2/28 Update – Housing and stocks; If you think we are in a bubble, just wait

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-Let’s not forget that we are still operating under a post-2008 monetary system. Despite concerns of nascent inflationary pressures, I see little chance of it really overturning the current system. All this debt for the social largess will have to be serviced and will provide the deflationary millstone required for this wealth consolidation scheme to continue.
-A too high percentage of investors are worried about inflation; if the Fed wanted, it could nip it in the bud. The Fed only has to come out and say something and the push in higher bond yields would halt. All this debt of $1.9 trillion in new stimulus will remain for future generations.
-A discussion about who really benefits from social spending.
-U.S. real estate prices are still very inexpensive. I lay out all the reasons why housing prices will still continue moving north; not just here in the U.S., but the rest of the world. Below are two tables that show house price affordability ratios around the world.  There is still room for house prices to expand here substantially.

Please click table headers to sort

Housing affordability by country

 

Housing affordability by city-state

-Sort the data on these two charts. You will see how cheap U.S. housing is for its residents. The demographics of open borders, reparations, massive social largess are only going to raise prices even higher.
-Once stocks overcome the problems we are seeing with the ostensible Fed ignorance, prices will move higher.

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28 thoughts on “2/28 Update – Housing and stocks; If you think we are in a bubble, just wait

  1. What sources do you read that help you make decisions ? And do you make them varied enough to help avoid confirmation bias ? I have found your incites very helpful.

    1. I look to everywhere to determine if what I am saying makes sense. I have no predetermined source that guides me.

      As an observer of the financial markets since 1985, I know certain realities in how these markets function. For instance, a few weeks ago, I called you all to get out of the growth and SPAC plays we traded and held overnight for easy gains. Why? Once the 10-year UST rose above 100 bps, and the Fed was not concerned about it, I warned all to listen and take cover. I didn’t read an article that decided that for me. I said this because I never saw an instance going back 35 years where those stocks didn’t fall in a rising interest rate environment. Now, I can make that 36 years.

      In the immediate term, I am concerned about rising bond yields here. In the pre-2008 world, it plays less of an immediate role. In the post-2008 world, low rates are vital. We now have 12 years of observations to figure this out. All this stimulus demand is generated with debt that will have to be serviced in the future, and it will always be on the aggregate balance sheet for future generations. If we saw true ever-lasting inflation, then the velocity of money would be rising.

      What I am trying to say here is simple; I can comprehend the laws of Economics and mass psychology to know the most likely outcomes. I don’t read the news of the day to determine my theories. I am guided by my theories and look to see how the governments and monetary authorities are acting, and how they are guiding the people’s minds.

      This is where my undergrad and grad economics, finance, and math background serve me well. Also, the Bible has shown me how people really act, and it clears me of all the political correctness that has permeated the last 40 years of mankind’s existence. People today are even worse than in Jesus’s time, because they think they are better, more virtuous, and more open minded. They remind me of the Pharisees and Sadducees. The people today are so full of themselves that they become the easiest suckers at the poker table. As the people get dumber with money, the elites have developed a whole new genre of behavioral economics and psychology studies to help them fleece the public. It operates like a clock. These experts win the Nobel prizes now.

      Guided by my broad framework of theories, I have developed a set of principles that I use to analyze the markets. For instance, in the post-2008 world, a set of ever-lower interest rates is needed to keep this system going. I am concluding here that eventually, rates will have to fall again. How they get there is yet to be determined. I warned the readers all throughout 2018 that the Fed needed to stop its tightening policies lest the USD and bond market derail the entire global system. I warned in 2019 about the overnight market meltdown and that the Fed would have to start QE again. It did on both occasions. Meltdowns averted. It eventually relented whenever the markets began to tank and ZeroHedge warned of collapse.

      Look back 2.5 years. I recall it vividly. We are being set up again for another showdown. This time, with my comprehension of how this works, the Fed will have to tighten and the government will have to stop its massive fiscal spending (the opposite) because bond yields must not rise to previous levels.

      The asset markets will become unglued, but real estate should hold up better as mortgage rates were not allowed to drop to the levels that the UST yields sank, and inflation will help rents, etc). Even at a 3% 10-year UST, mortgage rates are still low by historical standards, and if inflation rises (I doubt it longer term, because of the overwhelming offsetting debt burdens generated) it will be temporary. Recall my theories on social spending. It all gets sucked into the Financial and RE shell by the top 10% who fleece the bottom 90%. This money is more effectively sterilized.

      I am not concerned about inflation. Rather, I am concerned about what the bond market is saying about Fed policy. I stay focused on what matters here. if I was constantly looking for inflation and calling the Fed stupid, I would be redirecting my energies into a false dilemma. I only care how the bond markets are reacting. I don’t want to emphasize a problem that may never arise. The ZeroHedge readers can obsess over inflation data. I instead wonder why the Fed is acting the way it is.

