As usual an interesting Ross Rant from his perspective of Harris’‘socialist’ economic policy and interesting commentary on the markets, postzero real interest rates economy, fiscal drag, gold and commentary on theMiddle East! Also, policy issues may be he Harris achilles heal, however, mayresonate if Trump was disciplined (unlikely!) and not persist with personalattacks on Harris et al!
Kamala has released her socialisteconomic policies and none of it makes sense.
It is all just more governmentcontrol and excess spending of what is estimated to cost $2 Trillion over thetypical ten-year budget measuring cycle. Just take her housing plan. 3 millionunits. Reality check. Developers don’t just suddenly start to build morelow-cost houses because they get some tax credit. If they own lots that areentitled, they might need to go back and get them re-entitled for a differentquality and type of housing. It is questionable if even with a tax credit theywould make the same margin as if they build higher cost homes. There is ashortage of qualified construction labor so any fast ramp up in construction isnot likely. If there were to be a sudden flurry of new construction of homes toget to 3 million, the cost of lumber would skyrocket, as would some other keycomponents making the cost to build much higher thereby defeating the wholepoint of the policy. Then you get to mortgage rates. If there were suddenly abig surge in mortgage demand, then the rates would rise making the monthlypayment by the buyer that much harder to do. It does not make sense and anadvisor to Kamala has admitted her plan will not result in a lot of new homesand it is only a material lower cost of capital that will do that. Given thefiscal disaster we already have, it is unlikely ten-year rates will bedroppingmuch, and could rise, so the cost of capital will not decline sufficiently tomake this housing plan work. Her idea to give $25,000 to new home buyers isprobably illegal as it discriminates, but the cost would be so high as tocreate a new fiscal issue. The $25,000 does little to change the reality of themonthly payment. It might even increase demand for house which then would driveup prices. The Biden Harris plan to institute rent control nationally is likelyillegal and will never happen. Rent control is a disaster and leads to lessavailable units as developer don’t build. Rent regs are a local issue. The planto attack large corporate owners of residential would have the opposite effectof what she claims. They would pull back and stop creating new homes for rent,making the shortage of homes worse.
Now let’s look at her claimof price gouging by supermarkets. A supermarketmakes on average a1.5% profit margin. It would not take much of a decrease inprices to wipe that out. The producer price index and the CPI have risen intandem, so the data prove that retailers are not buying cheap and selling dear.With growth in inflation now much lower, there is not the pricing powermanufacturers and retailers had last year. Margins are now being squeezed.Lastly, this is classic socialism and when Nixon tried price controls it wasa disaster. Price controls mean shortages, and in the end higher prices.Her entire economic plan is designed to sound good to voters who have no ideahow the world really works, but it does buy votes, as it would be an economicmess if she really tried to implement any of it. To pay for all her ideas therewould need to be a major tax increase on all of you. That is the opposite ofhow you grow an economy. It would cause a slowdown instead, and so fewer jobs,lower wages, so fewer home buyers.
She is a pure socialist and her economicpolicies would be disastrous.
These proposals are pure electionnonsense designed to attract voters who do not understand economics.
The economy is slowing, but is beingsustained by massive fiscal spending which will need to be paid for soon.The more spending, the more debt and deficit, the more the fiscal crisis looms.In 2021 a economic consultant to the White House told me the entire strategywas to spend heavily to create jobs which is what happened. The more governmentspends, the more demand is generated and so the more jobs are created. Basicecon 101. The problem which he acknowledged is you also create inflation anddeficits. The more you create deficits the higher taxes need to be raised topay for all the spending. If you don’t raise taxes, which they have not beenable to do, the higher the deficit, and when interest rates rise as they havethe more unsustainable the deficit. So it all seemed a good idea to the WhiteHouse when rates were near zero for Treasury, but now the ten-year is near 4%and the numbers no longer work. If you look at the jobs number for the pastseveral months and this yar, almost all the job creation is government orgovernment paid for jobs. Take those away and the stimulus from all thespending and job growth would likely be negative. The economy is looking OKonly due to massive government deficits and while that will get the Dems morevotes, it is creating a monster of deficit, and the day of reckoning is comingsooner than many realize.The economy is now government deficit driven, andthat is make believe growth.
