Europe on Sale? Baloney!

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The Daily Reckoning | Tuesday, December 6, 2011 The lethal combination of mendacity and counterfeiting... Waiting for better deals in European real estate... Plus, Bill Bonner on stubbornly holding together Europe, and a new theory of government... ------------------------------------------------------- He Predicted the American Airlines Bankruptcy, Now What’s He Saying? Dan Amoss gave his readers the opportunity to multiply their money as American Airlines imploded. But his next prediction is even more dire, and could be even more lucrative… But if you don’t act before January 2012, it could be too late! Click here to learn more.   Pretending to Tighten Up How to Assuage the Fears of Long- and Short-Term Investors   Bill Bonner Reporting from Baltimore, Maryland... Not much to report from yesterday. Dow up 78 points. Gold bouncing around. All eyes are on Europe. If the Europeans can pull off a save...well, we’re all saved. At least for a few weeks. Maybe through the holiday season. The euro has been remarkably stable. It has never collapsed — despite all the talk of Europe falling apart. Apparently, people with money don’t think it is in real danger. They think it is too important to let go. They may be right. And the more people talk about the ‘end of Europe’ the more it doesn’t end. Instead of letting it go, the authorities become more and more stubborn in trying to hold it together. It’s hard to know how this will play out. But we feel we know how this week will go. Frau Merkel and Monsieur Sarkozy will put together a new plan... It will include promises of fiscal tightness along with monetary looseness. The EZ money is expected to put short-term investors’ fears at ease. The fiscal austerity, it is hoped, will help long-term investors sleep better at night. Governments will pretend to tighten up. The ECB will lower interest rates and print up some new ersatz money. What could go wrong? The combination of mendacity and counterfeiting should do the trick...for a while. The liquidity from the central bank will come like Christmas pudding, or perhaps more like spiked eggnog. It will put some cheer into the markets during this ‘dark passage’ of the winter solstice. And then, the promises of austerity will allow everyone to think that things will be fine in the long run too. So...keep your eyes on Europe...and your hands on your wallet. Meanwhile, the US is keeping its eyes on football games and the race for president. Newt Gingrich has pulled ahead in the Republican field. According to the papers, he’s the only candidate that seems to know what he was talking about. That is probably true. A man like Herman Cain was out earning a living...building a business...creating jobs. He didn’t have the time to keep his eyes on every flimflam coming out of Washington. How could he be expected to know about every disastrous piece of legislation, wrongheaded policy initiative, regulatory meddle, and military boondoggle that has come down the pike in the last 30 years? Newt on the other hand, had not only his eyes...but his fingerprints...on practically every one of them! That makes Newt the leader of the pack. Americans don’t want a leader who admits that he has no idea of what is going on. They don’t want an honest president who will offer to ‘learn on the job.’ They much prefer a professorial blow-hard who claims to have all the answers in advance... All he has to do is to speak with authority and confidence, even if he is saying absurd and obnoxious things. And they can love a scalawag, too. But can they love one as un- loveable as Newt Gingrich?   When Will Obama Confess to the Secret “Timebomb” Event Ahead? Obama and Congress won’t even talk about it... but we’ve got a much bigger problem ahead than anybody cares to admit... and it could hit harder than the 2008 banking collapse. What problem? Nothing less than a secret new meltdown for world oil supplies — with gas potentially doubling in price and oil potentially about to hit $300 — and it could hit as early as the end of this year. Find out how in this urgent new report... The Daily Reckoning Presents Europe on Sale? Baloney!   