I received a flurry of inquires the other day when Ben Bernanke mention the word ?sterilization? in his recent congressional testimony. And he wasn?t giving advice to the country?s wayward teenaged girls, either.
Sterilization refers to a specific style of monetary policy. Sterilized policies seek to manipulate the money markets without changing the overall money supply. The Fed implemented just such a strategy last summer when they initiated their ?twist? policy. This involved buying 10, 20, and 30 Treasury bonds and selling short an equal amount of short term Treasury bills.
The goal here was to force investors out of the safety of Treasury bonds and into riskier assets like stocks, commodities, and real estate. Given the market action since then, I?d say that he at least partially succeeded.
Dollar for dollar there is no change in the Fed?s balance sheet when sterilized actions are undertaken, although there is a huge increase in the risk profile of their portfolio. A private institution would be insane to do this at this stage of the economic cycle, as the risk of capital loss is great. But governments are exempt from mark to market rules and can carry this paper at cost or par, whatever they want. That?s why we have a central bank.
The Fed is now running up against a unique problem. The twist program is so large that it is literally running out of short term securities to sell. When this happens, they may well resort to 28 day repurchase agreements instead, which are essentially sales of short term paper out the back door. This is what Uncle Ben was attempting to explain to our congressional leaders, which I?m sure went straight over their heads.
The really interesting thing here is why Bernanke is suddenly interested in sterilization? These are the types of polices you pursue to head off inflation. With wages continuing to fall it is difficult to see why this should be an issue.
Maybe he?s looking at the price of gasoline or the stock market instead, which have recently been going through the roof. Perhaps he?s looking several years down the road. The great challenge for the Federal Reserve from here will be unwinding their massive $2.8 trillion balance sheet it build up during the Great Recession without triggering runaway price increases.
If Bernanke does have an inkling of coming inflation it could have huge implications for a security dear to my heart, the (TBT), a leveraged ETF that benefits from falling Treasury bond prices. Although it has been flat lining for the last four months, you better keep this one on your short list. It?s just a matter of time before we get an upside breakout.
For an excellent explanation of the history of monetary sterilization, please click here.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/03/birth_control_pill_package.jpg266399DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-03-08 23:02:242012-03-08 23:02:24When Sterilization is Not a Form of Birth Control
I am constantly asked if there are any ways investors can take advantage of the collapse of the natural gas market, where at $2.34/MBTU prices are plumbing decade lows. I have recently made good money buying puts on the ETF (UNG), but these are not for the faint of heart. They call this contract the ?widow maker? for a good reason.
You don?t want to touch the gas producing companies, like Chesapeake (CHK) and Devon (DVN), because prices are probably going to stay down for years. Good firms that benefit from the increased volume of gas pumped are few and far between. Unless you are a large consumer of this despised molecule, such as an electric power company or a petrochemical plant, it is tough to find a profitable niche.
However, there is one company that delivers a narrow rifle shot that could do extremely well in coming years, and that is Cheniere Energy (LNG). I first started following (LNG) a decade ago when I was still wildcatting for CH4 in the Texas Barnet Shale.
Back when natural gas was trading at a loft $5/MBTU, Qatar invested $50 billion in in developing its own substantial gas resources. The plan was to liquefy the gas at -256 degrees Fahrenheit in the Middle East, ship it to the US in a fleet of specialized LNG carriers, and have Cheniere convert it back into gas at its Sabine River plant for distribution to an energy hungry US market through the Creole Trail pipeline. It all looked like a great plan, and (LNG) shares traded up to $45.
Then ?fracking? technology came along and blew up the entire model. The discovery of a new 100 year supply of gas under our feet caused gas prices to crash from a post Amaranth peak of $17/MBTU down to $2/MBTU. Any plans to import LNG from the other side of the world were rendered utterly worthless. Chenier?s billion dollar investment in a gasification plant was now worth only so much scrap metal. (LNG) shares plumbed low single digits as the firm flirted with bankruptcy.
