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QUESTION: Dear Sir/Madam

Thank you so much for what you all do.

I was just reading today’s Blog 17-08-2018 – ‘ Real Estate – Leverage – Transition to the Reset ‘. The bit I did not understand was where it was written ‘ Keep in mind that as the currency declines, then the repayment cost of a mortgage declines. One the one hand, mortgages will be unavailable but those who hold the mortgage lose the most ‘

My question is when the Reset happens in which way will the mortgage holders lose the most even if the repayment cost of a mortgage declines ? I live in the UK

thank you so much

ANSWER: Since I posted that chart from Socrates that illustrates real estate, many people have written in to ask where can they find that on Socrates. This is part of the pro version that will be released WE HOPE for the WEC this year (see Socrates Newsletter just sent out). Here are the real estate markets covered by Socrates at this time.

What I mean when I say that those who hold mortgages lose in such a situation of a decline in the purchasing power of a currency is basic. The city of Detroit suspended its payments on bonds in 1937. They resumed in 1963. Now they say they never defaulted. However, they paid back with cheaper dollars. The holder of a mortgage or a bond charges interest which is supposed to be more than the inflation rate. When inflation exceeds the interest rate, then you are paying back with cheaper dollars.

Take a life-insurance policy. If you bought one in the 1940s and it was for the huge amount of $5,000, after funeral costs of say $1,500, you left your heirs a sizable chunk of money.

…click on the above link to read the rest of the article…

We Are All Lab Rats In The Largest-Ever Monetary Experiment In Human History

August 18, 2018

We Are All Lab Rats In The Largest-Ever Monetary Experiment In Human History

And how do things usually work out for the rat?

There are ample warning signs that another serious financial crisis is on the way.

These warning signs are being soundly ignored by the majority, though. Perhaps understandably so.

After 10 years of near-constant central bank interventions to prop up markets and make stocks, bonds and real estate rise in price — while also simultaneously hammering commodities to mask the inflationary impact of their money printing from the masses — it’s difficult to imagine that “they” will allow markets to ever fall again.

This is known as the “central bank put”: whenever the markets begin to teeter, the central banks will step in to prop/nudge/cajole the markets back towards the “correct” direction, which is always: Up!

It’s easy in retrospect to see how the central banks have become caught in this trap of their own making, where they’re now responsible for supporting all the markets all the time.

The 2008 crisis really spooked them. Hence their massive money printing spree to “rescue” the system.

But instead of admitting that Great Financial Crisis was the logical result of flawed policies implemented after the 2000 Dot-Com crash (which, in turn, was the result of flawed policies pursued in the 1990’s), the central banks decided after 2008 to double down on their bets — implementing even worse policies.

The Largest-Ever Monetary Experiment In Human History

It’s not hyperbole to say that the monetary experiment conducted over the past ten years by the world’s leading central banks (and its resulting social and political ramifications) is the largest-ever in human history:

(Source)

This global flood of freshly-printed ‘thin air’ money has no parallel in the historical records. All around the world, each of us is part of a grand experiment being conducted without the benefits of either prior experience or controls. Its outcome will be binary: either super-great or spectacularly awful.

…click on the above link to read the rest of the article…

David Stockman: The World Economy Is At An Epochal Pivot

August 14, 2018

Shutterstock

David Stockman: The World Economy Is At An Epochal Pivot

A ‘Great Reset’ approaches

David Stockman warns that the global economy has reached an “epochal pivot”, a moment when the false prosperity created from $trillions in printed money by the world’s central banks lurches violently into reverse.

There are few people alive who understand the global economy and its (mis)management better than David Stockman — former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier — which is why his perspective is not to be dismissed lightly. He knows intimately how how our political and financial systems work, as well as what their vulnerabilities are.

And Stockman thinks the top for the current asset price bubble era is in — specificially, he thinks it hit its apex in January 2018. As this “Everything Bubble” prepares to burst, Stockman estimates the risk of economic crisis is as great, if not greater than, the 2008 Great Financial Crisis because of the radical and unsustainable monetary policy expansion the central banks have pursued over the past decade.

This has caused the prices of stocks, bonds, real estate and most other assets to appreciate at rates that have no basis in the ongoing income/cash flow of the global economy. In short, they are wildly overvalued.

A key condition that Stockman has been waiting to see, that serves as a signal the bubble’s bursting is nigh, is the concentration of speculative capital into fewer and fewer stocks as the “good” options for investors shrink. We now clearly see this in the FAANG complex (a topic covered in detail in our recent report The FAANG-nary In The Coal Mine)

Stockman’s main warning is that there’s no bid underneath this market — that when perception shifts from greed to fear, the bottom is much farther down than most investors realize. In his words, it’s “rigged for implosion”.