Ronan Mcmahon The economies of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) are in disarray. Europe is in the throes of a banking crisis brought on by (among other things) exposure to Greek sovereign debt. Many of you have been asking if now is the time to jump in. Some of you read this piece in The Wall Street Journal and got excited. If you have been dreaming about that Spanish Hacienda or Portuguese villa in an olive grove, you are right to get excited. But, PLEASE, PLEASE wait. The deals are set to get much better despite brokers’ efforts to talk up markets. If, like me, you closely follow what’s under the bonnet of European real estate markets you will have found that these comments from brokers and journalists don’t give the full picture. Sure, as the writers of articles like in the WSJ piece above point out, prices have fallen. But they are set to go into free fall in parts of Spain and Portugal. As for Greece...how far prices will fall and what currency real estate will change hands for is anyone’s guess. You would be insane to go there now and spend euros unless the deal is so good you are almost given a villa. Ireland’s economy and real estate market is in deep distress. Four years into our crisis, prices are still falling. As I told you three weeks ago, a recent survey put Ireland on top of the charts for price falls so far this year. And as you have been reading in these alerts: My recommendation for Ireland is to only buy if you find a killer deal. Ireland isn’t a buy...but there are nuggets in the debris. For now, at least, the best place to find these nuggets is in the fire sale auctions I have told you about. Before we look at what really is happening in the rest of Europe — a word of caution... Europe Has Gone to “No Bid” “Price expectations have finally adjusted to the new reality. People are finally accepting that the game has changed,” says Joachim Wrang Widen, director of Christie’s International Real Estate in Europe. This is the type of rubbish we have come to expect from brokers. Almost all markets in Europe are still “no bid”. There’s almost no activity. Mainstream outlets across Europe and the US (this was quoted unquestioned in The Wall Street Journal) are more than happy to fill space with these half truths and misrepresentations. Sometimes the newspaper is trying to keep the real estate ads sections of their newspapers full. I watched this play out in Ireland, too. The market in Ireland stopped in ’06 amid uncertainty over stamp duty (transfer tax) rates. By ’07 it imploded. Read how the following Irish deal is described, and then I’ll comment: Earls Well that ends well By Tommy Barker Saturday, May 09, 2009 BUYERS, be brave — you’ll be the real winners at Waterfall’s Earls Well development — getting the best new homes, bar none, built in Cork (if not all of Munster) in decades. And, you’re being offered them for a bargain, value for money price. Assertive statements, to be sure, especially when prices here for these smart, contemporary-designed country houses do indeed start at just over the €1 million level — at what is clearly the worst time ever for the country’s house builders and property market. But, it’s true, there’s value, and quality of build here the likes of which you won’t have seen in a decade of the property boom. Had these houses been launched a few years ago, prices could well have been up to and over the €2m mark. Nothing sold in this development. Not a single “real winner”. The developer hasn’t actually closed on the access land even now. This was written at a time when the developer’s business was unraveling and the Irish real estate market was dead and buried. Why Pay Twice as Much as You Have to for Any Property? So, tread carefully when it comes to attaching any significance to what you read or what agents tell you. It’s easy to get seduced by that villa in an olive grove. But you don’t want to pay double what you might pay in two or three years. It can take a very long time for markets to find their new equilibrium. Particularly in Europe where foreclosure and bankruptcy processes are much more complex and drawn out than in the US. Over in Europe... Firstly it’s important to understand that Europe (or these PIIGS) certainly isn’t a homogeneous market. Tuscan villas, for example, are predominantly owned by wealthy Italian families. The house may have been in the family for generations and is likely debt-free. The owner won’t sell unless he absolutely has to. In the Algarve on the other hand...Irish people bought villas on golf courses at inflated prices with 100% mortgages from developers who are now bankrupt. This buyer in many instances is not making his mortgage payments. The banks are sitting on the problem. They might realize 250,000 euro from the sale of a villa with an 800,000 euro mortgage. The shortfall would need to be written off and the bank’s mortgage book would need to be written down. We see a similar situation on some of Spain’s costas. A Tale of Two PIIGS... PIIGS #1 So, we have places like Spain and Portugal’s tourist costas where British and Irish bought at inflated prices with finance. Many bought as investors in the final breaths of the bubble. Germans have also bought in some of these areas but they tend to be less leveraged and they bought as a second home they would use. The are less likely to be distressed. In these areas there can be major oversupply problems. There was too much construction — many of it poor quality or half built. I visited Portugal’s Algarve on a scouting trip to find distressed opportunities two years ago. This is an area I like...and enjoy visiting. You haven’t yet heard about Portuguese distressed opportunities in these alerts because there are much better deals to come. In many ways these markets mirror what has been happening in Ireland with two exceptions: 1. Fire sales haven’t really started the way we are seeing with the auctions in Ireland. 