Tag Archives: Real Estate

Hard Core Doom Porn, by Robert Gore

It will be a crash like we’ve never seen before.

SLL has been accused of trafficking in “doom porn.” Guilty as charged. If you don’t like doom porn, don’t read this article, it’s hard core. If you prefer feel good and heartwarming, there are plenty of Wall Street research reports and mainstream media stories about the economy available. Enjoy!

In 1971, President Nixon closed the “gold window,” which allowed foreign governments to exchange their dollars for gold. This severed the last link between any government and central bank-created debt and the real economy. Debt could be conjured at whim, and governments and central banks have done so for the last 46 years.

Not surprisingly, credit creation without restraint has papered the globe with the greatest pile of debt mankind has ever amassed, measured in nominal terms or relative to the underlying economy. A measure of how extraordinary this situation is: most people regard it as normal, if they think of it all. Debt is a first mover, a financial constant. Any exigency small or large can be met from an unlimited credit pool that will always be with us. How to rebuild Houston, Florida, and Puerto Rico? No problem, borrow.

Although fiat credit creation by governments and central banks is unconnected to the real economy, its effects are not. Their debt becomes an asset within the financial system. Through fractional reserve banking, securitization, and derivatives it become the basis for a multiplication of the original debt. That multiplication is many times the multiplier (the reciprocal of the reserve requirement) taught in introductory macroeconomics classes whereby the debt is contained within the banking system.

Nominal global debt is reckoned at between $225 and $250 trillion, or about three times global GDP. Financial, debt-supported derivatives (financial instruments whose prices are derived from the prices of other financial instruments) are estimated at anywhere from $500 trillion to $1 quadrillion notational, or six to twelve times global GDP.

Overpriced houses did not cause the last financial crisis and almost bring down the world’s financial system, securitized packages of mortgages and their associated derivatives did. The Panglossian view of derivatives is that most of them can be netted out against offsetting derivatives, thus actual exposures are far less that notational amounts. The real world view is they can only be netted out as long as all counterparties remain solvent. As we learned in 2009, that is not always a correct assumption.

Globally, unfunded old age pension and medical liabilities, not counted as debt but still promises made that often have the force of law, sum to another $400 trillion. In the US, they are about $210 trillion, or about 11 times US GDP. Demographics amplify the liability: across the developed world, declining birth rates and extensions in life expectancies mean a shrinking pool of workers supports an expanding pool of beneficiaries. In the last month, SLL has posted four excellent articles by John Mauldin for those who want all the gruesome details. (Just enter John Mauldin in SLL’s search box and they’ll pop right up.)

This doom porn, the skeptics will say, is almost as old as Deep Throat (released in 1972). Markets crash from time to time, but they always bounce back. Central banks and governments come to the rescue with fiscal stimulus (increased government debt) and unlimited fiat debt. Why should we worry now?

There are a number of reasons. When the world was less indebted, a fiat currency unit’s worth of debt produced more than a fiat currency unit’s worth of expanded output of goods and services. Sometime within the last year or two, the marginal economic effectiveness of all that government and central bank debt reached zero, and is negative after debt service.

With the world saturated in debt, another fiat currency unit of debt produces no increase in output. Kick in the costs of servicing and repaying that debt, and increasing debt is actually retarding economic growth. It accounts for the long-term slowing growth trend, flat incomes, and “secular stagnation” that puzzle so many economists.

It also accounts for the lack of inflation that puzzles so many central bankers, at least in the price indexes they look at. They are looking at the wrong indexes. The relevant indicia are stock, high-grade bond, real estate, and cryptocurrency prices, still at or close to record highs, and corporate and securitized-debt credit spreads to treasury benchmarks at record lows (indicating massive complacency about corporate credit risk). Here inflation—the speculative kind that blows bubbles—is alive and thriving.

With the Federal Reserve now taking steps to shrink its balance sheet and other central banks making noises about doing the same, global fiat debt creation may go into reverse for the first time in many years. Brandon Smith at Alt-Market.com argues that this is part of plan leading to a crash and global, centralized monetary control.

He may or may not be on to something, however, valuation extremes and sentiment indicators point to the same conclusion concerning a crash. SLL maintains financial markets are exercises in crowd psychology, impervious to government and central bank efforts to control them, designed to separate the maximum number of speculators from a maximum amount of their money.

Robert Prechter, of Elliott Wave International, has written the chapter and the verse on markets and psychology. (SLL reviewed his groundbreaking tome, The Socionomic Theory of Finance.) Consider the following from Elliot Wave International’s October “Financial Forecast.”

Every month another sentiment indicator seems to pop to a frothy new extreme. Last month it was the percentage of cash that members of the American Association of Individual Investors harbored in their investment portfolios. At 14.5%, it was the smallest allocation to this safe alternative since January 2000, the same month that the Dow Industrials began a 38% decline that lasted through October 2002. Last month, we also showed a new bullish extreme for the five-day average of Market Vane’s Bullish Consensus survey of advisors. On September 15, the average pushed to 71%, a new ten-year extreme.

