Month: July 2019

The financial lives of the majority are already imploding

What do you think the chances are of this whole thing imploding up with defaults, and we get higher rates.

The article with Ben Bernanke was interesting. They picked the right guy for the manufactured crisis in 08. Made me think of Jerome Powell, what his role going to be with Trump. Trump is a master of bankruptcies.

If I were placing bets; as of right now, I would give the likelihood of a financial market implosion from rising interest rates a one in six chance per year. That’s right; it’s not a high probability. Even if the markets imploded, that would just provide the central banks with all the excuses they would need to buy up everything that the scared sellers were dumping onto the marketplace.

If you think home prices are expensive now, just wait another few years after this upcoming round of QE gets going. Imagine how much more sovereign debt will be taking up space on the collective asset balance sheets. These low-yielding assets will need to be deployed as collateral, which will just continue to bid up prices. If the N.Y. Yankees are worth $4 billion now, I guess in another several years, they will be worth $6-7 billion. Nobody can import the Yankees from a low cost nation.

The whole system is centrally managed from stem to stern. This manufactured crisis talk provides the fertile ground to introduce new and novel concepts on the sleeping populace. Under such manipulated conditions, the dazed and confused debt-slaves will be more accepting of central bank asset accumulation and the jettisoning of national currencies in favor of centralized electronic assets like the Libra. As powerless bystanders, they will view it all as a fait accompli.

Chris Pirnak

Here is a typical article that spells out the sad state of owning owner-occupied real estate. This is why I always say to buy rental properties. All these costs offset your rental income. Your financial adviser will never tell you to directly buy investment properties, because he can’t manage that money and take a cut. He can’t control that money, so he will always recommend investing in REITs and buying a home to live in. Here’s a piece of advice; I rented my whole life until only a few years when I moved in with my wife. I deployed all that capital on rentals.

If I bought an owner-occupied millstone, my financial life would have already imploded and I would have had to go back into the workforce and profess my love of this world to my employer. But I haven’t had to work since 2001, because I know how to game this system.

The conflict of interest that is rampant in the financial industry, whether it’s from the broker/dealer or the alt-financial shill with a subscriber service, will almost guarantee a debt-slave existence. To many who do not understand this system, their financial lives have already imploded. The ZeroHedge and alt-financial followers, along with the partisan fools, keep looking around for a financial implosion. The problem is that the financial system that they thought they knew has been imploding and transforming itself into the desired outcome for decades. Implosion? That ship has sailed.

Are cryptos the answer? Will Facebook ever use outside cryptos?

Notice the tried and true method the globalists are employing to get their agenda pushed through. If the elite’s media kept proclaiming Facebook’s virtues, more people would catch on to the new world order. So, by controlling its opposition, the illusion of free choice is maintained and the people never really catch on to how they are stuck in a closed system.

The manufactured Facebook opposition appears to be overwhelming, but that is just a diversion to fool its observers into thinking the regulatory authorities are looking out for its users.  The Libra will go through and become reality. It will, because it is the clear response to the manufactured dollar and national currency crisis. It has been ingeniously positioned to be the only viable alternative to the dollar hegemony.

IMF says electronic currencies are the real threat

In a paper published Monday titled “The Rise of Digital Money,” IMF authors Tobias Adrian and Tommaso Mancini-Griffoli said the two most common forms of money today, cash and bank deposits, will “face tough competition and could even be surpassed.” While banks are “unlikely to disappear,” they face growing threats from big tech companies and fintech start-ups, the paper said.

It’s hard to bid up consumer prices when taxes and debt obligations eat up much of a person’s paycheck

I had a question for you regarding inflation/deflation as it relates with the decreasing interest rates. If I understand you correctly, you’re saying that when rates fall, it’s deflationary. However, you’re also bullish on housing (for higher rents and higher asset prices to continue with weak rates). I’ve also seen a continuing uptick in food prices. Minimum wage keeps rising although it seems like there is pressure on real wage growth in Canada – maybe there’s growth in the US employment market. Is your yardstick for inflation commodities (ie gold & oil) and real non-governmental manipulated wages (ie wages set by the market and not by government?) or how would you define it particularly in light of rising house, rent & food prices.

N – Canada

The higher taxes, the lower real GDP growth

This person asks some very reasonable questions and I hope to clarify them.

When I speak of price inflation, I speak strictly of consumer prices as reflected in the government data. Of course, these numbers tell only a small part of the picture, and that is done by design. For most of my discussions, I stick to the published government data as these data points are what largely determines central bank monetary policy.

