As we all know, residential real estate in many countries such as the US, Europe, and some Asian countries shows signs of deteriorating price rises. Coupled with a slowing economy which gives less people the opportunity to buy into the market (or at least, pay a premium), this leads to asset depreciation. Its largely believed by investors that retail and commercial investing is immune to this effect. Unfortunately, each part of the real estate market is tied into the same business cycle, and like every other option in investing, nothing is the perfect hedge against economic recessions.

The retail real estate market has already started to slow. In the third quarter of 2007, 7.4 percent of retail space nationwide was vacant, according to Reis Inc. A vacancy rate of 7.4 percent isn’t tragic by any means. But it’s the highest level since 2002, and it’s up from 6.8 percent at the end of 2005. The third quarter of 2007 marked “the tenth consecutive quarter of flat or deteriorating retail occupancy at the national level,” noted Sam Chandan, chief economist at Reis Inc., in a recent report. Thanks to continuing growth in supply and flagging demand, there was about 140 million vacant square feet of retail space in the third quarter of 2007, up from 124.4 million vacant square feet at the end of 2006.

That’s a lot of wide open space, considering that on paper, retail hasn’t started to slow yet. My advice is this — be wary about investing in large REIT or other types of real estate funds. As Centrino found out, being over exposed to one type of asset can make it a difficult task to offload and free up extra cash flows.

Yes, Australian banks do have some exposure to the US subprime crisis. It turns out, for some reason, that the big 4 decided to join a consortium that injected liquidity into the hardest hit of the mortgage backing companies, Countrywide. At first glance, it seems like the Australian banks lied when they publicly stated “we have no subprime exposure“.

Like a good politician, however, their use of weasel words and ambiguous statements could be used as a ‘get out of jail free card’. Its true, prior to the subprime crisis, the major banks had no positions. They weren’t part of the group who were bed ridden with ’subprimitis’. In becoming a doctor, however, for those who were sick, they contracted the subprime virus themselves. Technically, this means they didn’t have exposure, at least, not before the subprime term was coined.

Was it wise to get involved? I’m sure their financial modeling told them they were getting a bargain. What interests me the most isn’t so much that some Australian banks were involved, but that none of the big boys decided to stay away. Among banks, there’s usually one contrarian. Goldman Sach’s provided this rule in the US, betting against subprime loans and scored a record profit. I detect a trend in Australian banks becoming more sheepish. Maybe its because of the small Australian market which leaves little for financial diversity, but either way, its a worrying trend for those who like to diversify.

According to Morgan Stanley:

The US has entered its first full-blown economic recession in 16 years, according to investment bank Merrill Lynch.

Merrill, itself one of Wall Street’s biggest casualties of the sub-prime crisis, is the first major bank to declare that a recession in the world’s biggest economy is now underway.

David Rosenberg, the bank’s chief North American economist, argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.

It goes without saying that these guys have access to vast amounts information that I don’t, but since when does a definition of a recession take a month for fruition? Wikipedia quote:

In macroeconomics, a recession is a decline in any country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.

Sounds like Morgan Stanley are combining forecasting and current data to make a prediction sound like an economic certainty. Do you really trust the same people whom were the most exposed in the sub-prime debacle?

 From slate.

• Barack Obama is the alternative-energy sector. Hybrid, next-generation upstart, unafraid of entrenched market leaders, and embraced by corn-growing Iowans, Silicon Valley venture capitalists, and East Coast moneymen.

• Mike Huckabee is Chick-fil-A. Cheaper, healthier Southern alternative to steak and prime rib dished up by urban rivals. Explicitly fuses religion into business strategy in a way that no competitor does.

• Hillary Clinton is Citigroup. New York-based, enormously well-capitalized, longstanding market leader whose name is synonymous with the sector it dominates. A powerhouse in the 1990s is having difficulty reclaiming past glory.

• Mitt Romney is the Blackstone Group. Insecure private-equity player that tries to wow the masses with ostentatious displays of wealth—kitted out Mitt-Mobile for Romney, $3 million birthday party for Blackstone head honcho Steve Schwartzman.

