by Phil Martin, Founder & Co-CEO
Having been on the wrong side of the 2008 Housing crisis, I made it a mission of mine to understand how Global Macro economics impact all asset classes. The goal being to hedge myself, earn decent returns and minimize the impacts of future market corrections. Here is what I’ve uncovered in my analysis of the current environment, 13 years later and, what we can do to avoid financial pain, as I did.
Bubbles everywhere!
In all previous recessions, a single asset class has usually been the culprit for precipitating a correction. Not this time, let me explain why. The Fed is out of options and is now pushing bubbles through reckless manipulation, everywhere. You see, during the ’08 housing crisis, the Fed bailed out banks, initially, through 3 waves of Quantitative Easing and dropped the Fed rate to 0%. Without going into detail about the cause of that crash, the bottom line is that we still haven’t fixed the problem. Fast forward 13 years and the Fed is still pumping QE, and, much much more of it. They actually accelerated and added the purchase of Municipal bonds, Corporate bonds and has had to feed continuous Billions in the overnight REPO market, among other forms of money printing. This market intervention/manipulation has resulted in a total stock value disconnect from fundamentals and across every asset class. It’s debasing the currency, and as a result, artificially inflating the stock market. The fed is now calling the acceleration of this behavior “Transitory” but that is simply not true. The arbitrary way in which they now measure CPI, GDP and unemployment is completely misleading and outright fraudulent. This Transitory declaration insinuates the artificial money supply creation started a few months back, but the truth is, it’s been 13 years in the making with no possibility of easing it either. There is so much increase in the money supply now that not acknowledging we are in the throws of a massive hyperinflationary event is delusional and the Dollar is at risk. You have to ask yourself, if the economy was actually doing well, would there be a need for such money creation and constant bailouts? No. The issue now is that there is no stopping it. They have two choices: 1. Continue inflating or, 2. Default. And they won’t Default! I’ve explained before how you just can’t taper a Ponzi scheme, many economists have stated this. We now have Bonds, Growth & Value stocks, Indexes, Real Estate and ETF etc. in a Mania of sorts, completely disconnected from their fundamentals. The real economy is in a massive depression, unemployment at an all time high, real GDP is in its 4th consecutive negative growth quarter, real world CPI increase is out of control and inflation completely under reported. Except for FANG and a handful of others, most companies on the S&P500 are losing money. The markets, though, are breaking records every day with no end in sight. We have financialized the economy so much, the reporting isn’t reliable. This is not sustainable, pure and simple. The cost inflation of everything is so great, incomes aren’t keeping with the pace of it. We are at a teetering point where the majority of people won’t be able to pay most of their bills, food, credit cards, car payments or their rents or mortgages. This type of default will necessitate further stimulus checks, thus creating more inflation and accelerating costs even faster. The rising prices of everything will completely decimate demand. Classic ponzi and we can’t let this runaway train hit a brick wall. We will need to pay the piper at some point before the chickens come home to roost!
Real Estate value growth vs Incomes
No Real Estate market is more overvalued in the world than Toronto, Canada, an example.
Average price of a single home in Canada 1985: $109,000
Average Income in Canada 1985: $53,472
Average price of a single home in Canada 2021: $679,000 ($1.6m in Toronto)
Average Income in Canada 2021: $54,630
Res Mortgage rate Canada 1985: 19%
Res Mortgage rate Canada 2021: 2%
In 1985, $1.00 was equivalent in purchasing power to $2.54 today. According to the Bureau of Labor & Statistics consumer price index (CPI), a Dollar today only buys 39.37% of what it could in 1985. Average inflation between 1985 and today was 2.62%, producing cumulative inflation of 153.72% in 36 years. It may look as though you would prefer a 2% interest rate, but this is a misnomer. Quick math reveals current real estate prices to Income vs Inflation tell us prices at a national level are about 40-55% overvalued. Outside of speculators, REITs, Pension Funds, Corporate or institutional investors, the average Canadian has been priced out of the market. The speculation I make about this correction is not a question of if, but when. Keep your cash, rent, be patient and wait for the dip. You’ll be thanking me!
