014, it appears the American economy hasn't improved that much over the past few years. Although the White House and the media keep repeating the half-truth (at best, and whole lie at worst) that the economy is in recovery, I don't see much evidence of it in the Denver-metro area. 

Commercial vacancies seem to be everywhere, and a grocery store (in what I thought was a middle to upper-middle class neighborhood) closed its doors. Medical and recreational marijuana seem to be the largest growth industries after the 'evil weed' was declared legal in Colorado on January 1. 

So why did I choose this topic for this post? In investing, poker and life, success sometimes results in making the fewest mistakes - not hitting the most 'home runs.' Ask anyone who had their retirement savings wiped out by the Wall Street crashes of 2000 and 2008. If you choose the wrong industry to be in, it could cost you a lot of time and money. If you're an older Generation X-er or Baby Boomer, the stakes and opportunity costs of missing a better industry are much higher. 

What are these three industries that could be Tar Babies for your career and investing future?

1) Residential mortgages. A lot of brokers made insane amounts of money from the 2000s real estate boom, and have done well with the recent "mini-boom" in real estate in the Centennial state. Interest rates have been held down at rock-bottom levels by the Federal Reserve the past four years. Unfortunately, the Fed won't be able to maintain these ultra-low rates.

Although the BLS tells us the national unemployment rate is still low, it relies on a Clintonian-like spin of how you define "low." This number doesn't include "discouraged" workers who have given up looking for a job because of the difficult job market. The more reliable number is the employment participation rate, which measures the percentage of Americans who are gainfully employed. 

Zero Hedge reported last month this number has soared to a record 91.8 million Americans - an all-time high. So much for that "Hope and Change" stuff we were sold by the Marxist-in-Chief. 

I don't know the exact numbers on credit quality, but I don't see how the average Americans' FICO score could improve when almost 1/3 of the population isn't gainfully employed. Unlike the Roaring 2000s when all you needed was the ability to fog a mirror to get qualified for a home mortgage; credit standards have tightened up a lot. 

Lenders also require this crazy thing called (gasp!) a down payment. And a pretty sizable one in some cases - like 10 or 20% of the purchase price. With all these strikes against it, I'm not optimistic that this industry is (or will be) the "gold mine" it was from 2002 to 2007.

2) Commercial real estate. The boom in commercial followed the spike in the residential market. During the 2000s the real estate market was like playing the board game Monopoly: Trade your four green houses for one red hotel, strip mall or multi-unit property. If an investor could have properties appreciate 10-30% a year in the residential market, why couldn't you do the same thing in the commercial market where the numbers were bigger?

But the decline in the residential market also led to the downfall of commercial. When the easy money and credit stopped flowing (with no fundamentals and household incomes to support it), the end was in sight for this market as well. I see plenty of commercial vacancies in the Denver-metro area, and another grocery store (an anchor store for a strip mall) also closed its doors. 

The increase in the commercial vacancy rate isn't all due to a muddle-through economy. The Internet has given business owners a better, faster, and cheaper way to do business. Think about it: If your business isn't location or employee-dependent, you can deliver the product or service and accept payment online... why would any marginally sane business owner want the added expense and liability of a brick-and-mortar building?

I don't see the US economy or real estate markets getting better anytime soon, and Internet-related business will only increase from here on out. If you're a commercial building owner or lender, I don't think this industry will be good for a long time to come. The exceptions could be commercial buildings with medical and government tenants. However, if you consider making any commercial real estate investments, remember: Caveat emptor, or buyer beware. 

Make sure it's in a good part of town with reliable tenants who can pay for years to come. And make sure the numbers make sense as an investment TODAY. Don't bet on future appreciation or an improving economy, which may not come as soon as you think. There are many 'wildcards' which will affect the US economy - and some are outside of the country and outside of our government's control. 

A soft commercial real estate market leads to the third industry I'm bearish on:

3) New construction (residential and commercial). The 2000s produced a glut of new homes and commercial buildings, and times were good. But when you factor in the real estate and stock market crashes, tightening up of credit and the increase in Internet-related business, it doesn't make sense from a business standpoint.

Remember, if a business owner can run operations through a company website, why should he foot the cost to build and maintain a new brick-and-mortar facility? 

A good physical location doesn't have the intrinsic value it used to (with a few exceptions), and there are plenty of vacant homes and commercial buildings that you can lease or buy for a fraction of the cost of new construction. 

In the short term, these industries could perform better than I expect, especially with government intervention and/or tax incentives. 

However, I have a good track record predicting economic and financial trends. Here are a few samples:

-  I was bullish on physical gold and silver back in 2003, because of the federal government's increase in spending and debasing the currency - similar to what happened towards the end of the Roman Empire. Both metals have more than tripled in price since '03, and I believe have more upside room to run. 