• John Edwards is McDonald’s. Disdained by the media elite as déclassé, shunned by the fashionable as too populist and unhealthy to body politic, manages to thrive by working hard and dishing out cheap meat and potatoes to working-class patrons.

• Rudy Giuliani is Bear Stearns. New York-based firm spent years since 2001 raising easy money and globe-trotting. Initials of both should be B.S. Questions raised about judgment and adolescent personal behavior of standard-bearer—alleged dope-smoking for Bear Stearns CEO James Cayne, sex on the city for Giuliani.

• John McCain is General Motors. Old warhorse with solid reputation as patriotic brand takes repeated kicks but refuses to give in. Buoyed by poor performance of two top domestic rivals and by positive developments overseas—Iraq for McCain, growth abroad for GM.

I should do one of these for the next Australia election. Could be fun!

Oil and Gold have both hit new highs. Like I commented before, I see no real fundamental reason why oil continues to climb, other then the strong bullish trending that seems to creating a huge reluctance for anyone to sell or short. Commodity markets are not like stock markets. Commodities rise in price out of fear, stocks fall in price for the same reason. A weird inverse effect in sentiment seems to occur in both the stock market and commodity markets. General investor pessimism/optimism seems to teeter between the two markets like a seesaw, largely because commodities are seen as a hedge against economic problems.

Interestingly enough, this rarely applies to the price of both markets. Even with the grand amounts of stock market worries and concerns last year, it still finished the year in the black (as did commodities). It seems volatility, not price, is the key link between the two markets. This relationship makes commodities an excellent hedge; but not against a fall in the stock market. It’s a hedge against turbulent periods of time. Many are quick to jump on the ‘commodity and emerging markets’ portfolio as a way of continuing positive gains. The problem is, once stability returns to the US markets and long term funds become more comfortable with slowly acquiring positions, the volatility will shift from the US to elsewhere.

For the savvy investor, this is fine, as they possess a deep belief in their well researched fundamentals. For your investment bandwagon-er, the guy who merely takes ideas he here’s and applies it without understanding the logic it entails, this fellow may end up very disappointed with the performance of his portfolio.

I doubt any of the investment bank heads even knew/cared about Bhutto’s death. They cared about taking profits after a planned short squeeze.

Economics and net returns can make strange bedfellows during weird and wonderful economic events. Stagflation has been one of the possible scenarios touted as a consequence of the sub-prime mess, which is just a more complex form of hyper inflation that also brings low growth rates. Those looking to make money in a hyper inflation environment observe a myriad of paradoxical concepts, most notably the fact that both traditional investing and holding money as cash are both poor options on paper. The usual reaction from the crowd is to invest in secure interest-bearing deposits, like CD’s. As usual, the crowd calls the situation incorrectly. Stable asset growth may look attractive, but at the end of the cycle an investor may find he’s actually lost real money (which is much different to what he thinks he’s making when he receives his quarterly statement). CD rates often fail in beating inflation during these scenarios, and the only way to protect your money in relative terms is to place it somewhere that utilises the effects of inflation.

Mish in his economics blog outlines some potential asset classes:

• In hyperinflation the last place one wants to be is in cash.
• Commodities in general are a standout.
• Gold is a standout.
• Precious metals are a standout.
• Property is a winner.
• Equities are a winner.
• Treasuries are distinct losers if not an outright short.
• Foreign currencies
• Energy

The standout asset for someone looking to expand their net worth and take some risks is without a doubt, property. During periods of high inflation, economic theory says that the value of money is moved from lenders to borrowers. This is good news for those with a mortgage, as repayments now become lower relative to the new value of money. Another benefit is the opportunity to increase rental rates at the price of inflation. This allows the property owner to price fix his cash inflow amounts according to market conditions — a luxury not possessed by stocks or bonds. The anomaly that exists is whether property prices will rise or not. Considering a hyper inflation scenario may be the product of stagnant housing prices, the idea is starting to look less like an easy proposition. Mish says it best:

Is there a catch? Why yes there is. One needs to be able to make mortgage payments on the loan. That means the timing of the hyperinflation better be spot on. It also means that property values better keep on rising from the moment the leverage is taken or income must rise enough to afford the mortgage if it does not.