There is also the material impactof illegals now taking jobs so it looks like more people are employed. It isthe same as now in Russia with all the defense spending and employment of menas soldiers which is making the Russian economy look much better than it fundamentallyreally is.
The market continues to get all excitedby one or two simple reports that do not really provide a reason to getbullish. The retail sales report got them all juiced up about a numberthat was not adjusted for inflation. Unit sales were not up. Consumers did notall of a sudden get more money in their pockets. Inflation did not decline to2.0%, and wages did not suddenly go up a lot more than inflation. Nothingreally happened other than some traders grasped at any good sounding news andran with it. Don’t get sucked in. The economy continues to slow, and consumerscontinue to be very stressed for at least 65% of families. Credit card defaultscontinue to rise to historic levels. Discretionary spending is way lower. Thefurniture sales index remains down. Job growth is still totally dependent ongovernment or government subsidized jobs. It is always nicer when the marketgoes up for a day, but then there is tomorrow. I remain very cautious andconservative with a lot of short term Ts, gold on which I have made a very bigprofit, oil, and a few strong stocks like NVDA, LLY, VRTX, HD and a few Mag7 stocks. Copper is my big loser, but overtime it willbecome a winner as shortages become more severe. I am up over 10%and given mymajor holding of Ts at 5.2% yield on average, on a risk adjusted basis, thatfeels very good to me while my dividend and interest income remain substantialand safe. My portfolio can survive any downturn or geopolitical crisis, as thecompanies I hold will all survive a recession in good balance sheet and cashflow shape, and then return much higher over time.
The real risk now is the election, andthe possibility that Trump is blowing an obvious victory with hisirresponsible rhetoric and his refusal to change despite all of his advisorsand everyone else saying he loses unless he does change. His outrageouscomments about medal of honor winners makes one wonder what is wrong with him.If it looks like he will lose as we get close to election day, then sellingstocks and owning more Ts and gold may be the right strategy. If the Demscontrol everything, then the future is very dark.With Hamas saying thereis no deal, and Israel standing firm on key issues, there will be no real ceasefire and the risk of all out war remains very high. The Street continues toignore geopolitical reality and risk, but you should not.
Here is what you do not know about thehousing market and what Biden Harris and the Dems havedone that caused home prices to rise more than they otherwise would have. Hernew plan will just make it much worse. 70% of home mortgages are governmentguaranteed mainly by Fannie or Freddie or by FHA. FHA which is designed to helplower income buyers has only a 3.5% down and in some cases They also reducedmortgage premiums. This together increased buying power by 10.5%. That pushedup demand and so prices. They also allowed bigger mortgages in relation toincome to a pion t that invites default. (They learned nothing from2008). Now 40% of Fannie and Freddie mortgages are over the amount t consideredreasonable when measured by income. That is up from 16% in 2012. They have alsoreduced the down in some cases to as low as 3%and the buyer can use gifts, orgovernment grants to cover the 3%. So, the $25,000 gift to first time buyerswould just raise the price of homes even more by increasing demand for homesthe buyers cannot afford. If the Dems get full control, the housingcrisis will just get a lot worse for everyone and defaults will rise.Credit reports were forced to remove medical debt, and student loan defaultswere wiped out with Biden Harris forbearance. So, credit reports are no longervery valid on lower income people. You see where all this is headed.
Gold continues to rise very nicely. It is up over 21% this year and is my most profitable holding thisyear, and one of my highest percentage holdings. The more the world sinks intothe risk of major war, and the more instability there is, the more gold shines.For thousands of years it has been the store of safe wealth. It was what coinswere made of as far back as the Romans. It has not always been a winner to own,but it has always been a safety holding for some. It is my view that the worldwill continue to be in turmoil for several more years, and major wars couldeasily happen. When people get scared of events, they often buy gold and stashit. Now there are gold stocks like GLD that are what some buy instead of theactual gold bars or coins. It is fully tradable at any moment like any stock sohas advantages of liquidity over trying to hide real gold bars. Now Streetanalysts are suddenly pushing gold as a place to invest creating a momentumplay with forecasts as high as $3000 per ounce which might be over optimistic,or not. If BRICS were to ever happen, gold is the presumed reserve behind UNITSif they are ever issued. Gold maybe has stopped rising, so I am notrecommending you buy it here, or sell it here. This is just an informativecomment on my opinion.
