Market Update – Prepare for Fed funds rate cuts and rising asset prices

The Fed will cut to placate the world. The U.S. does not need a rate cut. Imagine what will happen to dollar-based assets.

The Fed will have to begin cutting the Fed funds rate sooner, but for reasons that have little to do with a slowing domestic economy. As global bond yields continue to sink, the Fed will have to follow suit – even if the Fed can afford to remain relatively tight. I do not see a recession on the horizon and the domestic economy remains relatively sound. If the Fed does embark on a much more aggressively dovish policy, I have to believe that the asset markets will rise more than what many are anticipating.

Janet Yellen, the former chair of the Federal Reserve, said Monday the recent triggering of a recession indicator in the U.S. bond markets could signal the need for an interest rate cut and not a prolonged economic downturn.

Yellen was asked at a Hong Kong conference about the yield curve inversion and whether it signals a looming downturn.

“My own answer is no, I don’t see it as a signal of recession,” Yellen said during a question and answer session at the Credit Suisse Asian Investment Conference.

“In contrast to times past, there’s a tendency now for the yield curve to be very flat,” she said, adding that it’s now easier for it to invert — which traditionally meant investors had become concerned about a future downturn.

“And in fact it might signal that the Fed would at some point need to cut rates, but it certainly doesn’t signal that this is a set of developments that would necessarily cause a recession,” Yellen added.

Former Fed Chair Yellen says bond market could be hinting need for rate cut — not a recession – CNBC, March 25th

I have been observing that the Fed seems to be much more preoccupied with what is going on in the rest of the world than in the past. The central banks are coordinating policy in an unprecedented fashion. I am concerned that the Fed will attempt to placate the outside world at the expense of the domestic economy. This is why I have to conclude that dollar-based asset prices of all kinds are going to climb higher and continue outperforming over time.

First, I completely agree with Janet Yellen’s assessment. There is no domestic recession on the horizon. Recall, that the U.S. Fed anticipates 2019 domestic GDP growth of 2.1%. While this was a drop of 0.2% from the prior Fed estimate of 2.3%, this is hardly a time to contemplate a recession. So, imagine what lower short-term rates will mean to the prices of assets.

Second, I predict that the Fed will have to begin to cut the Fed funds rate soon, because the rest of the global economy is sinking and the U.S. dollar has remained persistently strong. As the days go by, the global pool of negative-yielding sovereign debt continues to grow and the total amount now tops $10 trillion. The U.S. offers too much relative yield.

Third, the domestic economy will continue to outperform and if the Fed cuts, look for economic output here to continue to remain relatively higher.

Fourth, I find it difficult to comprehend that so many market analysts are anticipating an upcoming recession by looking at the sharp drop in the 10 year UST. Bearishness is very high right now. Lower rates are going to juice the U.S. economy at the worst time. Many market participants will be caught off guard.

Fifth, do not get caught up with yield inversions. It has been clear that there has been official intervention with longer-dated Treasuries. The long end of the yield curve fell in direct relation to the Fed’s change in policy stance. I cannot overestimate how large of a change the Fed has undertaken just since late December. Though the 10-year UST yield began to fall into the stock swoon of late 2018, the yield continued to sink as stocks recovered. This shows us the power of the Fed’s about-face. Bond traders are already buying in anticipation of what is to come.

Sixth, I no longer hear talk of asset bubbles by the monetary authorities. I have to believe that on some level, they are going to welcome higher asset prices. Higher asset prices justify higher debt levels, and this will work hand-in-glove with the central banks as they once again ramp up their asset purchases.

If we just focused on the United States economy, the Fed has room to remain tighter, but given the relative strength of the U.S. dollar and the yield differentials between U.S. sovereign debt and other nation’s, the Fed understands that the world is awash with too much government debt issuance and the central banks need to step up their coordination for more  rounds of QE and monetary stimulus. Those who believe that the PBOC is not participating are seriously misguided. Its balance sheet continues to grow as well and foreign reserves remain at high levels.

I know I am going out on a limb, especially in the face of such bearishness, but I still see higher real estate numbers in the wheelhouse of the U.S. and the lower rates are providing an auspicious tailwind. Short of a nuclear war, I don’t see this changing. Of course, we may see some short-term drops, but I expect higher prices for many things and the government will step in to “help” those who have gotten left in the dust.

 

Thoughts from a reader up north; Breaking free from the alt-financial shilling

Note: The Spring home selling season just got underway here in the D.C. Area and prices in the under $600,000 category are up about 6-10% YOY. A starter town home listed down the street, which would have sold for $360,000 last year is selling for $409,000. The open house was very crowded and I assume it will close for at least $405,000.