Certain items will always reflect the true rate of monetary inflation

With this said, there are many necessities and “fixed” items (e.g. healthcare, housing, education, debt payments, and taxes) whose cost burdens continue to escalate higher than the general rate of inflation, and their amounts have been taking up a larger percentage of a person’s income over time. This helps to keep the published inflation numbers lower, as people have less available to spend on consumable and durable goods.

There is one primary reason why the costs of these items rise higher than other prices; these items cannot be imported and their prices cannot be arbitraged between nations, like consumables, which can be produced and sourced from low cost countries. This is the primary reason why the governments of high cost nations promote free trade at the expense of the average worker; it helps to maintain the illusion of low inflation. This is why government tends to intervene in sectors like housing and healthcare. These are the areas of the economy that are highly susceptible to the damage that government spending largesse causes. In other words, the price increases of housing, education, and healthcare more accurately reflect the rate of monetary inflation (not general inflation) over time.

This is why we are seeing a surge in social program spending; it is being done out of necessity. As long as this monetary system is in existence, the governments will have to keep covering up their profligate ways, which were made possible by their central banking enablers.

So, rents cannot be arbitraged between nations nor different regions in a country. I may buy clothes that were produced in Vietnam, but I cannot pay the same rent as someone living in Hanoi. You may live in Toronto, but you will not pay the rent of someone living in Medicine Hat. Thus, I am bullish on rents.

As long as the central banks stand ready to buy all that is needed to keep rates moving lower over time, so governments can spend without a thought of national bankruptcy, I will be bullish long-term on housing, rents, stocks, and bonds. The costs of these items cannot be transferred from overseas. The key point that underpins this whole dynamic is the ability of the nation-state to remain in business without any debt repudiations. The central banks have made this certain and they will make sure that all sovereign debt will remain and be serviced. This is the deflationary drag I discuss. If any type of default looks imminent, all bets are off and the loss of confidence will cause bond yields and inflation to rise. That would put an end to this monetary experiment.

The prices of commodities can be sourced from all over the world. I just wrote an article discussing my thoughts on where I think commodity prices are moving. Although I believe the longer trend is definitely higher, this does not mean I want to establish a large bullish macro-position on commodities in general. The U.S. used to be the largest producer of many commodities, and if it remained that way, commodity prices would be much higher. But many developing nations are growing in importance as commodity producers, and as long as interest rates remain low, the supply side of the equation will continue to produce more than normal, as their costs of capital is less.

The only commodity I currently recommend is gold. It will always be the first to move when uncertainty reigns. If Fed Chair novices like Jerome Powell make mistakes, which I see as probable, gold will reflect this. Mr. Powell seems to be a simple-minded monetary scientist and he does not engender my confidence. I had more conviction in Ben Bernanke’s abilities. It is just difficult for me to imagine a world of higher spiraling commodity prices when so much of the world’s income is spent on housing, taxes, and debt payments.

Ben Bernanke was chosen as Fed Chair, because his advanced grasp of the unconventional was ahead of his time

Note to reader: The preservation and perpetuation of the Federal Reserve and the private central banking cartel is the primary objective of the elites. By the early 2000’s, it became clearly evident that under its normal routine of operation, the existing monetary system was reaching its denouement. The elites knew that unconventional actions and policies would need to be promulgated to move the existing monetary system forward. With his vast understanding of the unconventional, I have to conclude that Ben Bernanke was specifically chosen at the time to not only transform the Federal Reserve’s operations and policies, but to help frame the entire global central banking system for decades to come. There was no other candidate with the in-depth knowledge, and no other Fed Chair has had the capabilities that Mr. Bernanke possessed. We need to comprehend that Bernanke’s role was to preserve the existing hierarchy, and while those on the outside view his tenure as a disaster, I view it as a success.

I received an email from a reader:

Have you heard of the Bernanke doctrine?

https://en.wikipedia.org/wiki/Bernanke_doctrine

Art

Indeed, I have… On November 21, 2002, then Federal Reserve Governor, Ben Bernanke, delivered a speech before the National Economists Club in Washington, D.C. The speech was titled Deflation: Making Sure “It” Doesn’t Happen Here, and you can still read the transcript of this now-famous speech on the Federal Reserve’s website. At first, the speech did not receive much publicity, but it helped to quantify what would eventually be known as the “Bernanke doctrine.”

In 2005, this 2002 speech received renewed interest when President George W. Bush selected Bernanke as the chairman of the Council of Economic Advisers. After several months of grooming, President Bush nominated him for Federal Reserve Chairman. Ben Bernanke was sworn in as Fed Chair early 2006. This gave him time to prepare for what was coming – the manufactured crisis that would work to transform the entire central banking system. This auspiciously timed crisis provided the opportunity for Mr. Bernanke to spin his magic.

Here is an excerpt from his 2002 speech;

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination.

One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates.

