Thank You For Your Support
I would like to personally thank all the viewers of Crush The Market.
Crush The Market has been running for only a couple of months now and already I have received so much support, with followers sharing/liking posts.
Without you the viewers, there would be no Crush The Market, so thanks for providing the opportunity to share my thoughts and ideas to you in 2016.
I would like to also wish everyone Happy Holidays and a safe and relaxing time off over this period.
Holiday Reading / Entertainment
For any one who may of missed a previous macro article or wants to refresh on some of Crush The Market 2016 macro posts you can view them below:
The Perfect Storm Set To Pop Aussie Apartment Bubble Bringing The Economy Down With It
Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy
US Economy Continues To Weaken As Warning Signs Flash Recession Ahead
How We Lost Control Of The Real Economy By Trying To Control Everything
Global Real Estate Bubble Begins To Pop Like Dominoes
Macro Views On the US and Global Economy - Peter Schiff
One of my favourite places I visit weekly for macro views on the US and Global Economy is the Peter Schiff Channel.
If your not familar with Peter Schiff and would like to check it out click below:
Remember to share this with your friends & colleagues by clicking on the Facebook & Twitter Icon's Below.
If you have done so already to Subscribe to Crush The Market click on the 3 options: Facebook, Twitter or RSS Feed on the top right side toolbar.
The Aussie apartment boom that has turned into an epic bubble with record sky high prices, is showing all the signs for the perfect storm which will ultimately pop the apartment boom bubble. With the popping of the apartment boom, it will simultaneously bring down the Australian economy, as the apartment market is set to have a sizeable correction in 2017 and 2018.
A short Look At Australia's Real Estate Market.
Australian real estate prices have been going up for over 25 years with hardly a pause in between since the late 80's. The last time real estate prices fell considerably was when Australia last had an official economic recession back in 1987, when interest rates skyrocketed to around 17-18%.
The chart below show the price growth of real estate, rents and CPI since mid 1987. Initially the price growth of Australia's real estate market climbed steadily taking 11 years to double in 1988. From there the price growth continued to accelerate with the next 100% increase in price taking 4.5 years to reach.
An interesting observation on the chart below is that real estate prices have risen by over 700% since 1987, yet rents have risen just under 300% over the same period. This chart clearly shows that the majority of the price growth was not supported by a fundamental increase in rents to support the higher prices, but rather an massive surge in mortgage debt over the same period drove prices higher.
Rising Credit Leads To Booms & Contractions In Credit Lead to Busts
Professor Steve Keen in the interview shown below highlights his own reasons why he see's a recession coming in 2017 for Australia.
Steve highlights a number of reasons for his prediction, including a deteriorating terms of trade, the ending of the mining investment boom, the Government's pursuit to cut spending and a reduction in foreign buyers for real estate among others. However, the most important reason is a deceleration of credit / mortgage debt. Based on Steve's research and economic models the deceleration of mortgage debt growth is the leading cause for all economic downturns globally including the US, Japan and Europe economic recessions, with a correlation close to -1. What all his research showed is with the deceleration of mortgage debt growth, lead to a collapse in real estate prices which then lead to an economic recession in those countries.
Due to this research, Steve believes Australia will react the same way as other countries based on slowing growth in mortgage debt. Especially, as the conditions have already begun to slow based on the bank's tightening their standards overall. However, most of the lending restrictions imposed from the banks are for off the plan apartments and existing apartments within most major cities around Australia.
Given Australia was recently ranked number 4 in the world in the UBS global real estate bubble index, see: Australia's debt addiction fuels record real estate bubble, its easy to see that prices could fall over 20% as lending conditions continue to tighten and their effects take hold.
Why Are Banks Tightening Lending Conditions With Record Real Estate Prices?
The simple reason is that the banks do not want to be caught in a credit crunch like they faced back in 2008 and 2009 where they had to have the RBA and the US FED provide considerable financial assistance to keep them afloat.
Right now the banks can see what everyone else can see if you look at all the data publicly available. Australia will face a major oversupply of apartment dwellings over the next 1 - 3 years from a major ramp up of approvals of apartments. The growth of approvals over the last 7 years which you can see in the chart below, is leading to a big jump in the construction of apartments with a number of them being competed in the next 18 months.
Due to the rapid increase in approvals there has been a massive spike of cranes currently being deployed in Australia, to handle the apartment boom that is currently taking place. As you can see below in the chart Sydney and Melbourne are leading the way in Australia, dwarfing most major cities in the US including New York and LA.
With all the current construction for apartments taking place from the buildup of approvals, especially in the last 3 years, Australia is facing a glut of new apartments that are about to be completed in 2017 and 2018.
Knowing the upcoming glut of apartment completions is about to come available on the market soon, the banks have taken action to protect their capital by providing most of their tightening around new and existing apartments within the CBD's of Sydney, Melbourne and Brisbane where most of the construction has taken place.
Highest Housing Completions = Biggest Housing Price Fall
The chart below shows a comparison of house prices in Australia, UK, Spain, US and Ireland with an accompanying housing completions chart.
