A near-death
experience isn't something one gets over right away. So it's no surprise that
the US leveraged speculating community was a tad more cautious than usual for
a while. Real estate investors, for instance, still bought houses, but only
on very favorable terms where rental income would clearly exceed expenses.
And investment banks still repackaged loans into asset backed securities, but
on a very small scale, since there weren't that many willing/able buyers for
exotica that was "toxic" so recently.
This was
completely unacceptable to Washington, of course, since the only way an
over-indebted economy can "grow" is if speculators can be induced
to take unwise risks. So this year we entered the whatever-it-takes phase of
the process, where borrowed money became nearly free and permanent,
open-ended quantitative easing was promised.
It was a Hail
Mary pass, but it seems to have worked, at least in the narrow, Twilight Zone
terms in which today's system operates. That is, moral hazard -- the sense that you can do pretty much anything you want
because the government will bail you out -- is back as a driver of deal
making. See this on the return of a practice last seen during the housing
bubble:
House
flipping makes a comeback
Forget the
carnage of the last few years. The allure of the quick buck endures as home
flipping makes gains in hot real-estate markets.
Remember home
flippers? How could anyone forget those villains of the housing market crash?
A Santa Rose
Press Democrat blogger (tongue slightly in cheek) recalls
them as "predatory fish prowling the turbulent waters of the
real-estate market, feeding off of distressed properties and swimming away
with quick profits."
Well,
flipping is back. Investors and even some amateurs are venturing in,
snatching up ruined, cheap foreclosures in the hope of making profits on
rehabbing and selling or renting distressed homes.
RealtyTrac, in an instructional webinar on flipping (more on that
in a minute), defines flipping as "buying a home ... usually at (a)
discounted price, rehabbing it to sell at full market value, and reselling
that property -- all within 90 days and ideally for a profit."
Flipping
rises again
"When we
see mold in the basement, we just say cha-ching,"
a New Jersey investor tells CNNMoney in this
video. She shows off renovations to a home she purchased for $180,000,
saying she plans to list it for $450,000.
CNNMoney says:
One in four
homes that sold are actually bought by investors.
Part of the reason is because of the millions of foreclosures on the market.
With so many empty homes out there it's easier to find a good deal.
RealtyTrac
publishes a database of bank-owned and foreclosure properties. It says that
about 1,300 people - 47% of them classified themselves as "new
investors" and 13% claimed to be "experienced investors" --
recently signed up for its Foreclosure Flipping 101 webinar.
In a slide
show from the webinar, RealtyTrac shares a few
nuggets about flipping: In the first six months of 2012, there were 99,567
property flips, an increase of 25% from 2011, and an increase of 27% from
2010.
Hogging the
market
Aggressive
flippers are dominating housing markets in many cities. That puts first-time
homebuyers at a competitive disadvantage. USA Today says
that "instead of having their pick of homes to buy in some markets,
they're losing houses to cash buyers and bidders with bigger down payments,
or they're facing bidding wars spurred by shrinking numbers of homes for
sale." (Post continues below video.)
And this on
the growing appetite for exotic structured debt instruments:
They're
back! Yield hunt pushes funds into CLOs, CDOs
NEW YORK
(Reuters) - Fund managers are increasingly eyeing riskier exotic assets, some
of which haven't been in fashion since the financial crisis, as yields on
traditional investments get close to rock bottom.
Returns from
investments in "junk" bonds, government guaranteed mortgage
securities and even some battered euro-zone debt are plunging in the wake of
global central bank policies intended to suppress borrowing costs.
In
particular, the Federal Reserve's latest move to juice the U.S. economy by
purchasing $40 billion of agency mortgage-backed securities every month is
forcing some money managers who had previously been feasting on those
securities to get more creative. The only problem is they may be getting out
of their comfort zones and taking on too much risk.
"I would
not be surprised if some managers are reaching outside of their expertise for
a few extra basis points," said Bonnie Baha, a
portfolio manager for DoubleLine's Global Developed
Credit strategy.
To keep
performance high, credit-focused managers are moving back into some of the
risky assets that got tarnished during the financial crisis like
collateralized loan obligations, or CLOs, securities cobbled together from
pools of corporate loans.
LEANING TO
LEVERAGED LOANS
Mark Okada,
the co-founder and Chief Investment Officer of the $19 billion Highland
Capital Management, said bank debt, CLOs, and some mortgage securities will
provide the best returns in credit as the Fed continues to depress yields in
the United States until the job market springs back to life.
"The
government is in their market," Okada said of MBS, which has been so
profitable for hedge funds this year. "The government isn't in my market
buying loans and bonds."
That
translates into big opportunities for Highland and other managers who have
the expertise - and stomach - for such exotic securities. Of the $19 billion
in assets Highland manages, $14 billion is invested in CLOs.
The firm's
investments in $1.2 billion of secondary CLO assets are returning 27 percent
this year, a person familiar with the firm said. Returns for the bulk of
their CLO holdings could not be determined.
The issuance
of new CLOs fell off a cliff in 2008 during the financial crisis, after reaching
a peak of roughly $100 billion in 2007. CLO activity has slowly been ticking
back up, and JP Morgan research analysts forecast $35 billion in new CLO
supply this year, almost triple the $12.6 billion issued in 2011.
Some thoughts
The policy
hope is that energized speculators will kick-start a virtuous feedback loop
in which regular people once again borrow and spend, creating an economy that
grows unaided by extraordinary monetary stimulus. This is more Keynesian
fever dream than reasonable possibility, since if American citizens and local
governments are too indebted to borrow more today (which they are, as credit
card debt is replaced by student loans and unfunded pension liabilities
explode) then it will take a lot more than slightly higher home prices to
turn them back into rampant consumers.
What will it
take? A widespread realization that the dollar is falling and will continue
to fall for years, which means debts taken on today will become easier to
manage in the future as they're repaid in ever-cheaper currency. Borrowing
then becomes shorting the dollar, a financial speculation, with consumption a
mere byproduct. What you acquire with the borrowed money is almost beside the
point.
In this
scenario, individuals and municipalities become financial intermediaries,
funneling newly-borrowed dollars from banks to road builders, car makers,
home builders, and, crucially, to precious metals dealers. Gold and silver
are tiny markets compared to cars and houses, and will go parabolic if they
get even a modest slice of this pie.
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