Thursday, May 28, 2015

Venezuela's Currency Approaching Escape Velocity

In early November last year we had made a bet with clients that Venezuela's bolívar fuerte would weaken to USDVEF 200 by January 1st of this year. We were wrong. It hovered in the 175-190 range. 

Today, however, the Venezuelan bolívar fuerte has sailed past 200 and set a new record of USDVEF 423. That means that had you put your money in a bank in Venezuela at the beginning of the year you've now lost half its value.

[Technical note:  bolívares fuertes are often abbreviated as Bs.F. however the ISO currency code is VEF. As traders we always reference the exchange rate by using the ISO code.]

As many of you know we have long covered the situation in Venezuela. We have numerous friends and clients that are Venezuelan and we continually see the pain they endure as they watch their country sink further into economic ruin.

The currency is now very close to hitting escape velocity. When that happens it will be depreciating by enormous amounts every day until it is literally worth less than the paper it is printed on.

The human mind tends to be better equipped to grasp linear trajectories. This mental flaw has been one of our largest competitive advantages in predicting market moves. 100% of the time when currencies head towards terminal decline they move exponentially. Venezuela's currency is already on an exponential trajectory which means the terminal stage is now in motion. Our next post will probably be an eulogy. R.I.P. Venezuelan bolívares fuertes.

 Here's a view of the black market currency rate for the last 5 years. Historical data courtesy of

If you'd like to read more of our blog posts about Venezuela you can find them here.

Monday, May 11, 2015

Is Miami real estate in a bubble?

We live in Miami and the one question we get from investors all over the world is "should I invest in Miami real estate?" Our go to response is that we don't advise on real estate investments. As of late this doesn't seem to satisfy anyone. Clients want our view. Clients want to know if we own Miami real estate and if so where and why. Ok so we surrender! You asked for our opinion so we'll give it to you.

To begin with  NO we don't own any real estate, at least not directly. If you buy real estate all cash you're tying up a lot of equity in a non-liquid asset. If you leverage the real estate investment with a mortgage then you are adding leverage on a non-liquid investment. Even with a 20% down payment you are leveraging your investment 5:1.

Miami real estate started to recover in 2011. If you bought Lennar Corp stock at the close September 1, 2011 at 13.54 and were still holding it today where its trading at 47.10 you'd have a 348% return on your money. If you leveraged that 5:1 like you might have done with physical real estate you'd have a 1,740% return.

Some might argue that stock prices are more volatile than property. We've used Lennar, a South Florida home builder here in this example but you could just as easily buy into a publicly traded REIT. There are REITs for every possible real estate strategy and region you can imagine. You could also buy call options on REIT's or stocks of home buyers to capture upside while limiting downside. Try doing that with a physical property! Physical properties require maintenance, management, and lack liquidity. That's too much headache for our appetite when we can replicate similar exposure with better risk/reward characteristics.

Now let's get into Miami specifically. Every developer is always going to tell you that "this time is different". Every day I hear that foreigners are buying condos for cash and that will support the Miami market. People have such short memories. That was the same thing that was said in the last real estate bubble. No doubt Miami is a haven for flight capital but there is nowhere near enough flight capital coming here to support 300 new condo towers (see below). Flight capital is also not immune from circumstances in their local markets. Emerging market currencies have been crushed this year. Most foreign investors are investing offshore capital that they have generated from a local business situated in their home country. If that local business really begins to struggle they will rein in their offshore investing.

The number one thing propelling the resurgence in Miami's real estate market is the same thing that is propelling asset bubbles around the world - unprecedented credit injections by the world's central banks. The mistake everyone is making is believing that you can cure a debt problem with more debt. You can cure a debt problem by refinancing existing debt with cheaper interest rates but you can't cure debt by significantly growing the total amount outstanding.

As the Federal Reserve has ballooned its balance sheet we've seen that assets around the world have soared!

Here's some other notable data points:

Imagine that nearly 40% of new residents are going to pay half or more of their income to rent. This is not at all sustainable and like the last bubble has all the tell tale signs of a burst coming any moment.

We believe real estate is an important asset class. Owning your home is a great idea if you've found the one that you plan on being in for awhile. If you're in the real estate business and that's where you derive most of your income then that makes sense too but if you're just dropping your investment eggs into physical real estate for speculation like buying Miami pre-construction then you should really think twice about what you're doing.