Enter China. The Middle Kingdom?s voracious demand for energy in this recovery has caused the price of oil to soar from a 2008 low of $30 to $110. Despite accounting for an overwhelming share of the world?s new energy purchases, Chinese cities are suffering from brown outs due to power shortages. This is why China is resisting immense American pressure to quit buying Texas tea from Iran.
Enter the arbitrage. While oil has been spiking, gas has been crashing. Gas is now selling at 15% of the cost of oil on an adjusted BTU basis. Another way of saying this is that you can buy oil for $16 a barrel instead of $110. It only takes a second with an abacus to understand the appeal of such a disparity.
Gas also has the additional benefits in that it is much cleaner burning than crude, lacks the sulfur and nitrogen dioxides, and produces half the carbon dioxide. That?s a big deal in Beijing where the air is so thick you can cut it with a knife on a bad day.
Enter the long term contracts. During the 1960?s and 1970?s Japan entered into huge long term contracts to buy LNG from Australia and Indonesia to feed their own economic miracle of the day. Because very expensive, hard to get or offshore supplies were tapped, the price was set at $16/MBTU. Those contacts are now expiring. Do you think they?ll renew at the old price, or go to Cheniere for the $2 stuff. Gee, let me think about that one for a bit.
Enter Fukushima. The nuclear meltdown last March prompted Japan to shut down 49 of 54 nuclear power plants that accounted for 25% of the country?s electric power generation. The brownouts that followed forced a sweltering summer on millions as the government urged consumers to shut off air conditioners to save juice. Power companies there have been scrambling to obtain conventional energy supplies, and have been a major factor in driving oil up from $75 to $100 since the fall. Cheap gas supplies from the US would meet this demand nicely.
The trigger. Last May, Cheniere got US government permission to export 2.2 billion cubic feet a day for 20 years. That would require it to convert the existing gasification plant to a liquifaction plant, something that can be done with some expensive re-engineering. It has already found several large international buyers to take delivery of the new end product. All that was missing was the money to finish the plant. My hedge fund buddies have been accumulating this stock since October, when it bottomed at $3, expecting an angel investor to appear. But it was one of those ?someday, it might happen? kind of stories better lead to long term players.
Then last week, Blackstone jumped in with a beefy $2 billion investment in Cheniere. That will enable them to obtain an additional $3 billion in debt financing needed to finish the first of two export facilities. They are now expected to come online in 2016.
How does Cheniere stack up as an investment? Frankly, it is kind of scary. The market cap is only $2 billion, and it pays no dividend. When the current spate of deals are done, it will have $5 billion in debt. The Stock has just run up from $3 to $17. And these facilities are dangerous to operate. One blew up in Texas in 1937 and killed 300 schoolchildren. As a result, local permits for these are very hard to come by.
But as you can see, a whole host of geopolitical, technology and economic strands tie together in this one company, all of which are positive for the share price. If the story comes true, as Blackstone hopes, then there could be a double or triple in the shares for the patient. To learn more about Cheniere Energy, please click here for their website at http://www.cheniere.com/default.shtml.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/03/gas.jpg246400DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-03-07 23:02:352012-03-07 23:02:35Take a Look at Cheniere Energy (LNG)
I managed to catch a few comments in the distinct northern accent of Jim O'Neil, the fabled analyst who invented the 'BRIC' term, and who has been kicked upstairs to the chairman's seat at Goldman Sachs International (GS) in London.
Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them. As I have been pushing emerging markets since the inception of this letter in 2008, this is music to my ears. By 2018 the combined GDP of the BRIC's; Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), will match that of the US. China alone will reach two thirds of the American figure for gross domestic product. All that requires is for China to maintain a virile 8% annual growth rate for eight more years, while the US plods along at an arthritic 2% rate. China's most recent quarterly growth rate came in at a blistering 8%.
