Hi, Enzo:
I cannot post any more today on lbo-talk.
Greenspan agrees with you about central banking. But he is scared out of his wits. He is down to his last two bullets and he is not sure the powder in them are dry. If you reread his recent speeches, he is essentially saying he does not know what to do and please don't blame him, blame the market. He no longer even claims everything is O.K. Right now, we are just in the lull before the next storm. It could happen any Tuesday. I don't know anyone in NY that is optimistic and relaxed, except bankruptcy lawyers.
I cannot be too specific about REITs because I am involved in a major one with a major NY banks that is very much in the news. You can probably guess which one, but I cannot tell you.
But in general, this is the REITs' problem:
REITs borrow short term funds from banks (with a REPO repurchase agreement) to acquire properties or sell or acquire mortgages with an intention to sell mortgage-back securities (CMO- collateralized mortgage obligations or CMBS- commercial mortgage backed securities) in the securities market. As a trust, US law requires it to pass through most (98% or more) of the cash flow and all tax liabilities to the investors. The REITs made their profit in the packaging, and thereafter act only as accountants and collectors. During risk adverse periods, like now, the REITs cannot sell new securities at all or at a high enough price to pay back the short term bank loans loans, even though the cash flows from the properties or mortgaged are currently healthy or even robust. The REPOs default. Low interest rates do not help them, because investors are demanding prohibitively high rates for junk bonds or no buyers at any rate. That why I said Greenspan is pushing a the credit string. So you have a situation in which the entire REIT industry is going down the drain while occupancy and rental rates are high. Since there is no new acquisition because of a shortage of risk taking funds, property prices fall and money velocity slows, starting a downward cycle of fire sales, mortgage defaults and bankruptcies that wipe out otherwise good equity which in turn endanger collateral value. The same is expected to happen in the manufacturing sector when convertible bonds and other securitized debts collapse with the credit market while the banks are sitting on piles on cheap money. It is happening to HK in a smaller scale now. The Fed is institutionally much better positioned to fight inflation than to fight deflation, because traditionally, deflation was fought by fiscal Keynesian mean rather than monetary means. The Fed cut rate last week trying to fool the market into knee-jerk reaction, but nobody jumped. Rates will come down but it would not help the economy. all low rates will do is to buy some time. With each cut, the impact will be less, until it reached 3% and the market will say, although rates will need to come down, but that is not enough. Greenspan cannot print money, because it rate immediately push rates up to 10% or more. Today, there is a new item that the FEd is printing US$40 billion as a contingency fund for a Y2K banking foul up on bank accounts. What do you think is the real reason for the new cash?