What Assets Will Crash – Stocks, Bonds, or Real Estate?

Driven by the rise in interest rates, higher taxes, declining home ownership, and the reduction in long-term mortgages, real estate prices should peak with the Economic Confidence Model on 10/1/15, which Armstrong calls the Big Bang (the collapse in sovereign debt and the peak in govt). Since homeowners are only owners as long as they can afford the taxes, the headwinds will convert more and more into renters until the prices reach equilibrium. The only thing that may surprise investors more is the rise of the dollar.

Greece has been the epicenter for the coming sovereign debt crisis, and London real estate looks to be the canary in the coal mine for real estate. The US could continue to benefit in the short-term, because it’s still the best horse on the plot of land where the glue factory resides. However, on the other side of 2015.75, when the economy turns down and declining tax receipts “force” govt to raise taxes (instead of downsizing and reforming), distressed capital will look for a more liquid safe haven that doesn’t have a deflationary tailwind, especially when the cycle has another 17 years to decline.realestate-cycle

Chicago is the latest example of a broke government that needs to resort to raising property taxes, possibly by 30%, to save themselves at the expense of those who will stick around. Of course, brain dead politicians fail to realize that businesses and people with working brains can leave the state, just as they have left Greece, Portugal, Spain, and other countries that believe “tax-letting” is a solution to govt malfeasance. Illinois is not the only state with unfunded pension liability problems. The top 25 pensions in the US have an estimated funding gap of $2 trillion, at the same time baby boomers are retiring – meaning they are sucking govt resources instead of paying into the system.

Govt’s naïve belief that tax payers will stick around and get taxed to death will result in municipalities going bankrupt as people and businesses leave. Those that can’t or refuse to move, a declining standard of living will drive an increasing number of them to civil unrest and law-breaking, as the “dirty driving” motorist in Detroit demonstrate.

In Europe, we are all aware of the fraud, corruption, socialism, and austerity that is grinding up Greece into a 3rd-world economy that has already experienced a depression 30% greater than the Great Depression. Yet, bureaucrats are intent on not only ignoring the democratic voters in Greece and keeping the foot of austerity on their neck, but the French-led Eurocrats want to create another layer of tax-sucking, inefficient govt – what could possibly go wrong?  Are these self-centered idiots aware that Portugal, Spain, and Italy are in the same porous boat? What about the fact that Rome is about to become just like Detroit?

I guess since they believe that the bad debts of Greece and other PIIGS can be made to disappear by having EU funds purchase them, it probably makes perfect sense to bureaucrats who are dependent on more govt to add more govt. Do they ever ask, have we tried this before and has it ever worked?

Europe appears to be a lost cause, heading for civil war. Can the US avoid the same outcome? The biggest challenge is recognizing that all govt’s are corrupt and become blinded by power and perks. It doesn’t matter if it’s the Democrats, Republicans, Socialist, or Fascist, the Invisible Hand of individuals pursuing their own self-interest still applies, but it becomes destructive when the ultimate power of govt enforces its will, inefficiencies, and money confiscation on society.

To add insult to injury, the Fed’s artificial suppression of interest rates (to prevent debt payments from blowing sky high) is destroying the returns of pensions, insurance funds, and retirees trying to live on fixed income. For example, CALPERS (California Public Employees’ Retirement System) earned just 2.4% last fiscal year due to the large holding of treasuries that yield next to nothing. Pension models assume returns will be greater than 7%. So, what happens to their bond investments when rates start to rise?  All of these factors are resulting in municipal downgrades that make it more expensive to borrow. The latest examples are Cincinnati and Minneapolis, among other cities, that Moody’s has recently downgraded.

As a brief aside that demonstrates the desperation of govt, Sarasota, FL provides one of the craziest examples. We all are aware of the money collecting tactics of police ticketing and civil asset forfeitures, which the infamous speed trap city of Waldo, FL had to finally shut down out of embarrassment. However, have you ever heard of a good Samaritan getting the bill for clueing the police in on a drug house? Yep, the Sarasota police sent the bill for the investigation to the “rat” who reported the drug dealings. I guess the police want to teach everyone that no one will make them work without paying the price.