2. The economic outlook in Ireland is very bad. But there is a vibrant and booming multinational export sector. There is no bright spot to the economies of Spain and Portugal and the Spanish banks might be the time bomb that’s too big to fix. Estimates put the total of Spain’s excess supply and distressed inventory as high as 2 million units. Much of this inventory is along the touristy costas. Unemployment is topping 21%. If you are under 25-years-old there’s a 46.2% chance you are unemployed. In a dramatic shift young people are clambering to get visas to work in countries like Chile and Brazil. There has been no genuine effort to move this inventory of 1 million-2 million units (depending on who’s guesses you believe). Spanish banks have offered finance of up to 100% for some buyers of distressed properties on their books. But the prices offered just don’t make any sense — they tend to be between 70% and 100% off peak prices. On the open market these units would have to be discounted by at least another half to sell. My point is we have no idea, nor does anyone else. Before we will have any sense of how far prices will fall we need a market. This inventory will have to be dripped to the market. In Ireland we have been able to get a snap shot picture of the market through the fire sale auctions. They tell us that prices will likely be 70% to 80% off peak prices if you need to sell today. Driving across Dublin from the International Financial Services Center last weekend I visited a dozen condo buildings that are complete and now controlled by our “bad bank” NAMA. In the coming months these buildings will be sold. The buildings I visited alone hold a multiple of the inventory that was sold in ALL these fire sale auctions. That’s a lot of inventory to be added to an illiquid market. This will put further downward pressure on prices. That’s why I believe Ireland is only a buy if you find and can bid uncontested on one of those nuggets. In Spain and Portugal they haven’t even got to the first phase of recognizing the problem. The market first needs to be tested through a vehicle like these fire sale auctions we have in Ireland. That will give us a starting data point. Then we can guess how far prices will be pushed down as this excess inventory is absorbed. Don’t hold your breath about Spain or Portugal growing their way out of their problems. Don’t hold your breath for a surge in demand for second homes from northern Europeans. The British were always the biggest buyers here and they have their own challenges. PIIGS #2 The other PIIGS are places like Tuscany and Sicily in Italy...Granada in Spain...and for simplicity let’s lump France’s Provence and the Cote D’Azur in here, too. Leverage and distress is much less of an issue in these markets. There’s isn’t this oversupply problem. While prices rose dramatically in the boom, the construction frenzy we saw elsewhere wasn’t permitted. If you have your eye on a Tuscan vineyard and/or remote Spanish hacienda you might be wondering what a glut of condos on the Costa del Sol has to do with you. My point is that when this inventory hits the market (and it has to sooner or later) it will drag all prices down. Sure, the prices of condos on the Costa del Sol will fall further but everything will be affected. This is a time for keeping your powder dry. Prices are only heading in one direction for the moment. We have been waiting for the opportunities to come. Get Ready for the Property Opportunity of a Lifetime... Two years ago I told you about a strong opportunity in Granada, Spain. Since then I have run the rule over more than 100 deals...and passed each time. Our patience is being rewarded as the deals are getting better. It’s frustrating though that we have to wait so long. But when the opportunity comes we’ll be ready to act. It might just be the opportunity of a lifetime. The real estate markets of Europe’s most attractive second home markets were in disarray before this current crisis engulfed us. A story/urban myth about a major US developer and investor goes as follows: As a real estate crisis took hold he gathered with a golden circle of developers and bankers to figure out how they could re- energize the market and save their businesses. To start, they traded tales about how bad things were. Our friend stood up and put on his coat. When asked where he was going he replied “to the beach, call me when all this is over”. Sometimes doing nothing is the best action we can take. The first quarter of next year