?BRIC? almost became the 'RIC' when O'Neil was formulating his strategy a decade ago. Conservative Brazilian businessmen were convinced that the new elected Luiz Ignacio Lula da Silva would wreck the country with his socialist ways. He ignored them and Brazil became the top performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
This is not to say that you should rush out and load up on emerging markets tomorrow. The entire asset class is still digesting its grim performance in 2011, which saw the average BRIC stock market fall 20%, and there may be some work to do here. American big cap stocks are the flavor of the day, and as long as this is the case, emerging markets will continue to blend in with the wall paper. Still, with growth rates triple or quadruple our own, they will not stay ?resting? for long.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-02-16 23:03:522012-02-16 23:03:52The Long View on Emerging Markets
If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.
Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world's population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.
Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don't have any, and will easily double the end cost of water to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in concentrated form.
The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the 2008 US stimulus package was similarly spent. It says a lot that when I went to the University of California at Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!
At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 14% since the October low. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world's greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-01-23 23:03:182012-01-23 23:03:18Why Water Will Soon Become More Valuable Than Oil
Every time the price of oil spikes, we learn vast amounts of information about the global reach of this indispensable commodity. It's like taking a non-core elective in geology at college. So I was fascinated when I found the chart of relative sector winners and losers below.
No surprise that energy does best from sky high crude prices. It is followed by telecommunications and health care. You would also expect consumer discretionary stocks to take it on the nose, as high energy prices almost always lead to a cyclical downturn in the economy. Who is the worst performer of all? Europe, which makes the recent weakness even more understandable.
Europe Will be the Biggest Loser from High Oil Prices
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-01-23 23:02:552012-01-23 23:02:55Who Expensive Oil Hurts the Most
I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my eleven month return on capital comes close to 1,000%. I also like buying flood insurance in the middle of the summer when the forecast here in California is for endless days of sunshine. That is what we are facing now with the volatility index (VIX) where premiums have just broken under 20%, a six month low. The profits you can realize are spectacular.
The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index, which has been melting since the ?RISK OFF? trade peaked in early October. You may know of this from the talking heads, beginners, and newbies who call this the ?Fear Index?. Long term followers of my Trade Alert Service profited handsomely after I urged them to sell short this index with the heady altitude of 47%.
For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation. You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?
For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story. Class dismissed.
The (VIX) is expressed in terms of the annualized movement in the S&P 500. So today?s (VIX) of $19 means that the market expects the index to move 5.5%, or 72 S&P 500 points, over the next 30 days. You get this by calculating $19/3.46 = 5.5%, where the square root of 12 months is 3.46. The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 5.5%, you make a profit on your long (VIX) positions.
Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 5.5% range. I am going into this detail because I always get a million questions whenever I raise this subject with volatility deprived investors.
It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.
But wait, there?s more. Now, erase the blackboard and start all over. Why should you care? If you buy the (VIX) here at $19, you are picking up a derivative at a nice oversold level. Only prolonged, ?buy and hold? bull markets see volatility stay under $20 for any appreciable amount of time.
If you are a trader you can buy the (VIX) somewhere under $20 and expect an easy double sometime this year. If you are a long term investor, pick up some (VIX) for downside protection of your long term core holdings. A bet that euphoria doesn?t go on forever and that someday something bad will happen somewhere in the world seems like a good idea here.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-01-22 23:04:492012-01-22 23:04:49Buy Flood Insurance With the VIX
If demographics is destiny, then America?s future looks bleak. I have long been a fan of demographic investing which creates opportunities for traders to execute on what I call ?intergenerational arbitrage?.? When the numbers of the middle aged are falling, risk markets plunge. Front run this data by two years, and you have a great predictor of stock market tops and bottoms that outperforms most investment industry strategists.
You can distill this even further by calculating the percentage of the population in the 45-49 age bracket. The reasons for this are quite simple. The last five years of child rearing are the most expensive. Think of all that pricey sports equipment, tutoring, braces, first cars, first car wrecks, and the higher insurance rates that go with it.
Older kids need more running room, which demands larger houses with more amenities. No wonder it seems that dad is writing a check or whipping out a credit card every five seconds. I know, because I have five kids of my own. As long as dad is in spending mode, stock and real estate prices rise handsomely.