Low interest rates should serve as a huge warning to prospective home buyers. It’s a sign the market is too heated, not that it’s the right time to buy. The reason the market is too high is because we’ve had low interest rates for too long. With massive inflation currently making it’s way through every sector and broadly increasing costs, central banks don’t have a choice but to increase rates. This is where their “Catch 22” is. Whether you raise rates or taper stimulus, both outcomes will be very bad. They know this and that’s why they’ve been continuing to feed monetary heroin into the system and kicking the can down the road. Which road will they decide to take? Who knows, but you can only take so many drugs before you overdose!
The sad part is every 1st time homebuyer (mostly Millennials) scraped every penny they had or were gifted money to get into their first home or condo and will almost certainly lose everything they had into it and more. Banks in Canada have to stop pushing the stress test to the other side and cease lending in a market where homebuyers can’t afford the coming correction. It is exactly the same in the rest of Canada and across the US, but Toronto is a special kind of bad!
Banks know the Real Estate value growth is built on the biggest mountain of Mortgage debt in the world. In fact, Canada’s residential mortgage market is actually bigger that the entire rest of the economy combined. In a show of hesitancy about the continued growth of property values, US Banks have recently started to severely tighten mortgage credit availability represented in the lowest MCA Index since 2012. It’s nearly impossible to get a mortgage as a first time buyer in the US now. You need much more cash down and a near perfect credit score, no debt and a rock solid employment history. This will ultimately push values down over the medium term. Conversely, with similar growth in Canada, banks aren’t being prudent and this is a major problem fuelling artificial growth. There is a real risk that because of record debt, a residential mortgage crash could trigger a commercial lending default avalanche. Never mind the commercial real estate sector in COVID times, has basically changed forever, it’s on shaky ground. Shopping malls, theatres, downtown office buildings leases have been severely impacted by COVID and are themselves a contributing factor to inflated Residential valuations. This is due to them trying to makeup the losses from dwindling commercial property income by buying tens of thousands of Residential dwellings to cash in on rental incomes.
Young couples earning their respective average incomes in Canada ($54,630 X2) can afford a $200,000 if they are able to come up with 20% down, have no car payment, ZERO debts and can pay closing costs out of pocket as well. This house doesn’t exist anywhere, so young families are forced to be house poor or continue renting. The bottom line is that this generation should not be buying houses, period. Banks control who can own them and the young professional couple is currently priced out of the market. So forget it and rent for now, keep your cash and wait for the market to get back to normal or you’ll lose your shirt. This is a black and white, easy decision to make. Don’t be fooled by Realtors or Mortgage brokers who have to drink the KoolAid in order to sell houses and write mortgages. They aren’t even doing it intentionally, it’s just what they’re being taught. Buying a home in this market is a bad idea. You don’t own it because there is no equity in it. Instead of giving the bank all your money, here is what I think you should do.
So, what do we do?
Investing in stocks in a country where the sovereign currency isn’t so leveraged by central bank debasing manipulation and where they have a sound monetary policy is a good start. Singapore comes to mind. Precious metals such as Gold or Silver is good as well. The fundamentals have them undervalued compared with every other asset class adjusted for inflation. The volatility isn’t half bad, but in a correction, Gold and some gold stocks will fair much better. Within the US, Bonds are a bad idea too, if you were wondering. First, they don’t yield anything and their values are also way too high considering how much debasing the Dollar has taken. Compensating for inflation, Bond yields are actually negative. In the US, we like companies who are heavy in farmland. It’s still relatively inexpensive and there will come a time where growing food will be the most valuable thing in our economy. Global supply chains and food shortage will make farming in North America very lucrative for investors. In following this, we like Energy and Freight as well. I’m also very excited in semiconductor fabrication in the US, the implications of domestic production will put us in shape as technologies evolve. Shipping these jobs to China and Taiwan over the past 50 years has turned the US from the biggest creditor nation to the biggest debtor nation. We need to reverse that asap as there are risks looming that the Dollar could lose worldwide reserve status. Finally, Cryptocurrencies scare the hell out of me. Their volatility makes it equal to dealing in the derivatives market first of all. Second, I have a real fear that central banks aren’t going to just let them take over. The success of crypto will force global central banks to regulate it and so the possibilities for unpredictable exposure exists, 100%. I would own “some” but nothing you aren’t prepared to lose entirely!
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Phil Martin
Founder, Co-CEO