The alt-financial media has more conflict of interest than the MSM

They are dropping GIC rates (CD, term deposits) here the last couple of months. Mortgage rates have dropped, especially the 5 year. Yes sir, the asset prices are going to be held up for much longer pending a black Swan event. The masses are buying new cars, electronics, and larger houses they cant afford with these low rates.  I got rid of all my financial fear mongers bookmarks many months ago, and feel I have a clear head. Thanks Chris

Goodbye
Martin Armstrong
Gregory Manorimo
All the gold shills, too many to mention
X22 report
Zero Hedge
Peter Shiff, top gold shill
All the clowns on CNBC, Bloomberg Canada, Fox Buisness

You’re so right in that the internet confuses people more than informs them.

V – Toronto

The alt-financial media can be addictive

Someone has been learning. I try to keep a perspective when analyzing the markets. For instance, the written articles from the mainstream outlets (e.g. Bloomberg, CNBC, and Marketwatch) tend to be less biased than their TV programming. The guests are just shilling their agenda. Relying on others for advice and predictions is a one-way ticket to poverty.

Keep in mind that the X22 Report, Greg Mannarino, ZeroHedge, Peter Schiff, and Martin Armstrong make a lot of money with their sensationalism and disingenuous reporting. As an economist, it is easy for me to see past the data cherry-picking and linear analysis. You and I may see past this, but about 30% of the unfortunate souls who stumble upon this clickbait stuff get hooked and cannot reconcile. These alt-financial showmen know this.

Indeed, the world is a grim place. I get it. But that doesn’t mean our financial lives need to be grim as well. It really isn’t that difficult to invest in this environment. I am not talking about getting rich; I only discuss about becoming more self-reliant. We need to rely less on the people this quoted reader mentions and more on our own intuition.

One day, these shills may be correct. But what will be the cost to you? My net worth has more than doubled since early in the decade and now I make enough passive income to be financially free. I finally broke free of the alt-financial shackles about three years ago, and I will never look back. I only needed the confidence. Take my word, they are all full of sh%$!

In a centrally-managed economy, fear of recession brings opportunity

The world is not upside down; So what if we have yield inversions?

In a centrally-managed economy, the entire yield curve is controlled. The central banks must make certain that the governments remain in business, regardless of their fiscal policies, so long as it achieves their desired long-term objectives for a socialist new world order. Longer-dated U.S. Treasury interest costs were getting too expensive, so the Fed needed to lower longer-dated bond yields. If these rates drop below short-term yields, so be it. Yield inversions no longer mean the same thing anymore.

A weak economic backdrop provides the central banks with plenty of reasons to maintain QE and their dovish policies. The central banks need to temper the global economic growth rate; any inflationary forces would undermine their ability to keep the governments in business. The weaker the economy, the better.

Top candidates can already borrow below 4%. Mortgages will continue to get cheaper, since that is a direct result of the Fed’s primary objective.
If the Fed determines that sinking the economy is in its best interest to achieve its primary objective (keeping the U.S. government in business), so be it.

“The financial world is truly upside down,” said Peter Boockvar, chief investment officer of Bleakley Advisory Group, who offered the chart below in a Friday research note. Amid a gloomy global backdrop, more investors are willing to accept negative returns.

The total sum of negative-yielding debt in bond issues represented in the Bloomberg Barclays Global Aggregate Bond Index AGG, +0.50% stood at nearly $9.7 trillion, marking a more than 50% increase from September.

Amount of global debt yielding less than 0% approaching $10 trillion – MarketWatch, March 22nd

Since the New Year, I have been a buyer of U.S. Treasuries on any dip. If I were a U.S. Treasury trader, since December I would have been buying every U.S. Treasury security not nailed down. Why? The owners of the U.S. Fed made it clear late last year that their tightening experiment was abruptly coming to an end. All the markets responded well, with the longer dated Treasury market responding the most favorably. The more the Fed members speak, the more dovish they become.

Recall last year, we thought the banking families and owners of the Fed wanted to blow things up, since the Fed’s monetary policies were inimical to achieving its primary objective. We knew that the global central banks could never cease QE in its many forms, despite what they were claiming. This also includes the PBOC. In hindsight, it was all a thought experiment, because the elites are not ready to pull the plug. This monetary system can be maintained for years.

So what if the world is drowning in a sea of government red ink?

Primary Fed objective: Do whatever it takes to keep the United States government solvent and in business, with the Fed in control of the process. This means that the Fed must make certain that bond yields decline, so that interest costs stay reasonable (as a precent of GDP). Thus, it will begin a dovish campaign of lower rates and further asset purchases. Who else will absorb this extra supply? Besides, the Fed returns its investment income to the U.S. Treasury. The more Treasuries the Fed holds, the cheaper it is for the U.S. government to borrow.