…click on the above link to read the rest of the article…

Global Housing Bubble Is Popping. Here Comes The “Reverse Wealth Effect”

August 4, 2018

Global Housing Bubble Is Popping. Here Comes The “Reverse Wealth Effect”

Just a few months ago, real estate was on fire. Prices were blowing past records set during the previous decade’s housing bubble as desperate buyers bought whatever was available at above the asking price while homeowners, confident that prices would keep rising, held out for the next big pop to sell. Notice on the following chart how the ascent steepens at the beginning of this year.

Then, as if someone flipped a switch, the trend shifted into reverse. Not just in the US but nearly everywhere. This list of recent headlines tells the tale:

Housing demand sees biggest drop in more than 2 years

Hamptons property sales slow as caution spreads to the wealthy

Home Prices Are Falling in One of America’s Richest Suburbs

First Time Ever, More Chinese sellers than buyers

Vancouver Suffers Its Worst July for Home Sales Since 2000

Record Drop in Foreigners Buying U.S. Homes

Australian home prices take biggest dip since 2011

The End of the Global Housing Boom

Manhattan Real Estate: Prices Plummet, Sales Tank

What’s happening and why is it happening now?
Several things came together pretty much simultaneously to turn houses from must-have-at-any-price necessities into completely optional and maybe not even desirable: First, prices rose beyond the reach of all but the seriously affluent. The gap between the price of the average home and the size of the mortgage the average local buyer can afford has been rising for years, but recently in the hottest markets it has become a chasm. Meanwhile, mortgage rates have started to rise, increasing the monthly payment on a given house dramatically.

If you live in San Francisco or Sydney or Vancouver, chances are you can’t afford to buy a decent house – not even close. And if you can’t you don’t.

…click on the above link to read the rest of the article…

Canada’s Real Estate Sector Faces Difficult Transition

June 23, 2018

Canada’s Real Estate Sector Faces Difficult Transition

The great Canadian real estate bull market has pushed home prices to dizzying heights over the past two decades. And with ever-rising prices it has sucked in more capital and resources creating an almost self enforcing feedback loop, where an entire economy has become dependent on rising house prices. This misallocation of capital and resources is particularly well documented in the labour force where every year the number of realtors, mortgage brokers, and homebuilders seems to grow exponentially. Per Stats Canada, the share of employment tied to construction as well as finance, insurance and real estate is nearly two standard deviations above its long-term average.

I’m no economist but somehow it seems building an economy dependant on selling each other more expensive homes is probably not the greatest long term growth strategy. To illustrate this point we can see here that residential investment as a percentage of GDP now outpaces investment in machinery equipment research and development.

Source: Ben Rabidoux, North Cove Advisors

Currently there are over 55,000 new homes under construction across BC, with a record high number of housing starts also underway. This has created a massive shortage in the trades sector, while sending construction costs and house prices higher. However, with the real estate market across BC now beginning to slow, particularly in greater Vancouver, which saw housing sales across all property types drop to a 17 year low, early indications suggest a potential difficult transition may be underway. With the help of Ben Rabidoux of North Cove advisors, we can see that job growth in British Columbia is been in a funk in recent months.

BC job growth — Source: Ben Rabidoux, North Cove Advisors

For simplicity sake, we can estimate how this would affect the real estate broker space, where real estate commissions now command 2% of Canadian GDP. Through the first four months of 2018, British Columbians have spent nearly $2 billion less on residential real estate.

…click on the above link to read the rest of the article…

Neoliberalism, Pipelines, and Canadian Political Economy

June 22, 2018

Neoliberalism, Pipelines, and Canadian Political Economy

Photo by Luke Jones | CC BY 2.0

The national debate about how to get diluted bitumen to trans-oceanic markets by means of a twinning of the existing Kinder Morgan pipeline route between Alberta and British Columbia – known as the Trans Mountain Pipeline Expansion Project – illustrates the sad state of economic planning, diversification and vision in Canada.

The current policy of dependence on the sale of carbon-based energy resources, coupled with reliance on residential real estate construction and sale, is a short-sighted environmental and industrial strategy for a nation such as Canada. The country’s forecast continued dependence on the extraction of oil and gas, the burning of which our planet can no longer sustain, along with our primary devotion to the FIRE (Finance, Insurance and Real Estate) model of wealth creation does not serve the well-being of all Canadians nor preserve our natural environment. Instead, we should be considering alternative economic approaches that affirm Canadian economic sovereignty through the creation of jobs and socially re-invested dividends linked to a sustainable future.

