Over the past few
years, and past few months even more so, a number
of people involved in the banking, investment and
economic forecasting fields have been predicting
some kind of event horizon to manifest itself
sometime in the near future. But what
exactly? Possibly the end of current
existing economic paradigms that have become the
so-called new normal (which is anything but) to be
replaced by something else (back to the future is
the term we might use). Truth be told,
politicians and media shills for same can attempt
to convince the public, and maybe even themselves,
that all is well with the economy or what they
have been doing has helped. However, stock
and bond markets that need to be propped up by
central bank intervention, negative interest rates
(which have never happened in the economy during
the last 5,000 years of human civilization),
corporate employee layoffs and outsourcing to
lower wage jurisdictions, declining commercial
activity, declining activity for the shipping
industry, real estate asset bubbles, corporate and
political malfeasance plus a long list of other
things do not indicate a honest, robust economy
that is truly growing organically.
In order to get back to honest markets, honest business practices and organic growth, the current smoke and mirrors economic carnival show needs to be swept away (perhaps we can use Bleach Bit?). But, metaphorically speaking in terms of the economy, as any homeowner involved in a house or condo renovation can attest, there is a whole lot of mess, discord, angry words with contractors and inconvenience to get to the final goal of renovation. And we would argue had they done all this back in 2009 (when they should have done it), the proverbial new kitchen sink would have been installed and functioning by now. Alas, we think the free market (which is to say individual actors in the private sector) will end up forcing the correction one way or another. From time to time, they already have tried only to be heavy handed by the central banks (think gold market manipulations, equity and fixed income purchases by central banks in an attempt to prevent a much needed sell off and correction, artificially low and even negative interest rates which never, ever would exist in a properly functioning free and fair market)
Current US Economy is a Hoax
While governments often attempt to fool the public with trite commentary and often downright false statistics (and the mainstream media a willing accomplice), the real numbers tell a different story. Remember that politicians lie, but honest statistics do not. And on the topic of statistics, commercial bankruptcies in the US are up almost 30 percent year over year in August 2016. And 36 percent of chief executives from the very recent Business Roundtable report say they will be laying off employees over the next six months. This is no surprise. Revenues have declined each quarter for the past 18 months for companies comprising the S and P 500 index and the reports indicate corporate revenues are down 19 percent on average. The last time there was any report of increasing revenues was 2 years ago. However, the equity markets are not trading in a range of reality and in the US stocks are trading at heady 25 times earnings. This is smoke and mirrors, brought to you by the world's central banks. In other terminology, the magic people, as the European Central Bank member from Lithuania has called himself and his fellow central banking posse. Another more accurate term is illusionists.
But aside from the fact we are seeing something pretty much unparalleled in economic history at the moment, there are other non economic factors that will drive (or not drive) economic activity over the next few years and longer. I am speaking of demographics, and demographics are extremely important plus something central banks cannot control or manipulate. I mention this because many of our clients over the past two years have been accumulating cash in anticipation they can pick up bargains in real estate in 2017 as some have already done in 2009 (and courtesy of the asset bubbles the central banks have created they have actually made money in this environment). However, I am skeptical they can repeat that hat trick again. Which is to say while it is obvious the central banks in the developed countries will continue with monetary debasement (they have already stated they want to change their annual inflation targets from 2 percent up to 4 percent) and direct securities purchases, real estate is another matter (unless they start buying up all the real estate too, which is insanity on steroids and not out of the question considering all the other nonsense they have done).
Demographics Will Play A Role
They can keep interest rates artificially low thus resulting in bargain interest rates for mortgages, but the problem is many members of the Millennial Generation simply do not have the money to buy their own homes. In the US, there are 66 Million people making up the Millennial generation (ages 19 to 34), 55 Million making up Generation X (ages 35 to 50) and 76 Million making up the Baby Boom generation. So, obviously the native population is shrinking (without factoring in immigration). But, in terms of salaries and especially for the Millennial Generation, the new trend has been lower salaries for what these same professions paid 20 years ago (after adjusting for inflation). In addition, and regardless, many are moving back home to live with mom and dad after they have graduated university and are working. Pew Research reports that 35 percent of males between the ages of 18 and 34 are living at home with their parents. And this correlates to the higher unemployment numbers for this age group as well, with younger people without higher education degrees making up the bulk of the statistics. However, the living at home trend is also up for those with a university degree also. Of those aged 25 to 29 (post university years) it is reported that 25 percent live with parents, an increase up from 19 percent in 2006. Those aged 30 to 34 living at home has jumped to 13 percent from 9 percent just a few years ago as well. So, the trend is quite clear and it is claimed this is a 130 year anomaly. Truth be told, the younger generation today may end up living worse off and poorer than preceding generations, and that does not bode well for the domestic US and European real estate market plus the economy in general in the future.
In Europe, the situation is even worse than the US. We have reported before that in some European countries the Millennial generation is 25 percent of the number of Baby Boomers (or we can say the Baby Boomers in Europe outnumber the Millennial generation 4 to 1). Roughly 50 percent of younger people are living at home with their parents in Europe, with countries such as Portugal, Italy, Hungary, Romania, Greece and Poland well over 60 percent. And just as the case in the US, this is all economically driven. But even more important to our point, this age group is not going to be buying their own homes in mass both because they are poorer than their parents generation at the same age and in Europe, there is not enough of them. This is the very important demographic to understand when it comes to future real estate market activity in the US and Europe (the emerging or developing markets are another story).