Secondary Fed objective: Keep the country out of recession, maintain stable prices, and minimize unemployment rolls. Why is this secondary? It is an objective as long as it allows the Fed to achieve its first objective. If the Fed determined that its best course of action to attain its primary objective was to sink the economy, it would do so. The economy is hostage to the Fed’s primary objective.

I have been warning the reader that over the past several months I have observed how the global monetary authorities are no longer discussing the concept of asset bubbles. The topic has taken a back seat to the Cassandra calls of recession. If you scared about collapsing house prices in Australia, the monetary authorities have an answer; more monetary stimulus.

China Central Bank Balance Sheet -China is doing its part to inflate the asset markets. Imagine what else the ChiCom government is doing to hide bad debt. This is the tip of the ChiCom iceberg.
The Fed gave all the other central banks the green light

The European Central Bank launched another round of stimulus for eurozone banks at its last meeting, in part justified by the cut to growth expectations for the 19-member bloc to 1.1% in 2019, from a previous 1.7%.

Smaller central banks are also now singing from the same hymn sheet of caution.

The Reserve Bank of Australia has increasingly voiced its doubts over the economic outlook amid a China slowdown and a soft property-market, stirring market expectations for a rate cut versus an interest-rate hike. And the Swiss National Bank kept rates on hold at its Thursday meeting, trimming its inflation expectations.

Investors in Canada’s debt market are becoming more convinced that the next interest-rate move from the country’s central bank will be down, with bonds due in more than a decade now yielding less than cash.

An investor has to be willing to lend for around 14 years in order to get more than the 1.75 per cent rate that the Bank of Canada currently has as its overnight benchmark. While Canadian bonds due in 2033 on Thursday yielded around 1.79 per cent, securities maturing in June 2029 offered a rate of just 1.67 per cent.

My warning to the reader; assets priced off the yield curve (e.g. businesses and real estate) will move higher despite affordability concerns. Have plenty of cash on the sidelines, low leverage on our assets, and no debt that does not have offsetting income. Be ready for any asset bust. With the central banks telegraphing their intentions, we would be foolish not to listen. Don’t be a victim of central bank policy. Stay ahead of the game.

Response to an email; Nobody knows when this economic cycle will bottom out

A market bottom is predicated on a prior peak. Since the global economic cycle has been distorted via the yield curve and QE for the past decade, how can we know when a bottom will come? The answer is that we do not know. No one knows.

Note: Keep in mind, I once believed in the predictive capacity of Martin Armstrong’s algorithms and you can count me as a victim. This was why I attended his November 2015 WEC in Princeton. It wasn’t wasted money. The $3,000 in total costs was money well spent. I found out he was just another salesman.

Now, I don’t mean to beat a dead horse, so to speak, but I received an email from a subscriber regarding Martin Armstrong’s cycles. This email is one of a few dozen I have received from readers who have lost money and wasted opportunity listening to his recommendation.

I used to follow him [Armstrong] closely and made decisions based on his comments…..no longer. However, I am in too deep because of his precious metals prognostications. I positioned 20% of my net worth in PM’s, waiting for his ( I quote ) “$5,000 oz. gold and $100 oz. silver by late 2020 into late 2021.”

God speed and God bless!

Gary

Here was my response.

Thank you for the email and thoughts. I, too, believed what Martin Armstrong was discussing all the way until the end of 2015.

Prior to the end of 2015 I thought perhaps he knew what he was talking about, since he seemed so adamant about his Big Bang Theory. Moreover, he became a go-to guy in the alt-financial media. But as the months dragged on, I realized he was incorrect, and began to readjust my perspective on things and his work.

He was one of the only ones who was correct about the stock market, but since bonds did not tank as he expected, assets priced off the yield curve continued to do well and I remained bullish on a sundry list of items. I recall him discussing gold at the 2015 conference while gold was 1050 at the time. He was talking gold dancing in the 950-900 level and silver dropping to about 9.

He had been talking about a huge reversal in the price of gold [by 2017]; But personally, based on past performance [of gold and silver], I thought that reversal was too early. Indeed, we are seeing gold fluctuate around this level now for the past few years.

Given what we are seeing in the economy with the deflationary forces at play and the fading of the yield curve once again, I don’t see any reason for gold to take off at this point. My concern about Armstrong’s cycle is that since there was no nominal high in 2015 there cannot be a nominal low in 2020. My concern is that the economy may drag lower for years and that we will be wishing that the economy bottomed out in January of next year.

I think you see what I mean. We see the economies around the world fading. [Given that we never experienced a spike in bond yields] what is the catalyst to stop those [economic] declines by January of 2020? It is impossible in such a short time frame to see this happen. There are indeed cycles to the economy, to business, and to the monetary system [even with ongoing central bank intervention]. It’s just not according to Armstrong’s timeline.

