Bad day yesterday for US stocks. Big day for gold.
The Dow fell 170 points yesterday. Gold rose $27 an ounce.
Just guessing… But both markets are probably moving in the direction they “should” move. Stocks seem to want to go down. Gold seems to want to go up. And if that’s what they want to do, who are we to argue with them?
But today let’s look at real estate. What does real estate want to do?
“The Miami area is booming,” reports a friend who visited yesterday.
“I’m in Key Biscayne. Real estate went up about 20% last year in my neighborhood. This is like the days before the crisis…
“Everybody speaks Spanish. So I thought the new people would be coming from Colombia and Mexico. But not at all. The biggest buyers I see are Russians. Then the French. I guess the Russians have a lot of money. And compared to France, everything here is cheap.
“The third major group of buyers comes from Brazil. They seem to have a lot of money too. And everybody knows that Miami is the place to be if you’re Latin American.
“Argentines are in fourth place. They come to Miami because they think the Argentine economy is gearing up for another crisis. They’re probably right.”
Real Estate Takes Flight
Property prices are in the news. Bricks and mortar seem to have sprouted wings. All over the country they are flying.
In Miami, the market is driven by foreigners. In Long Island, the big spenders come from Wall Street. The New York Times reports:
[T]here is no surer sign that the big-spending ways that characterized the pre-financial crisis era have returned to the Hamptons than the blue “Farrell Building” signs multiplying across the pristine landscape here, along with the multimillion-dollar houses they advertise. It is a process some are calling “Farrellization,” and not necessarily happily.
“We’re as busy as we’ve ever been,” said Joe Farrell, the president of Farrell Building” […]
With a customer base composed largely of Wall Street financiers, Mr. Farrell has more than 20 new homes under construction, or slated for construction, at a time, making him the biggest builder here by far. He has plans for more, many of them speculative homes built before they have buyers.
What does Yale economist and co-creator of the Case-Shiller home price indices Bob Shiller think of this boom in real estate? Here’s a note from Zero Hedge on the interview Shiller gave to CNBC. (You can watch the interview here.)
With the Case-Shiller 20-City index up double-digits for the fourth straight month, Bob Shiller has some choice words for the CNBC interviewers about the ‘housing recovery.’
“Housing is a market with momentum,” he notes, “and right now, the momentum is up.” But he adds that while house prices are ‘recovering,’ he remains much less sanguine about this recent move.
But it is once he has explained the potential concerns that may weigh on the housing market that Shiller comes into his own as he explains “none of this is real, the housing market has gotten very speculative.”
Housing goes through “big cycles,” he chides, noting that California “has gone up and down like a roller-coaster for decades but doesn’t get anywhere… that’s what these markets have become.”
The Wall Street Journal pursued the story from a more negative angle.
“The return of the McMansion,” it reported, “is driven by credit rules that are squeezing out the ‘first timers.’”
The first timers don’t have much money… or much credit history. Builders put up houses for older, richer buyers. Why? Because that’s where the money is.
An Empty Nest in Charm City
Downtown Baltimore resists most real estate trends. The real estate market has probably been on a downward slide for the last 80 years. But even Charm City seems to have gotten on the bandwagon. Recently, we have found few bargains… and surprisingly robust buyers.
When we first returned to the city, after 18 years in Europe, we looked for a small apartment in the heart of town. We bought one and renovated it to a high standard. And then we realized that we needed a bigger place. Although we are technically “empty nesters,” we found the nest was getting crowded. Rarely was it actually empty. Usually, we had one or two children… with friends in tow… in residence.
What’s more, we were not cut out for apartment living – not in Baltimore. Our building had a doorman. A co-op board. And lots of neighbors. We can’t be nice to that many people!
So, we decided to sell the apartment. We expected to take a loss – after spending too much on renovations. But we were surprised that a buyer came along almost immediately… willing to pay a fair price.
Even in Baltimore… a real estate renaissance. Imagine that.
Are Dividend Investors “Stupid”?
From the desk of Jim Nelson
If you’ve been a regular Diary reader, you’ll have been tuning in to the debate I’ve been having with Bill about dividend investing.
I believe dividend investing is the best way to compound wealth over time. Bill is skeptical. He worries about the dividends diverting capital away from reinvestment in the business and about the effect of taxes on dividend income. He also reckons capital gains, not income, is what investors should be focused on. (You can follow these exchanges here, here and here.)