The most obvious data from the chart is both Ireland and Spain had the biggest fall in prices during the GFC in 2008 relative to the other countries shown. Those 2 countries also had the largest ramp up of new housing completed from 2000 - 2007.
Surging Bond Yields Leads To Higher Mortgage Rates In Australia.
Back in October US Government 10 yr bond yields were sitting at around 1.55%. Fast forward one month and rates are now sitting at around 2.3%. A 0.8% increase from the October levels (see chart below). The reason why this is a big deal, is that the US Government bond yields are what are utilized to benchmark most of the different types of retail and commercial loans.
In Australia the banks also rely heavily on overseas markets and especially the US markets to provide the necessary funding to support their loan book. So as bond yields have skyrocketed in such a short period in the US, it has already led to the banks in Australia lifting rates by between 0.20% - 0.60% on their fixed loans as their funding costs have jumped dramatically.
With mortgage rates rising and lending conditions being tightened its becoming more difficult for developers to sell their off the plan apartments as investors find it more difficult to access bank lending to finance their purchases, resulting in a slump in demand for off the plan apartments.
Melbourne Developer Offers $21,000 To Encourage Buyers
In an attempt to lure buyers to a new off the plan development in Melbourne, a large well known developer is now offering $21,000 to investors in an attempt to sell their $420,000 1 br apartments in Southbank Melbourne. The idea is to match the investor or first time buyer's 5% deposit of $21,000 to least assist them in meeting a 10% deposit.
The problem that this Melbourne developer and other developers will find, is even with this huge financial incentive, many of the banks in Australia have lifted their minimum deposit requirements for off the plan apartments in major cities to between 15% - 25% deposit.
Apartment Bubble Bursting Leading To Australian Recession
Similar to Professor Steve Keen's prediction that a recession is coming to Australia in 2017 or early 2018, I also believe that the perfect storm of conditions are developing that will soon pop the apartment bubble that has been taking place in Australia.
When the correction in apartment prices takes hold, it will have a domino effect on the Australian economy, leading to a contraction in economic activity in Australia. The reason for this is because the real estate industry and related industries now has the largest contribution to GDP at around 28%. (See chart below)
With record amount of apartment construction taking place over the last few years, fueling a considerable amount of GDP growth, I believe the slowing of the construction industry will start to subtract heavily on GDP growth in 2017 and 2018 leading to Australia's first recession in over 25 years.
Thanks for viewing Crush The Market latest post.
Remember to share this with your friends by clicking on the Facebook & Twitter Icon's Below.
To Subscribe to Crush The Market click on the 3 options: Facebook, Twitter or RSS Feed on the top right side toolbar.
www.afr.com - 1
www.afr.com - 2 - Subscription required
The US election results overnight stunned the mainstream media, wall street, world markets and millions of people around the globe. After initially falling sharply on the news, the markets eventually recovered and moved to finish higher as the mood turned from fear to bullishness.
Once the markets saw that Donald Trump moved to the lead early in the election results, the markets around the globe began to panic as the DOW futures was down over 800 points, the S&P 500 futures was down 5%, Gold jumped up over $50 and currencies moved violently as the odds turned to Trump becoming the new President.
Markets 180 Degree Reversal.
Once the S&P 500 futures fell by 5% the index automatically went to limit down, and temporarily stopped trading. Once trading resumed the S&P 500 futures began to slowly climb as the limit down measures meant the index could no longer fall more than the 5% level for the trading day.
Once the S&P 500 began to climb with the DOW, the massive fear that was gripping the markets slowly moved to cautioned optimism as the markets slowly crawled back the losses. By the time Trump was giving his President elect speech early in the morning US time, the DOW had recovered to be down 300 points. By the end of the trading day in the US with the results in for the new President the equity markets swung to a strong gain for the day.
The chart below shows that initially when the markets opened that the S&P 500 fell to the support level of 2125 before slowly climbing during the day for a big swing towards an up day closing at 2163.
Since momentum is now back into the positive and the S&P 500 closed above the 2157 resistance level the next target is 2190 which is back to it's all time highs for the broad US equity index.
US 10 Yr Govt Bond
One of the interesting swings in the markets overnight was in the bond markets. During the initial fear stages of the market the US 10 yr Govt bond yields fell all the way down to 1.70 level as investors moved into bonds bidding up bonds as the selling accelerated out of stock futures.
Like the equities market the bond market began to turn around and swing from a 1.70% yield on the 10 year to as high as 2.09% jumping by 20 basis points by the end of trade. Currently the 10 yr is sitting at 2.005 level.
The previous resistance level which is now support is around the 1.97/98 level, with the next resistance level for the US 10 yr Govt bond at 2.13%.
Lastly you can see that since June of this year that bond yields have been climbing since reaching the low 1.30's level and have broken its downtrend on a daily chart.
Crude oil had a crazy day after having been down considerably to as low as $43 and change which was also a key support level, to a swing to the green rising to 45.25. Currently in the next day of trading crude is sitting at just over $45.
