327: Reflections on USA and US real estate investment
06-10-2010
We haven’t written on US real estate investing for some time, indeed since the new administration took charge. We’ve been monitoring things at a distance – trying to stay objective – until it becomes clear what will happen. We’ve made up our minds now.
Problem Administration: In summary, we have a socialist inclined administration intent on big government, higher taxes, large public sector, large debt, increasing interference in business, not very business-friendly and short-sighted with regard to energy policy and energy self-sufficiency.
Two key issues are not being tackled in our view:
1) Dependency on imported oil (costs $1500 per person per year and increasing)
2) Escalating healthcare costs (costs $6500 per person per year and increasing)
The finger pointing blame game being played, beating up bankers and now oil company executives shows just how anti-business the leadership of the US administration are. It comes from the top. We have never seen a US administration anything like this one. We see this after 1½ years as just the tip of the iceberg and the pressure is set to increase. It will begin adversely affecting the economy shortly – someone has to pay for the public sector and debt payments – it all has to come from business, and the smart have started divesting and the wealthy are starting to exit – either to international markets are retiring before the next meltdown. Just look at the Dow Jones – this drop despite the massive profits being made with record low interest rates, windfall spending blitz and tax breaks.
End of Tax Breaks: The tax breaks to stimulate the economy given by the Bush administration are ending in 2010. Because of these breaks in 2009 and 2010, companies have been making healthy profits – and declaring profits before the tax hikes. Efficiency has not improved – its mirage profits. Companies are paying themselves and shareholders huge dividends to try and get the money off the balance sheets 
before the swinging high taxes come into force in 2011. If you think the budget deficit is bad in 2010 with all these tax revenues rolling in, just wait until 2011 when tax revenues and incomes dry up with the new tax increases and higher unemployment. The deficit will get worse and with it borrowing costs are likely to rise, the dollar fall further and there is a significant chance of a double dip recession – or at best stagnation in growth for some time as from about October 2010.
What Benefit Did $1.8 Trillion Do? As the dollar drops, the pressure on inflation is likely to increase – this could lead to interest rates rising just as taxes increase and growth slows. $1.8 Trillion of stimulation has helped the country grow its economy from -2% to about +3% this year – that’s an increase in GDP of about $0.4 Trillion – a very poor return on this spending (or investment as the government calls it). Would you invest $1.8 Trillion for a $0.4 Trillion return? The US economy on the face of it appears to be coming out of recession with the GDP fairly healthy at 3%. But it’s hardly surprising when interest rates are more or less zero %, printed money of $1.8 Trillion has been used up and as an example 400,000 jobs were 
created for a 3 month period just to perform a country census – that’s a lot of people not doing very much. There is a feeling that the USA will try and inflate its way out of the debt trap – but this is a very dangerous game. Especially when everyone else is at the same game.
Business Bashing: What’s rather disturbing is how the very best entrepreneurial companies like Google, Facebook, Apple and Goldman Sach have been under attack from certain anti-business people. USA used to pride itself on its business and dynamic economy – now some of the best people are hiding away. And innovation is being stifled. The USA should be incredibly proud of all these leading companies –they are massively global leaders. China now leads in renewable energy for example – they are building solar panels, wind turbines and nuclear power plants like there is no tomorrow. Also electric cars and normal cars. They now produce more cars than the USA. Meanwhile the US car firms were bailed out at huge cost with promises of change, but they are still making the old gasoline guzzlers – nothing has actually changed.
Increasing Oil Production Set for Decline: Last year, after years of stimulation and encourage by the previous administration, USA finally reversed its production decline with an increase of +7% in indigenous production, mainly from the Gulf of Mexico and North Dakota. But expect a rapid reversal next year and increasing oil imports as the ban on offshore drilling and slowdown generally starts immediately to affect oil production. This is likely to coincide with a global production decline or at the most optimistic – stagnation. Mean India and China’s oil demand rises by 10% per annum. The numbers don’t stack up. It means oil prices will rise to kill demand – and with it, global and US GDP will suffer. The USA’s reliance on imported oil is a huge country risk –and nothing is being done about it. It is likely to get a lot worse next year and the following year.
Security: One positive aspect is that the USA has high internal security despite the high gun crime rates. Measure adopted at airports and border posts such as scanning and interviews have meant the terror threat is probably lower now than in previous years within the USA. Yes, its a pain for tourists and business visitors to enter the USA, but at least the country has high security.
International Investors Positive: The good news is that international investors still have not lost faith in the US economy and investment. They see the dollar’s decline as an opportunity to buy cheap assets and what they currently believe to be knock down prices. But we thing despite the healthy population increases, in 2011 the US economy will stagnate again and unemployment will continue to rise as money runs out for public sector jobs, private sector is squeezed further and financial markets put pressure on the security of US debt – particularly as oil prices rise. We wish we could be more positive but we thing with the current administration – things are going in the wrong direction and it is not prudent to either view the US as any kind of safe haven or expect a long term growth to be again sustainable.
Flaws:
The flaw in the US economy is its gigantic use of a depleting oil supplies. The good news is there is a chance to switch to gas, along with coal-electric. But progress is so slow, we cannot see this happening for many years. There is a crisis, but no-one has noticed. And by the time they do, it will be five years too late.Longer term, because of USA’s huge gas and coal reserves, plus other resources and technology-innovation and infra-structure, things could improve, but what the USA urgently needs is a business friendly government that wants to tackle the deficit and reduce taxes. But instead, they have a business unfriendly government that does not want to tackle the deficit and wants to increase taxes. Sorry – bad combination. We hope we are wrong because we love the USA, the people – spent many years there. But for property investors, don’t expect a big improvement in 2011. And if you are pondering taking the plunge, expect a declining dollar, stagnant GDP in 2011 and pressure on house prices.
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