The World's Tallest Condo: World Empire Towers

Just as a bird in the house is a warning of a death to come; the construction of the world’s tallest condo is a signal that the housing bubble is bursting at the seams – ready to pop any minute.

Mr. Leon Cohen has proposed building the world’s tallest condo – 110 stories towering over Miami like a colossal perforated bomb that forgot to explode.

We salute Mr. Cohen for his boldness. We admire his audacity. We applaud his can-do spirit. We give a knowing wink at his clever name for the place – Empire World Towers. Or was it, World Empire Towers? To tell you the truth, in all the excitement, we can’t remember.

But as much as we admire Mr. Cohen, we would sell his stock if he had any.

Architectural pride cometh before a fall. The "prideful monsters" of Fourth Century Egyptian pharaohs signaled the decline of the Old Kingdom, says Frank Johnson in The Spectator. Hausmann’s reconstruction of Paris presaged the doom of the Second Empire. And just before the Crash of ’29, came the building boom in Manhattan; the Chrysler Building’s official opening took place just seven months after the stock market began its decline. The Empire State Building was already under construction, too.

The World’s Tallest Condo: Louis Adler

James Grant, in his book, "The Trouble with Prosperity," tells the story of another developer, Louis Adler, from whose block Mr. Cohen could be a chip.

"In the spring of 1930…Adler made history by becoming the first individual to buy up an entire Wall Street block…"

His plan was to build on it – a tall building, of as many as 105 stories; in the next 75 years, the nation’s prices shot up 20 times, but the nation’s dreamy developers added only a few stories.

"Adler, a 47-year-old immigrant dressmaker with a string of successful office buildings to his credit… in less than two months, was able to purchase 14 old, relatively stunted buildings in the block bounded by Wall, Water, Pearl, and Pine Streets. The cost was put at about $10 million (subsequently, in keeping with the deflationary tendencies, it was re-estimated down to about $5 million). Satisfying a curious and admiring public Adler vouchsafed some of his business secrets to the readers of the New York Telegram. One was not to skimp on price but to pay what it took to close a transaction: ‘You lose time fiddling around for the lowest price – and sometimes the deal,’ he said. If the complacency of the Wall Street sellers was itself an omen of trouble in the financial district, Adler was not alone in failing to heed it. He was still bullish: on real estate, on America and on New York."

There is, of course, a time to be bullish. But 1930, only a few months after the crash on Wall Street, was not it. Is 2005?

We don’t know. Mr. Adler’s building was never built. Whether Mr. Cohen’s building will be built or not, we cannot say. But announcements of very tall building projects give a fin de bubble air to the nation’s real estate market.

"Actual peak in the Coolidge bull market," Grant continues, "was accompanied by a richly symbolic milestone in the construction of 40 Wall Street…"

Fortune Magazine described the project:

"At first, 40 Wall was planned as a thirty-story building, but the builders soon decided that nothing less than fifty stories could meet the $675,000 ground rent and taxes of $693,000. Time and again, the backers changed signals, calling for fifty-six stories, sixty-seven, and finally seventy. Because of the high land value and heavy carrying charges, speedy construction was imperative…"

But quick construction did not help them. The problem was not the speed with which the building was put into service, but the rate at which the entire financial world fell discouraged. Tenants who could pay the rent were not easily found. Spaces remained vacant. And each day the passed cost money – not only for ground rent and taxes, but also for maintenance, operations, and utilities. These things hardly occur to the real estate tycoons of the 21st century. But back in the 1930s, the Donald Trumps of the era wondered whether to get up in the morning. If they had borrowed heavily to buy properties their choices were few: either they could sell apples on the street corners…or hang themselves. By 1942, seats on the NYSE sold for just 3% of peak prices that hit in 1929…and bonds issued by the reorganized 40 Wall Street Corporation sold for 10 cents on the dollar.

But it is a strange and marvelous world. Louis Adler’s vision for lower Manhattan was largely realized – many years later.

"There will be no middle class here; no slums," he told the New York Telegram. "The entire island will be a mountain of stone. The East Side from Park Avenue, an array of apartment hotels for elite tenants; the rest of the area executive office buildings for the direction of the nation’s industry."

