Just when you think American finance can't possibly get any more bizarre... Our government is now proposing to finance large-scale Chinese government purchases of U.S. real estate. No, I'm not making it up.
China Investment Corp. (CIC), China's $300 billion sovereign wealth fund, is considering buying huge swaths of distressed U.S. real estate, via the U.S. government-sponsored Public-Private Investment Program (PPIP). PPIP, you may recall, was created to rid banks of toxic mortgage assets by luring private investors to buy the assets with financing from the U.S. government. CIC is in talks with BlackRock, Invesco, and Lone Star Funds about buying real estate assets – including commercial mortgage-backed securities. Because most of the equity in these buildings has disappeared, buying the debt and foreclosing is the easiest way to gain control of the real estate.
Just take a minute and think about this... First, for the last 20 years, we've filled China's coffers with our paper receipts (dollars). In exchange for several future generations of savings, we got cheap furniture, children's toys, and electronics we didn't deserve. Now, we're going to finance – with future generations of taxes – China's purchases of our trophy properties. What can I tell you? I often feel like I'm the only sane man in a world gone mad. My wife tells me I'm the crazy one. But this? How will I possibly explain this to my children and grandchildren?
Having just moved into a new home in Miami, I have a new appreciation for the real estate opportunities here. Development is clearly moving up the beach. For the last 20 years, developers focused south of 20th Street. But now, the best available beachfront properties are all north of 20th.
About a dozen new huge developments have been built over the last several years (Setai, Fontainebleau, Gansevoort, The Palms, etc.). And they are still building. The market for beachfront property wasn't crushed like the other types of buildings. And plenty of huge lots are still available – like the one below. The photo doesn't show how far this particular building sprawls to either side, but it is enormous. Someone is going to make a fortune buying and flipping these vacant properties. How? Simple: Gambling. Gambling will come to Miami in the next five or 10 years. And the strip here will run from Lincoln Road north to the Fontainebleau.
Last week, we reported on Warren Buffett teaming up with Leucadia to buy Capmark Financial Group's loan-servicing and mortgage business for $490 million. Capmark is one of the largest U.S. commercial real estate firms. Buffett also bet on housing by increasing his stake in Wells Fargo, the No. 1 U.S. mortgage lender, and buying a Chicago-based real estate brokerage.
Now, word is Berkshire Hathaway will start selling insurance on foreclosed homes and properties that are still occupied to capitalize on banks' fear of neglect and vandalism. Berkshire joins Munich Re, the world's biggest reinsurer, and Australia's QBE Insurance Group in targeting one of the few expanding insurance markets in the U.S. Much like Buffett's investments in Goldman Sachs and General Electric, this is an opportunistic move to take advantage of a supply of foreclosed homes that has quadrupled in three years.
The world's bankers and politicians are in a race against deflation and default. They're fighting back with deficit spending and paper money. I believe they will win for what seems like an obvious reason to me: It's hard to beat a politician in a race to spend other people's money. But I have to give a nod to the deflationists today.
Deflation and default won a leg of the race yesterday when U.S. consumer credit fell a record $21.6 billion (10%) in July to $2.5 trillion. The drop was more than five times larger than economists forecast. And this is the sixth month in a row credit has fallen – the longest decline since 1991. With unemployment nearing 10%, home prices still falling (limiting the amount people can borrow against their homes), and consumer spending on the decline, the only spending engine left is Congress. I believe it's up to the task. And the stock market seems to think so, too. The danger is, of course, what happens to the value of the dollar over the next five or 10 years.
New highs: Annaly (NLY), Market Vectors Gold Miners ETF (GDX), Silver Wheaton (SLW), Silvercop Metals (SVM).
In the mailbag... a fellow Floridian. And a big solar wager. Send us your comments. We read them all – really... feedback@stansberryresearch.com.
