Linking ≠ endorsement. Enjoy and share:
↑ Tax Geek Tuesday: Why You Should Never Hold Real Estate In A Corporation – Forbes
Put a building in a C corporation, and it’s not getting out — either by sale or distribution — without triggering two levels of tax. Contribute the property to an S corporation instead, and the property can’t come out without triggering corporate-level gain. But place appreciated real estate into a partnership, and you receive the gift of flexibility; you can always undo your previous decision and distribute the building without recognizing gain at either the partnership or individual level.
Of course, there are liability issues with partnerships that are not present with corporations. Check LLC’s as well. If you are buying to hold, that could also make a huge difference in your decision as to which legal form to choose.
↑ John Mauldin On The Central Banker Throwdown
Tapering has revealed a big weakness in the global economy. At first, reducing QE by $10 billion per month seemed like a relatively meaningless amount in a world where trillion-dollar bailouts have become acceptable if not commonplace. But the Fed’s last move was HUGE in terms of the overriding narrative in global markets. As my friend Ben Hunt said recently, Ben Bernanke turned a single data point into a line during his last months in office. He established a trend, and the markets are reacting as if the Fed’s exit strategy has officially begun.
Whether the Fed can actually turn the taper into a true exit strategy ultimately depends on how much longer households and businesses must deleverage, but the markets now believe this is the beginning of the end. And the Fed sent a very clear message to the rest of the world: now it really is every central banker for himself.
John’s article is very interesting, though we disagree that manufacturing is flooding back into the US. It has increased and will likely continue to do so, but it is our view that John has overstated it.
We also have recently posted a link to a study purporting to show evidence that raising interest rates in the face of hot-money outflows is not necessarily the best move, that the negative impacts of not raising rates lasts only some 3 months or so: Tapering and emerging-market capital flows | vox.
We tend to side with John more on that one, but we’ll see.
↑ Severe drought has US west fearing the worst
California real estate will be slammed by this if it continues, but that’s not high on everyone’s list of worries.
“I have experienced a really long career in this area, and my worry meter has never been this high,” said Tim Quinn, executive director of the Association of California Water Agencies, a statewide coalition. “We are talking historical drought conditions, no supplies of water in many parts of the state. My industry’s job is to try to make sure that these kind of things never happen. And they are happening.”
We have been calling for major desalinization plants for years. Maybe now they’ll start doing what it will take to head off the next disaster even if decades away, which we doubt it will be what with AGW.
↑ The Current Scientific Consensus on Climate Change and Hurricanes—It May Surprise You – Carrier Management
This is a moving target.
All projections are for continued sea level rise that will subject coastal properties to higher wind speeds from landfalling hurricanes along with making the properties more vulnerable to storm surge flooding.
In summary, according to the most recent scientific consensus, human activity has of yet had no detectable influence on hurricane activity. Anthropogenic climate change is likely to impact hurricane activity later in the 21st century. The frequency of storms is likely to decrease or remain the same, but hurricanes are likely to become more intense—possibly with maximum wind speeds 2-11 percent higher by the end of the century.
Hecht says policies from his company aren’t intended for properties that are a frequent flooding risk. Policies will typically be for older homes with basements.
↑ In The World’s Best-Run Economy, House Prices Just Keep Falling — Because That’s What House Prices Should Do – Forbes
… Locke, a prominent critic of America’s latter-day enthusiasm for doctrinaire free-market solutions and a professor emeritus at the University of Hawaii, notes that a key outcome is that Germany’s managed housing market helps smooth the availability of labor. And by virtually eliminating bubbles, the German system minimizes the sort of misallocation of resources that is more or less unavoidable in the Anglo-American boom-bust cycle. That cycle is exacerbated by tax incentives which encourage citizens to view home ownership as an investment, resulting in much hoarding and underutilization of space.
In the German system moreover, house-builders rarely accumulate the huge large land banks that are such a dangerous distraction for U.S. house-builders like Pulte Homes, D. R. Horton, Lennar, and Toll Brothers. German house-builders just focus on building good-quality homes cheaply, secure in the knowledge that additional land will become available at reasonable cost when needed.
It is also interesting to note that Germany is such a highly mixed economy, favoring libertarian-like austerity concerning easy credit, etc., while maintaining such progressive rental and land policies.
↑ Target data breach could affect real estate transactions – latimes.com
Listen to Terry Clemans, executive director of the National Consumer Reporting Assn., the primary trade group that represents independent credit-reporting companies serving the mortgage industry. Clemans says that mass identity heists such as those at Target and Neiman Marcus have the potential to create “havoc on credit files for as long as it takes for the consumer to document [that] the accounts are due to identity theft and get them removed from the file. The impact on credit scores, although short term, is devastating because they are current defaults and [trigger] a big hit to the score. With the sizes of the breaches, this could be painful for a long time.”
↑ New York Property Managers Devise Survival Plans for the Next Disaster – NYTimes.com
… a 21-piece survival kit that ABS has begun installing in many of its buildings, including 44 Wall Street in the financial district and 210 11th Avenue in Chelsea, which were particularly hard-hit by flood damage.
