Tags: Zell | housing | stocks | Fed

Sam Zell: Stock Market Is ‘Very Treacherous’

Thursday, 11 Apr 2013 11:17 AM

By Glenn J. Kalinoski and Nancy Stanley

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The current stock market rally reminds Sam Zell, chairman of Equity Group Investments, of the housing market in 2006.

“Everybody feels they can’t afford to miss it,” he told CNBC. “Every single day [the market] goes up. Every day in 2006, the housing market went up.”

While Zell wouldn’t predict how low stocks would fall if a crash like that in the housing market occurs in the stock market, “I just think that we’re suffering through another irrational exuberance,” he noted.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

Zell said global currencies are being debased because of the Federal Reserve’s easy-money policy, which will lead to inflation.

“If you reduce the value of the currency, at some point, you're also going to reduce its buying power. That translates into a lot of inflation,” he explained.

“What we're seeing here is like a giant tsunami of liquidity, but I don't know that that necessarily means that things are better. I think the level of uncertainty may in fact reach a point where people are just throwing money, because they don't know what else to do with it.”

The Standard & Poor's 500 Index and the Dow Jones Industrial Average reached record highs Wednesday.

“This is a very treacherous market and, yes, it's gone up every day, and yes, you're not supposed to fight the Fed,” Zell maintained. “But you don't have to necessarily fight the Fed if you want to sit on the sidelines.”

The Fed is buying $85 billion in Treasury and mortgage-backed securities per month to stimulate the economy.

“It's like they're defying mathematics, let alone logic, history, everything else,” he said. “I don't know how we're not going to be confronted with a serious inflationary response to this. I don't know when. There are all kinds of factors, and obviously, the Federal Reserve is manipulating the system.”

Zell noted that the single-family real estate market and the commercial real estate market are “really very separate.”

“If you look at the single-family market, we've seen increases in pricing in the last six or seven months,” he said. “But from a supply-and-demand point of view, those prices, I believe, are going up because there's a big chunk of the supply that's not in the market —houses that are either unforeclosed or unresolved,” he said.

Meanwhile, the commercial real estate is in “the middle of a very major transition.”

“Basically we’ve built no office space since 2007, and yet we've also seen no increase in rate and a relatively small increase in occupancy,” he explained. “Usages are changing.”

Edward Pinto, who was the chief credit officer at Fannie Mae from 1987 to 1989, said the rebound in the housing market is "eerily familiar to the previous government policy-induced boom that went bust in 2006, and from which the country is still struggling to recover."

In an opinion article in The Wall Street Journal, Pinto noted that the Fed's aggressive policy of quantitative easing has lifted the stock market to record highs and supported strong bond prices. Moreover, he says, housing prices have jumped 8 percent, the biggest annual gain since 2006.

Pinto, now a resident fellow at the American Enterprise Institute, noted that the market value of single-family homes has risen by more than $1 trillion. That "wealth effect" should empower homeowners to spend more, thus boosting the economy.

But data from the Federal Housing Finance Agency suggest the increase in house prices reflects that the Fed's lower rates are simply being capitalized into higher home prices, he explained.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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