Crude is currently in a middle ground with no clear direction at the moment. Having said that crude recently broke its long term uptrend which is displayed on the chart by the blue line which is a bearish signal for crude moving forward.
The key areas to look out for in the medium term are $46.25 to the high side and $43.05 on the low side. We would need to see a break out in either direction to determine its next move.
Currencies around the globe experienced violent moves overnight as the market tried to digest the news that many did not expect to occur within the US election.
The USD/JPY pair fell sharply initially to a low of 101.18, before climbing sharply during yesterday's trade to also climb into the green reaching a high 105.88.
The technical's for this pair has recently turned bullish, after reversing it's long term down trend and clearing the previous resistance level now turned support of 103.88.
Momentum has now moved positive and with the strong reversal intra day the next resistance level for the pair is 106.83. Currently it's sitting at 105.57 at the time of writing this.
The EUR/USD pair had a similar outcome to the USD/JPY but in the opposite direction. After climbing strongly when news first came out that Trump was in the lead and looking likely to win the election. The EUR/USD pair jumped as high as the 1.13 level which also market the high end of the down trend level for this pair (see chart for trend line).
The currency also reversed course during the day and swung from a strong gain for the day giving up all the gains and falling for the day to reach a low of 1.090 level.
Momentum is only just positive and looks likely to swing back to the negative. The likely next stop for the EUR/USD is down to the next support level of 1.088 as shown in the chart below.
One thing that the gold bugs had expected was that if Trump would win that Gold would jumped sharply higher.
Unfortunately for Gold investors their prediction did not remain true as the trading day continued. Gold initially jumped spectacularly higher to a high of $1,336 for the day, before giving up practically all the gains to finish around $1,277 level.
Currently in the next day of trading Gold is slightly higher sitting at $1,286 at the time of writing.
Looking ahead for Gold it has 2 key levels to clear before it could regain it's uptrend. Its first resistance level is around the $1,305 - 08 level which it breached intra day but could not close above that level. If it clears this level the next level to close above is its downtrend line shown in the chart. During the highs reached Gold hit its downtrend at around $1,336.
XJO - Aussie Stock Market
Australia was one of the stock markets that was trading as the results were unfolding for the election yesterday. The Aussie market index the XJO was initially up in the morning when the market believed Clinton was winning. It quickly swung to the downside sharply following the US futures market, hitting a low of 5,052 which was around it's strong support level reached back in late June, before recovering considerably by the end of trade yesterday.
Today the XJO has risen sharply on the back of the swing in the US markets to around 5,300 level at the time of writing.
Since the XJO is currently sitting comfortably above its previous support level of 5,190, its next target is around 5,390 - 5395.
Keep in mind though that Momentum is still well in the negative at -142 as well as the current price is sitting below its 50 day moving average. The XJO would need to see buying to continue in the US markets to help lift the XJO out of its current slump.
Thanks for checking out my latest post.
Remember to share this with your friends by clicking on the Facebook & Twitter Icon's Below.
To Subscribe to Crush The Market click on the 3 options: Facebook, Twitter or RSS Feed on the top right side toolbar.
Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.
The Australian Banking sector is approaching a key resistance level for the 5th time and a break out above this congested area of resistance is key for the sector. We take a closer look at the sector and the key levels to watch out for confirmation of a breakout to higher levels.
The actual name of the stocks that make up the banking sector is called the ASX 200 Financial index excluding REIT's, which means the sector is predominately made up of the large and small banks and other financial intermediaries. If you would like to have a look at my review of the REIT sector last month you can by clicking REIT sector review. I excluded the REIT sector as the REIT sector continues to struggle from rising bond yields in October and the poor performance would skew the actual performance of the banks within the financials sector.
The Financial sector has been riding on a very long term uptrend that began after the considerable fall in 2008. Since making those lows the financials have been steadily climbing higher, on the back of rising profits from Australia's insatiable appetite for Real Estate. Thankfully for the bank's Australian's continue to increase their debt levels by taking out larger mortgages to participate in the Australian market that has been recently been described a bubble market. For more information on the Australian real estate bubble you can take a look by clicking: Debt Fueled Real Estate Bubble
ASX 200 Financials Ex REIT's Sector Review
After making all time record highs in March 2015 of 8419, the sector retreated back to the long term uptrend level over the next 18 months to around the 6060 level as it formed a down trend within its longer term uptrend. (See chart below)
Since bouncing off its uptrend line in February and March this year, the sector has been moving sideways in a tight range. However with only 5 trading days left in the month of October, the Financials index looks to have broken its downtrend pattern and has continued on its longer term trend (Labelled on the chart). In addition on a monthly basis the sector looks set to break out of its 6760 resistance level as it closed on Monday 24th October at 6750 only 10 points away from resistance.
On the weekly chart below the Financials ex REIT sector is slightly different. From the chart below you can see the resistance level is a little higher than the monthly chart at 6785. You can see that several times this year the sector attempted to close above the 6785 level and failed. However you will also notice that each time it failed to close higher, the retreat lower was shallower as it formed higher lows (shown with the blue up trending line), which is a bullish signal.