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

Remarks by Federal Reserve Governor, Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
Deflation: Making Sure “It” Doesn’t Happen Here,
November 21, 2002

The seven tenets of the Bernanke doctrine

According to Wikipedia (which was just an edit of Bernanke’s 2002 NEC speech), to combat deflation, Bernanke provided a prescription for the Federal Reserve to prevent it. He identified seven specific measures that the Fed can use to prevent deflation.

1) Increase the money supply (M1 and M2).

“The US government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost.” “Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation.”

2) Ensure liquidity makes its way into the financial system through a variety of measures.

“The U.S. government is not going to print money and distribute it willy-nilly …”although there are policies that approximate this behavior.”[1]

3) Lower interest rates – all the way down to 0 per cent.

4) Control the yield on corporate bonds and other privately issued securities. The Fed could lend to banks at 0% and take corporate bonds as full collateral.

5) Depreciate the U.S. dollar.

6) Execute a de facto depreciation by buying foreign currencies on a massive scale.

7) Buy industries throughout the U.S. economy with “newly created money”.

My concluding thoughts

Although central bank sovereign debt purchasing is deflationary, by nature, it will not actually cause deflation. Rather, the highly inflationary conditions that normally prevail under perpetual sovereign debt creation and currency debasement are tempered by the deflationary forces that are caused by the growing debt servicing costs. The more debt that is outstanding, the more of a deflationary effect it has on  the economy. As long as government default risk is removed from the equation, there is little reason to experience the inflationary conditions that a loss of confidence would engender. As the amount of outstanding debt balloons past normal GDP measures; if the central banks can maintain low interest rates (as Bernanke theorized), the monetary system can be maintained.

As long as the central banks stand ready to buy up assets as needed to keep interest rates low, the higher asset prices will rise and the lower the general level of price inflation the economy will experience.

With Mr. Bernanke’s guidance, the elites have developed techniques to keep the national governments spending with reckless abandon, while keeping the general price level low.

Mr. Bernanke was ahead of his time in 2002. He set the guide path for future monetary policy and it was his through his unconventional mindset, specifically with respect to asset acquisition, that we now see negative interest rates in many areas of the world.  Future policies will now be set by what the elites can imagine.

Are commodity prices about to move higher?

Chris….

Do you see commodity inflation arising in this era of low interest rates? I have casually been reading the business press and there are more articles arising about commodity prices rising, and, henceforth, an appreciation in the Australian and Canadian dollars.

Thank you,
Gary – United States

Despite the talk of agricultural calamity, global crop yields are still elevated and the effects of the weather in the U.S. have been minimized. We see crop prices rising on the futures exchanges, but their increases have not been as much as originally feared. Swine prices have tapered off after the large rise in the wake of the China Swine flu scare. Cattle prices struggle along multi-year lows.

What caused the spike in commodity prices about 10 years ago?

Recall about ten years ago when the global economy and financial markets were on edge. The U.S. dollar had been sinking into the abyss and looked ready to take out multi-decade lows and fall further. Commodities of all kinds increased and gold, especially, were telegraphing the fears of investors at the time. Recall the peak oil scam that preoccupied business media, while the preppers were warning of impending societal collapse. That was at the same time the USDX was tanking.

Moreover, there were tremendous worries that Ben Bernanke and the Fed were going to fail with their unconventional monetary experiments and QE. From 2009 to 2011, recall that gold reflected this concern, and it was during that period that gold had its blow-off top. Gold’s price movement coincided exactly to the global investor worries of this possible failure in central bank policy. By the end of 2012, it was clear to me that QE and the other central bank programmes were going to succeed, at least in the eyes of the globalists.

These QE programs were built on uncertainty, and while the great majority of the alt-financial analysts deemed QE to be a disaster, I saw things differently. I understood the agenda and marveled how the banks were able to pull off the stimulus programmes without inflation and loss of investor confidence. As a result, I turned bearish on commodities in general, and specifically, precious metals. As we can see, commodities and commodity-based currencies have been falling ever since.

So where do we go from here?

Once again, the central banks need to resume their monetary stimulus and the Fed mouthpieces have been vocal in its intentions since the market nadir in December 2018. Recall how we discussed that the dollar would be well supported, regardless of Fed easing, because the Fed was undertaking new stimulus due to global uncertainty and not from domestic concerns. The other central banks, especially the ECB and PBOC, desperately needed to commence further dovish and unconventional policy. Soon after the Fed announced its intentions to begin buying up US Treasuries once again, the ECB, BOJ, BAC, RBA, and PBOC “surprised” the markets with announcements of more bond buying, money injections, and short-term rate cuts.

The U.S. economy can withstand higher rates, as the dollarized debt can be spread far and wide. And although the USD should be falling with dovish policy on tap, the other nations are racing to be first. So, I see the USD being well supported here and into the indefinite future.