Perhaps Mr. Cohen’s vision for Miami will be realized as well.

The World’s Tallest Condo: The World Has Changed

But the world has changed. American businesses were still young and vigorous; they were taking more and more market share from their competitors in Europe. The American economy was still on the way up in 1930. GM was yet to be admired as the world’s best business. America was yet to become the world’s only super-power. Alan Greenspan was only a callow nine-year-old, Ben Bernanke’s parents hadn’t even met yet and the empire was expanding.

Now, Mr. Greenspan is 84. And the tallest buildings in the world are no longer being built in America – they’re being put up in China. The world’s three highest skyscrapers are under construction in China – the tallest one, in Shanghai, will rise to 1,509 feet, 260 feet higher than the Empire State Building. Surely, this is a sign of impending doom in China, too.

The difference is that the economic side of America’s empire may have peaked out. While GM loses money – Japanese competitors are showing the strongest sales and profit figures ever. And the Japanese pay about as much for labor as American firms. Asian airlines are making money, while U.S. companies go broke. Trains are better in both Europe and Asia than they are in America. Asians save more. They invest more heavily in new fixed-capital projects – both infrastructure and factories. The 10 airports voted best in the world are all outside the United States, with three in Europe and the rest in Asia. Throughout Asia, Russia, and India – productivity and real incomes are rising (they are stagnant or falling in America). In some areas, they are going up more than 10% per year. China’s GDP growth is three times that of the United States. Russia, a country written off as hopeless a few years ago, is growing twice as fast as the U.S. Plus, its citizens are arguably freer than Americans; the flat-rate income tax is just 13%. This steady increase in real purchasing power gives a boost to industries throughout the region. It also suggests that growth may last a long, long time.

At some point, Asian industries will shift to supplying goods and services to their own people, who have money and few consumer goods – rather than to Americans, who have no money and too many consumer goods already. When and how the shift will come about we don’t know, most likely there will be plenty of Adlers, Cohens, Wongs and Yangs who wished they had put up smaller buildings.

Regards,

Bill Bonner
The Daily Reckoning
May 20, 2005

Editor’s Note: The best way to protect yourself and your assets from the looming housing market crash, is to read up on the new rules for owning a house – you may be surprised how much they’ve changed.

Where does all the money come from?

We asked ourselves the question this morning. Once again, before we had had our coffee, we had encountered so many absurdities in the newspaper we were in stitches.

What particularly caught our eye was a page of advertising in the International Herald Tribune. Allan Schneider Associates sells property in the Hamptons, Shelter Island and the North Fork, New York. We’re sure it must be jolly good fun living in these places. Nevertheless, we tend to think current prices are a measure of the cash and credit in the United States, rather than the level of endorphins in the drinking water.

For example, there is a photo of a plain-looking cottage, the sort that might have been built as a vacation place in the ’50s and re-outfitted in the ’80s, situated on a "shy acre" in Wainscott. We don’t know why the acre is so shy. Perhaps it needs a little something else in the water. But at least, it has a sort of modest charm. And there’s nothing modest about the price – $2.4 million. That is the cheapest house on the page. Over in Amagansett, you will pay $10,250,000 for what appears to be a perfectly satisfactory – but by no means extravagant – house on two less shy acres. And in Mecox Bay is a "barn style" house …including a two-story kitchen that is a "chef’s delight" [we don’t know what is so delightful about running up and down stairs to cook a hamburger]…the property on three extroverted acres…at a price of $14 million. Why anyone would want to buy a barn for $14 million is one of those mysteries that must be reserved for the gods themselves. But readers who want to take advantage of these opportunities before summer, and before the real estate bubble pops, are invited to go to www.allanschneider.com.

Where does all the money come from, we ask again?

We find the answer in an article by Richard Duncan.

In early 2002, America’s system of imperial finance faced a challenge. The U.S. seemed to be sinking into Japanese-style deflation. The NASDAQ had lost 70% of its value. The homeland economy was in recession. The Fed was alarmed. It knew how to fight inflation; it could raise interest rates over 100% if it wanted to. But it knew no easy remedy for deflation. The Bank of Japan had tried the usual elixirs. Overnight money was free in Japan. Two-year loans could be had at 1/10th of 1% interest rate. Plus, the government had put into action so many public works programs that nearly half the country was already under concrete.

