Seeking Investor Bones.

PaulRen's picture

US Investor bones, where are they?

I wonder where American people will be investing their money next year and for years to come? Bank and bond interest rates are and likely to remain low -and the US stock market is a “crowded trade” in that there are millions paying close attention and so Mr. Market is very hard to beat, or even to keep up with. US growth stocks hardly pay any dividends and have p/e ratio’s even higher then the averages.  Yes, just the opposite of here.

It is now clear the US is in a huge deleveraging mode not just of debt but likely also on consumer spending surely including for US residential real estate.  J. Anthony Boeckh, quoted in the last article  (Former editor in chief of the Bank Credit Analyst, the book is called “The Great Reflation), bluntly says about US Real Estate, in general: “Our conclusion is that owning a home, in general, will be a poor investment in the future.”  US banks now have over a trillion US$ of write-offs on the books and will remain very risk-averse to new loans.  As is the new norm now, new home buyers there must make at least a 20-25% deposit, to get a home home-mortgage.  Since the average home is priced around 160,000$, this means around a 40,000 $ down payment.  However the median net worth or US renters under age 37, is just 7,500$. Nowhere near the amount needed as first time home buyers.  And without first time buyers, house markets struggle!

Consider also that the combination of the looming US pension nightmare for retirees, the demographics both of aging and declining fertility rates, guarantee that huge number of people will be forced to liquidate their homes in the next few years so to pay for old age -and second there wont’ be enough new entrants into the US housing market to buy these. A double whammy of selling pressure, just at a time when new demand for housing will falling.  These demographics are powerful forces there, on top of recovering from the housing led crisis; and will dominate the demand curve far more then any more favorable house price affordability.

Hence despite the roughly 32% drop in US averages house prices, between 2006 and 2009 representing the worst US real estate crash in 90 years, the outlook for a housing price recovery there is just not compelling at all, on average.  On top of this the US public sector is now debt chocked and so will be upping the tax bill along the way, another detriment to US consumer discretionary spending including on housing.

US investors can speculate on gold and silver and commodities but precious metals have had a huge run and are likely another “crowded trade”, as everybody now seems gold/silver bullish.(A contrarian indicator).  By the way, in “The Great Reflation” book”, the author in a number of places states again and again his strong conviction that “world deflation of general prices is likely to continue for some years.”  This is exactly what I have been writing here for some time.

US (and also Canadians) want to be smart and alert investors, and in many ways they are. But now they are stuck with low returns, and since this reality is likely to continue they will increasingly become restless and diversify globally.  They can buy international funds, or ETF.  Some will come to understand that going directly into some emerging market equities can have sober additional benefits.  This is a very different scenario from a decade ago, where post the Asian Crisis at the time, US investors where not interested in re-emerging Asia…why? Because as so many told me that time, “if you are digging here and find bones, why go dig elsewhere around the world?”   Today, there are not enough promising investor “bones” to be found anymore just at the time they are seeking those more then ever before, -and so they will be forced to look mostly East.

The bigger question may be, will they?  Or are they still in a world assuming anything non-American is by definition more risky?  My take is that this time they will have no choice and even if a small minority get on the global diversification theme, thousands will come and seek good growth stocks, high dividends, low financial leverage and reasonable p/e’s . We got them here like few other places.

Best Regards,

Paul Renaud.