As central banks crank up QE, social spending and asset bubble concerns go out the window

The Fed pretends to use QE for economic reasons

“This was a bit of a surprise, as the Fed took out its entire rate-hikes plans for this year and ended the balance sheet roll-off a bit earlier than expected,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York.

Treasury Yields Fall to Lowest in More Than a Year – Bloomberg.com, March 20th

The Fed spent 2018 looking to see what it could get away with before the markets caved. As soon as they began to fall, the Fed stepped in and ended its tightening experiment
A complete turnaround for Fed policy. Investors have been fooled into believing QE was designed to help the economy.

A growing number of financial market observers view the Fed’s recent actions with alarm. They have convinced themselves that a sharp slowdown in economic growth must be imminent and believe the Fed must be nervous.

But is the Fed really alarmed over the prospects of a recession? While it just dropped its 2019 GDP estimate from 2.3% to 2.1%, that is not a huge swing and it’s within their margin of error. But bond investors think the Fed knows something it hasn’t told us. As a result, the 10-year UST yield dropped this afternoon to its lowest in 15 months.  So much for spiking bond yields. Perhaps the owners of the central banks have another agenda that it cannot make public.

I give the Fed and other central banks credit. They have convinced us that QE was designed to help the economy. Who’s stupid now?

Even for a bond market bracing for an accommodative Federal Reserve, policy makers’ moves on Wednesday were a stunner, raising the specter of recession.

In particular, analysts said bond investors were taken aback by the sharp reduction of interest-rate-hike projections by the Federal Open Market Committee to zero from two back in December, as reflected in the central bank’s “dot plot” — a chart of Fed members’ projections for future rates.

“This decision falls firmly on the dovish side of consensus as the about-face from ‘further gradual tightening’ has now reached a complete 180 degrees,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a Wednesday note.

The most accurate recession indicator is closer to flashing red after the Fed’s ‘dovish double-down’– MarketWatch, March 20th

The agenda for a socialist new world order must move forward

The Fed is not reinstituting aspects of its QE programs over recession concerns.  The Fed understands that the global central banks must begin further rounds of monetary stimulus, so that the monetary system can be maintained for the indefinite future. The global central banks need to absorb all the extra sovereign debt supply, since the global investor can no longer digest it all.

Take a look at the growing social spending around the globe. Today, I came across a Bloomberg article titled, Trudeau Targets Home-Buying Millennials With Equity Plan, and it explains that Canada’s housing agency will spend up to $1 billion USD over three years to take equity positions in homes bought by first-time buyers. It’s part of a plan by Justin Trudeau’s government to make housing more affordable for the youngest voters.

I am not telling the reader that this is a stupid program. There are no fundamental attribution errors on this blog. But, after reading this Bloomberg article, if I were a Canadian investor, I would be planning for even higher home prices. Social spending always results in higher prices for everyone. The worst part of this; the central banks are more than happy to print the money to fund these programs. Socialism is alive and well, and it’s what the people want.

The point of this exercise is that the owners of the central banks cannot divulge their real intentions. Thus, the central banks have to be disingenuous in their intentions and claim they are using QE to help support the economic growth.

It is clear that the policies underpinning QE are poorly designed to enhance economic growth, but most in the MSM and alt-financial media still are of the belief that the Fed, ECB, and BOJ employ QE to help stimulate economic activity. All the while, social spending continues to spiral upward and the agenda for a socialist new world order accelerates. The NWO will be financed by QE and the citizens will rejoice. China’s monetary policies are even more obscene and obscure.

My real concern over the next several years is this; as the owners of the central banks quickly guide the nation-states into the desired outcome, the monetary authorities and governments will begin to care even less about how their monetary policies impact the average person. I can see how asset prices move higher regardless of how the economy performs. The average debt-slave will be left in the dust.

A reader asks about Martin Armstrong and his prediction for 2020

Armstrong is saying the economy will bottom in January 2020. Do you think that we will turn things around after that point?

Dave, PA

Let’s answer Dave’s question by first looking at Armstrong’s ECM:

Armstrong’s Big Bang in September 2015 didn’t materialize as expected, so how can the other aspects of his “cycle” come together? How can we get a bottom in early 2020?

Armstrong’s Big Bang of 2015.75 was predicated on growing default pressures for sovereign debt coming to a head on or about that day. Around this time he expected bond yields to escalate until bankruptcy. Higher bond yields would have also resulted in much lower real estate prices and assets priced off the yield curve.

Problem One: 2008, not 2015, was the pivotal year for all sovereign debt. In 2008, for the first time, organic investor demand for sovereign debt was no longer large enough to absorb all the massive new government issuance. In 2008 and 2009, supply began to outstrip demand and the gap has been growing every year.