But the Bank of Alan Greenspan had a solution. Fed Governor Ben Bernanke proposed "global cooperation" in a November speech. Then, in May of 2003, he went to Japan urging concerted action. The Fed was prepared to sacrifice the solvency of American consumers, he told the Japanese. Tax cuts and low interest rates could still induce them to buy things they didn’t need with money they didn’t have. But Japan had to help hold down U.S. interest rates – by buying up dollars and dollar-denominated assets, notably U.S. Treasury bonds.

What happened next, according to Mr. Duncan:

"In 2003 and the first quarter of 2004, Japan carried out a remarkable experiment in monetary policy – remarkable in the impact it had on the global economy and equally remarkable in that it went almost entirely unnoticed in the financial press. Over those 15 months, monetary authorities in Japan created ¥35 trillion. To put that into perspective, ¥35 trillion is approximately 1% of the world’s annual economic output. It is roughly the size of Japan’s annual tax revenue base or nearly as large as the loan book of UFJ, one of Japan’s four largest banks. ¥35 trillion amounts to the equivalent of $2,500 for every person in Japan and, in fact, would amount to $50 per person if distributed equally among the entire population of the planet. In short, it was money creation on a scale never before attempted during peacetime."

Why did the Japanese create so much money? Because they needed to buy from their citizens the dollars they had accumulated by selling things to Americans. Had they not done so, their currency would have gone up – making their products less competitive on the U.S. market. Had they not done so, the dollar would have fallen much further against other currencies. Had they not done so, the Japanese would not have had the dollars to buy U.S. Treasury bonds. And had they not bought so many of them U.S. interest rates would have risen…consumers would have had less money to spend…and probably the whole world would have had an economic crisis.

"Intentionally or otherwise," Duncan continues, "by creating and lending the equivalent of $320 billion to the United States, the Bank of Japan and the Japanese Ministry of Finance counteracted a private sector run on the dollar and, at the same time, financed the U.S. tax cuts that reflated the global economy, all this while holding U.S. long bond yields down near historically low levels.

"In 2004, the global economy grew at the fastest rate in 30 years. Money creation by the Bank of Japan on an unprecedented scale was perhaps the most important factor responsible for that growth. In fact, ¥35 trillion could have made the difference between global reflation and global deflation. How odd that it went unnoticed."

More news, from our team at The Rude Awakening:

————–

Chris Mayer, reporting from Gaithersburg, Maryland:

"Because a 50-1 long shot named Giacomo won this year’s Kentucky Derby, a few lucky trifecta punters cashed in on a $133,184 payday. Meanwhile, the hordes of bettors who plunked down money on the favorites walked away with nothing but regrets. Be one of the lucky few…"

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening:

Value Investing…By A Nose

————–

Bill Bonner, with more irrelevant commentary:

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*** The euro is down to $1.26. Good news for us poor scribblers here in Paris. If only it would stay down!

*** Gold is down to $420. Mining shares are down, too.

*** "Yobs" and "yob culture" threaten Britain. Practically every day the papers bring us a new incident of hooliganism. A poor man is beaten by drunken youths in broad daylight…another man is killed in a good neighborhood when the yobs knock him to the ground and kick him in the head…and yesterday – "A funeral cortege was attacked by a teenage gang as the yob culture plumbed new depths," said the Daily Mail. "The thugs threw an 8-ft-long lump of wood through the windscreen of a slow-moving limousine carrying women mourners."

Just the day before "The Feral Gangs Who Rule Our Streets," was the Daily Mail’s headline, detailing even more tales of yob behavior.

*** Meanwhile, back in center of the Empire: According to an email making its way around the Internet, the homicide rate from firearms in Washington, D.C., is about 80 per 100,000 residents each year. American soldiers serving in Iraq should get a break on their life insurance. Their death rate is only 60 per 100,000. Two possible implications: troops in Iraq ought to be called back home to pacify Washington. Or, Americans ought to withdraw from Washington altogether.

And the Brits…what are they complaining about? The homicide rate in London is the lowest in Europe – just two per 100,000.

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).