It is time we organize our economy along different lines, putting people, communities and the environment ahead of pipeline revenues, quarterly profits, and energy stock prices. That this may pose challenges is not a matter of dispute. Nevertheless, our reluctance to revise or discard established ways of doing things has been an impediment to change in the past. This was noted fifty years ago by the distinguished Canadian economic historian Harold Innis, who, in discussing our political culture, noted our “infinite capacity for self-congratulation.” This complacency is perhaps not surprising when one considers our rich abundance of resources, land, and water; our good fortune to be situated next to the world’s economic behemoth which possessed an apparently insatiable appetite for our raw materials and commodities; and, finally, our small population occupying an immense landmass according each individual an almost blessed sense of space, ease and, for a time, opportunity.

…click on the above link to read the rest of the article…

SILVER INVESTMENT: The Lowest Risk, Highest Return Potential vs. Stocks & Real Estate

March 3, 2018

SILVER INVESTMENT: The Lowest Risk, Highest Return Potential vs. Stocks & Real Estate

While silver is completely off the radar to most investors, it will turn out to be one of the best investments to own as the massive amount of leverage in the stock and real estate market evaporates. Unfortunately, investors, today are no longer capable of recognizing when an asset displays a HIGH or LOW risk. Thus, fundamental indicators are ignored as the investors continue the insane strategy of “Buying the Dip.”

A prudent investor is able to spot when an asset becomes a high risk and then has the sense to move his or her funds into one that is a lower risk. However, the majority of investors do not follow this practice as they are caught by surprise when a Market Crash occurs… again and again and again. Even worse, when investors are shown that the indicators are pointing to assets that are extremely risky, then ignore it and continue business as usual.

Today, complacency has turned investors’ brains into mush. They are no longer able to discern RIGHT from WRONG. So, when the market really starts to correction-crash, they will hold on to their stocks waiting for Wall Street’s next BUY THE DIP call.

Regardless, if we can understand the fundamentals, then we would be foolish to keep most of our investment funds in Stock and Real Estate assets. The following chart follows the KISS Principle – Keep It Simple Stupid:

You don’t need to be a highly-trained financial or technical analyst to spot the HIGH vs. LOW-RISK assets in the chart above. Hell, you don’t even need to see the figures in the chart. If we understand that all markets behave in cycles, then it’s common sense that asset prices will peak and decline.

…click on the above link to read the rest of the article…

A Warning Knell From the Housing Market–Inciting a Riot

February 7, 2018

A WARNING KNELL FROM THE HOUSING MARKET – INCITING A RIOT?

Global residential real estate prices continue to rise but momentum is slowing
Prices in Russia continue to fall but Australian house prices look set to follow
After a decade of QE, real estate will be more sensitive to interest rate increases

As anyone who owns a house will tell you, all property markets are, ‘local.’ Location is key. Nonetheless, when looking for indicators of a change in sentiment with regard to asset prices in general, residential real estate lends support to equity bull markets. Whilst it usually follows the performance of the stock market, this time it may be a harbinger of austerity to come.

The most expensive real estate is to be found in areas of limited supply; as Mark Twain once quipped, when asked what asset one should invest in, he replied, ‘Buy land, they’re not making it anymore.’ Mega cities are a good example of this phenomenon. They are a sign of progress. As Ian Stewart of Deloittes put it in this week’s Monday Briefing – How distance survived the communication revolution:-

In 2014, for the first time, more of the world’s population, some 54%, lived in urban than rural areas. The UN forecasts this will rise to 66% by 2050. Businesses remain wedded to city locations. More of the UK’s top companies are headquartered in London than a generation ago. The lead that so-called mega cities, those with populations in excess of 10 million, such as Tokyo and Delhi, have over the rest of the country has increased.

Proximity matters, and for good reasons. Cities offer business a valuable shared pool of resources, particularly labour and infrastructure. Bringing large numbers of people and businesses together increase the chances of matching the right person with the right job.

…click on the above link to read the rest of the article…

The Inescapable Reason Why the Financial System Will Fail

December 30, 2017

girardatlarge.com

The Inescapable Reason Why the Financial System Will Fail

Credit cannot expand faster than fundamentals forever

Modern finance has many complex moving parts, and this complexity masks its inner simplicity.

Let’s break down the core dynamics of the current financial system.

The Core Dynamic of the “Recovery” and Asset Bubbles: Credit

Credit is the foundation of the current financial system, for credit enables consumers to bring consumption forward, that is, buy more stuff today than they could buy with the cash they have on hand, in exchange for promising to pay principal and interest with their future income.