"I grew up in Daytona Beach, Florida doing the same stuff... riding up and down the beach, surfing almost daily. I was a lifeguard for several years making $1.75 per hour and all the girls you could meet... I think I would have paid them $1.75 per hour for that job. Graduated from Seabreeze High in 1955 and we used to always beat Winter Park's butt in basketball every year. I now live in Palm Coast and ran into a southern belle from Winter Park High and she remembered me playing basketball against her team while she was a cheerleader... she said she 'hated my guts.' Small world. Graduated from University of Florida and USC." – Paid-up subscriber Jerry Forsythe
Porter comment: Seabreeze was a big Winter Park rival... but I don't recall us losing to them while I was in school. My family's beach cottage was on the very north end of Beacon Street, about a half-mile south of the Ponce Inlet jetties. I'd fall asleep to the light from the lighthouse sweeping through my bedroom and the sounds of the waves breaking about 200 yards east of my bed. My great grandfather bought the lot for peanuts in the 1930s and built the cottage himself. It wasn't much, but it was a great piece of land. I hope to give my children the same kind of memories at our place in Nicaragua.
"I think you are right about not being good at math. It looks like you are saying it cost Spain $615 a watt to put in solar. Probably off by a factor of 100 at least since it is only costing about $6 dollars a watt for residential solar in the U.S. and less at utility scale... Consider that these calculation errors may be influenced by deep seated personal beliefs that are coloring your lenses. The comments about laws of physics appear superficial, where did this information come from? So far I am not giving any credibility to your analysis on this subject." – Paid-up subscriber John Broberg
Porter comment: Yes, my math was wrong. According to our energy analyst, it costs $0.40 per kilowatt-hour in the United States, which puts the costs in Spain at roughly $6 per megawatt-hour, not $600. But keep this in mind: At current prices, you can generate electricity for about $0.01 per kilowatt-hour using either coal or natural gas. So on-grid solar power is 40-60 times more expensive. In places where there's no grid or where building a grid would be extremely expensive, using solar power to generate electricity locally makes sense. After all, some power is better than no power. But trying to power an existing grid with solar panels is simply loony. It will never happen.
If believing that it's foolish for an individual (or a nation) to spend 40 to 60 times too much money for on-grid electricity "colors" my lenses... that's fine. I'll tell you what. I'll happily bet you $100,000 solar energy will never contribute even 10% of the grid power in the United States. We can set the bet to expire at any time period you'd like: 10 years, 15 years, 20 years, whatever. Putting solar power on the grid has to be the stupidest energy idea I've ever seen. It is nothing but a government scam – a scam that nearly bankrupted Spain.
Regarding physics... you don't have to be Einstein to understand the Second Law of Thermodynamics. It's pretty simple really: Energy doesn't flow backward.
"Although I would agree that we probably have a few too many English, philosophy, political science and other 'humanities' majors, exactly where do you think that all of the scientists and engineers and doctors that we so desperately need to try to dig us out of our current mess and keep civilization as we know it functioning will come from if we don't have colleges? It takes many years of education in math and the sciences to reach even a basic knowledge of the fundamentals necessary to perform even an entry level job in most technical fields these days, and years more to be able to do the competent bleeding edge research necessary to advance the state of technology. I don't see the Chinese or the Indians or the Japanese cutting back on advanced college level education, and for good reason. And as for delaying college a few years after high school, while that might lead to more mature students, the ability to learn highly complex fields decreases with age, and throughout the history of science, most major advances have been made by scientists in the early years of their careers. So aside from the problems of getting people to return to school, delaying the start of their technical educations may well be counterproductive in terms of societal advancement." – Paid-up subscriber Robert Churella
Porter comment: Folks who believe the only way to learn things is to attend public schools must have never attended a public school. The best thing we could do for our country today (besides establishing a sound currency and financial system) would be to get the government out of the education business.
Regards,
Porter Stansberry and Sean Goldsmith
Miami, Florida
September 9, 2009