charleshughsmith
Executive Summary
- The Fed Won't Be Able To Soak Up Bad Mortgages Like It Once Did
- Chinese Capital Will Dry Up After Capital Controls Are Imposed
- The weakening petro-dollar will weaken demand for high-end housing
- The inevitable symmetry of bubbles will force a price mean-reversion
If you have not yet read Part 1: How Much Longer Can Our Unaffordable Housing Prices Last? available free to all readers, please click here to read it first.
In Part 1, we looked at factors that limit further home price appreciation—mortgage rates that can’t go much lower and stagnant household incomes—and factors that could continue to push prices higher in islands of strong job growth and global demand.
Here in Part II, we’ll look at several dynamics that could deflate the current Housing Bubble #2, even in areas currently experiencing high demand for housing such as New York City and San Francisco.
The Fed Will Encounter Political Headwinds in Pushing Money to the Wealthy
Setting aside cash buyers from overseas, a major factor in the inflation of Housing Bubble #2 was the Federal Reserve’s quantitative easing programs that expanded the pool of money available to the already-wealthy while prompting very little “trickling down” of this new money to the bottom 90% of households.
The one Fed policy that aided the bottom 90% was buying $1.75 trillion of home mortgages. This unprecedented buying spree helped push mortgage rates down to equally unprecedented lows.
But as this chart shows, the Fed is…
How A Major Housing Correction Can Happen Over The Next 1.5 Years
PREVIEWExecutive Summary
- The Fed Won't Be Able To Soak Up Bad Mortgages Like It Once Did
- Chinese Capital Will Dry Up After Capital Controls Are Imposed
- The weakening petro-dollar will weaken demand for high-end housing
- The inevitable symmetry of bubbles will force a price mean-reversion
If you have not yet read Part 1: How Much Longer Can Our Unaffordable Housing Prices Last? available free to all readers, please click here to read it first.
In Part 1, we looked at factors that limit further home price appreciation—mortgage rates that can’t go much lower and stagnant household incomes—and factors that could continue to push prices higher in islands of strong job growth and global demand.
Here in Part II, we’ll look at several dynamics that could deflate the current Housing Bubble #2, even in areas currently experiencing high demand for housing such as New York City and San Francisco.
The Fed Will Encounter Political Headwinds in Pushing Money to the Wealthy
Setting aside cash buyers from overseas, a major factor in the inflation of Housing Bubble #2 was the Federal Reserve’s quantitative easing programs that expanded the pool of money available to the already-wealthy while prompting very little “trickling down” of this new money to the bottom 90% of households.
The one Fed policy that aided the bottom 90% was buying $1.75 trillion of home mortgages. This unprecedented buying spree helped push mortgage rates down to equally unprecedented lows.
But as this chart shows, the Fed is…
Executive Summary
- Why global capital flows will determine everything
- What impact euphoria and fear wil have on liquidation and valuation
- The importance of debt denominated in other currencies
- What's likely as capital shifts from Risk-On to Risk-Off assets
If you have not yet read Part 1: Here's Why The Markets Have Suddenly Become So Turbulent available free to all readers, please click here to read it first.
In Part 1, we listed five interlocking trends that will severely limit the scale and effectiveness of official responses to the next recession. In effect, the world will not be able to “borrow and spend” its way out of recession.
In Part 2, we’ll examine the single most important dynamic in any asset value: capital flows.
The Tidal Forces of Capital
Let’s start with the most basic building blocks of supply and demand.
Capital flowing into an assets class (buying) in excess of capital flowing out (selling) increases demand and pushes prices up.
If supply increases even faster than demand, prices may decline despite rising demand.
If capital flows out (selling) in excess of inflows (buying), prices will decline.
Prices are set on the margin. If 5 homes out of a neighborhood of 100 homes sell for 25% below the previous price level, the valuation of the other 95 homes also drops 25%.
Risk on = seeking asset appreciation and taking on more risk in exchange for higher yields.
Risk off = seeking capital preservation and accepting lower yields in exchange for reduced risk.
Assets have two ways to appreciate/depreciate: the nominal price, and the underlying currency the asset is priced in.
If a Mongolian bond yields 7%, the owner earned a nominal 7% on the capital. But if the currency the bond is denominated in dropped 20%, the owner suffered a 13% loss when the investment is priced in other currencies.
The consequences of capital flows can be counter-intuitive.
For example, if the Federal Reserve creates $1 trillion out of thin air, our initial expectation would be…
What Happens Next Will Be Determined By One Thing: Capital Flows
PREVIEWExecutive Summary
- Why global capital flows will determine everything
- What impact euphoria and fear wil have on liquidation and valuation
- The importance of debt denominated in other currencies
- What's likely as capital shifts from Risk-On to Risk-Off assets
If you have not yet read Part 1: Here's Why The Markets Have Suddenly Become So Turbulent available free to all readers, please click here to read it first.