      My conclusion, the Fed needs to respect the bond market in the post-2008 world. They didn’t in 2018 nor in 2019, and they are acting the same way three years later. They are pretending we are operating in the PRE-2008, but that system is long gone. I just take note on this, and focus on what matters.

  2. Hearing reports of Chinese buying up land in US above market value. Do you know why and where ?

    1. This would make sense. China has always had a problem with having enough farmland. They’ve been buying up areas in Australia and I am sure they are buying up areas here in the United States under llc’s. A lot of Chinese money is flowing around as they have so much cash sitting waiting to be used. After Decades of balance of payments surpluses, they have to do something with it. China’s house prices are so expensive already that would make sense for these people to disperse it overseas.

      The price of Farmland keeps going up, and it certainly is not the small farmer who is causing it. Small farmer is actually selling off his land, because he can no longer run the businesses. It’s all being channeled into large private equity and I am certain that China has a ton of money in these PE firms.

      I could take a look and see if I can come across some data on where China is buying, but it may be difficult given the privacy laws and objectives of the buyers and where the actual money comes from. I doubt the money will come from Chinese corporations per se, but we’ll come from private citizens instead.

      1. Is Bitcoin a money laundering tool for China? My friend made this observation and it makes sense because how better to move large amounts of money around without the red tape?

        1. Bitcoin is a laundering tool for the whole world. The Patriot acts make it a crime to carry 10k in cash or gold, but for some reason, nobody is clamping down on btc. I guess we can move 100k or more in btc. How long this lasts is anyone’s guess. As of right now, we can only really move the btc, because once we declare it, it is now traceable. So, two parties have to be willing to transact exclusively in btc and the recipient has to be willing to hold it and chance that he may have to declare it. Since these transaction are traceable, both sides have to worry about ex post facto govt. audits.

    2. I also still think there is a lot of private Chinese money going into the US housing sector at this time. I believe that a lot of it is being circumvented around restrictions, and is also responsible for building up home prices here in the United States despite a fading economy. I recall analyzing the price to income multiples for Real Estate around the world about 2 years ago and recall that the U.S. price to income multiple was about 3.6x back then. It is now up to about 4x, and I am sure that given the price increases this year and drop to the average person’s income, it will be 4.25 by year end. By the time this process is finished if Biden or Harris Serve All 8 years, I could see that multiple up to 5.5 X. While I think a socialist regime will be anathema for the United States going forward, it’s hard for those who are properly positioned to not want to root it on. We know where the trend is going, so it would be foolish of us to not take advantage of it.

      1. Hey Chris,

        I have been listening to your valuable podcasts and reading the commentary for some time. Thank you for this invaluable service!

        How are the general markets looking now? Seems like a battle back and forth – one day falling as yields rise, then the next day rising as yields fall. Is this market behaviour in your estimate indicative of a pending market correction or still too early to tell?

        Many thanks

        Samir

        1. Interesting observations with the market. I am of the mindset that the Fed is behind on things and will probably have to restrict policy sooner than many are thinking.

          Here is a link to a CNN article discussing the former Fed’s Bill Dudley’s opinions in a speech earlier.

          He thinks the 10-year UST will move as high as 3-4%. While I doubt it will move that high, I am concerned that if we see 2%, things could unravel in stocks. The former growth and spac plays we traded are bleeding daily. We expected this. The Dow is holding up so far and we expected this. But if yields close in on 2%, it could get ugly for a lot of traders still holding out.

          https://www.google.com/amp/s/amp.cnn.com/cnn/2021/03/03/investing/wall-street-markets-bill-dudley/index.html

          I am not saying I agree with all Dudley says, but except for his assessment of a 3-4% 10-year UST yield, I see his scenario as a very probable one with 2% yields.

          I don’t understand the reasoning for the Fed’s new policy objective (i.e. inequality in society). It is one that will never be quantifiable, and following that course will leave the Fed to play a reactive role in cleaning up the excess it caused. Unless the Fed gets religion soon on the proper course, it is going to hurt. The market is still in denial.

          I hold 100% cash every night in my trading accounts.

          1. Chris sorry if its a dumb question but hey I am not afraid to say I am dumb when I am. ; )
            Will not the huge stimulus push the markets up even with rates moving up because of the huge surplus of cash being given out? The stimulus is probably going to give many people more money than they ever had at one time. $7000 for married couple with 3 kids making under $75K. And most will probably spend it as soon as they get it.

            1. Hi I wrote an article today that should help answer your questions. All this spending is debt generated and the debt will be wildly deflationary to the welfare recipients in the long run. All this money will flow to the wealthiest and most powerful in the economy, while the welfare recipients will be stuck with a lower quality of life that this debt millstone generates. The dumbed down masses will never put the two together. It will also flow to me, since I own the necessary assets to keep ahead. Housing P/I multiples will increase.