The most recent Commitment of Traders Report shows that Large Speculators in futures on the CBOE Volatility Index (VIX) have amassed a record net- short position of 172,395 contracts.

This record bet on subdued volatility sets the stage perfectly for the period of “high volatility” that EWFF called for in August.

…Large Speculators in the E-mini DJIA futures have pushed their net-long position to 95,976 contracts, more than four times the number of contracts they held in January 2008, shortly after the Dow started its largest percentage decline since 1929. So, investors are betting to a record degree that the stock market will continue to rise and volatility will continue to remain subdued. Paradoxically, these measures indicate that exact opposite.

Various media accounts confirm that a rare complacency now dominates the stock market.

One doesn’t have to buy in to socionomics to realize that virtually everyone is now on the same side of the boat, a condition generally followed by the boat capsizing. Using conventional valuation measures, the only time stocks have been more highly valued is just before the tech wreck in 2000.

If one does buy into socionomics, the last few upward squiggles in the stock market will put the finishing touches on intermediate, primary, cycle, supercycle, and grand supercycle Elliot Waves dating back to 2016, 2009, 1974, 1932, and the 1780s, respectively. In other words, this is going to be a crash for the ages.

Given the unprecedented level of global debt, that appears to be the most likely scenario. Every financial asset in the world is either a debt claim or an even less secure equity claim—a claim on what’s left after debt is paid. Much of the world’s real, tangible assets are mortgaged.

When the debt bubble implodes, a global margin call will prompt forced selling, driving down all asset prices precipitously. Most of what is currently regarded as wealth will vanish. Opening up the world’s fiat debt spigots full force won’t stop this one. The notions that governments and central banks have speculators’ backs, that problems caused by excessive debt can be solved with more debt, will be revealed as monumental follies. And markets will not come back, at least in our lifetimes.

Long-time readers will point out that SLL has been issuing warnings for years. Again, guilty as charged. However, we’ll join Mr. Prechter and company in their prediction that US equity markets top out before the end of this year. (They called last year’s top in the government bond market, adding to an impressive list of correct calls.) If we’re wrong, it won’t be the first or last time. If we’re right, given the magnitude of what’s coming, being a few years early won’t matter at all. Our concluding clichés: fear is stronger than greed and markets go down much quicker than they go up.

Alt-Historical Fiction!

AMAZON

KINDLE

NOOK

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US Government Mucks up Money-Laundering in Real Estate, Puts Luxury Housing Bubbles at Risk, by Wolf Richter

What happens to a bubble when many of the bubble-blowers are breaking the law? From Wolf Richter at wolfstreet.com:

Manhattan and Miami already get mauled. Now expanding to San Francisco, Silicon Valley, Southern California, even Texas!

Cash sales of homes – mostly the domain of foreign and affluent buyers – fell to 32% of total home sales in April, down 2.8 percentage points from a year ago, according to a new report from CoreLogic. For the first four months, cash sales dropped to 34%, the lowest since 2008.

In Florida, the number one destination for foreign homebuyers, cash sales accounted for 46% of sales, and in New York, for 44%, both decreasing as well. The “strong dollar” and “global uncertainty” were blamed.

In Manhattan and Miami, the luxury condo markets are already getting mauled. For example, we reported that in Manhattan, condo prices plunged 14% in just three months.

We also reported that foreign investors were pulling back, particularly Chinese investors, the most prolific of all foreign buyers. The number of homes they purchased over the 12-month period had plunged 15%.

So is it just the “strong dollar” and “global uncertainty?” Or could there be more to the story?

Today, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced that it would expand a program it had kicked off in January to identify and track secret homebuyers who hide behind shell companies.

The expanded program will “temporarily require US title insurance companies to identify the natural persons behind shell companies used to pay ‘all cash’ for high-end residential real estate in six major metropolitan areas,” up from the two areas designated in January, Manhattan and Miami, among the biggest destinations of global wealth:

FinCEN remains concerned that all-cash purchases (i.e., those without bank financing) may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures.

Real estate purchases in the US have been a perfectly good way to launder large amounts of money, no questions asked. Brokers and banks and other industry professionals have played along. Everyone in the world knew it. And they came to launder their cash.

These folks don’t mind paying a little extra. So as an industry-pleasing side effect of this influx of opaque money, luxury home prices soared, from where they trickled down to the rest of the market.

The New York Times, whose investigative reporting on money laundering in the real estate business, particularly in Manhattan, appears to have stirred the Treasury Department into action, explained in January:

It is the first time the federal government has required real estate companies to disclose names behind cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.

