“Everything seems to be going up here,” reports our old friend, Doug Casey, in Buenos Aires. “We bought a place down here for $1.2 million only about a year ago. Last week we got an offer for $1.7 million. And it’s not even for sale.”
We were sitting in a restaurant not far from the Four Seasons hotel. The place was packed. We had to wait for a table.
“I liked this place better a couple of years ago,” Doug continued. “You could go into any hotel and any restaurant in the city. You didn’t need reservations; they were all empty. And very cheap.”
Buenos Aires is still relatively cheap, but only because everything else is so expensive. A nice four-bedroom apartment can be had for $400,000 – maybe $500,000. That is peanuts compared to similar digs in London, Paris or New York. But it’s twice what they sold for here three years ago.
“This place is extremely cyclical,” continued our friend. “It goes up and down in cycles of about ten years. This up-swing began about four years ago…so I figure it’s got at least another five years or so to go. That would be a good time to sell.”
Humans are ‘thinking, expectant beings,’ we recall from last week’s quote of Edmund Phelps – which is why you can’t count on cycles. As soon as they begin to expect a cyclical change, it changes in some way so as to catch them off-guard. Expecting a slump in 2010, for example, investors are likely to sell in 2009…bringing on the correction a year early.
That is the trouble with thinking, expectant beings. An alarm clock neither thinks nor expects. Set it for 6AM and it will go off everyday at 6AM. But when men begin thinking and expecting, well, anything can happen.
We read in today’s paper that consumer prices – as well as real estate prices – are rising in Argentina. They’re up 12.5%, says La Nacion. Elsewhere, we read the investors are taking up more fixed-income assets. And what rate of return are they getting on their money? This is the funny part – just 8%.
Obviously, something is going on that we don’t understand. What sense does it make to lend money at 8% when consumer prices are rising at 12.5%? What is it that they put in the water down here? We admit – we are still only learning Spanish. Maybe we got it wrong.
Then again, north of the equator…and north of the Rio Grande…there might be something in the water there too. What does a lender get – 5%? What is the rate of consumer price inflation? It’s hard to say…but there is also the dollar to consider. If it goes down another 10% next year, a U.S. Treasury bond yielding less than 5% may not seem like such a good investment – especially to the thinking, expectant beings who keep score in other currencies. They’re likely to start thinking that maybe lending in dollars at 5% is not such a good deal after all. They might even begin to expect another year of losses. “Maybe the price of gold will go up another $100,” they may think to themselves.
And then…whammo…the Crash that no one thought possible is suddenly the Crash that everyone is trying to avoid – by selling U.S. dollar assets all at once.
We caution readers that, most likely, a crash will not happen. Crashes are rare. Nor do we have any special information on the subject. Most often, what happens tomorrow is what happened yesterday. But there are times when betting on a change brings you such a nice long-odds payoff…it’s worth taking the bet, even if it doesn’t happen.