              The Fed is being foolish here or are forcing the covid markets to unwind. Either way, stay in cash. Any inflation caused by social spending will be dwarfed by the potential loss of confidence in the Fed and the Federal government as the markets lose confidence in the Biden regime much faster than I thought possible. He is out stumping for more socialism again today. We are toast.

      2. Just a basic question that you may have answered, but if you could give a brief answer to how do we properly position ourselves to take advantage of the trend you mentioned?

        1. For now, you can see everything falling out of bed. I am sitting on cash. I don’t own stocks and I just hold cash and my rental real estate. I see Bitcoin is taking a big dump here this afternoon as the liquidity is being squeezed out of this Market on a daily basis. Anybody who’s long on a trading position or on a speculative asset like Bitcoin or gold is going to get punished as interest rates move higher.

          RE has traditionally been a more stable asset class as interest rates rise, because real estate can still move higher or at least remain stable as inflation moves up. We witnessed this in the 1970s.

          I just sit on cash and it’s better to sit on our hands and do nothing with cash while prices become less expensive. Not so much in real estate but definitely so in stocks and bonds.; and evidently cryptos as well. Nothing will be immune from the rising interest rate environment. Nothing except cash. Having cash under the circumstances is great, because when there are recoveries, you have more fuel to add to your portfolio of assets.

          This much is certain, the more social spending that the governments entertain, the higher the price to income multiples of housing will become.

  3. Hey Chris, a question on RE:

    What is the longest distance you can practically own and rent a property? If there is an attractive market 3 hours from me is that too far away?

    1. It all depends on the circumstances. If I lived in LA, I would be willing to drive as far as Barstow. Keep a handy man on call for simple things. I know in Barstow and places out on I15 or I10 corridors, there are a few home depots and Lowe’s to make rehabbing and repairs easier. That is key. I only own where it’s easy to buy stuff for the properties. Don’t buy somewhere and it takes an hour to go to a Home Depot. It is a hassle for you and for anyone doing work for you.

      For me, in the DC area, I don’t drive more than 45 mins to any property. Many decent deals around here. If you live in very expensive areas, you will have to compromise and drive in further concentric rings to find something where the RE math makes sense.

      I used to live on LI near NYC and NYC. There are no deals there and the taxes are outrageous. Moreover, to find a low cost place would have meant driving out to NJ or upstate NY. That’s why I left. A few places aren’t worth it. If I lived in the Bay area of San Francisco, I would be buying in the central valley. There you can get reasonably priced help. I have a sister near Santa Cruz. That stuff is very expensive. If I lived there, I would retain a realtor who knew about Investments and who could show me a bunch of stuff inland.

      Age also is a factor. If you are starting out and you are young, be willing to travel further. At my age, I have a harder time with traffic.

      Keep in mind that we don’t have to want to live there, and with most of the places I manage, I would not want to reside there. That’s okay. Unless it’s ghetto, invest where the numbers make sense. It should be an objective thing. Get comfortable with the numbers and concentrate on a particular location that makes sense. I have some rural and former rust belt listeners who could buy down the street. Everyone’s situation is different.

      All you need is one property to start. You can make many mistakes and still come out ahead. It’s a learning curve. After the first one, the second gets easier.

      If you have particulars in mind, shoot me an email.

  4. I know you say that people want and choose this system, but if they really knew about it do you think they would? It is interesting that you show how there is a big difference between military spending and social spending. I guess we can’t just take what we spend on Military and transfer to public spending. I guess not all spending is the same.

    1. I observe how most of the stimulus payments are going to stores like Target, Walmart, and Amazon. I guarantee it’s being spent on total useless garbage. The people like their easy money and they spend it as quickly as they get it at the big globalist firms. This monetary system allows them to indulge in all their fears while this whole manufactured covid scam resulted in the closing down of the economy, which was only made possible by this monetary system. People no longer like to be held accountable for their actions and they like their own personal bailouts. They no longer want the responsibility of taking care of themselves, so they like to have subsidized medicine. They’ve been scared beyond recognition because of a fake covid-19 in which they were inculcated with the fears from their Netflix streaming movies. All the zombie apocalypse movies were given to them by the globalist firms as suggestive propaganda to be used in a weaponized fashion against them when a fake crisis is manufactured. This monetary system allows the people to hide in their holes and ask for government saviors. It’s the perfect monetary system for an amoral society.

      And the wealth consolidation continues on a scale unseen in human history. My blog is designed to show the reader how to recognize it and then how to overcome it. No gloom-and-doom here. Just the facts, and the answers. I do notice I have less gloomers coming by the website. I have more people coming by who are seeking answers in how to overcome this wicked monetary system.

