Just recently I wrote about the profitable opportunities that the government creates for the aware … and well off … investor. It concentrated on the Caxton Associates hedge fund and Andrew Law its Chief Executive Officer and Chairman and dealt with Mr. Law's comment that there now existed "A Glut of Trading Opportunities." The post examined Mr. Law's position.
More information is now becoming available about how the "glut of opportunities" that has existed over the past few years, several of which I have written about, is working out. One example of this is the report on the Bloomberg website "Blackstone Funding Largest U. S. Single-Family Rentals."
In this article we read "Steve Schwarzman's Blackstone Group LP has spent $7.5 billion acquiring 40,000 houses in the past two years to create the largest single family rental business in the U.S."
And, Blackstone is not the only one forming organizations to buy houses and rent them out. Other hedge funds are doing this. Construction companies are doing this. Real estate investment trusts are doing this. Investment firms are doing this. And, I know at least five individuals involved in real estate that are forming vehicles to do exactly the same thing.
Do we have a housing recovery or do we have a "boomlet" in the housing sector underwritten by the Federal Reserve?
And, who is benefiting from this increase in home purchases? Certainly not the middle-class! But, I commented on this development in February in my post about how Bernanke is underwriting the wealthy.
And, the 'opportunities' were especially nice as Blackstone benefited not only from the lower prices resulting from the collapse of housing prices through the purchase of individual properties but they also benefited "through foreclosure auctions and short sales."
But, now others are getting involved. The Bloomberg article goes on about how Blackstone is planning to sell bonds backed by the lease payments on the rentals. "Deutsche Bank AG may start marketing almost $500 million of the securities as soon as this week … ."
Going further, the article quotes Rob Boemker, chief executive officer of Five Ten Capital LLC, an investment firm, as saying "Securitization is the next step in the evolution of the single-family rental business. It brings consistent and conforming standard to lending, which will help bring larger pools of capital in and get comfortable investing in these types of loans."
And, now, housing prices are beginning to rise faster. "The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent in July from a year earlier, the biggest advance since February 2006."
So, the value of the assets being purchased by hedge funds, construction companies, real estate investment trusts, and investment firms are going up. Sounds like a win-win for these organizations.
Note, however, that with all this buying going on and the financing of these purchases that are taking place, residential real estate lending is not increasing in the banking system. Loans to finance these purchases would most likely be considered to be commercial loans if they are going through the commercial banking system. Also note that these purchases are for existing homes and not new construction.
Thus, prices are increasing without much gain in housing construction. So, this situation carries with it the threat of a new bubble in housing prices, a possibility suggested by Robert Shiller, even before he received his Nobel Prize.
But, this is a situation that is not unlike what is happening in the economy, as a whole, and stock prices. A discussion of this is found in "The Short View" column by Michael Mackenzie in the Financial Times. Mr. Mackenzie argues that the economy of the United States is not growing very rapidly and this is restraining the growth of corporate earnings. Yet, the U. S. stock market is doing very well, the S& P 500 being up 23 percent so far this year.
Mackenzie gives a lot of credit for this increase to the Federal Reserve and its policy of quantitative easing. In fact, the irony of this is that when the government announced that the rise in payrolls in September was a lot weaker than expected, the stock market rallied because of the belief that the not-so-good economic news would cause the Fed to continue to purchase securities at the current rate of increase rather than reducing the rate as had been expected until recently.
He continues, "Such a rally will only intensify the divergence between equity valuations and the underlying performance of the economy." But, "For now, equity bulls have time on their side as the Fed keeps the liquidity punchbowl filled to the brim." This is an issue that I examined in "The Stock Market and the Economy--Warren Buffett."
So, many profitable opportunities seem to exist in the United States at this time. Unfortunately, most of these opportunities seem to be related to the monetary policy of the Federal Reserve System and will continue to exist as long as the Federal Reserve pumps money into the economy at the present pace.
Obviously, the risk of taking advantage of these opportunities is that one day the Fed will have to remove the punchbowl. And, as is well known, when the punchbowl is removed there will be a rush for the door as people attempt to all leave the party at the same time.