-  In 2004 I predicted the bust of the residential real estate bubble, because household incomes didn't  increase even close to the rate of increase in home prices. I was three years early, but cracks in the sub-prime mortgage market in August 2007 were the beginning of the end for the late, great Real Estate Boom. 

-  And in 2008 I was bearish on Fannie Mae and Freddie Mac because both entities were missing financial statements for the last three quarters. If they weren't quasi-government entities, their stock prices would have dropped like a rock. I bought February and April put options in January, but they both expired worthless because the stock prices didn't drop far enough (and soon enough) to make a profit... and I stubbornly held on in hopes they would.

However, on September 9, 2008 my hunch was vindicated. The federal government took both Fannie and Freddie into receivership (i.e., bankruptcy)... both stocks dropped below a $1 per share... and both stocks were de-listed from the New York Stock Exchange in July 2010. 

If you consider making your fortune, staying employed or hitching your income wagon to either of these three industries, be very careful - and have a Plan B ready in case either of these wagons goes in the economic ditch. 

Post-Thanksgiving Thoughts on the Future of US Futures and Markets

I'm reflecting on the state of American markets after Thanksgiving, and not sure I like what I see. The MF Global meltdown and closing down of Barnhardt Capital Management are two major events that show eroding confidence in the US (and probably global) financial system. The only collateral that financial paper assets (which include futures and options contracts) have are the public's confidence in those assets.

These two events may be key turning points looking back on this time in American financial and political history. Unfortunately, the government and politicians are joined at the hip with big business and US financial markets; and there's no such thing as truly free markets anywhere in the world. Central banks and financial regulators are constantly intervening to prop up (or knock down) certain markets to benefit their contributors, boost or dampen confidence in specific markets.

The MF Global event may be a combination of an unexpected "Black Swan" event (name of the Nassim Taleb book) and a modern-day canary in the coal mine. I don't know many financially-astute people who were concerned about the solvency and legitimacy of US futures and options markets before now. Right now, anyone who trades futures and options should make damn sure the company they trade through is financially sound and solvent.

If this has been happening at MF Global, who's to say that it hasn't been (or isn't happening) at other commodity brokerages? If so, how safe are your funds and positions?

As I'm thinking out loud, US and EU government officials may have ran out of suckers to buy their Euro-trash debt. In order to fill the gap, the Federal Reserve could either print money out of thin air - or, they could find the most liquid markets and source of funds on the planet, such as commodity brokerage firms.

If (more likely when) Greece is officially declared bankrupt, and the Euro and EU can no longer be functioning, long-term entities, this will probably set off a daisy-chain of financial events - and they won't be good ones. Almost the entire world is leveraged to the hilt with debt at the government, corporate and household levels.

Trying to borrow and spend your way to prosperity and freedom is like trying to drink yourself sober - it's impossible. The biggest financial hangover in the history of the world is descending upon us, and there's no avoiding it. No more financial Bloody Marys or "hairs of the dog" to avoid the pain.

I want to envision a positive future financial scenario, but I'm having a difficult time doing so. This massive amount of debt will have to be resolved either through repayment or default (probably more of the latter), and in America we won't see the easy or profligate use of credit for a long, long time - probably for decades.

Residential real estate has a few strong headwinds: 1) A sluggish economy, which doesn't appear to be coming back for awhile, 2) Tightening of credit standards, and lending to home-owners, and 3) Issues with determining title, generally due to MERS - which allowed transfer of a mortgage without having to pay transfer taxes and fees to cities and counties.

What's the bright side of this current recession/depression? It's that most of the knuckleheads in business are being flushed out, and the better business owners are staying put. The cream is rising to the top, and the fools are being dealt with. Common sense and good financial values are (hopefully) returning to America, and people are re-gaining their senses from the days of day-trading dot.com stocks, and flipping houses.

It's a painful lesson to learn, but one that our country has had coming for a long, long time. Unfortunately, it's time to pay the piper and endure the pain; but we could see a nice rainbow after all this rain - that's my hope for the U S of A.

Real Estate & Mortgage Chickens Finally Come Home to Roost

I guess it's better to be 3 years early instead of a day late - which is exactly what I was in calling the real estate/mortgage market bust. My predictions are finally coming to fruition, and we're seeing the start of the Great American Debt Implosion.

Back in 1993 after I graduated college, I was a Kansas farm kid living in suburban Kansas City (Kansas side), in awe of the fancy cars and nice homes a lot of people had. I made the assumption that these folks were rich, but later found out that most folks with lots of 'bling' have it financed.

The past few years I've looked in bewilderment and amusement at how people in Colorado have afforded these McMansions, nice cars and SUVs. The answer - obviously - was/is easy credit. When Greenspan lowered the rates to rock-bottom levels, that was all Americans needed to go on a shopping spree. Instead of 're-trenching' and saving money back in 2001 (which is what usually happens in slow economic times), people just papered over the problems by borrowing more.

