Real estate

Though "another Lehman Brothers" isn't likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices.

As we start the new year, there is a debate raging within the market.  No the debate isn’t whether there is weakness in the manufacturing economy, that is taken as a given, especially after Friday’s awful Chicago Purchasing Manager number of 42.9. Instead, the debate boils down to this: 'bears' believe the manufacturing economy and the service economy act in conjunction with each other – that one cannot turn, without the other; 'bulls' view each segment of the economy as relatively independent and they highlight the size of the service economy relative to the manufacturing. The answer lies in the missing cog - the 'wealth' economy.

Important pillars of the bull case evaporated throughout 2015. Global price pressures weakened, the global Credit backdrop deteriorated and the global economy decelerated. The huge bets on central bank policies left markets at high risk for abrupt reversals and trade unwinds – 2015 The Year of the Erratic Crowded Trade. Indeed, a global bear market commenced yet most remain bullish. Serious and objective analysts would view this ominously.

The unfolding correction of the visible excesses of the credit inflation - such as overinvestment and malinvestment - will destroy incomes and profits; the Great Unwind of the less visible effects, such as the sovereign wealth fund liquidations, are a giant pin aimed squarely at the monumental worldwide bubbles in stock, bonds and real estate.

Despite such endless financial engineering, sales for the S&P 500 have been declining for the last three quarters. And profits have declined for the first time since the 2009 expansion. Simply put: The recovery is a mirage... It isn’t real... And it isn’t sustainable.

The last two years rents have been rising primarily due to supply and demand issues.

“I think 10-year USTs are quite attractive because of my outlook for the weakening economy. Actually I believe we’re already entering a recessionin the US. Given the weakness in the global economy and the deceleration of growth in the U.S., I would imagine that by next year the Fed will cut rates once again and launch QE4."

My overriding theme and the central drama for the coming year is that unexpected events can take on greater importance as the Federal Reserve ends its near-decade-long Zero Interest Rate Policy. Consensus premises and forecasts will likely fall flat, in a rather spectacular manner. The low-conviction and directionless market that we saw in 2015 could become a no-conviction and very-much-directed market (i.e. one that's directed lower) in 2016. There will be no peace on earth in 2016, and our markets could lose a cushion of protection as valuations contract. (Just as "malinvestment" represented a key theme this year, we expect a compression of price-to-earnings ratios to serve as a big market driver in 2016.) In other words, we don't think 2016 will be fun.

I bet OPEC never factored into their analysis the lifting of the US Oil Exporting Ban in 2015 after being a non-starter for so many decades.

If it takes more than $126,000 to fund a qualitatively defined middle class lifestyle, what sense does it even make to call this "middle"?

In the case of the car business, longer loans have been the key to maintaining the facade of this Potemkin village on wheels. But this dodge only works when the cost of the loan – interest – is low. And with cars – unlike houses – there is a built-in limit to how far out the loan can be stretched as way to tamp down the month-to-month costs down. Eight or nine years is probably the absolute maximum, because cars – unlike houses – always decrease in value over time and because unlike houses, cars are fundamentally throw-aways.

Following the yellow brick road leads us deep, very deep inside the rabbit hole...

There’s only one investment we can think of that many people either love or hate reflexively, almost without regard to market performance: gold. And, to a lesser degree, silver. It’s strange that these two metals provoke such powerful psychological reactions - especially among people who dislike them. Nobody has an instinctive hatred of iron, copper, aluminum, or cobalt. The reason, of course, is that the main use of gold has always been as money. And people have strong feelings about money. From an economic viewpoint, however, money is just a medium of exchange and a store of value. Efforts to turn it into a political football invariably are signs of a hidden agenda, or perhaps a psychological aberration. So, let’s take some recent statements, assertions, and opinions that have been promulgated in the media and analyze them.

The poor are getting poorer but the rich, it appears, are no longer getting richer. With apartment vacancies at 9-month highs, Bloomberg reports that Manhattan's luxury-home market is rapidly losing its luster. Prices have been dropping every month since February, when they reached their highest point on record, and, as one analyst notes, "the downward trend in that decline hasn’t abated, and we haven’t seen it wavering in any way."

There is just one very big problem with this "solution"...