Debt generation and QE are deflationary

Recall my prior research that lays out all the reasons why this exploding debt generation is not inflationary, but, in fact, deflationary. All this debt generation has produced massive amounts of future obligations for the nations and all this will produce a drag on future economic vitality. It doesn’t matter how low interest rates move, the outstanding principal will continue to explode for future generations. How can the people in these nations bid up prices if the debt obligations continue to grow? Even if everyone gets a universal income stipend, if that payment is as a result of higher sovereign debt and taxes, inflation will continue to fade. People are just taking money from one source and giving it to another, with a cut of it going to bank profits.

Lower rates increase supply and is deflationary

Furthermore, recall my research that indicates that lower interest rates distorts the supply/demand equation. Under a regime of consistently falling rates, equilibrium supply will remain elevated as marginal players remain in business, while established and well-capitalized players enjoy lower costs of capital and can produce additional output profitably at lower prices. We see this in oil and many other industries. With lower costs of capital, equilibrium supply will always be higher. If interest rates rose, producers, in aggregate, would produce less. Higher rates would result in a supply shock and that would be inflationary.

Now, let’s turn to gold’s recent rise. Its higher price above $1,400 was not followed up with any sizable increases in silver and platinum. Gold’s break out has been in relative isolation and it is as a result of investor concern over the central banks’ new policies and experiments with deeper negative rates, which will spread as time moves forward.

Here is the bottom line for those who are looking for a commodity bull run; If you believe that the central banks are going to lose control, longer-dated bond yields will increase, and that inflation will finally surface, then you should buy commodities and gold, and short the USD to the benefit of the commodity-based currencies. If, on the other hand, you are concluding that we will see more of the same and that the central bank programmes are working as intended (not for our benefit, but for the benefit of those at the top), then I would leave commodities alone.

I see more of the latter, so be careful about the commodity perma-bulls who have this next leg-up in commodity prices pegged. If after the recent floods, this is the best farm prices can do, then what will it take for commodity prices to rise. The only answer at this point would be for the central banks to print the money and directly give it to you and me without any offsetting debt creation, and that will never happen.

If you can believe it, most Americans have it easier than those outside the country

If the good ole U.S has an affordable housing crisis, then your neighbors to the north have it much worse. An example we discussed, Niagara Falls, Canada has much higher home prices than Niagara Falls, N.Y.

You can buy a fixer upper on the U.S side for around 40k [the cheapest price is 240k CAD on the Canadian side]. Up here that won’t get you a garage. Wages are not that much different from one side of the Niagara River to the other to justify the house price difference.

Canada, Australia, New Zealand are basically unaffordable places for the middle class to have any kind of normal life like in the 60s and 70s.

Besides the healthcare the majority of Americans are living an easier middle class lifestyle than the other commonwealth nations. Consumer goods, utilities, and most food items are much cheaper in the U.S.

Either way the middle class is disappearing in the majority of the English speaking countries. Like you said Chris, all done by design.

V – Toronto

I definitely agree as the U.S. can ship off much of its inflationary dollar printing to the rest of the world.  The alt-media focus on the bubble cities here in the United States, but on a relative basis, house prices and the costs of living here in the U.S. are cheaper than in most other places around the globe when compared to incomes.

While expats leaving the United States to move to Central America view housing down there as dirt cheap, to those who have always lived in those nations, housing ratios are astronomical when compared to the numbers of American cities (look at the detailed sortable infographic below). For instance, to an American expat, the typical house in Lima, Peru may be cheap. But to the average Lima resident a house has a price/income ratio of 15.38. That means it takes over 15x the average household’s income to buy an average house in Lima. If you are an American moving down there, you will not gain any friends as the locals see you as responsible for those high prices.

Look at this difference. Houses in Rochester, NY are priced at 2.08x household income. I have been to Rochester and it is a decent city on the south side of Lake Ontario. In contrast, Toronto, which is situated on the north side of Lake Ontario, carries a housing stock price/income ratio of 13.91. If I lived in upstate NY, I would be buying as many properties as I could.

Look at the chart below to see how cities around the globe stack up to one another. Pay careful attention to the American cities. Even houses in the Washington D.C. area (price/income ratio of 4.3) are inexpensive when compared to other areas. The ranking of the 325 cities are based on price/income ratios. Click on each header to sort.

I already know how cheap housing is in many areas of the U.S. I have always believed that real estate investing in the United States can be one of the most profitable avenues still available to investors. Here in the United States, traditional investment analysis can still make sense. Imagine how low the capitalization rates and IRRs must be in many areas of the world with low affordability indexes. Even here in the Washington D.C. area I can still easily make positive cash flow on a property with a 4% mortgage and a 25% down payment.