Problem Two: Quantitative easing was not a failure if viewed from the establishment’s eyes; it was the elites’s response to this growing supply/demand gap. The Fed and their apologists could never admit this and chalked up QE to helping the economy.

It was clear that a debt forgiveness was not in the cards. Had QE not been promulgated, the monetary system would have collapsed. Yields would have spiked starting a decade ago, and that would have been it. The central banks have been absorbing all the extra supply to ensure fading yields.

Problem Three: If the economy has been on an effective IV-drip for a decade and 2015 was not a nominal high (low in longer-dated bond yields) as expected, how can we bottom in early 2020? If sovereign bond yields continue to fade and have yet to spike and real estate prices continue to rise what will be the catalyst for a bottom? There is none.

Problem Four: The central banks seem to have things under control as they are managing the entire yield curve. The monetary authorities, especially in China, have been intervening for 10 years now and I see little reason to conclude that the banks during any time in 2020 will stop the QE process. The central banks are in firm control of the agenda and the global investors know this. If the central banks stop now or any time in the future they will get the blame.

Problem Five: Those who understand the conspiracy for world government and have also concluded that the elites are still in firm control of the economic system will achieve greater predictive accuracy and will be able to stay ahead of the rest of the other prognosticators, Armstrong included. Mr. Armstrong scoffs at the talk of conspiracy. A man at the 2015 WEC asked him about a conspiracy and Armstrong got angry at him.

We are the hollow men, we are the stuffed men; Leaning together, headpiece filled with straw

I see central bank intervention only growing in the coming years. There is no more business cycle; that’s a relic of the past. There is no way that the economy can bottom out any time in the near future when bond yields will continue to sink. We cannot bottom out as long as the global debt balance continues to increase. Turnaround talk is the stuff of folly and wishful thinking, but this does not mean that assets values will fall.

Imagine a scenario where the economy continues to succumb to all the debt while asset prices resume their upward trajectory. I say to throw all that silly cycle talk and discussion of pi out the window. Socialism will not collapse, because this is what the people want. The more debt that is generated for social spending, the lower the inflation rate, the weaker the economy, and the higher asset prices move.

This is the way the world ends, not with a bang, but a whimper.

Martin Armstrong – Chief Fed shill of the alt-financial media and admirer of all things ChiCom

It’s all about the up-sell with Armstrong
For the bewildered Armstrong disciples it has been a punishing road

As a writer for a blog that uncovers the alt-financial charlatan deceptions, I continually scour the alt-financial media to bring us the ongoing disingenuous scamming to my readers. Every few days I run down the Martin Armstrong blog to see what types of misleading stuff he conjures up. Case in point; I came across this missive titled, Global Recession & Hard Landing, and had to comment it.

Our focus at this WEC will be how you can position yourself. So while others just see a recession emerging, as always, they will be unable to comprehend the real shifts within the global economy as a whole.

Global Recession & Hard Landing, Martin Armstrong, March 18th

I have absolutely nothing against the man personally, so when I comment on his “research” it is only to save us from unnecessary financial harm and the massive opportunity cost of waiting for the world to end according to his timeline. I did spend nearly $3,000 to attend his November 2015 WEC Princeton conference to get his take on his “big bang” theories and although I came away with nothing new, it was money well spent. I found out that the man behind the curtain was only a promoter with a number of services to sell his unfortunate followers. The whole thing was like a mirage, but his cult is very powerful with a number of people.

Look everywhere, but not at the elephant in the room
Convicted white collar felon still cons the masses

If I had listened to Armstrong’s advice four years ago, I would have lost a lot of potential profit and it would have come at a tremendous opportunity cost. Most of the 2015 WEC attendees I spoke to at the time were overly concerned about how rising global bond yields would collapse the economy. I told them that the central banks would probably take the world in another direction and that yields would remain subdued. I asked them, why would the central banks let sovereign bond yields rise? Wouldn’t they get the blame? They all said that the central banks lost control. I strongly disagreed.

This just goes to show that if we rely on others to make our investment decisions, we lose money. We lose with poor decisions and we lose money buying services we don’t need.

Back to point… Armstrong can never admit he was wrong, so he needs to keep pounding home the same point every year. Some fall for it.

Even the US economy has been gradually slowing since the 1950s. As taxes rise and the share of the economy government consumes keeps growing, they are starving the real economy and suppressing its economic growth rate. We are headed into a very hard landing. It has been the rise in taxes and regulation that is also behind the trend to automate replacing workers as much as possible.

Global Recession & Hard Landing, Martin Armstrong, March 18th

The real enemy is hidden in plain view

Armstrong never blames the Federal Reserve for the problems it causes. He is responsible for running cover for the Fed in the alt-media.  The reason why taxes and government spending climb every year is because the United States is enslaved under a private banking cartel that has absolutely suffocated its victim (you and me). But that idea doesn’t work for people who either cut a deal to get out of jail or are trying to curry favor.