I plan to be a very good customer of Irish budget airline Ryanair. I’ll be making multiple scouting trips to Spain, Portugal, Italy...and Greece once we see what will happen around their default. Stay tuned...go to the beach and wait to hear from me when it’s time to act in Europe. I’m hoping it will be in the not-to-distant future. Regards, Ronan McMahon for The Daily Reckoning P.S. If you do come across a fire sale that you feel is just too good to pass up, remember my golden rules of buying distressed property. Only buy quality...the creme de la creme. Don’t ever buy in a half-built project. And don’t buy in a project where there isn’t a functioning and funded HOA with enough owners contributing to maintain services. Joel’s Note: Ronan McMahon is the real estate editor at International Living. If you’d like to keep up with Ronan’s global gallivanting and the stellar real estate deals he regularly uncovers for his readers, simply click here for more information.   Get Rich as Europe Collapses? It sounds weird, but did you know a Euro-collapse could be a GOOD thing for your retirement? It’s true! A little known strategy that could have literally saved your retirement in the middle of the 2008 market meltdown is set to soar again according to one market analyst. But you must act before January 2012, or you risk missing out on this opportunity... Click here to learn more.   And now back to Bill, with the rest of today’s reckoning... A New Theory of Government...   Bill Bonner How about this? A new theory of government. “I can’t lead. And I don’t want to follow.” — Martin Clark Yes, dear reader, we’ve been thinking. We have been disappointed with political ideas and theories of government. They are nothing but scams, justifications, and puffery. One tries to put something over on the common man...the other claims it was for his own good...and the third pretends that he’d be lost without it. Most are not really ‘theories’ at all...but prescriptions, blueprints for creating the kind of government the ‘theorist’ would like to have. Not surprisingly, it is a blueprint that flatters his intellect and engages his imagination. But it does not answer the critical questions: Why do we let other people tell us what to do; are we not all equal? What is the purpose of government? What does it cost and what benefits does it confer? You may find these questions have drifted far afield from our usually Daily Reckoning fare. But they’ve been on our mind. We’re coming up on a major election in the US. Several men have come forward offering to take charge of the US government. Maybe it would be worth wondering what it is that they are taking charge of. And since The Daily Reckoning is free, we feel entitled to write whatever we damned well please. Government is a fact. It exists. It is as common as stomach gas. It is as ubiquitous as lice and as inescapable as vanity. But what is it? Why is it? And what has it become? We know very little about the actual origins of government. All we know, and this from the archeological records, is that one group often conquered another. There are skeletons more than 100,000 years old, showing the kind of head wounds that you get from fighting. We presume this meant that ‘government’ changed. Whoever had been in charge was chased out or murdered. Then, someone else was in charge. Tribal groups, or even family groups for that matter, probably had “chiefs.” They could have been little more than bullies...or perhaps respected elders. Over the millennia there were probably as many different examples of primitive ‘government’ as there were tribes. Some elected their leaders. Some may have chosen them randomly, for all we know. Many probably simply conferred leadership by consensus. Some probably had no identifiable leaders at all. But it seems to be a characteristic of the human race that some people want to be in charge...and many people want someone to be in charge of them. In adversity, there was probably an advantage to having a leader. Hunts were often collective enterprises. There were also group decisions to be made...about how food was stored up or rationed out, for example, that would affect the survival of the whole group. Under attack from another group, a strong, able leader would make the difference between life and death. We can guess that people enter into leader/follower roles today because they are programmed for it by evolution. Those who can’t or won’t...perhaps they died out many millennia ago. We don’t have to look back to the Last Glacial Period to see what happens in small political units. We can see them today. They are all around us. Every church has its governing board. Every community has some form of government. Every corporation...group...club...every place where humans get together seems to develop a political/social order. Rules evolve. Leadership arises. Informal groups typically