The kits include gallons of distilled drinking water, which has a longer shelf life than typical bottled water; military-grade food rations that have high caloric value if not much taste; and rubber suits to protect underclothes. Depending on how many people need them, these survival kits can cost $4,500 to nearly $7,000 apiece.
… miniature toothbrushes and toothpaste, shampoo, razors and shaving cream. … enough clothes to last several days, emergency cots, heavy-duty work gloves, a multiuse tool, batteries, a first aid kit, flashlights, battery-powered radios, sump pumps, boots, a generator, bleach, five-gallon gas drums, duct tape and even a closet with a lock.
… canned food like tuna fish and soup, wash cloths, socks and a hand-cranked radio with flashlight. … 5,500-watt portable generator.
What would you list?
↑ Obama’s Speech Raises Hopes of Advocates of Mortgage Finance Overhaul – NYTimes.com
Professor White [Lawrence White, an economics professor at New York University’s Stern School of Business] said. “Rental housing is often the forgotten element of a lot of rhetoric about housing. Even in the president’s speech last night [State of the Union, 2014], it was about the American dream, which is supposedly home ownership, but surely if we have learned anything over these past five, eight years, it’s that home ownership is not for everybody.”
↑ Richard H. Serlin: Important Points that are Rarely Made on Income Inequality Statistics
An extremely important point: Richard H. Serlin:
The statistics you almost always see are per household, not per adult, or earner. For some of these quintiles, deciles, etc. you see a slight gain — over 30 or 40 years — but it’s per household, not per worker. To make only slightly more over a generation or more, and then it’s only with now both spouses having to work to get it! This should always be talked about. It makes it much worse.
… if reducing tax rates on the rich increases jobs and incomes for the poor, why is inequality increasing? Why have low and middle incomes been stagnating for twenty years while the incomes of the rich have continued to rise? Why has unemployment been persistently higher in the era of low tax rates for the rich than it was when tax rates were higher? It would be equally reasonable to argue that the causal link runs in the other direction: the rich have benefited disproportionately from rising general prosperity that is largely due to technological change, and lower tax rates simply enable them to keep more of the wealth they have extracted. Indeed this explanation seems to fit the evidence better: if the rich really are able to extract wealth disproportionately, we would expect inequality to increase over time — which is what is happening, particularly in countries that have explicitly cut taxes for the rich. If the causal link runs in this direction, then there is a strong case for RAISING taxes on the wealthy, not reducing them.
We completely agree with Frances.
We should not raise taxes on anyone but the very rich. We should reduce taxes on the very poor. In fact, the very poor and poor should pay no taxes.
What’s your view on it?
↑ The euro zone: Where has all the money gone? | The Economist
… this looks like a very weak recovery, if it is one at all; loans to the private sector, for example, fell 2.3% in the year to December and those to non-financial corporations dropped 3%. And euro zone inflation at 0.8% is well below target.
↑ Mortgage Bonds Head to Biggest Gains Since 2008 in Reversal – Bloomberg
Government-backed U.S. mortgage securities are poised for their biggest monthly gains since 2008 after posting their first annual losses in 19 years, as investors seek havens amid turmoil in developing nations.
Of course this is good for mortgage rates, and with the competition of the returning hot money in the ongoing flight to safety, the Fed’s continued buying, though less than before, will still add downward pressure on rates. It’s awfully expensive for the world economy; and it should still increase disinflation in the US, which the Fed doesn’t want. Well, let’s hire people at both the private and public sector levels to heat up the economy then!
What needs doing? That should be the central question right now. Let’s train the people to do the work that needs doing and pay for it via United States Notes.
The Fed would be mortified though that the US would be financing itself without borrowing and paying interest via taxes.
↑ Fed draws criticism from abroad as emerging markets still reeling | Reuters
The pressure, however, is unlikely to dissuade the Fed from ramping down its asset purchases by later this year unless the turbulence starts to derail recent momentum in the U.S. economy. Fed policymakers did not mention emerging markets in a statement on Wednesday, when they unanimously decided to trim bond-buying by another $10 billion per month.
“So far I don’t see anything that’s happened in the last month around markets as fundamentally shifting an improving outlook for the U.S. economy and improving labor markets,” San Francisco Fed President John Williams said Friday on Fox Business television.
You see there that they are gambling with disinflation, even outright deflation with all of it’s attendant problems.
↑ BBC News – Fall in eurozone inflation rate fuels deflation concerns
Calls for European Central Bank action to help protect the eurozone’s fragile recovery have grown after the release of inflation and jobless data.
Official figures showed that eurozone inflation fell to 0.7% in January, down from 0.8% in December and further below the ECB’s 2% target.
It has fuelled worries about whether the euro bloc could suffer deflation, potentially de-railing economic growth.
Separate data showed the unemployment rate in December was unchanged at 12%.
↑ Krugman is Wrong About the Market and Hot Money – YouTube
Excellent explanation by Heiner Flassbeck:
As “hot money” reeks havoc around the globe, Heiner Flassbeck, former director of UNCTAD, says economist Paul Krugman continues to have faith in the market to establish exchange rates.
