Creditor.net

Massive Deflation?

I am new to investing (outside of investing in websites we own and operate) but some stuff that happens in the market simply does not make much sense to me. We have deflation rates that have not yet been seen since the Great Depression.

via the NYT

Real Estate Deflation

While the real estate market is already down about 25% from its peak, experts like Robert Shiller believe it still has a ways to go.

• On a historical basis, US residential real estate prices are still way above normal averages (if you compare rent price to sale price or sales price to median home income – lots of research in this PDF)
• the future of commercial real estate is looking grim, with consumers cutting back on spending
• and there is going to be a ton of Alt A and ARM mortgages resetting in the next couple years

Shouldn’t Real Estate Deflate?

So if we are seeing rising unemployment, a contraction of credit, and are in for massive deflation, then an asset class that is still well above its historical prices (like residential and commercial real estate) should be easy to trade against, but for some reason (maybe the US government backstopping incompetent companies – and fears of more of the same?) that trade has been a failure in the current market. ProShares UltraShort Real Estate (SRS) is a leveraged fund that “seeks daily investment results that correspond to twice the inverse daily performance of the Dow Jones U.S. Real Estate Index,” but it reached fresh 52 week lows only 2 days ago, traded up yesterday, and then gave back most of those gains today.

There can be a small decay rate associated with such leveraged funds that can cause them to lose out on some growth, but it should not be so much that real estate backed assets are seemingly increasing in value.

Commercial real estate firm Simon Property Group (SPG) has a price to earnings ratio over 30 (50% higher than Google’s!!!) while ShopperTrak reports foot traffic in malls is down 17.9% year on year.

Refinancing Rising, but Few New Home Purchases

People have not been buying many new homes, but mortgage refinance is up sharply on lower interest rates.

How Much Inflation Can the Fed Create Before US Bond Yields Rise?

Longterm treasury bond yields are exceptionally low, killing trades against it – like TBT. The US Dollar has been sliding hard against the Euro recently, and the is planning on using inflation to help stimulate the economy. How far can they push this string?

Chicken or the Egg?

With the US recycling money (and attempting to inflate the crap out of it) to prop up an overpriced asset and stimulate the economy, either real estate or treasuries will eventually get killed…though I am not smart enough to know which bubble has further downside in the short run, and was recently on the wrong side of a trade/bet against the fed.

Are those trade so obvious that there is no opportunity left? How long can the market deny fundamentals? How steep is the market decline when it does happen?