Notes From Weekend Reading

Saw an article in Sunday's New York Times that was so good that it made me want to re-watch the latest Kyle Bass presentation which was so great that I had to take notes. Got that?

So before I get to my comments from the Times' article, let me first give the link to the Bass video (embedding has been disabled for some reason) and share my notes.

AmeriCatalyst 2012: Kyle Bass video

Notes:

Past 10 yrs total credit market debt has grown 10% per yr to $200 trillion.....largest peacetime accumulation of debt in history

War: "economic entropy played to its logical conclusion"

Europe's banks are 3X more levered than US banks, and they've not been re-capitalized yet

Europe has yet to go through the same time of banking crisis that we have. we had a $15 trillion banking system backed by $1 trillion of equity (ex Fannie & Freddie, ex off-balance sheet). US basically recapped its banking system during/after the crisis (using preferred and common equity injections of ~$880B).

Germany:  82% on-balance sheet sovereign debt-to-GDP, and their banks are 340% of GDP and have not been re-capped.

"Anchoring biases" -- "truth" through repetition. Be aware of these and avoid.

Total credit market debt to GDP: historically 250% debt-to-GDP reflects deficit spending heading into a war. US is at 350% debt-to-GDP...and it's peacetime.

No historical precedent for this. Where to from here?

Four largest central banks of the world have $13T on balance sheet, $10T since the start of the debt crisis.

"When your banking system gets to 10X GDP and you lose 3% of your banking system ... you're finished: Ireland, Iceland . . . possibly France soon?"

Non-linearity of debt: when you get to 20-25X debt-to-central government tax revenues, a non-linearity develops between revs and expenses. The question then becomes inflate or default . . . but to try to inflate will cause default . . . expenses grow exponentially verses linear revs. until spending more than revs on interest which equals check mate, i.e., finished.

Others peg Japan's global sovereign debt as a percentage of total government revenues as close to 2000% (20X). Bass says it's 25X.

Japan has all-time low rates (0%) with record spending on interest.

Their current account will be negative by next year, and balance of trade is deteriorating at 2X the rate previously thought. They will be forced to print.

"Pension gap for Japan's fiscal year 2012 will be financed by selling government compensation bonds (new bonds, not JGBs) which will be paid for by future radical reform of the taxation system." Desperate move.

Retail ownership of JGBs is cratering, showing acute distress on behalf of savers

Personal savings rate, which was as high as 18% in 1981, is back below zero.

The globe is about to enter a period of sovereign restructuring . . . a lot of people are going to lose a lot of money

Asian trade: FX reserve accumulation (basically their trade surplus) is now tracking below $100B, last time was 1998 Asian crisis, and never even came close to this low in 2008. Trade is slowing down, along with wages reaching equilibrium. (Is this finally a Chinese internal consumption indicator instead?)

China: its banking system has expanded by 50% of GDP 3 years in a row. $23T equivalent injection into US banking system. (This is probably why the Shanghai index is ripping higher.)

Chinese banks have grown to 3X GDP and NPLs (non-performing loans) are at 1%, whereas historically in crisis they get to 30% -- should this happen, their FX reserves would be gobbled up. (This is why I hope I'm right about the Shanghai index . . . I'm currently long.)

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If I had to sum up Bass' observations, it would appear that the world is right back to where it was in 2007 . . . only worse. Not only have the numbers gotten larger, but everyone seems to think the coast is clear because we made it through the storm. What if this is only the eye of the hurricane?

This is why I thought the Times' article was such a big deal. With the Bass presentation as a backdrop, The Sport Of Tycoons seemed to be sounding a socionomic alarm. Notice these priceless tidbits:

IT was a year of record-high sales for luxury real estate. But 2012 will also enter the books for its chart-topping listings, as sellers sought to ride the wave of irrational exuberance for trophy properties.

In Manhattan, it all began in March with the record sale of a penthouse at 15 Central Park West for $88 million by the former chairman of Citigroup, Sanford I. Weill, to the daughter of a Russian billionaire. Then the casino king Steve Wynn paid $70 million for a 14-room duplex at 50 Central Park South. Mystery buyers signed contracts for a pair of duplexes at One57, a Midtown tower still under construction, for at least $90 million apiece.

New York, while seeming to set the tone, was not alone. High-end markets in cities across the country, including Miami and Chicago, caught the fever, producing record sales prices in 2012, and affixing record price tags to houses and apartments.

Yet for all the hype, at year’s end most of the biggest listings still remain on the market. In Manhattan, sellers of properties of $50 million or more have been stubborn about reducing prices, while in other parts of the country, brokers have begun to drop prices rather than lose out on the billionaire-buying wave.