Credit also enables speculators to buy more assets than they otherwise could were they limited to cash on hand.

Buying goods, services and assets with credit appears to be a good thing: consumers get to enjoy more stuff without having to scrimp and save up income, and investors/speculators can reap more income from owning more assets.

But all goods/services and assets are not equal, and all credit is not equal.

There is an opportunity cost to any loan (i.e. credit), as the income that will be devoted to paying principal and interest in the future could have been devoted to some other use or investment.

So borrowing money to purchase a product or an asset now means foregoing some future purchase.

While all products have some sort of payoff, the payoffs are not equal. If I buy five bottles of $100/bottle champagne and throw a party, the payoff is in the heady moments of celebration. If I buy a table saw for $500, that tool has the potential to help me make additional income for years or even decades to come.

If I’m making money with the table saw, I can pay the debt service out of my new earnings.

…click on the above link to read the rest of the article…

2017 Year In Review

December 27, 2017

Tortoon/Shutterstock

2017 Year In Review

Markets fiddle while Rome burns

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year’s is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It’s quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. — cheers, Adam

Introduction

“He is funnier than you are.”

~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review

Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition—the likes of Dave Barry on one extreme¹ and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime.² (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup).³ I rely on quotes to let others do the intellectual heavy lifting.

“Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.”

~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review

“Just the facts, ma’am.”

~Joe Friday

…click on the above link to read the rest of the article…

The Great Oil Swindle

December 16, 2017

silentera.com

The Great Oil Swindle

Is leading us to destruction

When it comes to the story we’re being told about America’s rosy oil prospects, we’re being swindled.

At its core, the swindle is this: The shale industry’s oil production forecasts are vastly overstated.

Swindle: Noun – A fraudulent scheme or action.

And the swindle is not just affecting the US. It’s badly distorted everything from current geopolitics to future oil forecasts.

The false conclusions the world is drawing as a result of the self-deception and outright lies we’re being told is putting our future prosperity in major jeopardy. Policy makers and ordinary citizens alike have been misled, and everyone — everyone — is unprepared for the inevitable and massive coming oil price shock.

An Oil Price Spike Would Burst The ‘Everything Bubble’

Our thesis at Peak Prosperity is that the world’s equity and bond markets are enormous financial bubbles in search of a pin. Sadly, history shows there’s nothing quite as sharp and terminal to these sorts of bubbles as a rapid spike in the price of oil.

And we see a huge price spike on the way.

As a reminder, bubbles exist when asset prices rise beyond what incomes can sustain. Greece is a prime recent example. In 2008 when the price of oil spiked to $147/bbl, Greece could no longer afford imported oil. But oil is a necessity so it was bought anyway, their national balances of payments were stressed to the point that they were exposed as insolvent and then their debt bubble promptly and predictably popped. The rest is history. Greece is now a nation of ruins and their economy might as well be displayed alongside the Acropolis.

…click on the above link to read the rest of the article…

The Asymmetry of Bubbles: the Status Quo and Bitcoin

November 30, 2017

The Asymmetry of Bubbles: the Status Quo and Bitcoin

Shall we compare the damage that will be done when all these bubbles pop?

Regardless of one’s own views about bitcoin/cryptocurrency, what is truly remarkable is the asymmetry that is applied to questioning the status quo and bitcoin. As I noted yesterday, everyone seems just fine with throwing away $20 billion in electricity annually in the U.S. alone to keep hundreds of millions of gadgets in stand-by mode, but the electrical consumption of bitcoin is “shocking,” “ridiculous,” etc.

Since the U.S. consumes about 20% of the world’s energy, we can guesstimate the total amount of electricity wasted on stand-by and similar sources of waste is more on the order of $100 billion annually.

What’s shocking and ridiculous is that upwards of $100 billion in electricity is squandered globally annually on stand-by devices and other painfully obvious sources of waste. But this attracts essentially zero concern or commentary. Do you notice any asymmetry in the scrutiny being applied to the status quo and to bitcoin et al.? The status quo– wasteful beyond measure–is just fine: nobody questions the staggering waste built into the status quo, from hundreds of millions of devices consuming electricity but doing no work to hundreds of millions of vehicles idling in traffic for hours each and every day across the globe–nope, the really big issue is bitcoin / blockchain consumption.

Does anyone question how much electricity the vast server farms of Google and Facebook consume in order to serve up adverts and store photos of puppies and kittens? And how about the energy consumed by the NSA and the dozens of National Security agencies that have proliferated over the past 16 years? How much coal gets burned to serve adverts, archive photos of puppies and kittens, and store billions of emails, phone calls to Aunt Sadie, etc. for future analysis?