No QE in China, but what it does is much worse

We simply must approach this from an international perspective for China is also slowing but thank God they have rejected Quantitative Easing which I have warned is a complete failure.

Global Recession & Hard Landing, Martin Armstrong, March 18th

Armstrong is indeed correct; the ChiCom government and the PBOC have not engaged in quantitative easing. It reminds me of Bill Clinton when asked about Monica Lewinsky. I take note that Armstrong has been a huge promoter of ChiCom policy at the expense of the United States and rarely criticizes the Party. Perhaps, we can lump Armstrong in with Ray Dalio and his constant praise of all things ChiCom.

For years, my contention with Chinese investments rested in the simple conclusion that foreigners can never get an accurate financial, economic, and monetary system picture of what the government and all their controlled corporations are doing. Why create a Chinese version of QE when the government can just create fictitious shell companies and off the bad debt to their balance sheets?

I am tired of the disingenuous shill, the click bait articles, and the up-sell in the alt-media. I write my blog as a Christian with nothing to gain (except my soul) and as someone who is able to warn others to stay away from those trying to save us.

 

 

If tax jurisdictions raise property taxes, will real estate be a good investment?

I received an observation and question from a subscriber.

I have read that the states and municipalities in the U.S.A. plan to raise property taxes astronomically in the next 7 years.

Obviously, this will effect property values and rents. Is real estate a good investment with this in mind?

Gary

This is a common concern I hear about often. Here was my response. I edited for grammar and such (most of my responses are text to speech). If we see how property taxes work (in the U.S.), we can get a better feel for understanding my response.

Existing home owners also struggle as house prices rise

There are two ways for tax jurisdictions to raise property taxes.

The first one is to raise the millage rate. [The millage rate is the amount per $1,000 of assessed property value that is used to calculate local property taxes. Tax jurisdictions use millage rates to calculate the total jurisdiction’s local taxes to be collected based on a derivation of the total property value within the jurisdiction’s boundaries.] Each homeowner in that tax jurisdiction is responsible for their fraction of the total operating budget for that tax jurisdiction.

The second way is to let the assessed values rise [via price appreciation] while keeping the millage rate the same. This is basically how most tax jurisdictions raise their tax revenue over time. The millage rate stays substantially the same while the assessed values rise. They tend to work in tandem with the tax jurisdiction’s need for cash for operations.

In some desperate tax jurisdictions we read the articles about how property taxes are rising. That is performed through increasing the millage rate. I hear about this ad nauseam in the alt-financial media. These types of articles are enough to scare the crap out of anybody. That is done by design.

Property values are indeed increasing. So are other types of cost of carry. I discussed this on my March 15th article. The central banks are going to work to increase asset prices. On the surface, this intimates that homeowners will be wealthier, at least on paper. The problem with higher real estate values comes higher costs of everything else. As real estate prices rise, property taxes rise. Insurance and rehab and repair costs also climb and pressure the costs of ownership. Rehab, permit, and construction costs get more expensive, because the local jurisdictions and states continually promulgate more zoning code. Licensing Laws and requirements for contractors continue to grow and their costs get passed on to the customer.

On a simple level, it looks like real estate is a poor choice of an investment. However, the offsetting cash flow [rent roll] is rising at a steady clip. Since the Great Recession rents are up about 30% nationwide and in some areas up much higher.

Cost of carry [ownership] may also be up 30% over the same time frame but from a lower base. So the absolute value of the rent roll has increased at a much greater amount than ownership costs. What I’m trying to get at is that our dollar cash flows have been rising at a much higher value than our costs like taxes.

Eventually, only well-funded individuals will be able to remain in this game. The average over-extended homeowners with no offsetting rental income will struggle. Real estate values may rise, but many homeowners will no longer be able to afford to keep the property. Prudent investors can still make a lot of money. These investors need to understand the markets and also know how to rehab and self-manage the properties to keep costs contained.

Everyone suffers with higher property taxes, especially renters

With respect to how rents will be affected by increases in property taxes; I know firsthand how rents respond. Rents have moved higher and will continue to climb as more people will no longer be able to afford the costs of home ownership. They will be forced to rent and as the stock of rental properties in working-class areas plateaus, rents will move higher.

As time goes on, we may indeed see millage rates rise. I know Martin Armstrong talked about property values topping out with his “big bang” prediction for 2015 Q3. His thesis was based on higher bond yields and credit contraction. His concern was that property taxes would also have to rise to levels that would bankrupt all jurisdiction stake holders. This clearly has not happened, and I suspect as asset values rise over time, our tax liabilities will rise, even if the millage rates remain consistent. Federal Reserve monetary policy raises our taxes in many ways. By increasing our house prices, local jurisdictions can charge higher property taxes.

