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Selling the Landscape: Sold--5% of State of Maine   (November 10, 2005)

As noted here on Nov. 5, the world is awash in $46 trillion in cash, all of it seeking high returns. Now for sale: the U.S. landscape; owner: your typical shady hedge fund, or worse. If you're a subscriber to the Wall Street Journal, check out this story online: U.S. Timberland Gets Pricey As Big Money Seeks Shelter. (Non-subscribers can read it at their local library.)

The story's headline encapsulates the issues very neatly:
"Rush Reflects Glut of Capital, Low Payoff on Other Assets; Sold: 5% of State of Maine But Do Trees Grow to the Sky?"

Here's the situation in a nutshell: as it gets harder and harder to make a killing in real estate and global stock markets, and as low interest rates guarantee most bonds don't even keep pace with inflation, then money managers are pouring money into "hard assets" like timberland.

There's only three problems with this land rush:

  • The investments are illiquid, meaning when the economy goes south in 2006-2012 the new owners won't be able to unload them. Using Japan's "Lost Decade" as the example of how financiers handle this destruction of wealth, we can expect them to keep the assets on the books at what they paid for it, when in fact it's worth only a fraction of the purchase price.
  • Using financier Charles Hurwitz's raping of the forests owned by Pacific Lumber Company in Northern California as the model of how your typical financial type handles forest stewardship, we can expect that as their house-of-cards empires collapse, these money managers will sell the timber to pay down debt--and never mind what that "harvesting of assets" does to the ecosystem or the local landscape.
  • This enormous ocean of global capital has created bubble after bubble around the world as it shifts from one sector and region to the next; having driven every asset class into a bubble, there is no safe haven left (except perhaps gold) when all the bubbles pop.

    And why will the bubbles all pop? Inflation is rising globally, will will necessarily push interest rates higher. As the cost of servicing the enormous mountain of accumulated debt rises, so will bankruptcies; once cheap money disappears, then there will be no buyers left to bid up overpriced assets. Once buyers vanish, then prices plummet. As prices drop, owners must liquidate assets at a faster clip to make their interest payments, creating a vortex of increasing "fire-sales" and sinking assets values. As more owners fail to make interest payments, banks repossess more assets and auction them off, increasing the oversupply of assets for sale, adding even more downward pressure on the price. A self-feeding cycle of wealth destruction will be firmly in place, with no end in sight.

    But don't take my word for it--just keep your eyes open in late 2006, when the cycle will become clearly visible.

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    copyright © 2005 Charles Hugh Smith. All rights reserved in all media.

    I would be honored if you linked this wEssay to your site, or printed a copy for your own use.

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