So, when rising rates collapse real estate and bond markets, where is capital going to park, especially as bankrupt govt’s and their banksters bail-in their depositors, and eliminate cash so there is nothing you can do about it? In a word, stocks. It has nothing to do with P-E ratios and other fundamental statistics. It’s about survival, and companies with tangible assets that can’t be vaporized by deleveraging.

The biggest mistake that investors make is thinking domestically and linearly. The world is connected and multi-variant, which is why the dollar will rise much higher before it fades into the night of being just another actor in the IMF’s SDR. Those that are betting on a decline in the US dollar because they believe that QE to infinity is the US solution to exponential debt and unfunded liabilities, fail to look beyond our borders, even though the story of Greece and China are playing out right under their nose.

US-Dollar-Index-Historical-Chart

When Greece and the other PIIGS default, and rising rates explode Japanese debts, where is the safe haven money going to go? When turmoil breaks out in the Middle East and elsewhere because the economy turns down and politicians need a war distraction, where are the international reserves of these countries going to park? There currently is no other alternative to the US Dollar, and until a market for SDR’s and Yuan are big enough to absorb the reserves of the world, dollar-based assets will remain the only choice.

A rising dollar is good if you have lots of them and you want to buy overseas assets. However, if you are trying to sell your goods around the world, it makes your products more expensive. It also increases your dollar-based debts. This currency-based debt problem is exactly what got Greece and the other weak currency PIIGS countries into their debt spiral. When Greece joined the euro, its debt was converted to euros, which promptly doubled, taking Greece’s debt levels with it. The same thing will happen to all the holders of dollar-based debts as the dollar rises. Since most think the dollar will decline, this will be the most destructive force that no one sees coming.

30-Year-Mortgage-Rate-History

Yes, diamonds, collectibles, precious metals, and cash will rightly attract safe-haven capital when confidence tanks, but the world’s reserves need much deeper (liquid) markets. Real estate has generally been an appreciating asset as rates declined for over 30 years, baby boomers formed families, incomes rose, and municipalities had not yet entered the death spiral caused by too much debt and too many pensioners. If your real estate is located where govt’s are broke and will perpetually raise taxes to overcome their self-interested mismanagement of resources and reality, you may want to sell before it’s too late. Real estate will not only become a depreciating asset, but an anchor for those needing to move for work.

home ownership

The rush from real estate and bonds into stocks cannot occur until the bag holders get scared into bonds and real estate one last time. If stocks continue to inch higher going into the Big Bang, the scare could come from a Fed rate hike, which will be done so the Fed doesn’t get accused of blowing another stock bubble. This should get investors over to the same side of the boat, as the stock fundamentalist shout I told you so and chase the masses into the negative yield of bonds.

If the Fed chooses not to raise rates in the next few months, the scare could easily come from the sovereign defaults and/or rioting against austerity in Europe. As Herbert Hoover chronicled in his memoirs, any of these events “will cause capital to start acting like a loose cannon on the deck of the world in a tempest-tossed era”. In the end, the Invisible Hand will guide capital to the jurisdiction with greatest freedom and respect for the rule of law.

Armstrong slide

Even though sovereign defaults have been common throughout the centuries, with Spain holding the record for a string of six defaults that started in 1557, people act like it will never occur again, even though the signs are everywhere. Armstrong first posted his forecast for the 2015.75 Big Bang at his 1985 World Economic Conference, which also shows a few more remarkably accurate forecasts. The Big Bang (Peak in govt) is starting to show up domestically, and of course in Greece, but the sovereign default dominoes start to topple after October 1st.