yield to the strong personality. Juries try to control it. Families resist it. Dinner parties try to avoid it. But that’s just the way it is. Some people seek to dominate. Others like being dominated. Trouble is, there is usually more than one person or one group that wants to do the dominating. This leads to conflict. Treachery. Murder. Rivalry. And elections. But let’s not get ahead of ourselves. We’re talking about the origins of government and trying to guess what they were like. On a small scale, we conclude, they were both extremely variable in form...and extremely limited in scope. That is, how much governing can you get away with in a small group? Not much. You can boss people around, but they won’t take too much bossing. And there is always a rival bosser who is ready to topple the big boss if he should lose his popular support. In a tribal setting, we imagine that the strongest, fiercest warrior might have been able to set himself up as the governing authority. But he could be stabbed in the back as he slept...or even shot with an arrow in a hunting accident. Even in the best of circumstances, his reign wouldn’t last much longer than his own strength. In a small town, government proceeds tolerably well. There is not much distance between governors and the governed. The latter know where the former live...and how they live...and how little difference there is between them. If the governors over-reach, they are likely to find themselves beaten in the next election...or in the middle of the street. But as the scale increases...as the distance between the governed and the governors increases...and as the institutional setting grows and ages...government becomes a bigger deal. More formal. More powerful. It can begin governing more effectively. The first large scale, long-term government we know about was in Egypt. After the unification of the upper and lower kingdoms in about 3,150 BC, the dynastic period began. It continued for two millennia, not ending until the Romans conquered Egypt in 30 BC. We don’t know exactly how government worked during those many centuries, but we know that a theory of government arose out of them. At the time, it was not considered a theory at all, but a fact. The ruler was divine. A god. As a theory it is a good one. It answers the question: why should you take orders from another human being? In Ancient Egypt, the question didn’t arise. Because Pharaoh was not another human being. He was something else. Precisely what he was...or what people thought he was...is not clear. But the archeological record shows that he was treated as though he was at least a step or two higher up on the ladder than the rest of us. If not a full god, he was at least a demi-god...a missing link between man and the heavens. If that was so...and who are we to doubt it?...the theory holds together perfectly well. The divine authority is transmitted from heaven to man via his intermediary...the pharaoh. You might think that would be the end of the story. It was not. There were Asiatic settlers moving in the delta area — the Hyskos — who apparently had a different idea. And the Thebans. And the Nubian. And the Assyrians. And the Hittites. And hundreds of years of internal warfare against dozens of different groups...not to mention the struggles within the divine families themselves. If God had wanted his man on the throne, you’d think he would have done more to help him. Or at least you’d think he would have been a little clearer about who His man was. Why let people guess and rumble, trying to decide who is really God’s choice? But who can figure the mind of God? Maybe the whole divinity hypothesis was just a lie. Maybe God liked to see His man get a workout. We can’t know. Pharaohs may have lived like lords. They may have governed like gods. But they died just like everyone else. And after the 30 dynasties, as counted by Menes, the whole system was kaput. Cleopatra Ptlolemy got herself rolled up in a carpet so she could spin out at the feet of Julius Caesar. She had a child by him...but then went over to Marc Antony’s side. That proved a mistake. Caesar’s nephew, Octavian, was better organized and a shrewder politician. Antony’s army was beaten at Actium. But the idea of a divine ruler survived. Antony had already begun to feel the blood of divinity pumping in his veins. And then, after he was out of the way, hardly had the half-god pharaohs gone to their graves in Egypt than the half-mad Caesars in Rome started to sprout wings... More to come... Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Zombified Government Spending Misunderstanding Capitalism The Corruption Continues... China Still Finding Ways to Gain Wider Renminbi Distribution Did the Jobless Rate Really Fall? Rate Cut Week Next Week? The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. 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