Should ever one get in a position via excess leverage to not be able to sell the asset for more than one paid while not being to afford the mortgage payment, foreclosure or bankruptcy occurs. Losing a job ad being underwater on leveraged property is an instant enormous headache.

In order to beat your mortgage payments and make money on the investment, housing prices need to climb higher. As the property markets becomes more fragile, its apt to one making a 6:1 roulette bet, but with only an even money pay out. Much risk for an investment vehicle that is supposed to be defensive. What about the much hyped commodity market? Well, the double edged sword rears its ugly head again. This type of economic environment will probably lead to a slowdown in the US. The rippling effect on emerging economies, the ones eating up resources like Kirsty Alley at a buffet, will likely depress the already over-speculated asset prices. Gold has probably seen the most speculation since the 70’s, and it too is a high risk/low return proposition. Even if the price of gold rises above $1000 in a year, it still means a meager 17% return on its current prices. $1000 gold is the most bullish estimate I’ve seen, too.

Foreign currencies can work (or better still, combining the two with property prices), but once again, you’re hoping the knock on effect doesn’t create too much domestic disruption in your chosen investment currency. Some currencies seem to buckle under pressure, like the Australian dollar did against the greenback during 2000.

So what’s my advice? Wait for the cards to be revealed. No sense making a big bet now, especially during historically unprecedented volatility. Wait for the smoke to clear, then make your move. The thing about inflation spikes is, they usually carry through for at least 3-4 years. Once hyper/stagflation becomes a reality, its usually not too late to plan a portfolio around the new economic conditions. Just remember the fundamentals of debt during high inflation, and beating the markets real returns should be a breeze.

I’m speechless. That was outstanding.

It’s my birthday today, so I’ll be taking a week long break from blogging. Don’t worry, I’ll be working long and hard on some ardeous tasks over the Christmas period, because the true spirit of Christmas is working off the indebtedness one has to Mastercard!

Many people I talk to are intimidated by the thoughts of financial planners. They see it as something only upper class people do, and only necessary if your assets are over an exaggerated figure, like $2 million. Truth is, everyone can benefit from a financial planner. Even just managing your super contributions to ensure a solvent retirement is a crucial thing to assess now, rather then later. Why not let a professional do it? Like an accountant, often they pay for themselves by bringing you in more money.

Financial ViewPoint has written an excellent article on choosing a financial planner. It’s worth two minutes of your time, believe me. The one tip I’d give, keep an eye on money magazine (or any other financial publication), and note the most consistent funds. Colonial is my pick, always a consistent performer (and award winner). Start with the upper echelon, and you shan’t go wrong.

Television has existed for more than 60 years, but like all mediums of communication, there comes a time when the model just doesn’t fit in with new release technologies. The writer’s strike could very well be the death of the format known as television. As we speak, Venture Capitalists and Writer’s are meeting together to discuss a variety of ideas to launch new ways of pushing entertainment into the home. Money quote:

“Dozens of striking film and TV writers are negotiating with venture capitalists to set up companies that would bypass the Hollywood studio system and reach consumers with video entertainment on the Web.

At least seven groups, composed of members of the striking Writers Guild of America, are planning to form Internet-based businesses that, if successful, could create an alternative economic model to the one at the heart of the walkout, now in its seventh week.

Three of the groups are working on ventures that would function much like United Artists, the production company created 80 years ago by Charlie Chaplin and other top stars who wanted to break free from the studios.

“It’s in development and rapidly incubating . . .”

Stirring the beehive of entrepreneurial innovation in America is just asking to get stung. Its not like they couldn’t find someone with the capital to launch these ideas. I’ll make a bold prediction; within 15 years, television as we know it will not exist. A hybrid internet style digital broadcast combining both elements of entertainment variety like the internet, but with similar production standards as current broadcast television. All it’ll take is one genius to come up with a strong advertising model, and any barrier still left in the way of progress will cease to exist — unblocking the future.