I have also circled the area on a weekly chart where it broke its downtrend pattern in July and August this year, which confirmed the end of the 18 month down trend within its large uptrend cycle.
If the sector can close above its 6785 level the next level of resistance is 7070, as shown in the chart. You will also notice for the sector to reach the previous record highs set in 2015, the sector has a number of resistance levels to clear along the way.
On a daily chart taking a much closer look at the sector, you will notice the resistance level is set a little higher again at 6815 compared to the monthly and weekly charts. I have marked with circle each attempt the sector made to close above this key area of 6815.
Considering the financials ex REIT sector has failed the close higher above 6815 level on 4 attempts, this resistance level is a very critical area for the sector to break in order to move to higher levels.
On a daily chart there are a number of technical indicators that provide a bullish case for breaking its resistance level of 6815 including but not limited to:
1. The chart has been forming higher lows indicated by the blue rising sloping line.
2. The closing price on the 24th October is above the 10 and 50 day moving average.
3. The sector has broken out of its down trend on a weekly and monthly basis.
4. The closing prices in 2016 has respected the longer term uptrend line.
The Market To Confirm If The Real Estate Bubble Will Continue
Since the Financials sector comprising mostly of the banks, if the market confirms a close above the key resistance levels mentioned above, this would indicate that the market believes the Australian Real Estate Bubble will continue in the medium term.
Alternatively failure to close above resistance, and break below its long term uptrend would indicate that the market believe both the bubble is coming to an end and that real estate prices are set to fall in Australia.
Subscribe to Crush The Market by clicking on the 3 options: Facebook, Twitter or RSS Feed on the right side toolbar.
Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.
The world has changed a great deal in the last 85 years in terms of how the markets and the economy functions as well as how we see them operating. Slowly over time we have added and implemented more and more policies, regulations, controls, mechanisms and various forms of stimulus in an attempt to smooth out business cycles booms and busts. Central Banks (CB's) and Governments have tried very hard to shorten the busts / recession cycle by lowering interest rates and extend the boom cycles in each and every business cycle over the last 85 years.
Now we fast forward to 2016 and the chief aim is to never experience a bust / recession / depression or deflation ever again. Central Banks (CB's) have taught us that they are all bad things and that we must avoid them at all costs.
These CB's have tried multiple policies and even some new experiments like negative interest rates in attempt to keep the global economy from experiencing a slow down or any amount of deflation. How bad is it really if the price of everyday items like food, rent and fuel becomes 1 or 2% cheaper each year. For the average income earner around the world their money will be allowed to go further if prices fall.
The more we have tried to control every aspect of the market, capitalism and the economy, the harder its becoming to not lose total control of these very things. However I believe we are already in the process of losing control of one of the most important things, the real economy. Presently all the Central Banks have done an excellent job at keeping the Financial assets Ie Stocks and Bonds markets up at or near record highs , while the actual economy has been unable to improve in real inflation adjusted terms over the last 10 years.
Real Assets At All Time Lows
If we take a look at the chart below, it illustrates perfectly the complete distortion of over 85+ years of controlling mechanisms, policies and Central Bank experiments have done to the relative value of real assets compared to financial assets.
This chart goes all the way back to 1925 and currently we are at an all time low, for real assets (Houses, commodities, fine art, jewellery etc) relative to financial assets of stocks and bonds. All the stimulus and attempts at controlling the markets and economy have only influenced the price of financial assets. Financial assets are more easily influenced and controlled through electronic exchanges, rather than real tangible assets which are much harder to manipulate on a global scale.
In the video below, Ray Dalio and company deliver a frank assessment on how we have reached the physically limits of the system. As we have artificially pushed markets and demand higher through debt accumulation, lowering interest rates to zero and by ballooning the derivatives market.
Increasing Volatility And Valuation Divergence
The chart below provides a good understanding on the ever increasing huge swings in volatility the financial markets have experienced. Central Banks began to introduce and try new stimulus and policy ideas in the early 2000's to reduce the busts / recessionary periods, causing large swings in the prices of the financial market as well as the valuations.
The most recent round of stimulus that began in 2009 with Zero Interest Rate Policy (ZIRP), followed by QE 1, 2, 3 and negative interest rates have stretched out the valuation of the S&P 500 relative to US productivity. Up to 1995 / 96 US productivity moved in sync with the S&P 500 stock market. This is clearly no longer the case as the chart indicates a strong divergence in valuation.
This week we received the latest monthly industrial production number in the US and showed that the year on year figure remains negative.
Since mid 2014 you will notice that industrial production data used to coincide with the value of the S&P 500 index very well. Now industrial production has been falling for 2 years and the stock market is near nominal all time record highs.
One of the policies that the Central Banks have utilized to try and control the economy, markets and financial assets values is to physically adjust interest rates up and down. Since the 1980's when Paul Volcker raised interest rate to around 18% to combat high inflation, we have been steadily lowering them all the way to zero.
