Absent Liquidity, What Do You Have?
The greatest perspective about the United States stock and bond market is that it provides liquidity. A client can call me up and in trade plus three days have a check or bank wire drafted and way they go. For a while it looked like real estate was going to have permanent liquidity because of the securitization market for asset backed securities. Investors were able to make large, leveraged purchasing of hard assets without concern for there being a viable market in the future. Unfortunately, that just isn’t the case anymore. The United States government is trying to do everything it can to keep asset prices from crashing. And that is the job of the elected official. However, the job of the investor is to make a trade. That is what happens in a market crash. Smart money comes out of the woods and makes long-term investments in assets that were previously too expensive or too risky for those that sat on the sideline. They get rewarded for patience with low priced assets and the seller takes a loss. The problem is the majority holding political office do not want people to feel uncomfortable. That is the heart of the problem. With intervention operating the way it is with bailouts, stimulus packages, mortgage reworks, TALF, TARP, etc., I’m afraid the US government has put a plug on things returning to the way they used to be. What I am saying is who in their right mind is going to pay $7500 per square foot for a 3 plus acre 3800 square foot house on Pebble Beach? The cost is $31,000,000 dollars. What is even more entertaining is to look over Redfin.com and see that many homes at this luxury level have been on the market for 1000 days. Most are holding at 400 days on MLS. So the question is where is the liquidity for that asset? No one wants to pay property taxes on that property. At 1.25%, that’s $32,291.67 per month to the county tax assessor.
In the past we could have looked for the public stock market to provide liquidity, but that was taken away by Elliot Spitzer and Sarbanes Oxley changing employee stock option expensing. But that didn’t quit ruin liquidity because the banks started lending like never before and the tech wreck provided new ways to invest and profit. Private equity and hedge funds. Two of the most illiquid forms of investing. They promised handsome returns and for that investors lined up around the block swearing they were long-term investors who qualified as accredited investors. So the professionals that made money off trading and investing in tech IPO’s went to hedge funds and private equity and the investors followed. So much for once burned twice shy. They difference was these new investors left the public regulated world that Elliot Spitzer tried so desperately to cleanse. funny thing is Elliot left that world too. I digress. So the investors were making money, the money managers were making money, and the real estate kept getting bought. As a matter of fact it created so much liquidity, that those illiquid funds started buying publicly traded companies and taking them private. Like that great deal Cerberus got on Chrysler.
Well are you ready? People started withdrawing their money from assets. All of them. From really hard investments to sell.
So it’s back to basics for investor education, “What is your investment time horizon”, and “Describe your risk tolerance”, or “How soon before you need you money”?
"Greg Gilbert and James Simos" are registered representatives of FINRA member firm, "Infinity Financial Services."