In Part 1, we listed five interlocking trends that will severely limit the scale and effectiveness of official responses to the next recession. In effect, the world will not be able to “borrow and spend” its way out of recession.
In Part 2, we’ll examine the single most important dynamic in any asset value: capital flows.
The Tidal Forces of Capital
Let’s start with the most basic building blocks of supply and demand.
Capital flowing into an assets class (buying) in excess of capital flowing out (selling) increases demand and pushes prices up.
If supply increases even faster than demand, prices may decline despite rising demand.
If capital flows out (selling) in excess of inflows (buying), prices will decline.
Prices are set on the margin. If 5 homes out of a neighborhood of 100 homes sell for 25% below the previous price level, the valuation of the other 95 homes also drops 25%.
Risk on = seeking asset appreciation and taking on more risk in exchange for higher yields.
Risk off = seeking capital preservation and accepting lower yields in exchange for reduced risk.
Assets have two ways to appreciate/depreciate: the nominal price, and the underlying currency the asset is priced in.
If a Mongolian bond yields 7%, the owner earned a nominal 7% on the capital. But if the currency the bond is denominated in dropped 20%, the owner suffered a 13% loss when the investment is priced in other currencies.
The consequences of capital flows can be counter-intuitive.
For example, if the Federal Reserve creates $1 trillion out of thin air, our initial expectation would be…
Executive Summary
- Too much of China's wealth is tied up in housing
- The Obvious Risk: Declines in demand will crush prices
- The Less Obvious Risk: housing in China is very illiquid
- China's extraordinary vulnerability
If you have not yet read Part 1: Is China’s “Black Box” Economy About to Come Apart? available free to all readers, please click here to read it first.
In Part 1, we looked at the factors that render China’s economy a black box: the inputs and outputs are visible, but the internal workings are often opaque. Though there is an abundance of data on China’s housing market, it too is opaque in critical ways.
Let’s dig into what makes China’s housing bubble so risky.
Chinese Household Wealth Is Mostly In Housing
The percentage of household assets in real estate varies from source to source, but however it’s sliced, China’s household wealth is extraordinarily concentrated in housing.
This means any reduction in housing values will have an outsized impact on household wealth and the perception of wealth, i.e. the wealth effect: people who own assets that are rising feel wealthier and tend to spend more freely as a result. Those with assets that are declining in value tend to feel poorer, even if their day-to-day life in unaffected by the drop in wealth. This is the negative wealth effect.
While middle-class households’ wealth is in their primary residence, upper-middle class households tend to put the family wealth in additional homes as investment properties. Anecdotally, it is not uncommon for middle-aged people with secure employment to own three flats: one for their residence and two as nest eggs. The practice of buying third homes was subject to restrictions a few years ago, but the resulting drop in housing demand scared authorities into…
Why China Is Extremely Vulnerable Now
PREVIEWExecutive Summary
- Too much of China's wealth is tied up in housing
- The Obvious Risk: Declines in demand will crush prices
- The Less Obvious Risk: housing in China is very illiquid
- China's extraordinary vulnerability
If you have not yet read Part 1: Is China’s “Black Box” Economy About to Come Apart? available free to all readers, please click here to read it first.
In Part 1, we looked at the factors that render China’s economy a black box: the inputs and outputs are visible, but the internal workings are often opaque. Though there is an abundance of data on China’s housing market, it too is opaque in critical ways.
Let’s dig into what makes China’s housing bubble so risky.
Chinese Household Wealth Is Mostly In Housing
The percentage of household assets in real estate varies from source to source, but however it’s sliced, China’s household wealth is extraordinarily concentrated in housing.
This means any reduction in housing values will have an outsized impact on household wealth and the perception of wealth, i.e. the wealth effect: people who own assets that are rising feel wealthier and tend to spend more freely as a result. Those with assets that are declining in value tend to feel poorer, even if their day-to-day life in unaffected by the drop in wealth. This is the negative wealth effect.
While middle-class households’ wealth is in their primary residence, upper-middle class households tend to put the family wealth in additional homes as investment properties. Anecdotally, it is not uncommon for middle-aged people with secure employment to own three flats: one for their residence and two as nest eggs. The practice of buying third homes was subject to restrictions a few years ago, but the resulting drop in housing demand scared authorities into…
Executive Summary
- Energy plays a key role in sovereign economic (un)sustainability
- The export boom is imploding
- The neofeudal model is collapsing as 'serf' nations enter default
- Take preparation now, while it still matters
If you have not yet read Part 1: Why Greece Is The Precursor To The Next Global Debt Crisis available free to all readers, please click here to read it first.
In Part 1, we examined the core dynamics that expanded Greek debt to its current unmanageable size—currency/trade deficits and bailouts—and the enormous transfer of private bank debt to the public ledger via the Troika bailouts, only 10% of which trickled down to the Greek people.