As soon as kids flee the nest, this spending grinds to a juddering halt. Adults entering their fifties cut back spending dramatically and become prolific savers. Empty nesters also start downsizing their housing requirements, unwilling to pay for those empty bedrooms, which in effect, become expensive storage facilities. This is highly deflationary and causes a substantial slowdown in GDP growth.? That is why the stock and real estate markets began their slide in 2007, while it was off to the races for the Treasury bond market.
The data for the US is not looking so hot right now. Americans aged 45-49 peaked in 2009 at 23% of the population. According to US census data, this group then began a 13 year decline to only 19% by 2022. Using my two year ?front running? rule, the bear market in equities that started in 2007 will last all the way until 2020. This is a major reason why I am predicting a second ?lost decade? of sluggish 2% GDP growth for the US, and why our stock market could remain trapped in a broad range for much of this time.
You can take this strategy and apply it globally with terrific results. Not only do these spending patterns apply globally, they also back test with a high degree of accuracy. Simply determine when the 45-49 age bracket is peaking for every country and you can develop a highly reliable timetable for when and where to invest.
Instead of poring through gigabytes of government census data, my friends at HSBC Global Research, strategists Daniel Grosvenor and Gary Evans, have already done the work for you. They have developed a table ranking investable countries based on when the 34-54 age group peaks?a far larger set of parameters that captures generational changes. The numbers explain a lot of what is going on in the world today. I have reproduced it below. From it, I have drawn the following conclusions:
* The US (SPX) peaked in 2001 when our first ?lost decade? began.
*Japan (EWJ) peaked in 1990, heralding 20 years of falling asset prices, giving you a nice back test.
*Much of developed Europe, including Switzerland (EWL), the UK (EWU), and Germany (EWG), followed in the late 2,000?s and the current sovereign debt debacle started shortly thereafter.
*South Korea (EWY), an important G-20 ?emerged? market with the world?s lowest birth rate peaked in 2010.
*China (FXI) topped in 2011, explaining why we have seen three years of dreadful stock market performance despite torrid economic growth. It has been our consumers driving their GDP, not theirs.
*The ?PIIGS? countries of Portugal, Ireland (EIRL), Greece (GREK), and Spain (EWP) don?t peak until the end of this decade. That means you could see some ballistic stock market performances if the debt debacle is dealt with in the near future.
*The outlook for other emerging markets, like Russia (RSX), Indonesia (IDX), Poland (EPOL), Turkey (TUR), Brazil (EWZ), and India (PIN) is quite good, with spending by the middle age not peaking for 15-33 years.
*Which country will have the biggest demographic push for the next 38 years? Israel (EIS), which will not see consumer spending max out until 2050. Better start stocking up on things Israelis buy.
Like all models, this one is not perfect, as its predictions can get derailed by a number of extraneous factors. Rapidly lengthening life spans could redefine ?middle age?. Personally, I?m hoping 60 is the new 40. Immigration could starve some countries of young workers (like Japan), while adding them to others (like Australia). Foreign capital flows in a globalized world can accelerate or slow down demographic trends. The new ?RISK ON/RISK OFF? cycle can also have a clouding effect.
Still, it does present an intriguing framework for analyzing the international investment scene. In the meantime, I?m going to be checking out the shares of the matzo manufacturer down the street.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-01-17 23:02:062012-01-17 23:02:06Demographics as Destiny
Call me a nerd, but instead of spending my Sundays watching the NFC playoffs, I pour over data analyzing the monetary aggregates. This is so I can gain insights into the future performance of assets classes. What I am seeing these days is not just unusual; it?s bizarre. Call it a double reverse, a Hail Mary, and a Statue of Liberty all combined into one.
You can clearly see the impact of QE2 at the end of 2010 on the chart below, which caused the monetary base to explode and triggered a six month love fest for all risk assets. Hard asset prices, like energy, commodities, the grains, and precious metals did especially well, leading to fears of resurging inflation. This prompted the European Central Bank to commit a massive policy blunder by raising interest rates twice. The US dollar (UUP) was weak for much of this time.