A lot of analysts shy away from criticism of their strategies. But I love these debates. People are right to be skeptical about investing strategies that come with big claims attached. This is a debate that started off in private. But I’m glad to have the chance to continue it in public.
We got a ton of feedback from Diary readers. So thanks for that, if you wrote in. The feedback we got is a real mixed bag. Some readers think dividend investing is a great way to build long-term wealth. Some think dividend investing is a waste of time.
For instance, Robert L. writes:
The very notion of BUYING a dividend-paying stock in an already grossly-overbought market is simply stupid – never mind an idea that is already (roughly) a year “too late.” And his off-set notion about dividends as a form of cash to CONTINUE to buy (those same dividend-paying) stocks in a market that is destined to CRASH, HARD, SOON is to intentionally act to “catch-a-falling-knife.”
‘Got any skin in your own game, Jim? If so, good luck with this “plan” of yours.
OTHERWISE: If my personal (marginal) “income tax rate” exceeds my personal (marginal) “capital gains tax rate,” and dividends are taxed as ordinary income whereas capital gains are not, and whereas I surely do have personal discretionary control over “when” I receive (realize) capital gains but have no similar control over “when” I am paid (realize) dividend income, it’s plain stupid to prefer/want/seek dividends over capital gains.
This “debate” is asinine, and I am genuinely disappointed – even disturbed (actually angry) – to find that it has been deemed worthy of “publication,” never mind “within” Bill Bonner’s Diary…
It’s ALL CRAP in my estimation – and fully compatible with and equivalent to “clueless” MSM bullshit blowhards with their own private agendas and hidden motives. CONGRATULATIONS!
Sorry, Robert. But I respectfully disagree.
Forecasts like the one Robert outlines above – a market “destined,” as he puts it, to “crash hard soon” – don’t mean much to me. The truth is nobody can see into the future. And let’s face it. Nobody can know that the market is “destined” to do anything.
Of course, you must think about the risks inherent in any market. And you may well think that those risks are particularly high now. But fall in love with your wife, not your forecast. No one can know for certain how every single rally and correction, boom and bust, will play out.
What we CAN know is how certain types of investment strategies have played out over time in certain types of markets. You CAN also know that in just about any period you want to mention, S&P 500 dividend-payers outperformed non-dividend-payers.
But let’s assume Robert is right. And that the stock market is “destined” for a serious correction. In 2008, about the worst thing you could do was own stocks of any type, right?
Despite the S&P 500’s 41% decline from peak to trough, a number of stocks did pretty darn well. Take Family Dollar Stores Inc. (NYSE:FDO) and Wal-Mart Stores Inc. (NYSE:WMT). They ended the year with a 35.6% and 18% gain, respectively.
These are two of the premier names in discount retail – a sector that tends to do well when the economy hits the skids.
But they’re also consistent dividend payers. Not only were Wal-Mart and Family Dollar able to continue paying dividends during the financial panic of 2008, but also they were able to increase their payments. This gave shareholders stability and profitability at a time when these two qualities were scarce.
Robert also raises the straw man of taxes.
This is something I come across all the time. There is huge confusion over this issue. But under current law, dividends and capital gains are taxed at the same rates.
Here’s how the Wall Street Journal summed up the deal struck on taxes at the start of this year. (You can read the full article here.)
Qualified dividends, as well as capital gains, for individuals in the 25%, 28%, 33% and 35% income-tax brackets will continue to be taxed at 15%. Individuals with more than $400,000 in taxable income – and couples with more than $450,000 – will see the rate rise to 20%. (People in the 10% and 15% brackets, as before, will have a zero tax rate on dividends and capital gains.)
Still not convinced? Feel free to drop me a line. Just hit “reply” to this email. I read each email that hits my inbox. And Will said he’d have me back at a later stage to update you on the progress of my “experiment.”
P.S. I opened up slots for 500 Diary readers to receive two months of my latest income investing recommendations. If you managed to sign up to the “experiment,” it’s great to have you onboard. I’ll be in touch soon with what to expect. If you didn’t manage to sign up, I’m sorry. We hit our limit on Monday. So there are no more slots available. But Will has promised to give Diary readers the opportunity to sign-up to my new service once the beta-test period is over. So look out for more on that soon…