Why Lower Interest Rates No Longer Work?
Presently the federal funds rate is at 0.25% as you can see from the chart, however lower interest rates are no longer having the desired effects to stimulate the real economy anymore. One of the reasons for this is the fact we have reached the limits of our debt bubble cycle. We can no longer leverage ourselves any higher despite having interest rates at close to zero .
Leveraging Corporate America
One of the many side effects of lowering the federal funds rate to close to zero, has been the leveraging of US companies to levels higher than the 2007 and 2008 peak before the GFC crisis. Debt to equity is approaching 60% for non-financial companies, as the incentive to load up on debt has never been so high. But is it really helping corporate America?
What Is The Debt Being Utilized For?
The accumulation of more debt relative to assets would be ideal in the short term if companies were utilizing the debt to fund new innovation, capital expenditure and additional capacity for future growth.
The reality is that a large majority of the debt accumulation has been utilized to fund buybacks of company stocks to artificially boost earnings per share (EPS) which in turn helps stock prices rise despite the company profit not actually growing from this strategy.
The chart below shows that share buybacks have more than doubled since 2012 to $161 Billion in the 1st quarter of 2016, as more companies engaged in artificial growth strategies rather than invest in their own business models.
IBM a large technology company that has been an consistent innovator issuing several thousand new patents each year. However even though IBM still continues to issue several thousand patents, the company has been steadily increasing its debt levels (See chart below) to allow it to participate in stock buybacks.
IBM Increasing Debt & No Growth
These higher debt levels has allowed IBM to engaged in stock buybacks with the additional funds at their disposal. Unfortunately for IBM the stock buybacks have not helped the actual company as it has struggled to grow over the last few years.
The chart below is a perfect example how a large company has tried to control its EPS through artificial boosting its profits with stock purchases funded through debt. However the actual result is that IBM's revenue (which can't be artificially adjusted through stock buybacks) has been falling since 2012 as the company continues to struggle to grow its top line and bottom line numbers.
Netflix, which is relatively young technology company that provide online streaming of TV content, is a company that has been investing large amounts of money into the companyto deliver new and original TV content, as it differentiates itself and reduces its reliance on licensing content from other media companies.
On the 18th October Netflix announced its latest quarterly result, which was above estimates for EPS and subscriber growth. However the interesting thing that investors didn't seem care about is that Netflix free cash flow is going the wrong way and accelerating. It burned through $506 million in a single quarter and just over $1 billion over 3 quarters. (See chart below) The stock ended up jumping around 19% after reporting its results.
Because of the huge drain of cash despite reporting a profit, Netflix did mention it will be tapping the markets for an increase in debt soon. Because interest rates are so low the market does not care that Netflix is essentially, borrowing more money to make new TV shows to attract more members. The current business model is simply not sustainable, especially when the company spends $142 to add one new subscriber.
If Interest rates were set by the market and were not manipulated by Central Banks the actual interest rate would be significantly higher to encourage savers to part with the capital. In this scenario Netflix business model would not survive in its current form.
The last chart summaries very simply, how "we have lost control of the real economy by trying to control everything". Global GDP estimates continues to decline as global stocks continue to increase, as Central Bank balance sheets fund global stocks higher.
Lastly this MUST WATCH video Rick Santelli makes a simple request to Central Banks.
One by one real estate markets across the globe have begun to pop as the record real estate bubble has turned to a slow down in prices and growth. Multiple regions and real estate markets have begun to cool despite record low interest rates and Quantitative Easing (QE) stimulus.
Until recently the global real estate markets had been one of the best performing asset classes over the last 7 years, as Central Banks coordinated efforts to stimulate the economy in 2009 and further in 2012 - 2016 brought interest rates around the globe to record lows. Some countries even went negative with the objective to ensure GDP growth continues.
The Tipping Point Of Stimulus - Too Much Of A Good Thing
Eventually though any market will reach the limits of what artificial stimulus can do to prices and demand. Whether its auto / car market, think of the cash for clunkers stimulus and the more recent auto subprime loans bubble in the US, or whats happening right now with real estate prices in different countries. Eventually demand begins to wane even when stimulus remains or increases. This happens when too much of a good things begins to take hold and stimulus actually becomes a negative to demand.
Pizza Eating Example:
If your hungry and you love pizza you decide go to a pizza restaurant. The demand for eating pizza is high, however eventually the demand or desire for more pizza will start to fall until you reach the point of when you don't want no more pizza. Your desire or demand will not change even if the pizza price falls by 50% making it easier to buy more. Why because you reach the limits of your own consumption and demand eventually disappears.
This simplified example works in a similar way to economic stimulus in asset markets as it does for the rise and fall in demand for pizza. Everything has a limit where extra stimulus stops being effective.
Luxury Manhattan Real Estate - Latest Market To Correct
The luxury real estate market in Manhattan is one of the latest markets to cool as it pop its real estate bubble. In the chart below you can see the declining trend in growth in prices in Manhattan. Since January 2015 where growth was around 8% pa, the level of growth has continued to fall each month to February 2016. Where the data shows that it has gone negative to close to a 1% fall in prices.