Property taxes on my rentals are up by as much as 25% over the past five to six years while the millage rates are essentially the same. But the rental income or income potential is up by about 20%. On an absolute dollar basis, my net rental income has grown faster. The owner-occupied holder suffers, especially as SALT deductions are capped for federal income tax purposes. I write off all my taxes on my investment properties.

Personally, I see prudent rental real estate ownership as the most effective way for Joe Six-pack to stay ahead of what is coming.

Response to astonished subscriber; Didn’t Japanese real estate prices fall for over 30 years?

Japan’s demographic trends are moving in the opposite direction to the rest of the world. Ask yourself, where are all these people going to live? The cities are filling up fast.

Asset prices to rise? Same trajectory as Japan? Correct me if I’m wrong, but didn’t  real-estate prices in Japan tumble over 30 yrs ago, and still haven’t really recovered? Deflation is also an on going problem there as well?

Thanks,
Chris in Seattle

I get it. Chris is not alone in his thoughts. If other central banks elsewhere around the globe try to copy the BOJ’s actions, why should they attain anything better? After all, Japan has been shrinking for decades. I get other similar emails as well. I understand that people are astonished with what I write. My email database continues to shrink and the bandwidth fades. Unfortunately, I have been correct so far and I will be in the future. I understand that what I say doesn’t conform to any other source I come across. Yeah, this stuff is a fait accompli and people do not want to hear that; it makes many feel powerless. It’s too depressing.

First, if you are reading this then you probably already assume that bond yields are going to continue to fall. I have been talking about how bond yields would move lower since I started this blog in 2016. No “big bangs” here.

Second, many presenters of Japan’s real estate data have been disingenuous and misleading. Despite Japan’s miserable demographic trends, as we will analyze further, home prices have been rising most all decade. I find that one observation a direct result of BOJ financial engineering.

I am surprised U.S. house prices haven’t risen more in many areas. The growth rate in urban areas has been breathtaking. Since the great recession, the U.S. population has risen by the total population of Australia.

That’s right; in many areas of the United States, real estate is a relative bargain. I run the numbers and it still makes sense. Imagine the impact of more monetary stimulus. The central banks seem to be telling us that they are going to hammer it out until it collapses and that can be in another decade.

We have discussed in the past that land (not real property) prices in Japan, in aggregate, have fallen for a long stretch of time (this article shows that land prices throughout Japan fell for 26 consecutive years). Despite this, house prices have been rising. However, Japan is quite unique as we must take into account the slow death of rural Japan (which has skewed this land price data), the aging of its population, and its dire demographic trends.

Japan’s population is roughly the same as it was in 1990; almost 30 years ago, and it is now falling fast.

Japan has the lowest population growth of all the larger nations (209th overall). Its population has been falling since before the great recession. When Japan’s shrinking pool of young people have little hope for the future, they stop having children and don’t bother buying houses.

Despite this poor backdrop, Japanese home prices continue to rise off their Great Recession lows.

Residential property prices for Japan continue to move back higher, despite their dire demographics

Here is the link to the BIS data that was used to derive the above price chart.

I have been analyzing rural farm-belt house prices here in the United States (not farm land) on an ongoing basis and there are huge areas here where house prices are still selling at steep discounts to their former highs over a decade ago. Why is that? The former vibrant farming towns in the midwest have been decimated in a similar fashion to Japan.

About 127 million people live in Japan. The population could drop below the 100 million mark by 2049, according to the National Institute of Population and Social Security Research.

Japan’s Population Is In Rapid Decline – NPR.org, December 21, 2018

Japan has eight million vacant properties and their population is shrinking

Given the terrible demographic trends, I am absolutely amazed that home prices have trended upward all decade. I tip my hat to the BOJ.

Japan’s home prices may be rising, but the country still has more than 8 million unoccupied properties – so many that owners have taken to giving them away for free.

Many of the homes are dilapidated – a product of the shoddy construction methods used during the postwar housing boom in the 1960s. These prefabricated structures have a lifespan of just 20 to 30 years, according to The Guardian. A number of them are also built on sloping land, making them structurally unsound.

But there are bigger reasons why no one seems interested in buying.

Japan’s population is shrinking, with researchers predicting the loss of around 16 million citizens in a little more than two decades. Its residents are also trending older, meaning there are fewer young people trying to nab property – particularly in suburban or rural areas.

The phenomenon has carried over into urban areas as well. The Japan Times reported that more than one in ten homes in Tokyo are now empty.