…click on the above link to read the rest of the article…

Sweden: The World’s Biggest Housing Bubble Cracks

November 15, 2017

Sweden: The World’s Biggest Housing Bubble Cracks

Sweden’s property bubble is probably the world’s biggest, despite which it gets relatively little coverage in the mainstream financial media – although that might be about to change. Warnings about this bubble are not new. In March 2016, Moody’s issued a very explicit warning that Sweden’s negative interest rates were propagating an unsustainable housing bubble.

The central banks of Switzerland, Denmark and Sweden (all rated Aaa stable) have been among the first to push policy rates into negative territory. A year into this novel experience, Moody’s Investors Service concludes that, from among the three countries, Sweden is most at risk of an – ultimately unsustainable – asset bubble…

“The Riksbank has not been successful in engineering higher inflation, while Sweden’s GDP growth continues to be among the strongest in the advanced economies,” says Kathrin Muehlbronner, a Senior Vice President at Moody’s.

“At the same time, the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent – in the form of rapidly rising house prices and persistently strong growth in mortgage credit”, adds Ms Muehlbronner. In Moody’s view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends.

In October 2016, the Riksbank’s Governor, Stefan Ingves, spoke in grave terms to the FT about the impact of negative rates on house prices.

But despite a lack of drama so far, Mr Ingves remains worried about a bad ending due to risks over financial stability.

He said: “It remains an issue because we are mismanaging our housing market. Our housing market isn’t under control, in my view.” The ratio of household debt to disposable income in Sweden is one of the highest in the world at more than 180 per cent and the Riksbank estimates it will continue to rise in the coming years.

…click on the above link to read the rest of the article…

PBOC’s Zhou Warns Of “Sudden, Complex, Hidden, Contagious, Hazardous” Risks In Global Markets

November 5, 2017

PBOC’s Zhou Warns Of “Sudden, Complex, Hidden, Contagious, Hazardous” Risks In Global Markets

Just two weeks after warning of the potential for an imminent ‘Minsky Moment’, Chinese central bank governor Zhou Xiaochuan has penned a lengthy article on The PBOC’s website that warns ominously of latent risks accumulating, including some that are “hidden, complex, sudden, contagious and hazardous,” even as the overall health of the financial system appears good.

The imminence of China’s Minksy Moment is something we have discussed numerous times this year.

The three credit bubbles shown in the chart above are connected. Canada and Australia export raw materials to China and have been part of China’s excessive housing and infrastructure expansion over the last two decades. In turn, these countries have been significant recipients of capital inflows from Chinese real estate speculators that have contributed to Canadian and Australian housing bubbles. In all three countries, domestic credit-to-GDP expansion financed by banks has created asset bubbles in self-reinforcing but unsustainable fashion.

And then at the latest Communist Party Congress meeting in Beijing, the governor of the PBoC (People’s Bank of China) said the following;

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”

Yet, stock markets shrugged off his warning… while the Chinese yield curve has now been inverted for 10 straight days – the longest period of inversion ever…

Which appears to be why he wrote his most recent and most ominous warning yet… (as Bloomberg reports)

The nation should toughen regulation and let markets serve the real economy better, according to Zhou.

The government should also open up financial markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.

…click on the above link to read the rest of the article…

One River CIO “We’re Willing Participants In Our Own Demise”

October 22, 2017

One River CIO “We’re Willing Participants In Our Own Demise”

With the world’s focus falling on Beijing this week, where president Xi Jinping give a glowing account of China’s future during the 19th Party Congress, boasting that “the banner of scientific socialism with Chinese characteristics is now flying high and proud for all to see,” not all are impressed by China’s vision of the world in which China sees itself as increasingly taking over from the US as the world’s superpower. And it’s not just stories about China’s neverending behind the scenes bailouts of anything that may telegraph a hard landing for the economy (as decribed in “China’s Government Is Expected To Buy 24% Of All Residential Real Estate For Sale In 2017“); it’s the country’s entire financial system, which Kyle Bass has been shorting for nearly two years now but which he has failed to recognize now holds the entire world hostage: if it goes, so does the global financial system, unleashing a worldwide depression the likes of which have not been seen.

Here is Eric Peters, CIO of One River Asset Mgmt, explaining why everyone is wrong about the $35 trillion Chinese financial system, and yet how Beijing has figured out a way to become a parasite on the global financial system, resulting in an outcome in which “we’re willing participants in our own demise.”

Excerpted from One River’s latest Weekend Notes:

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