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-As predicted, the S&P futures broke 3,000. Despite Friday’s strong domestic employment report, they remain very close to that number.

-The Dow futures briefly traded above 27,000. More to come. Now that the S&P futures hit 3,000, I see Dow 28,500 as likely by the end of the year.

 

–Bonds across the globe traded lower as yields rose. This shows how big of an influence the Fed’s actions have on the rest of the world. Despite the strong employment report, yields did not rise as much as I feared.
–Jerome Powell speaks three times next week. Traders will take note of his House and Senate testimony on Wednesday and Thursday.
-The FOMC minutes come out on Wednesday afternoon, but I do not see them as a huge market mover. All will be paying attention to what Powell says about the employment report and his current path.
-Despite the strong employment numbers on Friday, the market traded off their lows. If the Fed doesn’t make a big deal about them, the markets will shrug them off and higher highs will come soon.
– Gold didn’t react as poorly as usual to a strong employment report. Rather than trading down all day, it rebounded $10 off its lows. This sets it up to trade higher tomorrow evening.
-Futures COT reports are delayed due to July 4th holiday.
–Bitcoin putting in a daily bullish pennant flag. I am still long here.
-Christine Lagarde has only one option available; carry on the same program of lower rates and bond buying. We said three years ago that the central banks can never stop stimulus. Although higher asset values lessen the immediate need to lower rates, eventually they have to step back in. The ECB can never stop, regardless of whatever Lagarde says.
-I feel bad for those who are trapped in their economic-collapse confirmation bias. Trying to fight this secular trend in interest rates will be nearly impossible. TPTB want higher asset values and will get them.

Affordable housing advocates never look at the two elephants in the room

Check out this article from Inman News titled, Why It’ll Take A Village To Solve Housing Affordability Woes (I downloaded the article as a pdf, as it is behind a paywall). The author argues that “everyone needs to engage in the search for the formula that creates affordable housing.” She even goes as far as to call the affordable housing issue a “complex problem.”

I do not see the problem as being a complex one. The problem is actually very easy to solve.  The author says that we all need to help out. But I ask; is this my responsibility? Is it yours? No, not anymore. I tell people all the time about how to cure this housing crisis, but most want no part of the conversation. Many of the people who disagree with my assessment stand to lose if we overturn the status quo. You and I are not causing the problem, but we are being held as its victims and perpetrators at the same time. Talk about new world order double-mindedness.

The pressure is growing as we see more homeless people on our streets and as more middle- and upper-class families realize their children can’t afford their own housing. This new level of urgency has encouraged corporate giants like Wells Fargo, Google and Microsoft to throw their weight behind the problem.

Yet a complex problem requires a complex solution, and the question remains: Is this enough to solve our housing problem?

The U.S. has a shortage of 7 million homes for renters whose household incomes are at or below the poverty guideline, according to the National Low-Income Housing Coalition’s annual report. Despite this, the majority of houses built over the past five years have catered to the mid-high and high-end of the market.

Cost burdened Americans are sacrificing their health for their homes: Nearly a third of U.S. households paid more than 30 percent of their incomes in 2016.

Why it’ll take a village to solve housing affordability woes – Inman News, July 2nd

The experts are compromised, so no real solutions will ever be proffered

Imagine if this housing “expert” discussed the real issues behind the affordable housing crisis. What would happen to the author’s standing if she criticized the government’s spendthrift ways, which were enabled by the owners of the Federal Reserve? The resulting fiscal and monetary policies have been a disaster to the working class, and are the primary causes of the explosion in asset values. This has driven up house prices, rents, and property taxes. Owner-occupied real estate has become nothing more than a costly millstone for ten of millions of households.

Imagine if this author contemplated how the nation’s open-borders policies have worked to crowd out many wanna-be home owners. These people who were born in the country can no longer afford to own a home.

I know what would happen to this housing “expert” if she spoke the truth about what is causing the affordable housing debacle. She would lose all her funding and would never be hired anywhere in the real estate industry. Her money depends on her being willfully ignorant of the real causes behind the affordable housing crisis. Instead, she is trying to solicit corporate sponsors, while claiming the whole dynamic is a complex matter.

I have an easy solution. We discuss them everyday, but they will never see the light of day. The owners of the central banks want it this way. Their compromised experts and shills will never discuss the real causes and the problems will grow so large that government socialist policy will eventually take over and control the entire sector. I see the existing solutions to the housing crisis only making it worse, which is the plan all along. Welcome to the new world order.