      Real estate in many areas of the country is still very cheap. There are some cheap properties here in the DC area. But most people in the alt-finance would rather listen to Charles Hugh Smith and Zerohedge, and lament about how evil everything is and cry about how hopeless everything is. Meanwhile, they get their government benefits and tap away behind the computer, because that is much easier.

      I think of the a hundred billion dollars a year that the tech firms make off of those who engage with their social media platforms. I think of the countless billions that these Tech Titans squeeze out of the unwashed masses. It feeds the monetary system and exploits humanity. This tech turns humanity into willing lab rats in an experiment, which just makes the elites’s jobs of milking them that much easier. This monetary system allows these firms to flourish and the people also allow these firms to flourish. These people will take their government checks and spend it at these globalist firms, thus perpetuating this monetary system.

      I doubt there is one person reading this that is taking their tax stimulus payment and placing it as part of a down payment on a rental property or purchasing a durable good item.

      I do notice that Mr Smith is talking about how to overcome this by the use of modern psychology. He doesn’t sound like he has his heart right with Jesus, and as long as that’s the case, the answers will elude him and his reader.

      1. I agree with you Chris watch how many tenants will waste the checks coming and have no money for rent next month when the checks coming out will probably cover rents for 2 months. There is always money for junk, $1.5 cans of pop at the local gas station, big tvs, tattoos, cigarettes, cell phones, etc. Have you ever noticed in America how fat our poor are? If you get free food why not get healthy food? why worry about your health if you have free health care. We reward bad choices so guess what kind of choices are going to be made.

        I see rates are going back up again but also read the FED is going to do Operation Twist(?) where they buy longer term bonds and sell short term bonds to reduce the interest rate of the longer term bonds.

        1. You get it. Property managers and landlords see the real person. Not the PC virtue signallers.

          I personally am not worrying about yields here. I have to suspect that all of this new debt generation will provide the necessary lead blanket to the economy as the wealth consolidation continues. If worse came to worse I could see the FED concentrating on the treasury yield curve as opposed to spreading the purchases between treasuries and mortgage backs. By concentrating on treasuries only with more treasury purchases, the FED would still indirectly affect mortgages.

  5. Chris great again! Glad to hear you mention about tenants being a pain in the A$%. As our society goes down the tubes morally we have to keep in mind we have to deal with tenants from that society. If you have a good tenants treat them good!

    1. If the government confiscates property, it will be retirement money first. I can see a case where there is an expropriation of “affordable” housing, but more likely, we will begin to see tighter restrictions on investment property ownership. Maybe a cap on the number of homes. I keep reading about how Biden wants to do away with the 1031 exchange, but it’s for those making more than 400k a year. I read that 88% of investment sales do not use this tax code anyway. I never used it. It can be a pain. I read how NZ is clamping down, but we will see. I see rising prices as a means for restricting for now. For now, I assess what other developed nations are doing.

  6. Do you think Zillow will be “blessed” by the system to capitalize on housing booms? It seems they are destined to take over the real estate transaction market in a similar way to Amazon.

    1. Yes. I do. Good observation…

      Zillow has been upending the proprietary data hoard of the NAR and MLS. Already, it has upended property management, and as prices and closing costs for RE transactions climb with house prices, Realtors will be increasingly seen as archaic and greedy. People are already finding it harder to sell and buy again as Price/income multiples climb, so transaction costs have to come down.

      To sell a home and then to buy another one of the same price will mean costs of at least 10% if mortgages are involved. That is way too high for the average wage earner. That has to be cut in half. Keep in mind that taxes eat up some of that. Title insurance is a racket, but needed.

      There has been a lot of litigation against Zillow over the years, and yet it comes out ahead over its direct and indirect competition.

      1. RKT is having a WSB type pump. It’s highly shorted and just declared a dividend. I been looking at that one and Opendoor.

  7. What do you think of private equity in single family homes? Could that be a reason to see higher house price multiples?

    1. A good observation here. House prices will become increasingly unaffordable for the average person, but private equity will still find better returns in single family residences. I have access to investor loans and I have 4-5 lenders sending me emails and calling me about programs. Sure, the rate is higher (5-7%), but i can close in 30 days and they are only concerned with income potential on the property. I can’t get cheap lending yet.

      Large private equity firms can obtain federally backed loans for 3%. The institutions will own an ever greater percentage of homes, and more people will be shut out from owning.

    2. Also, as I stated in the podcast, I estimate that the Price/income multiple for US housing will rise from just below 4 to about 5.5 if Biden/Harris serves for eight years.

      We can see that the US’s socialist proclivities have begun to mirror Western Europe’s and the former Commonwealth’s. Thus, its housing market will also begin to mirror Western Europe’s and the former Commonwealth’s as well. This means higher price/income multiples as it races to reconcile with the rest of the globe. It will be debilitating for many recipients of social largess.

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