In the early to mid-2000s, real estate prices kept on going up and up, and there was this newfound equity folks could extract bundles of cash from - just like having their own magical ATM. But that ATM has gone up in smoke, just like a lot of sub-prime (and now Alt-A) mortgage lenders have.

Even if homeowners didn't use their house for a cash machine, folks in the past few years have definitely bought at the top - and shouldn't expect much (if any) appreciation in the short-to-medium term future. I know two couples who bought homes at a cool quarter million and half million each. They're nice homes, don't get me wrong, but I think they'll come to regret those decisions in the near future.

It's crazy how supposedly-educated Americans are so financially and economically illiterate. They buy into the myth that their home is an asset, real estate is (or was) a 'sure thing' investment, and that levels of government, corporate and personal debt don't matter.

Well, the time that debt matters is right here and right now. The Dow has gotten a 1,000 haircut in just a few weeks, The Fed and other central banks around the world have injected massive amounts of liquidity into the financial system, and Jim Cramer had an on-air meltdown, imploring Ben Bernanke to do something for Wall Street firms to save them from their own stupidity.

Speaking of stupidity, here's a flashback to November of 2006 where the Mad Moneymeister gave the 'all clear' to buy back into homebuilder stocks. The same ones that have lost 15-20% now in August of 2007. It's funny, isn't it, how CNBC and other financial shows almost never tell the investing public to sell - except when the stock has tanked so badly, the only benefit you get is a tax deduction? Like the 80s song, Things that make you go 'hmmmmmm...

For even more stupidity, here's an article trying to spin recent home sale news in a positive light. They're saying "Even though the number of sales have gone down, the average price of homes has gone up. That's why we're bullish on real estate." Note to idiots: The reason the average price has gone up is because the number of homes sold has gone down. The higher priced homes will skew that average up - it's a simple freaking concept! That's basic math 101, but maybe your classes were different in the public school you went to.

If the real estate correction were a baseball game, I'd say we're only in the 2nd or 3rd inning. We've got a long ways to go, especially with the Fed increasing money supply at crazy rates, plus oil and gas prices staying high. I don't know when the bottom will be, but I think it'll be at least a few years - maybe a decade or so - before real estate will come back.

This has been the mother of all debt parties, and the hangover will be a doozy. Prudent folks will keep their debt levels and expenses as low as possible, and keep at least a portion of their portfolio in precious metals. Normally cash is king in declining stock and real estate markets, but not when monetary inflation is around 10%/year. Even if you get 5-6% interest on your money, you're still losing 4-5% in real (inflation-adjusted) terms.

I'd highly recommend you get financially and economically literate if you haven't yet - or find someone who is and heed their counsel. Start by reading the book Rich Dad, Poor Dad by Robert Kiyosaki, and Why We Want You to Be Rich by Kioysaki and Donald Trump. You may not like The Donald, but he has a very good understanding of what's going on in America and around the world - and how prudent Americans should prepare for a very different future.

A friend of mine I had lunch with was worried about what's happening in the markets and the economy. But if you're financially and economically literate, you should be ecstatic. That's because some great opportunities will reveal themselves to wise investors. You can take advantage of these opportunities honestly and ethically, and make a boatload of money in the process.

Real Estate Fundamentals - the Key to Predicting Value

Just as I examine fundamentals to analyze commodities and stocks, I use the same fundamentals to look at the present and future of real estate. Residential real estate increased in value from 2001 through 2005-6 because of several factors: 1) Lower interest rates, which allowed folks to buy more expensive homes, 2) "hot" money that flowed in from stock market investors who were licking their wounds, and 3) Excessive speculation - especially in California, Arizona and Florida - that drove prices through the roof.

Interest rates (just like anything else) go up and down in cycles, and eventually 'revert to the mean,' or the average over a long period of time. Because interest rates have been low for the last few years, they're due to come back up. Residential real estate values are affected by location, size of house, and the condition, but the two main factors that affect real estate values (no matter the location) are: Income and interest rates.

Because most Americans rely on working as an employee for a company for their main source of income, and because of global competition for labor, I don't see incomes in the US going up significantly for years to come. This factor - combined with the eventual rise in interest rates - is the reason why I don't see real estate values 'bouncing back' in the short term.

You also see the purchasing power of the US Dollar declining, and this makes for a very strong headwind against American residential real estate. I know that over the past several decades real estate has been (emphasis on past tense) a good asset class to invest in, and that home prices have almost always increased.

However, there are always exceptions to every long-term trend, and I believe the next two or three years will probably be one of those exceptions. I know that realtors and mortgage brokers don't like to hear this type of analysis, and most of them don't believe real estate can decrease in price significantly.

Keep in mind that almost all realtors and mortgage brokers are salespeople - and not investors. They want to believe that the good times will keep on rolling. Residential real estate today looks like the NASDAQ in 2000: A bubble market coming off its peak, and correcting downward. I could be wrong, but looking at the financial and economic fundamentals, I doubt it.