A subscriber has some thoughts and questions about bitcoin and Libra

Since the big up and down of bitcoin a year or two ago, where my 21 YO neighbor was telling me how I need to get in on this, I only saw it as the biggest Ponzi scheme ever and the prototype for the mark of the beast. Not that I have any financial expertise – I’m not suggesting bitcoin can’t be profitable for some but, I also can’t help wonder why the anti-fiat money people don’t ask the simple question. Who is willing to take lots of “worthless” dollars and give in return this electronic hocus pocus? I mean we are not talking about gold bricks, rare classic cars, art, property or whatever. It’s pixilated characters on a screen?

Having this idea in my head along with your analysis about the gov’t buying assets [actually, private central banks], I wasn’t sure exactly how to phrase my search. The correlation [of cryptos rising], while gov’t debt is on the rise may suggest that those who are giving up the dollars are in fact funding the gov’t debt. You mentioned this about the Libra and I just transposed it to bitcoin to help my search and found this article –

https://www.newsbtc.com/2019/06/27/bitcoin-price-rising-alongside-negative-yielding-government-debt/

Is bitcoin essentially a financial instrument created by the bankers to get more money to buy debt? Unlike the Libra that is being set up as the new currency with backing from the same players that run our current system.

Alex

These are all actually very reasonable questions. Let’s address them.

As for bitcoin being a ponzi scheme, I would disagree in that an asset’s value is based on what people believe it to be. Thus, if investors believe bitcoin to be worth $10,000 or $100,000, and the supply and demand equation support those levels, then that’s what btc is worth.

Beware of the shill articles

Income-generating assets like stocks and sports teams move higher as sovereign debt levels rise and interest rates fall. I will not make that same claim about assets like gold and bitcoin, which is short-term at best.

The average NBA team is worth $1.9 billion, up 13% over last year and three times the level of five years ago. The New York Knicks lead the way, worth $4 billion by Forbes’ count, up 11% from a year ago. (And owner James Dolan says he’s been offered even more: a cool $5 billion.) The club is tied with the New York Yankees as the second-most-valuable U.S. sports franchises after the Dallas Cowboys, which is worth $5 billion.

NBA Team Values 2019: Knicks On Top At $4 Billion – Forbes, Feb. 6th

First, let me discuss the typical shill articles that populate the crypto and gold spheres. Let’s look at the one this subscriber sent.

Bitcoin Price Rising Alongside Negative-Yielding Government Debt

This is the typical flimsy research that asset shills put together. Bitcoin will rise and fall on its own merits, so if the amount of negative-yielding debt levels fall from here, don’t make the mistake and assume btc will also decline. I bet that if the amount of sub-zero debt drops, this writer will talk up btc, because he will argue that with rising yields, economic collapse is just around the corner and btc will be the asset of choice.

You see the circular logic. This is the same type of shilling that takes place in the gold bug community. It is all designed to promote an agenda, and it starts with you accepting the logic and buying the product.

All other things being equal, when interest rates fall, the prices of income-generating assets rise. This is especially true of assets that are priced off the yield curve. But it can also hold water with other types of assets like gold, silver, and bitcoin, which do not generate income. However, it has been my experience that this relationship with non-income generating ones is often far than perfect. We have seen instances where gold has risen in a rising rate regime (late 1970’s, mid-2000’s) and falling while rates dropped (early-mid 2010’s). The same can be said about bitcoin (rising during the latest Fed tightening and rising in this dovish cycle), so I will never assume that there is a relationship between interest rates, debt levels, and bitcoin. It is a simple, short-term one at best.

Is bitcoin just another way to help support sovereign debt generation?

I marvel at the amount of generated vitriol directed at Facebook with its proposed Libra. I find it amazing that many of the crypto shills have sided with Facebook’s blockchain creation. If the authorities embraced Facebook’s Libra with open arms, the crypto shills would have raised hell. But the manufactured opposition has provided Facebook with an unexpected partner; the blockchain enthusiasts that support all things blockchain.

Chris Pirnak

I do find the timing of bitcoin’s creation quite interesting. We now have a new asset sector that is worth hundreds of billions; all auspiciously timed to coincide with the explosive rise in sovereign debt generation. All assets help to sustain the current system, so the more in total value we have available, the more debt that the world can absorb. The young folk, who have been shut out of home ownership and the sharp rise in stock values now have an asset they can call their own. Good for them. The elites are happy and so are the crypto bulls.

My only concerns with bitcoin as a currency rests in its decentralized nature. There is no debt backing it and it is too volatile to ever be a currency. If bitcoin became the global currency, the economy would collapse, because mathematically, there is not enough available and its price volatility would render business contracts too risky to undertake if priced in bitcoin.