San Francisco area has been another hot real estate market that has started to cool down, despite being a trendy place to live and close to employment opportunities. With several big Technology companies headquarters located in the area.
In this short video below its give you a good understanding how the bullishness of the real estate market has tapered off, as the real estate sales and prices have soften and the time taken to sell has increased compared to a year ago.
One of the reasons why the San Francisco real estate market has started to cool despite low interest rates and stimulus is due to the fact the employment levels in the area has peaked, and has been stagnating since September last year with no growth recorded in employment in the area. This has effected rental demand and rental prices have begin to come down also weighing on the San Francisco real estate market.
Based on the indicators and the employment data the trend for this real estate market is not looking good going forward.
Across over to Vancouver real estate market in Canada, has experienced a spectacular fall in prices in a very short period of time. (See chart below)
Similar to San Francisco real estate market, Vancouver had experienced sharp rises in prices over the last few years as foreign buyers and local demand drove up prices. This was due to record low interest rates forcing investors to find a destination to earn a return on their capital, as cash and bonds income continued to fall. However recent tax increases for foreign buyers in Canada has effected demand dramatically in the area, with prices falling sharply since July this year.
The video below gives you a snapshot of the current Vancouver real estate market and the fallout from a sharp drop in home sales in the region. On a bright note they expect the market to remain relatively stable moving forward. Given the global backdrop in real estate trends this assumption may change.
In the UK commercial real estate has been experiencing a slowdown since the beginning of the year and was in the process of cooling before the Brexit vote dampened confidence for this asset class further causing further pain for the sector.
The graph below shows the trend in property deals value falling compared to the same month year ago. The trend is clearly falling faster as February through to May show steeper falls than January.
The falls in property deal values is most likely the consequence of income and capital growth returns continuing to fall each month since reaching the peak in October 2014 of 12.95% return, to the current return of 5.91% in March 2016. (See chart below)
Australia's real estate bubble has continued to remain red hot in bubble territory despite warnings from BIS and other groups on debt levels. To see the article click here Australia's debt addiction fuels bubble.
Despite the residential real estate market continuing to perform strongly in Australia, the Australian real estate investment trust (REIT) sector which predominately focuses on commercial real estate, has experienced sharp falls in prices since August. The REIT sector current price has fallen back to the levels set in April this year despite setting a yearly high back in July this year.
Why It Feels Like Everything Is OK
This chart below shows exactly why it appear that everything seems to be OK even though each month another real estate market across the globe starts to cool as their bubble pops and deflates.
The chart below shows global GDP expectations for 2016 overlapping the global stock market and global central bank balance sheet levels.
The chart shows the blue line which represents global central bank balance sheet continuing to increase, and the global stock market following this trend up with it since the start of this year.
What this indicates is that the global stock market is being held up by artificial stimulus as the stock market no longer reflects global GDP movements to the downside.
I'm aware that not every real estate market around the globe has started to pop. In fact some markets like China and Australia residential market are continuing to go higher.
The signs however are getting stronger as more and more real estate bubbles popping are emerging each month. Eventually more real estate markets will be effected, as the stimulus effect on demand starts to fade. Coupled with the fact global GDP continues to fall and the effect it will have on employment levels will cause real estate markets to fall in more regions.
bloomberg.com - 1
bloomberg.com - 2
zerohedge.com - 1
zerohedge.com - 2
zerohedge.com - 3
China's remarkable growth in GDP has provided a large boost to global growth over the years. As the global economy and trade recovered from the GFC in 2009 and 2010, China was major contributor in reversing the global down turn and lifting GDP higher.
China Growth Fueled By Record Debt Levels
Its no secret anymore that the real reason, China has been able to rebound so strongly in the last 7 years, was because China has accumulated a record amount of debt to fuel its own GDP growth and keep demand for global trade strong.
Now that total debt to GDP is approaching 300% (see chart below) in China, its starting to become a drag on the largest economy in the world. As the economy continues to slow due to its debt bubble impacting growth, it increases the risk that China will actually threaten global growth as it deals with its own debt crisis.
If you take a look at the chart below from 2004 to 2008 period, you will notice that the debt to GDP ratio was stable and moving sideways at around 175% debt to GDP. This indicated that the economy was growing in sync with the level of debt growth within China's economy, which is a healthy sign of a growing stable economy despite at the time debt to GDP was high.
However when you look at the chart from 2008 to 2016, the debt to GDP starts to increase for the first few years and then accelerates as it approaches 2012 over the next 4 years to 2016. This trend is not a healthy sign for China's economy, as this indicates that the GDP growth has been unable to keep up with the level of debt taken on within the economy.
If debt is growing faster than GDP the debt stops becoming a contributor to growth and instead starts to drag on growth especially as debt to GDP ratio accelerates.