Paul Jay doesn’t understand here that money flowing into the US is lowering mortgage rates, but it is a complicated interplay, which he acknowledges.
↑ Death toll rises after Indonesian volcano eruption – YouTube
Indonesia’s Mount Sinabung volcano on the island of Sumatra is continuing to spew ash as the number…
↑ As the temperature drops, your risk of fracture rises | University of Michigan Health System
Keep your walks and stairs, etc., clear of snow and ice especially on these slipperier days.
Record-setting winter weather in the U.S. has led to lots of road condition advisories, but could there also be a slip and fall alert?
By analyzing various conditions — like snow, wind speed, temperature — into a ‘Slipperiness Score,’ a University of Michigan Health System study helps identify what days are the most risky for slip and fall injuries.
Strangely, this has not been a big story in the West.
In order to stop contaminated groundwater from leaking at the Fukushima nuclear power station, the Japanese are planning to use artificial permafrost there. They’re going to drill 30-metre-deep pipes with liquid nitrogen. The construction of the huge underground fridge will start soon and is scheduled to end next year.
↑ EconoMonitor : Thoughts From Across the Atlantic – Turkish Monetary Policy at the Crossroads
Thomas Grennes & Andris Strazds:
Turkey’s dependence on short-term capital inflows makes it vulnerable to changes in spreads between Turkish lira and foreign interest rates. If US interest rates rise, Turkish rates must rise as well, otherwise Turkish lira denominated assets will not be competitive. If simultaneously the country risk premium for Turkey also rises, interest rates in Turkey will have to rise even more. Otherwise capital will flow out, and the lira will depreciate further.
However, there are counter arguments such as that raising rates too much will tighten everything up internally, greatly slowing the economy. Allowing the rates to float without interference would make Turkish goods and services more competitive internationally.
What’s the proper balance?
It will be interesting to watch what the higher interest rate does.
↑ The Trouble with Emerging Markets by Nouriel Roubini – Project Syndicate
Speaking of tightening: Nouriel Roubini:
… structural reforms are not likely until after elections; and incumbent governments have been similarly wary of the growth-depressing effects of tightening fiscal, monetary, and credit policies. Indeed, the failure of many emerging-market governments to tighten macroeconomic policy sufficiently has led to another round of currency depreciation, which risks feeding into higher inflation and jeopardizing these countries ability to finance twin fiscal and external deficits.
… the short-run policy tradeoffs that many of these countries face — damned if they tighten monetary and fiscal policy fast enough, and damned if they do not — remain ugly. The external risks and internal macroeconomic and structural vulnerabilities that they face will continue to cloud their immediate outlook. The next year or two will be a bumpy ride for many emerging markets, before more stable and market-oriented governments implement sounder policies.
We think he’s right that the main point is that they all waited too long to reform in preparation for what’s happening right now.
↑ BBC News – Who’s to blame? The Fed taper debate and contagion
Irrational actors and too many variables regardless: Linda Yueh:
As global markets are inter-linked, how emerging economies cope will reverberate back to the US.
Perhaps the answer to who’s to blame is that causation is difficult when there are numerous macroeconomic linkages so there isn’t one cause but rather one action leads to another.
As a statistics teacher would say, correlation doesn’t imply causation. It may be that it’s not a question of who’s to blame, but rather how to disentangle and manage the many correlations in an interconnected world economy.
↑ [Highly Recommended] Markets Tumble. How Will the Fed React? – Tim Duy’s Fed Watch
This is the best article we’ve seen to date that jibes with our own take on the impact of the taper.
We see that Tim Duy also sees that the taper is tightening, disinflationary, and obviously premature, all of which we’ve been writing too.
Ben Bernanke appears to have deliberately taken the heat off Janet Yellen by testing the waters for her before she would otherwise have been saddled with having led the way on the timing of the taper. She may now ease up and take the credit.
Unfortunately, it might take one more cycle before she’ll either see it or do it depending upon how she’s reading the people around her and the domestic and global politics and economics of the situation. We truly hope she’s more on the ball than that though, but it remains to be seen. We’ll know soon enough.
Bottom Line: The Fed is once again in a familiar place. They try to pull back on policy, and markets tumble. Tightening has repeatedly proved to come too early; one wonders if the Fed would have had to keep doing more if they didn’t keep promising to do less. If history is any guide, they will eventually reverse course. But that same history would suggest that they need to see conditions deteriorate further before they act.
1. The JW Marriott Marquis Dubai Hotel is the world’s tallest hotel, a 72-storey, 355 m (1,165 ft) twin-tower skyscraper complex in Dubai.
Question from one of our readers: what is cash-on-cash return in a commercial real estate investment context?
Answer: At its most basic, cash-on-cash return is defined as annual pre-income tax operating cash flow (annual Net Operating Income less Financing Costs less Capital Costs) divided by the total cumulative cash investment in the property. However, there is some nuance here that needs to be detailed to make sure we fully grasp what exactly the cash-on-cash return in a particular yearly period represents.