CapInflow-USA

If Europe, Japan, and the developing world collapse as expected over the next two years, the US could see the same influx of capital it experienced in the run-up to 1929, when European capital was fleeing WWI; and as occurred prior to the peak in Japan in 1989, when the Japanese sold their dollar-based assets and brought them home in response to the G5’s plan to devalue the dollar by 40% to stimulate exports after the 1987 crash. Two years later Japan’s real estate market peaked and the economy is still stagnate after more than 20 years of deflation and QE (money printing/debt creation), in an attempt to mask the necessary deleveraging.

Velocity of money

Throw in rising interest rates that pop the bond bubble, and you have the largest market in the world looking for a safe haven. As the above chart of the velocity money highlights, markets are thin and will result in flash crashes that will catch the managers of pensions, insurance funds, and other fixed income investors totally off guard.

CAP-WAVE

The study of global capital flows is not only an education in economics, but also in history, and an epiphany of understanding of how everything is connected. For example, the San Francisco earthquake in 1906 not only caused the Panic of 1907, as the major insurance companies and banks that financed the rebuilding were in NYC, but it was a big reason for the deflation in Munich and all of Germany, which started WWI in 1914. Not only were east coast financial institutions depleted of capital, but so were Munich RE and Allianz, which provided the bulk of the reinsurance money that rebuilt San Francisco. The 1907 panic also led to the creation of the Federal Reserve system. Armstrong provides a great history of financial panics, and how they spiral out of control. Another ominous warning is the current drought cycle in CA, which is telling of the rising earthquake cycle . Although, the next earthquake may not be a natural disaster, but one that is totally man-made.

debt

The current explosion in govt debt, that started in the early 80’s and has resulted in accumulated interest that’s almost 70% of total debt, is causing govt to become increasing aggressive and creative in their money confiscation methods to protect their jobs, perks and power. One can hardly fault the bureaucrats. After all, if we spent a career in politics with no real world skills, we may also do what ever was necessary to hang on to our status. Unfortunately, their absolute-power-backed desperation is exactly the root cause of our problems, which is why the elimination of the career politician is a fundamental change that must be made if we are ever to restore economic prosperity to America.

The good thing is the sane people recognize the problem, and are rising up across the globe, including in the US, where the rise in Independents is explaining Trumps rise in the polls – something Armstrong forecasted decades ago.

Unfortunately, the govt also knows what’s coming, and they will not go quietly into the night. With an obedient military, the govt will clamp down on descent in such an overwhelming way, the people will finally come to understand why all those military armaments were needed by municipalities. Just as the NSA and FATCA have been all about finding and confiscating money, a broke and desperate govt with unmatched resources can do some crazy sh*t, which is exactly what operation Jade Helm 15 is all about.

It’s not necessary to go down the path of what those who have not done their homework would consider conspiratorial, to point out the crazy, corrupt, and fraudulent actions taken by govt. Therefore, only one thought will be put forth for investigation and awareness. Most are aware of our military drone and robotic warfare technology. What few people know about is the programmed military response that the pentagon is developing, a response that does not need to wait for the emotional response of human commanders.

An integral part of computerized warfare is to understand how the enemy will respond to certain military actions and civilian responses during civil unrest and protest. Tracking GPS movements and cell phone chatter in response to specific military actions, and then programming the responses into Artificial Intelligence models that can learn on the fly, is a large part of the Jade Helm exercises.

When govt has too much time and money, mixed in with just enough hubris and grandeurs of power, God only knows what these psychos can destroy, but whatever it is, it needs to be stopped now – before psychopaths, like former Democratic presidential candidate Wesley Clark, have us thrown into an internment camp for disagreeing with their totalitarian visions.

There are solutions for what ails us, which where summarized at the bottom of a previous post, and Armstrong makes available on CD. If we fail to proactively reform govt and our monetary and foreign policies, the divide and conquer tactics of govt will snuff out the freedom, connectivity and collaboration of citizens, which defines prosperous societies.

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