Lead Story… A major leak of over 11 million documents from a sketchy Panamanian law firm that specializes in helping people launder money through offshore shell corporations is casting light on one of the sources of demand for high end real estate in Miami. The list of clients included politicians, drug lords, celebrities, billionaires and some very close associates of one Vladimir Putin. NSA whistle blower Edward Snowdon called it the “biggest leak in the history of data journalism.” We posted a piece a couple of weeks ago about how the downfall of Swiss bank secrecy (ironically pushed by the US) was turning US real estate into a haven for money laundering due to a lack of oversight when it comes to all-cash transactions. The Mossack Fonseca law firm helped clients set up offshore shell companies in countries with lax oversight laws which then become vehicles to purchase real estate in NY or Miami where the true owner is obscured. The US Treasury Department is getting concerned and recently started cracking down on shell companies purchasing high priced units in Manhattan and Miami. Why is this concerning? First off, it appears that a lot of this is dirty money: political graft, drug money, cash from arms sales, illegal business, etc. Second, it only serves to drive up costs for would-be homeowners by taking units off the market in cities where inventory is already tight. Just in case you were wondering, this is not just a Miami issue. It’s happening in Irvine (mostly Chinese money) and New York (Russian money) as OC Housing News astutely pointed out as well as pretty much every high priced coastal city. Consider this yet another factor that is hurting affordability in expensive cities.
Broken Clocks: Talking heads and pundits are constantly calling for a recession for one reason or another. However, as Bloomberg’s Barry Ritholtz notes, the conditions for one to occur simply aren’t present at the current time:
We can create a basic checklist to tell when an economic expansion cycle has begun to have run its full course:
● Full employment (check)
● Wage gains (hardly present)
● Inflation (1.7 percent is far below recession levels)
● And last, an aggressive Federal Reserve tightening that takes interest rates too high. We are now at a mere 0.25 percent, perhaps going to 0.50 percent — hardly soul-crushing rates.
Thus, while we can easily imagine the necessary conditions for the beginnings of a recession, they are for the most part simply not present.
The Big Squeeze: A new type of student debt puts the onus of repayment 100% on parents rather than students.
Conflicting Messages: REITs have become net sellers (h/t Scott Barnard) of assets while foreign investors and private equity are taking up the buying slack. CBRE is saying that fundamentals are strong and they believe that the market is on solid footing (h/t Eric Snell). However, there are a couple of significant developments to keep an eye on. Historically, when private equity investors and foreign investors are buying while REITs are net sellers it is a contrary indicator that the market is near a top. In addition, REIT yields are now below those of Baa bonds, (even when train-wreck energy and commodity company corporate debt is excluded) which they historically trade at a premium to. Again, this is not exactly a positive indicator historically. A bull might point to the fact that the corporate bond market has been chaotic of late and that foreign investors are buying for different reasons this time around, primarily as a tax shelter in a stable country. However, there is some mounting evidence that we might be in for some turbulence.
Struggling: Home builder stocks are taking it on the chin despite an economic environment that, at least on the surface should be favorable.
Don’t Call it a Comeback: Homes in the Rust Belt have largely been a dead asset in recent years as population has fallen and economic growth has been sluggish, keeping housing prices low. However, shortages in certain key Mid-West markets could foreshadow an uptick in prices.
The Breaking Point: With venture capital investment waning and tech firms announcing layoffs, some tech workers in the Bay Area in particular and San Francisco in general are leaving town to get away from $4,500 per month rents and home prices well over $1MM. Thus far, Portland, San Francisco, Austin and even LA appear to be the beneficiaries as workers realize that there isn’t any point to paying that much if you don’t have the stock options to go along with it.
The Juggernaut: As we noted on Tuesday, Tesla pre-sold sold over 276,000 new Model ‘s for 2017 delivery (update: they are now over 325,000). As a point of reference for how huge this is, Audi only sells about 180k new cars a year in the US across all model lines. Despite some concern about Tesla’s capacity to manufacturer that many cars in such a tight time frame and then provide service, this is a game changer. So far, sales of electric cars have been a niche product measured in thousands of sales a year rather than hundreds of thousands. Tesla has now proven that the electric car can and will have mass appeal in the United States. In the meantime, they are using their cars as a platform to develop battery technology that will be used as a greener power plant for homes and businesses in the future. There is one other aspect to Tesla that I find fascinating: it’s an American company building a luxury car that can compete with any luxury brand in the world. When’s the last time that happened? Old school auto makers like GM, Ford, etc. have needed to appeal to a buyers patriotism to sell cars to American consumers. Why? Because the inferior products that they were building couldn’t compete against superior products from Japan and Germany on their own. Tesla not the only can compete, it is winning. On top of that, it doesn’t need a gimmicky patriotic marketing campaign to pull it off.
A Sucker Born Every Minute: Frank Bruni of the NY Times wrote a great satirical piece as an April Fools Day joke last week claiming that Stanford dropped it’s already record-low admission rate to 0% by not admitting any students to it’s class of 2020. Right on cue, a lot of people on the internet fell for the joke because a lot of people on the internet are idiots. (h/t Tom Reimers – a Stanford alum)
Frivolous: A group of Patriots fans is suing the NFL for taking away their teams’ 2016 1st round draft pick as a penalty for Deflate Gate. This is the end result when sports fans don’t have a life outside of their team. I wish that they posted a picture of the fans who are suing with the article. I’m guessing that they look like the Patriots equivalent of this.
Chart of the Day
Revenge Stinks: A Swedish man was arrested after a woman called the police on him for “revenge farting” in her apartment and leaving a disgusting smell after she declined to sleep with him.
Seems Reasonable: A Stockton, CA man is in police custody after he attacked a man with a knife on his front yard. Why, you ask? The man was pooping on his lawn.
Wimps: A British gym recently put up a billboard with a picture of an alien encouraging people together in shape because, aliens will go after fat people first when they land on earth. Right on cue, easily offended presumably chubby folks got offended and called for the sign to come down because it hurt their feelings. That sound that you hear is the worlds smallest violin in the world. Maybe if they spent the time wasted on complaining working out at the gym, they wouldn’t have an issue. Just sayin’.
Landmark Links – A candid look at the economy, real estate, and other things sometimes related.
Visit us at Landmarkcapitaladvisors.com