The impeachment report is now out, andit is very indisputable that the Biden family is totally corrupt and Joe shouldbe impeached. It is not accidental that the report isreleased just as the DNC convention gets underway. It is not clear how themedia will deal with this as they have tried to claim the Republicaninvestigation proved nothing all these months. Very likely they will try tobury the story and claim it does not touch Harris so no big deal. Onceagain, the media has been shown to have been undertaking a massive coverup ofone of the most important stories in American history of a totally corruptpresident taking millions in payoffs.
The attached link is a superbexplanation of what is really happening in Israel as opposed to what BidenHarris are saying and what the media are reporting, none of which is accurate.It is an hour long so wait to listen until you have a full hour to hear it allat once. It explains the truth about the Netanyahu political situation which isfar better than you have heard and the reality of the conflict between he andhis defense minister, which is very different than what you have seen in USmedia. As usual the Biden foreign policy is politically driven and not theright one, and the media has lied to us in a major way again.
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It is far from clear what is reallyhappening in the cease fire talks, but they appear to be going nowhere. MaybeIsrael is dragging it out so they can kill more Hamas and give their troopsmore rest to get ready to attack Hezbollah. Maybe Israel is ready for a ceasefire and hostage release. Hamas is not only not present, but they say the westis claiming optimism when none is justified. In fact, they say there isno deal at all. Netanyahu says he is not budging on some key points. It looksto me as though both sides are just going through the motions of a negotiationto look like its failure will not be their fault. This was all a political moveby Biden to announce a great foreign policy accomplishment at the convention.It is not happening. It just again shows the White House including Harrisdrives foreign policy by US election political wishes and not by geopoliticalneeds. I would not expect a real deal happening, and if there is one, itwill not be lasting. Blinken is not going to be able to pressure Netanyahu toconcede key issues like control of the corridor on the border with Egypt. Ifanyone thinks a cease fire will result in real peace they are fools. They havetried that numerous times, and it just results in the bad guys rebuilding theirweapons and forces for another day. Israel has not yet completed killing all ofthe Hamas fighters and they have not yet killed Sinwar which is a major goal.Iran still is close to building a Nuke which has to be prevented at all costs.Iran still is run by the Mullahs who intend to wipe out Israel. Biden isdesperate for a big win before the election so Blinken will go all out to makesomething, anything , happen. In the end nothing will really change until Iranis under different rule, and that will take years unless Israel gets to attackand destroy them. So don’t expect anything to really change even if theyannounce a deal. The risk of a much wider war remains no matter what they say.