A stable coin is needed and it seems to me that Facebook has delivered the Libra, which addresses all of bitcoins shortcomings (as a transaction currency), while working with the existing global hierarchy. It will be backed by debt and the amount of Libra will rise over time. As a globalized stable asset, I can imagine contracts of all sorts eventually being negotiated with Libra.

I marvel at the amount of generated vitriol directed at Facebook with its proposed Libra. I find it amazing that many of the crypto shills have sided with Facebook and its blockchain creation. If the authorities embraced Facebook’s Libra with open arms, the crypto shills would have raised hell. But the manufactured opposition has provided Facebook with an unexpected partner; the blockchain enthusiasts that support all things blockchain.

I can’t help but think how this dialectic process was probably planned a long time ago.

A lot of analysts are advising to sell our real estate now. Should we?

I have been seeing more articles like this one attached calling for a Real Estate correction.

ARE REAL ESTATE ETF’S THE NEXT BIG TRADE?

Recently, at a seminar held for my pension plan, one of the key-note speakers advised plan members to start unloading real estate holdings as the cycle is coming to an end over the next 12 months – despite low interest rates.

What’s your response to their advice.

Gary – USA

Before we analyze the research article, I want to let the reader know that the author’s site offers a lot of paid services and has posted a YouTube video about how to take advantage of the 2019-2020 bear cycle. He claims to be an expert on Southern California real estate, so I will refer to the area’s housing market.

In April, 6,438 homes changed hands in LA County—up 12 percent over a month earlier. But that was still roughly 1 percent under the number that sold in April 2018.

CoreLogic analyst Andrew LePage points out in the report that, across all of Southern California, the number of sales in April was almost 15 percent below average for the month. Total sales have declined year-over-year for nine consecutive months.

Experts initially pinned the region’s underwhelming sale numbers on rising mortgage interest rates, which raised monthly payments for most buyers. But rates dropped significantly in winter and have remained at relatively low levels since then.

Instead, LePage says the high cost of buying may simply be enough to keep many would-be home shoppers out of the market.

“The slowdown in price growth and sales over the past year suggests that despite a healthy economy, the cost of homeownership has outpaced incomes for many,” he says.

As expensive as homes are now, the median sale price across all of Southern California ($527,500) is still 13 percent below where it was just prior to the Great Recession, when adjusted for inflation. One potential reason home prices haven’t yet hit that level is that it’s tougher for cash-strapped buyers to borrow huge sums of money.

LA home prices back up over $600k, Curbed.com (May 29th)

Okay. Let’s dissect this analysis by looking at the article the email subscriber references. The author bases his research on his experience with the Southern California market. Specifically, he writes;

A subscriber recently mentioned getting into a real estate ETF so we started going over the data which may suggest the Real Estate sector could become the next big trade over the next 12+ months. The news that the US Fed may decrease rates in an attempt to front-run global economic weakness and real estate market weakness may result in a waterfall event in local and regional real estate markets.

Overall, our research has been focused on one of the hottest markets anywhere in the US, California. Los Angeles, Ventura County, Orange County, San Diego, and San Francisco make up the entire massive Southern California real estate market. The California real estate market is a fairly strong indicator for weaker market segments because the number of transactions taking place across the 400+ miles spanning San Francisco to San Diego represent multiple trillions of dollars, vast segments of consumers and types of housing as well as an incredibly diverse economic landscape ranging from coastal regions, farming regions, cities, technology hubs, agriculture and dozens of others

I am not so sure that concentrating on one market, albeit a large one, can afford a person the ability to make a conclusion about the entire investment sector. Here in the Washington D.C. area, things look okay to me.

Moreover, this analyst is concerned about some sort of waterfall event in residential real estate. That’s a big guess. Recall those who employ the gambler’s fallacy to conclude that another 2008 is coming soon. Okay, let’s continue.

This next paragraph is the basis for his thesis about dumping our real estate.

Our concern is that a rate decrease by the US Fed may be interpreted as a “move to attempt to abate fear” instead of a “move to support the markets”. If this decrease in rates does happen and at-risk homeowners fear the Fed is trying to push buttons to adjust the consumer environment toward a “buying bias” and sellers become scared, then the race to sell faster (decreasing prices to attract buyers) may become the norm. In other words, in an effort to support the markets, the Fed could take actions that remove the floor from the markets as sellers attempt to get the best price possible before buyers become aware of the “race to the bottom” in terms of pricing.

Another hazy assumption. How does he make this conclusion? Few home sellers  will view what the U.S. Fed does with any real concern. Any sellers are guided by what their Realtors say and mortgage rates are coming down. The demand is still there, just based on population growth alone.

Subscribe to his cycles analysis

People are still pushing this cycles stuff, as it sells.