There are two other dynamics beneath the surface theater, dynamics which are not unique to Greece but are characteristic of the most heavily indebted nations.
Food and Fuel Imports Drive Structural Imbalances and Debt/Currency Crises
In our recent podcast, Chris mentioned this chart of imported energy by nation. Note that the nations with crushing structural debt loads (the so-called PIIGS—Portugal, Ireland, Italy, Greece and Spain) also happen to be major importers of energy.
What does this have to do with Greece’s debt crisis? Let’s go back to the key driver of Greek debt—imports that far exceeded exports, not occasionally but structurally, year in and year out. Money was borrowed to pay for those imports, interest accrued on the loans and then austerity was pressed on the debtor nations by the lenders as a means of extracting interest on the rising debts.
If a nation does not generate a significant percentage of its own energy and food needs, or export enough goods and services to offset its imports of energy and food…
More Sovereign Defaults Are Coming
PREVIEWExecutive Summary
- Energy plays a key role in sovereign economic (un)sustainability
- The export boom is imploding
- The neofeudal model is collapsing as 'serf' nations enter default
- Take preparation now, while it still matters
If you have not yet read Part 1: Why Greece Is The Precursor To The Next Global Debt Crisis available free to all readers, please click here to read it first.
In Part 1, we examined the core dynamics that expanded Greek debt to its current unmanageable size—currency/trade deficits and bailouts—and the enormous transfer of private bank debt to the public ledger via the Troika bailouts, only 10% of which trickled down to the Greek people.
There are two other dynamics beneath the surface theater, dynamics which are not unique to Greece but are characteristic of the most heavily indebted nations.
Food and Fuel Imports Drive Structural Imbalances and Debt/Currency Crises
In our recent podcast, Chris mentioned this chart of imported energy by nation. Note that the nations with crushing structural debt loads (the so-called PIIGS—Portugal, Ireland, Italy, Greece and Spain) also happen to be major importers of energy.
What does this have to do with Greece’s debt crisis? Let’s go back to the key driver of Greek debt—imports that far exceeded exports, not occasionally but structurally, year in and year out. Money was borrowed to pay for those imports, interest accrued on the loans and then austerity was pressed on the debtor nations by the lenders as a means of extracting interest on the rising debts.
If a nation does not generate a significant percentage of its own energy and food needs, or export enough goods and services to offset its imports of energy and food…
Executive Summary
- Which power groups will determine how the war on cash is waged?
- Is it better to hold cash in savings/checking accounts, or securities accounts?
- What will likely happen with retirement accounts?
- Ways to diversify your cash risk
If you have not yet read Part 1: The War on Cash: Officially Sanctioned Theft available free to all readers, please click here to read it first.
In Part 1, we reviewed the basic elements of the war on cash, and how it benefits banks and governments but not households that don’t already own productive assets.
In Part 2, we’ll review the downside of imposing capital controls and eliminating physical cash, and discuss strategies to protect our financial assets from bail-ins and negative interest rates/fees on cash.
What Will The Wealthy And Politically Powerful Tolerate?
One of the key dynamics in this discussion is: what will the wealthy and powerful tolerate? Any policy that inhibits or harms the wealthy and politically powerful is a non-starter, and so if we align our strategies accordingly, we are less likely to suffer any negative consequences.
The wealthy and politically powerful have little need for physical cash (President John F. Kennedy famously carried no cash), so eliminating cash will probably not generate any resistance in the financial elite.
But other forms of capital control, such as requiring retirement accounts to hold Treasury bonds and limiting transfers to other nations’ banks might…
What To Do With Your Cash Savings
PREVIEWExecutive Summary
- Which power groups will determine how the war on cash is waged?
- Is it better to hold cash in savings/checking accounts, or securities accounts?
- What will likely happen with retirement accounts?
- Ways to diversify your cash risk
If you have not yet read Part 1: The War on Cash: Officially Sanctioned Theft available free to all readers, please click here to read it first.
In Part 1, we reviewed the basic elements of the war on cash, and how it benefits banks and governments but not households that don’t already own productive assets.
In Part 2, we’ll review the downside of imposing capital controls and eliminating physical cash, and discuss strategies to protect our financial assets from bail-ins and negative interest rates/fees on cash.
What Will The Wealthy And Politically Powerful Tolerate?
One of the key dynamics in this discussion is: what will the wealthy and powerful tolerate? Any policy that inhibits or harms the wealthy and politically powerful is a non-starter, and so if we align our strategies accordingly, we are less likely to suffer any negative consequences.
The wealthy and politically powerful have little need for physical cash (President John F. Kennedy famously carried no cash), so eliminating cash will probably not generate any resistance in the financial elite.
But other forms of capital control, such as requiring retirement accounts to hold Treasury bonds and limiting transfers to other nations’ banks might…
Total 177 items
by blaggers