China To Drag Global Economy Down
Now that the debt has become a major problem in China, there have been a number of people and international groups including the BIS, Bank of England (BOE) and NAB Bank among others, who have raised concerns over the growing risks that China's debt bubble poses on the global economy.
The video below is from a former chief economist of the IMF Ken Rogoff discussing the key issues he believes China's slowdown poses on the global economy.
Debts Start To Pile Up
The chart below is from 2014 and shows the EBIT debt coverage of 780 bond issuers in China, and the level of interest payments to operating profits.
You can see that back in 2014 a number of debt issuers had a level of 100% or higher EBIT debt coverage. Meaning that the interest payments were higher than operating profits to pay for the loan. Leaving the only options of defaulting on the debts or borrowing more money to pay the interest. Borrowing money to pay existing interest and debt is the definition of a ponzi scheme.
The chart is very interesting even though its from 2014, as it layed the foundation for the problems companies in China are facing in 2016.
According to Reuters.com 25% of Chinese companies profits in the first half were not higher enough to service their debts and make their interest payments.
China's Debt Crisis Too Big For Government Stimulus To Be Effective.
Professor Steve Keen highlights in this video below, his agreement with BIS assessment of China's debt crisis, the subsequent slowdown in growth and how China grapples with its high debt levels.
Steve also suggest that the China's Government will attempt to stimulate the country to allow it to grow out of its debt problems, however he believes the problem is too big even for the Government to handle without experiencing a downturn in the economy.
Global Growth Slowdown To Continue
China's debt crisis and its subsequent slowdown within its own economy, is coming at an inconvenient time for the global economy. Many countries including the US economy are starting to experience a slow down as recent economic indicators highlight the slowdown in global growth.
Within the US it's becoming more apparent that the US economy is about to experience a recession or may already be in a recession unofficially.
To see the recent post on the slowingUS economy click on the link . Is the US in a recession?
Australia's obsession with real estate over the last 50 years, has created a generational debt addiction and record levels of private debt to GDP of over 200% (see chart below). Because of the record debt levels Australia now has a real estate bubble and just received confirmation with the title of coming 4th, behind Vancouver, London and Stockholm in the UBS Global real estate bubble index.
See link for full story on UBS Global Bubble index - www.zerohedge.com/news/2016-09-27/global-housing-bubble-biggest-these-six-cities
Our private debt levels relative to GDP has been steadily rising since the 70's (see chart below), surpassing the USA and most advanced economies. Besides pulling back so slightly in 2009 and 2010 due to the GFC, we have not looked back. Since Australia's debt levels have kept rising, real estate prices have followed suit, as people outbid each other to drive prices higher. This in turn has further fueled more speculation into real estate as asset prices rise year after year without hesitation.
In contrast to the USA and advanced economies, Australia's private debt to GDP levels are at record highs, where as the USA private debt tapered off from 2009 - 2012 as the consumer deleveraged, after millions lost their homes. Since then the private debt has been going sideways relative to GDP, which explains one of the reasons why growth in the US in the last few years, has been so sluggish compared to previous recoveries from a recession.
Income Vs Real Estate Prices
A key ingredient to determining whether an asset is in a bubble is to compare the current value of an asset compared to income / rent levels.
The chart below shows since 1986 rents and construction prices have risen 25% -30% adjusted for inflation, compared to housing prices which have risen by 270+% adjusted for inflation over the same period.
If you take a look at household income it has risen by approximately 50% adjusted for inflation since 1986, which explains why its has become increasing difficult for first time buyers to get into market.
The exponential rise in real estate prices from the mid 80's has been clearly supported predominately by an equally significant rise in the level of private debt, rather than being supported by increases in household incomes or rent prices.
Australian Real Estate Bubble Parody Video
Below is a short real estate parody video that shows the crazy lengths Australians go to so they can participate in the real estate bubble as the fear of missing out drives their decision making.
Even though this is a parody the reality is, the themes shown here resemble behaviours similar to the current state of the Australian real estate market.
Real Estate Now The Biggest Contributor To GDP
Australia has experienced a record breaking 25 years of GDP growth without experiencing a recession, which is defined as 2 quarters of consecutive GDP declines.
Since the mining boom has slowed the last few years, the real estate and related industries have become more important within the economy, as it has been a big contributor to Australia's GDP growth.
Looking at the chart below of Australia's Industry share of GDP, I have outlined in black - Ownership Dwellings, Rental, Hiring and Real Estate, as well as Finance and Insurance. These 3 real estate industries account for a combined 20.3% of Australia's GDP.
When you combine the construction industry 7.7% contribution to GDP, of which real estate construction would be a considerable component of the construction industry. You realize that real estate industry is the single biggest industry by GDP in Australia, and any downturn in real estate prices and or construction activity would impact on Australia's GDP considerably in the future.
Lastly I wanted to show a real life of example of a house that was sold this week to illustrate how much real estate prices have risen. The picture of the house below is a 2 bedroom house located in Greenarce, a suburb that is 17km away from Sydney. It sold for AUD $926,000 and features 545 sqm of land and is un-renovated.