Still for sale is the $100 million penthouse at CitySpire at 150 West 56th Street. So, too, is the $95 million full-floor co-op at the Sherry-Netherland hotel at 781 Fifth Avenue. The 9,800-square-foot penthouse at the Mark hotel that was on the market for most of 2012? It’s still available for $60 million.

“You had some records being set,” said Jonathan J. Miller, the president of Miller Samuel, a real estate appraiser, “and then that created a chain reaction of copycats who were hoping to piggyback onto that phenomenon.”

The blast of sales at One57 — where billionaires in 2012 scooped up full-floor apartments with unobstructed views of Central Park for about $50 million apiece (or about $8,000 per square foot) — seemed to embolden owners of other would-be trophy properties to expect as much or more on resale.

For Miami, 2012 was also a year of record sales. An Italian buyer paid $25 million for a penthouse on South Beach, while a Russian bought a 10-bedroom house at Indian Creek Village for $47 million. Those sales inspired agents to go for broke on other properties. A six-bedroom penthouse in South Beach owned by the New York developer Ian Bruce Eichner has been listed for $39 million for several months.

The biggest Miami trophy of all is Casa Casuarina, the former mansion of the fashion designer Gianni Versace, who was shot to death in 1997 as he opened the gate of the 23,462-square-foot house. Owned now by the telecom mogul Peter Loftin, it went on the market for $125 million in June — and was at that time one of the two most expensive residential listings in the country, according to Forbes. The house has 10 bedrooms, 11 baths, and a 54-foot mosaic-tile pool lined with 24-karat gold, and it sits on Ocean Drive in the heart of the South Beach scene.

Jill Eber, a Coldwell Banker broker who is listing the house with her partner, Jill Hertzberg, said there had been “serious interest” from around the world. But with nobody biting at $125 million, “the Jills,” as they are known, lowered the asking price to $100 million in November. “We really wanted to open it up and have the price right for the winter season,” Ms. Eber said. “We have been seeing numbers like we have never seen before in Miami.”

While Casa Casuarina has come down toward earth somewhat, an apartment in Chicago soars above all others. An 89th-floor penthouse at Trump International Hotel and Tower, at about 1,200 feet above the ground, it is the tallest residence in North America, and perhaps in the world, said Chezi Rafaeli of Coldwell Banker, the listing broker. The $32 million price tag makes it the highest-priced apartment in the Midwest, brokers say.

“You feel as if you can go out of your window and walk on the clouds,” Mr. Rafaeli said of the 14,250-square-foot spread, which has seven bedrooms.

Sellers seemed eager to try to break records in 2012. Leroy Schecter, the steel magnate, decided to list two apartments on the 35th floor of the tower at 15 Central Park West as one combined unit for $95 million, or more than $15,800 a square foot. The finished product will have a little less than 6,000 square feet; it has no outdoor space. Mr. Schecter jumped in just a few days after two other Manhattan listings topped $90 million.

Have sellers’ expectations become unrealistic? Some appraisers, especially in Manhattan, certainly think so. Mr. Weill’s $88 million sales price, at $13,000 a square foot, was already considered a market anomaly, Mr. Miller said. A number of prominent people in the New York real estate community feel that without price reductions, properties like the penthouse at CitySpire are likely to remain on the market for a good while longer.

“Real estate is irrational and emotional,” said Ms. Beare, in trying to sum up 2012, including why Mr. Schecter is asking nearly $3,000 more per square foot than Ms. Rybolovleva’s place sold for. “You can’t look at real estate in rational terms.”

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Two things: this time it seems as though sellers are the story.  And with high end sales seeming to slow, it seems their timing may be prescient. What could this mean?

To me this is classic socionomic theory in action. Robert Prechter, the father of socionomics, states that waves of social mood regulate the character of events, as opposed to events themselves influencing social mood.

So here we have sellers of real estate caught up in euphoria (to say nothing of the buyers who are actually paying the prices, and the brokers playing both sides). I see this as a distinct shift in psychology. It's about getting the money now. The dash for cash is here. Soon it will spread to prospective buyers, but for now watch the sellers; they're the smart money at this juncture. At market highs, the smart money is getting out. At lows, the smart money is getting in.

We're at highs.

As for Kyle Bass and his views on Japan? I think over the next several years, one could make an entire career and a not-so-small fortune just on this one country. Even though I am long the Nikkei at the moment (just in case), I see it eventually testing 5,000. I would be a euphoric buyer there. Though I recently sold my short yen position from the earthquake and tsunami of 2011, I will re-enter when the next short opportunity comes (too many are short now, too few bulls). The Japanese bond market will crack sooner or later, and I'm watching it closely. 10-yr JGBs are currently in the 140s. It could turn out to be a bloodbath.

Targets? Would a 50,000 Nikkei sound crazy? Or a 160 USDJPY? Or a JGB in the 60s? Not when apartments are selling for $15,000 a square foot and don't even include the land they're built on.