When quantitative easing ended in June, not only did the base stop growing, it started shrinking. Hard assets rolled over like the Bismarck, and gold peaked in August. No surprise that when you take away the fuel, the fire goes out. And guess what else happened? The dollar began an uptrend that continues unabated.
So what happens next? Given the continuing strength of the economic data, I think that the prospects of a QE3 have been greatly diminished. Not only has it been taken off the back burner, the flame has been extinguished and the pot put back into the cupboard.
Needless to say, if this trend continues it will have a deflationary impact on the global economy as a whole,? and ?RISK ON? assets specifically. This is great news for the dollar. It?s simply a question of supply and demand. Print fewer dollars and you create a supply shortage, forcing bidders to pay up. This augurs poorly for the non-dollar currencies, especially the Euro (EUO), which you should be heavily short. What! I?m already short the Euro? Fancy that!
Those who lived through the cataclysmic ?flash crash? that occurred precisely at 2:45 pm EST on May 6, 2010, have been dreading a replay ever since. Their worst nightmares may soon be realized.
That is when the Dow Index (INDU) dropped a gob smacking 650 points in minutes, wiping out nearly $1 trillion in market capitalization. On that day, some ETF?s saw intraday declines of an eye popping 75% before recovering. A flurry of litigation ensued where many sought to break trades as much as 90% down from the last indication, some successfully.
The true reasons for the crash are still a matter of contentious debate. Many see a smoking gun in the hands of the high frequency traders who account for so much of the daily trading volume. But I happen to know that many of these guys pulled the plugs on their machines and went flat as soon as the big move started.
I think that it was the obvious result of too many people following similar models in markets with declining liquidity. The ease of instant execution through the Internet was another contributing factor. It also could be a symptom of no growth economies and lost decades in the stock market. The increasing short term orientation of many money managers also played a hand.
Mathematicians who follow chaos theory and ?long tail events? known as ?black swans? argue that the flash crash was not only inevitable, it was predictable. They are also saying that the next one could be far worse.
Since then we have suffered several mini flash crashes. These include the recent $200 collapse in gold, a $5 plunge in silver, a five cent gyration in the Euro, and a ten cent gap in the Swiss franc. Notice that these ?flash? events only happen on the downside, and that we don?t have flash melt ups.
In many respects, traders and portfolio managers dodged a bullet on that fateful day. What if it had happened going into the close? Then assets would have been marked to market less $1 trillion, and the Asian openings that followed hours later would have been horrific. This could have triggered a series of rolling flash crashes around the world from time zone to time zone that would have caused several trillion more in losses. Those losses eventually did happen, but they were spread over several more months at a liquidation rate that could be absorbed by the markets.
Regulators claim that they have reduced the risks of a flash crash through the enforcement of daily trading limits across a broader range of financial instruments. I am not so sure. During a real panic, preventing people from unloading risk is almost an impossible feat. I know because I have lived through many of them.
In the meantime, the S&P 500 continues its inexorable rise well above the exact point at which the last flash crash started, at 1,160. We are now 10% above that last flash point. Avoid, like the plague, shorting leveraged naked puts on anything.
If you really want to get a read on how ?the 1%? are faring these days, take a ski vacation to the tony hamlet of Incline Village on the pristine shores of Nevada?s Lake Tahoe.
Each morning, I trekked to Starbucks, one of the few local sources for the Wall Street Journal and the New York Times. There, trophy wives line up to buy their chai tea lattes, all tall, thin, and blonde, wearing designer sunglasses and snow boots, as if produced from a Gucci cookie cutter. The parking lot is jammed with Range Rovers and Cadillac Escalades.
Keeping up with the Jones?s here on fabled Lakeshore Drive can be quite a task, especially when they are populated by such names as Oracle?s Larry Ellison, casino mogul, Steve Wynn, and Saudi arms dealer, Adnan Kashoggi. Ellison alone is thought to have poured $200 million into his mountain retreat. Some of these compounds offer private beach lodgings for bodyguards and dog groomers. Junk bond king, Michael Milken, springs for the cost of the town?s annual Fourth of July fireworks display as it coincides with his birthday.
