November 2009 - Is it time to buy the US?
I have just received a tempting offer to buy properties in Florida at
distressed prices with a view to collecting some rent for the next 2/3
years and then selling the properties on for a nice uplift in price.
The question is: Is this a good deal?
I dont have the details of the actual properties for sale. However, I
do know I can buy properties in the US for $1. I have advertised one
such on the Unique Property site already, and I have, for the past 18
months, featured auction properties at bid prices of less than $1,000.
Everything I have featured has come in at less than $10,000, which is
about £6,000. There is no denying it, homes are cheap in the US.
But are things going to get any better in the next 2/3 years?
If there is a good rental return then that's fine, do all the deals you
can, if you can keep an eye on those deals from 3000 miles away. If you
are looking for a capital gain after three years, then think again.
There are a lot of very obvious things that are screaming out. Only
someone totally deaf would not hear the screams.
1 The US has the largest economy in the world. That is not
going to vanish overnight. Britain went down the pan over the course of
about fifty years. The Roman empire took about 300 years to go to the
dogs. These things dont happen overnight. But the US is going to get
smaller, and slower. Why climb onto a train that is slowing down?
Especially when there are other trains racing ahead, like Brazil,
India, China, Korea, etc.
2 Look at a chart of the dollar. It has lost roughly 50% of
its value against the euro over the course of a decade. I mean, heck,
that is seriously bad. Look at its value against the small but stable
swiss franc; a similar drop of 50%. In fact, how about looking at it
over the past 40 years? If you are making money, and then when you come
to repatriate it, the currency has lost half its value, how much profit
have you
really made?
Look at it this way. You buy a house for
$20,000. Let us say it doubles in value over the next three years. I
shall show below that is very unlikely, but let's go with it for a
moment. You now have $40,000 to repatriate. If the dollar has lost,
say, 25% of its value in that time, you will only be repatriating the
equivalent of $30,000. Now take off the taxes on your profit, which are
likely to be another 25% as you are taking money out of the country,
which the US government doesn't like. Ooops! You have now lost another
$5,000. Is the profit worth the risk? Supposing the $ drops more. Look
at that
currency chart again.
3 Now have a look at this chart, which shows mortgage
resets.
This is a chart showing how many mortgages which were taken out with
low teaser interest rates that will reset to considerably higher rates,
and it shows when they reset. What do you think that will do to the
housing market over the next 5 years? Note: there are more of these to
come than the original subprimes, and they spread out over a longer
period, and they keep re-setting till the end of 2012. Give it another
year or two for that pain to work through to bankruptcy, and you have a
housing meltdown until 2014 at least. You may make money on rentals,
but there wont be a capital gain in three years. Taking a bet on that
is a no-brainer.
4 There are 30 million people in the US dependent upon
state handouts. That's almost equivalent to the whole population of
Spain. 18% of the population are unemployed (that's including those
whose benefit entitlement has run out). Tax revenues are down by a
similar amount. Welfare costs going up while government receipts are
going down.
It's a classic crunch scenario. Anyone who cant see this isn't looking,
and deserves to go bust investing in this complete disaster zone. In
the area so loved by the British; Florida, the unemployment level is
officially 11.2%, which is dreadful. The real rate is twice that. How
can people pay for anything in a state where one in five people is out
of work?
5 Government finances simply dont stack up. The amount that
is owed is so huge it is impossible to grasp. Those debts are
escalating. The US debt has doubled in the last few years, twice. You
cant go on like that. At least half the debt is unfunded, and half the
rest is only funded by assets the state cant sell. Within the next two
or three years the interest payments on that debt will take up a
suicidal amount of tax receipts. The only way out from that scenario is
to print money. The money supply has already gone up nearly 50% since
this debacle started. When that money actually hits the streets it will
cause hyperinflation. That means the currency value will plummet. When
that will happen is anybody's guess, but it has to happen sometime in
the next 3-10 years unless the world does a complete flip.
6 Not convinced? The US has $2.5 trillion in borrowing to
repay within the next 12 months. It aint got the money, so what's
the next move? With money going out faster than it's coming in, the
situation a year down the road will be worse not better. You cant keep
rolling over debt for ever. Something's gotta give. I dont know what
will give first, but it wont be pretty, and certainly not for the
housing market.
7 Not convinced? It now costs $2 input into the system to
get an extra $1 dollar out. Does that sound like a good economic model?
8 Let me put it another way: would you lend someone your
life savings if they had a credit rating like that? Or would you run?
People are going to get seriously burnt here.
9 The euro has, over the course of a decade, gone from
being nothing, to being used for almost 40% of world trade. That trend
will increase. Once the percentage goes above 50, the dollar will be
finished as a reserve currency, and there will be a flight from it, and
it will crash. Of course, that may take another decade, or even more. I
dont know. But I do know Brazil, Russia, China, and other countries are
all clammering for the dollar to be replaced by a basket of currencies
for international trade. Already deals are being done that bypass the
dollar, and other deals are being done using such a basket of
currencies. The countries that are pushing for these changes are the
ones who are the strongest financially, and, in case you hadn't
noticed, money talks.
10 The US has only three ways out of its mess: the first
does not seem to be an option altho it is the only sane way out, and
that is to cut spending to the bone, and put up with a hard decade, and
work their way out. They could do it. A few more people could have
voted for Ron Paul, only they voted for the Hollywood smile of that
buffoon Obama. And so the government is intent on spending money it
doesn't have to prop up financial cronies and dead-beat companies. When
times are tough it's the dead-beat companies that should go to the wall
leaving space for new faces. That isn't happening. That will mean it
will take much longer than it should for things to start improving.
The second way out is to keep borrowing through the sale of government
bonds. That is working at the moment, but two things are problematic
here. The first is that the more you borrow, the more you are owned by
the lender. Foreign lenders already own 44% of the US debt. At the rate
things are going, foreigners will own more than 50% of the US within
the next five years. Once the figure reaches 55% I would say you have
the scene set for all-out revolution. After all, how can a country
function when it is owned by a collection of foreign governments?
The third way out is to devalue the currency, and default on the debts.
If the US defaults then that is the end of the dollar as reserve
currency. And I mean that happens almost overnight. They would then be
forced to borrow at competitive rates, which means much higher interest
rates, and the country would be forced onto itself because it would no
longer be able to borrow and would therefore no longer be able to
trade, as no-one would accept their currency.
11 Such a situation will bring down the Caribbean
currencies as well, as they are tied to the dollar. They will try to
decouple, but that will be nigh-on impossible. Where do the Bahamas buy
their tea and coffee, their concrete blocks, and cement? Through Miami
just across the water. They are an extension of the US.
Finally, have a look at the previous
newsletter for a few statistics on US housing. They are bleak
indeed.
I see this mess unfolding ever worse over the course of the next 10
years. I also see the euro strengthening further, simply because, as a
currency of international trade it will be used more, and therefore
needed more. Need pushes up the price. Hold your assets in currencies
that will appreciate: euros, renmimbi, brazilean reales.
America is sleepwalking into a total breakdown. Will it wake before it
goes over the edge? Who knows, but I dont want to invest in a country
that is in the middle of a serious nightmare.
I'll tell you when the time is right to buy into US real estate. It
doubt very much whether it will be before 2015.
john clare. November 2009.
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