The world is still working through theaftermath of zero interest rates, QE, and Covid lockdowns. Zero rateswere a massive distortion of the capital markets as was QE. The cost of capitalwas not market driven, so there was an immense misallocation of capital andmassive excess spending by Congress and other nations. Debt became theprimary source of funding for not just governments, but also for private sectorinvestments and especially real estate. A lot of projects, especially in officeand multifamily, got developed regardless of demand. Many believed low rateswere now the norm and they ignored market history, or they just took advantageof the moment and let caution go away. An immense amount of consumer spendingtook place as huge fund flows through the system provided consumers andcompanies with excess demand ability. Then came Covid and lockdowns and excesssavings which was followed by excess demand once lockdowns were over andconsumers went on a spending and travel spree that is ending. Biden and The DemCongress did the same believing that zero rates were here to stay and asSchumer loved to say, Modern Monetary Theory meant they could spend much moreas it would be a nil cost of capital. MMT is a false theory and was justan excuse for much more spending to buy votes. Lots of entitlement and subsidyprograms to make people and companies dependent. Lots of money to subsidize andmandate EV’s and no fossil fuel through subsidies here and elsewhere. Withoutall this supposedly cheap money, green would likely never have gotten off theground. Now the ten-year is close to its normal range, and mortgage rates areback to a more normal range, reality has set in for most. Unfortunately, Harrisand the Dems seem not to have understood normal economic theory, and theycontinue to propose massive new spending programs to try to buy morevotes. The ten-year is actually cheap at the moment as 4.5% is theaverage rate on the ten-year over the past 75 years. Anyone who thinks the tenis going back to 2% or even 3.0% is living adream. Very unlikely giventhe unsustainable fiscal debt that has to be funded over the next three yearsat much higher rates. This is why I continue to believe we are very possiblygoing to have a fiscal crisis next year, or soon thereafter. Then watch whathappens to rates regardless of anything the Fed does. The Fed cutting ratesdoes not solve the unsustainable debt problem. Treasuries are not bought basedon Fed Fund rates. They are bought on economic forecasts, market demand,capital flight, and perception of potential fiscal crisis. Yellen has beenmanipulating the market for several years by front loading short term paper,but that will not be sustainable.
There is a lot of research happening torecycle used uranium from power plants. There is also a new Chinese technologybreakthrough that will allow nuke plants to not generate all the used uranium.It also appears that the climate crazies now realize nuke power is the realanswer to power production in a clean way. It is unclear when this all moves toa point when nuke power is finally permitted and plants are built, but it iscoming and when it does uranium will be in very short supply.
JOEL ROSS
PRINCIPAL
CITADEL REALTY ADVISORS
http://www.citadelrealty.com
Mr. Ross began hiscareer in Wall St as an investment banker in 1965, where he handled publicofferings, mergers & acquisitions, leveraged buyouts, and other corporateadvisory matters for a variety of clients. During the seventies he was CEO ofNorth American operations for a UK based conglomerate where he acquired andoversaw six companies. He also sat on the parent company board. In 1981, hebegan his own firm handling leveraged buyouts and investment banking, as wellas financing real estate syndications. In 1984 Mr. Ross began providinginvestment banking services and arranging financing for real estatetransactions with his own firm, Ross Properties, Inc.
In 1993 Mr. Rossand a partner, Lexington Mortgage, created the first Wall St hotel CMBS programin conjunction with Nomura. They went on to develop a similar CMBS program foranother major Wall St investment bank and for five leading hotel companies.Lexington, in partnership with Mr. Ross established a hotel mortgage bank tablefunded by an investment bank, and making all CMBS hotel loans on their behalf.These were the first capital markets financing programs for hotels to becreated since 1989, and it reopened Wall St to the hotel industry.
In 1999 he formedCitadel Realty Advisors as a successor to Ross Properties Corp., which focuseson all types of real estate investment banking. This includes raising equity,mezzanine capital and debt for individual properties as well as entities, andadvising individuals on the formation of new entities for which he then raisedthe equity funding. In addition to the US, Citadel has arranged the financingfor numerous office and industrial transactions in the UK and Paris. He hasclosed over $3.0 billion of financings for office, hotel, retail, land andmultifamily projects.
Mr. Ross was co-master developer for a 240 acrebrownfield mixed use development in Sacramento, CA., while continuing theinvestment banking practice in New York. He was also a founder of Market StreetInvestors, a brownfield land development company.
Mr Ross is also involved in the acquisition of notes on defaulted loans andvarious REO assets in conjunction with several major investors.
Mr. Ross has servedas an expert witness in eight court cases testifying on debt structures,interest rates, markets and development. He was an adjunct professor in thegraduate program at the NYU Hotel School. He is a member of Urban LandInstitute and was a member of the leadership of his ULI council. In 1999, heconceived and co-authored with PricewaterhouseCoopers, the Hotel MortgagePerformance Report, a major study of hotel mortgage default rates.
Mr. Ross is a graduate of the Wharton School andserved two tours in Vietnam with the US Navy.