Of Future Tax Increases
But that is not the only problem. Real estate, along with gold, silver and maybe some other kinds of tangible assets certainly are more attractive places to store wealth over traditional bank accounts. Prospects of a bank bail-in plus negative interest rates make a traditional bank account one of the riskiest places to store wealth today. And there are calls to eliminate all forms of paper currency (cash) supposedly to frustrate criminal activity (we have news for you, this will NOT eliminate crime or force criminals into a career change). Rather, the real reason is to more effectively execute a negative interest rate policy. Since about January of 2016 in Japan and now more recently in Germany, individual citizens in those countries have been stocking up on home safes in order to remove cash from the banks and store it at home. This is really what the shills and commentators want to frustrate when they rail against cash in the economy.
Physical gold and silver are of course portable and in the case of coins even more so than larger bullion. Real estate located inside of Europe and the US is not portable and is a captive asset to tax even further. And we have a tendency to believe that is one place or asset class broke desperate governments will go after for revenue. That is our concern. Not that investors could possibly pick up bargains in a deflation of the real estate asset bubble, but rather the carrying costs (taxes), not to mention the shrinking pool of eligible buyers to sell later on.
Case in point, Chicago's Municipal Employees’ Annuity and Benefit Fund which is ONLY 20 percent funded and predicted to be insolvent within 10 years despite the fact just 77,000 people are covered (representing .02 percent of the entire population of Chicago). So what has Chicago done? They have increased water and sewer taxes by 33 percent for the good property owners living in Chicago. That translates into an additional US$ 3 Billion Dollars in taxes between now and 2022 for these home owners. And that is assuming they do not increase these and or other kinds of taxes again in the future. Also remember, this is to fund only one of four municipal pension funds in the city of Chicago. What about the other pension funds? What about all the other various city expenses?
The US Federal Government is getting in on this government services fee increase band wagon as well. Naturalized citizenship application fees are due to increase by 21 percent effective October 1, 2016 and there is now a new fee of US$3,000 to apply for an employment immigration visa. So here is the main point. The various government agencies reporting statistics want us to believe that the rate of inflation is some ridiculously low number (two percent?). So, where do they get off increasing government services fees to the public by 20 percent or more? If only you could get that amount in annual interest from government bonds or other investments to at least keep up.
In terms of what we might face going forward, there is no complete and unanimous consensus. Some economic prognosticators seem to be looking for deflation. Others are suggesting inflation, devaluation of the respective currencies and higher consumer prices (especially for imported goods) as a result. Indeed if the rest of the world starts to refuse payment in USD or the Euro currency, and insists instead to be paid in gold or yet another currency (Yuan, Ruble) then that alone will have a number of implications for the average citizen in Europe and the US. However, in terms of the deflation – inflation argument, perhaps we will have both?
It is not out of the question to consider we might see deflation, at least in terms of prices for certain kinds of products and assets (a deflating real estate bubble, liquidations of inventory in the retail sector). However, these price reductions are consequential as it is certainly possible we see higher consumer prices and higher cost of living for the average consumer inside the US. Commodity prices have fallen and this is especially true for petroleum. So, the question then is: has this happened due to a fall in manufacturing and production (and thus lower demand for raw materials) or is something else? The famous epinephrine injection device (recently made even more well known due to Hillary Clinton's health issues) has gone up in price to consumers from US$100 to US$600. Is this due to higher raw material or manufacturing costs, price gouging by the pharmaceutical company owning the patent or a mere desperate attempt for revenue?
A number of things could happen before the end of 2016 that triggers a dramatic change to the current so-called new normal (which is abnormal, at least in terms of economics). The US dollar could be formally phased out for use as the world's reserve currency, and thus effecting it's use by central banks around the world as a staple part of such bank's reserves (reducing demand as a result). Already we have seen a slow but steady reduction in central banks USD reserves and we are now starting to see more gold purchases by these same central banks as well. Do they know something is coming? Such an event will effect US consumers eventually as some other form of payment might then be required from US importers bring in foreign made goods (and let us be honest about it, just about everything from shower curtains to light bulbs is now made in China and elsewhere). The well known investment manager, Mr. Jim Rogers, predicts an initial spike in the value of the US Dollar (versus other currencies) as investors might rush into the US Dollar (thus pushing it up from buying pressure as opposed to fundamentals) but that rally could be short lived after the reality and fundamentals set in.
Regardless, think globally in terms of where to keep your wealth (the emerging or developing markets are still growing and we think they will continue to outperform the European and US economies, for fundamental and demographic reasons). Real estate prices in many of these markets are lower and are stable because price increases have not been caused by cheap credit and asset bubbles. Employment opportunities could be more robust in such developing markets as well although immigration has become a contentious issue in these markets. Such developing country governments continue to grapple with a high number of the Millennial generation in said countries needing jobs and a concern to keep out foreigners that may be looking to fill such jobs. This is one reason why having another residency and citizenship becomes important (ironically, many non UK residents or citizens are scrambling in London to obtain residency now because of the Brexit vote, as an EU passport no longer guarantees the right the live and work in London as a result). The world economic and political dynamics are changing. For this reason, one must be aware, be informed and be ready for anything that manifests itself from these changes.