This analyst is still working with what I would consider an anachronism; the investment cycle. Specifically, he has a paywall that will enable you to see his proprietary research. Just like all the other cyclists and market timers. But the problem with all these analysts is that they refuse to see the elephant in the room.

We have laid out all the points that indicate the owners of the central banks have decided to keep things moving along, and will do whatever it takes to make certain asset prices move north. Higher asset prices plus unlimited central bank debt buying will enable the world to digest all the sovereign debt issuance and keep rates low. Before this whole thing blows up, we will eventually see negative rates across the board. The central banks will try everything before any disaster. Keep that in mind if you are predicting a real estate or stock market crash.

So, because he believes residential real estate is going to fall, he recommends buying SRS – ProShares ULTRASHORT REAL ESTATE at some point in the near future. Okay, let’s take a look at the chart. The ProShares UltraShort Real Estate (SRS) seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the Dow Jones U.S. Real Estate Index.

Next, I took a look at the top weightings in the Dow Jones U.S. Real Estate Index (DJRI). Here is what I came across:

American Tower (AMT) – Owner and operator of cell towers and infrastructure
Crown Castle (CCI) – Crown Castle is America’s largest provider of shared communications infrastructure, with more than 40,000 cell towers and approximately 70,000 route miles of fiber
ProLogis (PLD) – Currently the world’s largest owner of warehouses and distribution centers
Simon Property Group (SPG) – Simon Property Group, Inc. is an American commercial real estate company, the largest retail real estate investment trust, and the largest shopping mall operator in the US.
Equinix (EQIX) – Specializes in internet connection and data centers.
Public Storage (PSA) – The largest brand of self-storage services in the US
Welltower (WELL) – mostly invests in seniors housing, assisted living and memory care communities, post-acute care facilities, and medical office buildings. It also owns hospitals and other healthcare properties outside the United States.
AvalonBay Communities (AVB) – a publicly traded real estate investment trust that invests in apartments
Equity Residential (EQR) – A publicly traded real estate investment trust that invests in apartments.
SBA Communications (SBAC) – Owns and operates wireless infrastructure, including small cells, indoor/outdoor distributed antenna systems, and traditional cell sites.

Based on his belief that residential housing is due for a correction, this analyst claims that the SRS is primed for a big jump. But, based on the top 10 weightings for the DJRI, I have to conclude that this is the wrong investment to trade. The DJRI has only a muted connection to residential real estate. Moreover, the DJRI’s weightings in residential RE is based on apartment buildings, not single family housing.

Conclusion

I see little reason to think that residential real estate is going to waterfall like last decade. Moreover, I would not take this person’s advice on how to trade whatever he thinks is coming to real estate.

• The Fed would never let that happen, and it would open the financial flood gates, as it would get the blame.
• Moreover, the Federal government would stand ready to offer whatever tax incentives and subsidies were needed.
• The U.S. city population continues to rise much faster than what housing is available. You can thank open borders for that. This trend is also taking place in most of the large cities in Western Europe and the former Commonwealth nations.
• This analyst’s selection of the SRS is a poor choice for shorting the housing market. Since you and I have determined that interest rates are coming down, the stocks and REITs that comprise the DJRI will directly benefit from dovish Fed policy. These businesses will be even more attractive with low rates. These companies run cell towers, call center, warehouses, shopping centers, hospitals, and other infrastructure. This is why the performance of SRS has been an unmitigated disaster. Buying the SRS is like shorting the stock market. Go to the casino instead; you will have better odds.
• Home sales may have topped out, but I am certainly not calling a top in home prices. The whole market dynamic is different from last decade. Rising interest rates were the cause of last decade’s debacle and the Fed will not make this mistake again. In fact, we will see sub-1% 10-year rates in all the former Commonwealth nations. All other things being equal, I think real estate will be a disaster… to those who continue to rent.
• Most areas in the U.S. are just breaking even with last decade’s top in nominal prices, but that was 13-14 years ago. Adjusted for inflation, many areas are still down by up to 20% or more.
• Maybe the analyst’s prediction will one day be correct, but not before  seasoned investors have paid down mortgages, derived tax benefits, and earned rental income.
• If I believed that residential real estate was going to fall, I would build up cash positions and pay down debt, so I could take advantage of the lower prices. Selling real estate is expensive;  out and back in is at least 10% of the houses prices. This amount is even higher if you have to spend money to fix up a property for sale, because many times you will not get your money back out.
• I normally do not recommend investing in real estate via REITs. They may be okay in a passive portfolio, but their dividend yields are way too low for my taste. Direct ownership of the property is much more profitable in the long run.
• There are clearly some areas that are extremely overpriced (e.g. Toronto, San Francisco, Manhattan, Vancouver, San Jose), so stay away from these areas for investment. Just use common sense. If you have to live there, then don’t overpay.