Millions of Japanese homes are abandoned, and owners are giving them away for free Business Insider, December 8, 2018

If it weren’t for the BOJ and its heavy intervention, prices would have dropped even further. There is very little immigration into Japan and it still is a relatively closed society.

I know it’s easy to read the dire news stories regarding Japan and their asset bubbles. I get it. It’s easy to extrapolate its results with other nations.

One more thought that I have been warning the reader; The central banks and their charlatan shills and apologists do not seemed to be as concerned about asset bubble formation like they once were as recently as six months ago. I observe their behavior and I am concerned that they are going to attempt to massively inflate asset prices. Should we preorder our Dow 30k hats?

Once again, I apologize to my readers. The world is a grim place and will only get worse and what I write doesn’t make us feel any better.

Federal Reserve policy confusion ensures the existing agenda will move forward

Mainstream business media work to ensure current policy direction
All monetary theories are presented as equally valid, so only the existing path moves forward

I came across an article from this weekend’s edition of Barron’s titled, The Federal Reserve Faces a Reckoning, and wanted to share it with you. It is behind a paywall, so I copied the article to the website.

My first thought while reading it was how the article’s quoted experts all seemed at odds with how to proceed. At the core of the issue; the Fed needed to act in a way that was most fair. This is a branch of economics called normative economics. But the experts who were quoted couldn’t come to any consensus. This ostensible confusion was the intended message of the author. It helps to ensure the existing agenda will move forward.

Normative economics (as opposed to positive economics) is a part of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be.

Normative Economics, Wikipedia

Although it is an interesting article, I am sure the average reader is left more baffled than ever about how the Fed should proceed with monetary policy operations in the future. Here is an example of what I mean:

Martin Wolf, the Financial Times’ economics writer, contended this past week that “monetary policy has run its course,” having done all it can to fight secular stagnation, the state of persistent inadequate demand hypothesized by Lawrence Summers, the former head of the National Economic Council under President Barack Obama and Treasury secretary under President Bill Clinton.

Persistently low interest rates aren’t artificially depressed by central banks but by the low level of real rates needed by the economy, Wolf continues.

With monetary policy having reached this apparent cul-de-sac, Wolf contends fiscal measures are needed to counter insufficient demand. Taken a step further, this argument extends to adopting Modern Monetary Theory [MMT], which essentially argues a nation that can borrow in its own currency isn’t limited by the size of the debt. If inflation heats up, fiscal policy can be tightened. Powell dismissed MMT as “just wrong” in recent congressional testimony, an opinion shared by the overwhelming majority of mainstream economists, even as it gains adherents on the left.

The Federal Reserve Faces a Reckoning– Barron’s, March 15th

Quantitative easing; Modern Monetary Theory in action
Anyone can make it a left/right issue, but MMT is the very essence of current central bank policy

Here’s the odd thing about Powell’s rejection of MMT; he didn’t reject it as a policy tool, rather he rejected the notion that the Fed was engaging in it. I say, of course it is.

The business media have done an effective job in politicizing the matter by making it a left/right issue. But, at the end of the day, any central bank that is engaging in sovereign debt purchases is employing Modern Monetary Theory. Jerome Powell’s MMT rejection was so adamant that most experts in the field agreed with him.

Wolf still conjures up the idea that bond yields are somehow determined in a free market. He cannot yet admit that the central banks have artificially suppressed the yield curve. As a writer for the FT, he is not allowed to have that view. He chalks up the current low regime of interest rates in the bond markets to the low levels of equilibrium rates needed to stimulate the economy and that it was not a by-product of monetary policy. Even more disconcerting; there is a sizable consensus that the Fed has been too tight and that is helping to keep longer-dated bond yields too high. I think you see the confusion that has been planted.

Many researchers are now predicting that enormous doses of fiscal stimulus will be needed going forward. You can see that all these programs were what caused the problems in the first place. Even if liberals/socialists can convince the population that fiscal and social deficit spending are the preferred normative policy, the results will be toxic as the prices of assets will continue to climb and the intended beneficiaries of this social spending will continue to fall further behind.

I say that without the central banks engaging in ongoing MMT, the credit markets would have collapsed a decade ago and they never would have been resurrected without a new monetary system. The elites, however, are not ready to introduce that new system. The current one fulfills all their needs.

As far as what will happen in the future, I see more of the same. I view the monetary policies of Japan as a template of what will come to the rest of the developed world. The BOJ’s monetary policy is the very definition of MMT. The BOJ conjures up any money that is needed for the Japanese government to stay in business without upsetting its citizens. MMT is alive and well and all the major central banks are engaging in it.

Just because the business media frame MMT as a liberal idea, doesn’t make it so. I see more of the same coming, so we better plan for this reality. Politics have nothing to do with it. It’s all designed to consolidate the global wealth.