Apparently, this first experiment in Manhattan and Miami was successful for the government, according to the release today:

The initial GTOs [Geographic Targeting Orders] are helping law enforcement identify possible illicit activity and informing future regulatory approaches. In particular, a significant portion of covered transactions have indicated possible criminal activity associated with the individuals reported to be the beneficial owners behind shell company purchasers.

This corroborates FinCEN’s concerns that the transactions covered by the GTOs (i.e., all-cash luxury purchases of residential property by a legal entity) are highly vulnerable to abuse for money laundering.

To continue reading: US Government Mucks up Money-Laundering in Real Estate, Puts Luxury Housing Bubbles at Risk

Even ‘Trophy Assets’ Suddenly Tanking—–Trickle Down Crash? by John Rubino

SLL would argue that the global collapse in commodities, transportation, intermediate goods, manufacturing, and retailing mean that this will hardly be seen as a “trickle down crash,” but that’s quibbling. The high end is catching up to the rest of the economy. From John Rubino at dollarcollapse.com via davidstockmanscontracorner.com:

One of the defining traits of the past few years’ “recovery” has been the torrent of money flowing from big banks to favored clients, and from there into trophy properties like high-end real estate, superyachts, and fine art. This might be the first financial bubble to completely bypass the 99%.

And now it’s ending. Falling oil prices and negative interest rates (rich people own a lot of government bonds) seem to have sucked the animal spirits out of the 1%, leading to stories like this:

A Worrisome Pileup of $100 Million Homes

(New York Times) – One of the latest symbols of the overinflated luxury housing market is a pink mansion perched above the Mediterranean on the French Riviera.The 13,000-square-foot property, built and owned by the fashion magnate Pierre Cardin, is composed of giant terra cotta orbs arranged in a sprawling hive. The home’s name befits its price. “Le Palais Bulles,” or “the Bubble Palace,” is being offered for sale at approximately $450 million.

The listing is part of a global pileup of homes listed for $100 million or more. A record 27 properties with nine-figure prices are officially for sale, according to Christie’s International Real Estate. That is up from 19 last year and about a dozen in 2014.

If you add in high-priced “whisper listings” that are offered privately, brokers say the actual number of nine-figure listings worldwide could easily top 40 or 50.

“It’s a bumper crop,” said Dan Conn, chief executive of Christie’s International Real Estate. “It’s just a new world in terms of what people are building and offering for sale.”

The rise in nine-figure real estate listings comes just as sales of luxury real estate have cooled. Many say the sudden surge in hyperprice homes — often built and sold by speculative investors — is the ultimate bubble signal.

“When you have a record number of homes for sale at a price point of $100 million or more, that tells you these homes aren’t selling,” said Jonathan Miller, president of Miller Samuel Inc., a real estate appraisal and research firm. “It’s not as deep a market as some might hope.”

Still more nine-figure homes are on the way. Real estate agents and developers say a home under construction in Bel Air is likely to have more than 50,000 square feet of living space, with finishes rivaling a superyacht’s. The price will be yacht-like, too, at around $300 million. Among the home’s amenities: the world’s largest safe.

To continue reading: Even ‘Trophy Assets’ Suddenly Tanking—–Trickle Down Crash?

 

China’s Real Problem Isn’t Stocks – It’s Real Estate!, by Harry Dent

From Harry Dent, at davidstockmanscontracorner.com:

I always say bubbles burst much faster than they grow. And after exploding up 159% in one year, Chinese stocks crashed 35% in three weeks.

This all happened while the Chinese economy and exports continued to fall. And two thirds of these new trading accounts belong to investors who don’t have so much as a high school degree. How crazy is that?

As Rodney wrote earlier this week, the Chinese government is taking every desperate measure to stop the slide:

Artificial buying to prop up the market…

Banning pension funds from selling stocks…

Threatening to jail investors for shorting stocks…

Allowing 1350 out of 2900 major firms to halt trading in their stocks indefinitely, and stopping trades on another 750 that fell 10% or more…

It’s madness!

This second and FINAL bubble in Chinese stocks occurred precisely because real estate stopped going up. Over the last year it actually declined.

So after decades of speculation, the gains stopped coming in, and rich and poor investors alike switched to stocks.

But the funny thing about the Chinese is – they don’t put most of their money in stocks. Only about 7% of urban investors own stocks and half of those accounts are under $15,000. In fact, it’s estimated that the Chinese only put 15% of their assets there, and that may be on the high side.

What is so unusual about the Chinese is that they save just over half their income! And the top 10% save over two-thirds!

And where do those savings go? Mostly into real estate!

China’s home ownership rate is 90%. It’s just 64% in the U.S. even though we’re much wealthier and credit-worthy.

That’s because home ownership is a staple of their culture. A Chinese man has no chance of getting a date or getting laid unless he owns a home – no matter how small.

To continue reading: China’s Real Problem Isn’t Stocks-It’s Real Estate