If you want to take a look at Australia's REIT's sector review and how it is holding up, despite record levels of debt and low interest rates you can click on the link at: Aussie REIT Sector Review
Mortgagee Property Youtube Channel
The 7 Year Experiment
Central Banks around the globe have experimented with a myriad of different policy tools over the last 7 years, with the explicit goal of reigniting global growth to prior 2007 levels. Central Banks figured if they could reverse falling asset prices and deflation, by creating inflation via Quantitative Easing (QE) they would be able to re inflate asset prices and kick start growth.
However since the global economy slowed down in 2007 and reversed course, crashing in 2008 and 2009, growth hasn't been quite the same. In fact the recovery from the 2008 recession has been the weakest in history.
By flooding the world with trillions of dollars in liquidity and creating money out of thin air, by printing digital money or QE and dispersing it through the banking system, the Central Banks have been able to create the illusion that the global economy is growing and things are back on track.
Yes the S&P 500 is just off all time record highs in price, and yes real estate prices around the globe have either recovered most, or all of the losses prior to the 2008 crash. Better still real estate markets in some countries like in Canada and Australia have surpassed their previous highs . Wages have also been rising steadily for the last 5 years after falling from 2008 to 2011. Yet for the average person it doesn't feel like we are better off with higher levels of standard of living. More importantly we cant seem to pin point the exact reason why.
The Hidden Tax
The actual reason why the recovery from 2008 crisis has been so sluggish, with the weakest on record is because real household incomes adjusted for inflation have gone nowhere. In fact real household wages are down 1.1% in the last 16 years. This is evident even though nominal wages have actually grown by just over 40% since the year 2000. (See chart below Titled: Median Household Income in the 21st Century)
Inflation is sometimes referred to as a hidden tax, because you don't seem to notice it as much on a day to day, quarterly or annual basis. Yet inflation over a 5 or 10 year period or longer can be really easy to spot when you take a look and compares prices over longer periods for goods, services and assets like food, rent, education and real estate.
Since real wages adjusted for inflation has not increased in 16 years, yet the level of private debt has grown dramatically over the same period, the share of wealth by the bottom 90% of US households has actually been declining. (See chart Titled: Distribution of wealth in the US since 1917)
The reason for the decline is because the bottom 90% have used debt to fund increasing consumption on their home and living expenses, since their real wages have stagnated. In comparison the top 0.1% have steadily been increasing household wealth as they have been able to utilize debt and higher equity / capital levels to take further advantage of rising asset prices over time.
Lastly to further illustrate the real cost of inflation, and how it can be subtly hidden from most people. Take a look at the chart below of the S&P 500 which has been adjusted for inflation.
If you take a look at the current level on the right hand side of the chart you will notice its only just above the price level from the year 1999 / 2000 level.
The second interesting point is that the last bull market that occurred between 2001 - 2007 did not reach the prior 1999 - 2000 level when adjusted for inflation, even though the nominal price chart for the S&P 500 recovered to the same level as 1999 - 2000.
Some Things Cant Be Manufactured
So after experimenting with so many different policies and trillions of dollars in QE, Central Banks have achieved the outcome they have desperately tried to create, inflation and an artificial type of manufactured growth. Artificial because when you factor or adjust for inflation, you realize that there isn't a whole lot of real growth to be shared around.
Commonwealth Bank (CBA) is the largest company listed on the Australian stock market (ASX 200) with a market cap just over AUD $123 Billion.
Being the largest company on the ASX it is a widely held stock among investors directly as shareholders and indirectly via managed funds and super funds both domestically and internationally.
Similar to Woolworths that was recently reviewed on this blog see: Has woolworths wow turned a corner?
CBA had experienced strong and consistent share price gains over a number of decades and has been a very popular stock for that very reason.
Below you can see that CBA has joined a great run from the $5.80 a share range back in 1992 to the more recent highs achieved in March 2015 of just over $96 a share.
More recently CBA has been struggling to reach new highs in its share price. Since touching the $96 level last year the stock has been in a downtrend and bouncing off the $70 a share range to form a strong support level.
Below on the weekly chart you can see the level marked with a black line labelled - $70 strong support level, has so far not been breached, as CBA is currently trading just under the $72 a share level today.
If CBA was to break the $70 support level the next support area would be around the $64 a share range shown below with the black line labelled - $64 next level of support.
Zooming in on the stock you can clearly see since October last year that CBA has been bouncing off the $70 a share level a number of times and is close to approaching the $70 level for the 4th time in 12 months.
CBA just recently reported its earnings last month and based on the market's response sending the share price from around $78 a share when they announced their profit result to just under the $72 a share today the market believes the profit results were underwhelming for the largest bank and company in Australia.
Disclaimer: This post was for educational purposes only and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide those services.
Via Social Icons
Crush The Market Follows:
- Peter Schiff
- Bert Dohmen
- Steve Keen
- Rick Santelli @ CNBC
- Robert Kiyosaki
- Daily Reckoning
I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.