In the ultimate feat of hubris one upsmanship, one billionaire is converting the profits from his check cashing business to build a $150 million, 36,000 square foot residence that looks like a convention center. He has ruffled the feathers of locals by chopping down every ancient pine and cedar tree on the property to max out the square footage, violating multiple town ordinances. Who knew that cashing checks was so profitable?
In fact, lakefront Incline boasts one of the few neighborhoods in the US that has held up reasonably well during the real estate crash, with six properties changing hands at $1,000 a square foot in the last year. I guess they?re just not making beachfront property any more. Current listings include a 3 bedroom, 2 bath bungalow for $49.9 million and a 8,694 square foot palace for $43 million. If you are looking for a real bargain, check out the five bedroom French castle at www.inclinecastle.com for $22.85 million. As with the large diamond shortage I have written about previously, this is further evidence that the rich are getting richer at an accelerating rate.
The land here was originally owned by one of the Comstock silver barons of the 1860?s. You may recall it as the location of the TV series ?Bonanza? and I?m sure that every female reader will remember ?Little Joe?. A development company subdivided the land during the 1950?s with the intention of creating a Palm Springs in the mountains, spurred on by the completion of Interstate 80 as part of the infrastructure demanded by the 1960 winter Olympics at nearby Squaw Valley.
Devoid by edict of the down market fast food chains that afflict most of America, Incline boasts two municipal golf courses, where at 6,300 feet, the air is so thin that your drive travels an extra 50 yards. If you want a Big Mac, you have to travel down the road to California-- if the road isn't blocked by snow.
Incline is also a Mecca for libertarian millionaires drawn by the absence of a state income tax. Unfortunately, they also possessed the financial sophistication to buy gorgeous mountainside homes, extract cash-out refi's all the way up, invest the proceeds in the stock market, and lose it all in the subsequent crash.
The result has been a meltdown of Biblical proportions in the housing market. Of the 8,000 homes in the village, 400 are for sale at distressed prices and another 400 or more discouraged sellers hang over the market. Brokers report a brisk business in bank owned short sales, foreclosures, and sales on the Washoe County Court House steps for homes worth less than $800,000 at prices down 60%-70% from the 2006 peak.
Jumbo financing is now an extinct species, unless you're happy to pay a 200 basis point premium over conventional loans. So the middle market, where homes are priced from $1 million to $4 million, has ceased to exist. Only cold, hard cash talks here. But high net worth individuals hate tying up capital in an illiquid asset when more attractive options abound. Precious metal coins are especially popular in the Silver State.
I am sad to report that antidepressant addiction among realtors in Incline Village is at epidemic proportions, since they don?t have anything to sell to the 1%. Some of their properties have been on the market so long that snow drifts have collapsed balconies, the local wildlife have moved in, and prospective buyers are scared away by offensive odors. Break-ins by black bears have become a serious problem, leaving basketball sized poops on the living room floor.
Abandoned homes see their pipes freeze and burst, causing irreparable damage. In Las Vegas, foreclosed homes can be easily spotted from the air by their dead lawns and green swimming pools. In Incline the 'tells' are the ten foot high mountains of frozen snow dumped there by snow plows, blocking entry. I guess all real estate markets really are local.
Owners used to be able to cover half their annual carrying costs by renting out their properties during Christmas and New Year's, and for a few weeks in the summer. Unfortunately, that market has collapsed also. There are not a lot of high rollers willing to fork out $10,000 a week for a vacation rental in a recession.
If you are one of the 99%, I?d think again before buying a vacation home any time soon. The only consolation is that conditions are much worse in Las Vegas. The optimists concede that prices could stay down for another decade. The pessimists can already be found at the bottom of the lake with the Godfather's Fredo Corleone, another former resident of Incline Village.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/01/incline2x.jpg240320DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-01-03 21:02:172012-01-03 21:02:17Rubbing Shoulders With ?The 1%? at Incline Village
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