Tag Archives: Federal Reserve

THE NEXT 20 MONTHS TOLD TODAY BY USING SOCIONOMICS

UPDATE July 13, 2019 – The Dow 30 hit 27,300 yesterday and thus entered the target range for a top to be put in place.  At this point the detonator has been activated and the clock is click down….we just can’t see the clock to know exactly what day the top will occur.  It appears that the stock market and gold will top out in the next month or so.  Then they will decline significantly in sync.  That should surprise the masses that believe the stock and gold markets move in opposite directions.  My belief is yesterday was not the final top.  As always, we shall see how this plays out…

The fun part for me is watching the Fake News Media come up with news stories that will be excused for the markets tanking.  The reality is the markets declining will cause the news stories!  I am sure the FNM will blame Trump’s trade wars (which obviously can’t be a reason as the market is at all-time highs after a few years of trade wars), something that Iran does (again we are at new highs after several Iran events recently), and other BS excuses.

UPDATE July 3, 2019 – The Dow 30 closed at an all-time high of 26,966.  A month has gone by since my original post below.  I can now update the range of the current top that is forming to be 27,200 to 28,300.  It is occurring sooner than I expected.  But, that is not an issue as long as the price range is met.  It can be met in a single day or may play out over several more weeks or months.  Once we get into the range, the downside target to look for to confirm that a 20%-25% bear market might be underway is 26,400 or such.  I will be updating this as the waves unfold.  So far, so good….

Most of the bad economic indicators for June have been reported.  Of course, everyone is worried that the economy is headed into a recession.  Based on the first six months being the biggest rally for some indices since 1938 or 1955, the economy should grow faster in the 3rd Quarter and even faster in the 4th Quarter.  The 2nd Quarter GDP growth should be the lowest of the year.

June 9, 2019 – As I mention now and then, I use Socionomics (not to be confused with Socio Economics) to do many things in my life.  All of my investments for the past almost 40 years have been based on this science – granted for the first 20 years it wasn’t an organized concept with that name).

Right now, the long-term picture has become clear.  This is a rarity.  But, when it happens, I take action.  And, I would like to put in writing what it is forecasting thru Inauguration Day 2021 (I don’t recall if a re-elected President has that again or not).

The Dow Jones Industrial Average (Dow 30) is the best reflection of social mood.  The current forecast is for it to move to new all-time highs this Summer or Fall.  The expected range is 27,000-28,000.  Depending on where we stand based on certain indicators in the theory, I will be liquidating all of my stock holdings and sitting on cash thru the forthcoming 20%-25% bear market.

What this upward move over the next 3-6 months is telling us is the public is expecting President Trump to be re-elected and the booming economy to continue.  That should be the mood at the end of the year and into the 1st Quarter of 2020.  Also, this suggests a very strong GDP in the 3rd and 4th Quarters of 2019 and 1st Quarter of 2020.  The growth should be significantly above the very slow rate we will see for the 2nd Quarter of 2019 that ends in 3 weeks (this was forecast by Socionomics when the Dow crumbled into its December 24th low).

Following the top this Summer/Fall, a bear market much larger than the one last Fall should occur.  As noted above, a 20%-25% decline to the 21,000 area on the Dow 30 is expected.  This should occur around the 1st Quarter/Spring of next year.  Obviously, the Presidential campaign will be officially underway at that time.  The mood should have totally changed and the public will now expect Trump to lose in November.  In fact, the Fake News Media, along with even some Republican strategists, will be talking constantly about how the Democrats will hold the House and even take over the Senate for complete control of the government.  Such an event would destroy our economy and the business world will be as pessimistic as it has been in probably 10+ years.

When examining the ‘waves’ that explain social mood, there is always an alternate scenario that is watched.  For the above, both the most likely and the alternate (i.e. less likely) wave patterns forecast the same events to occur.  However, it is at this junction next Spring that the two patterns provide polar opposite forecasts.

Most Likely Scenario – As of today, the expectation is that following a panic low around next Spring, the stock market will begin a large bull move back to all-time highs.  i.e. the Dow 30 should exceed the highs expected this Summer/Fall.  29,000 is an early target.

This bullish move means the public has determined who the likely Democratic Presidential Candidate is going to be and that person has no chance of defeating Trump.  So, for the remainder of 2020 and into early 2021, the stock market goes straight up (not literally) and Trump is re-elected and businesses are bullish on the economy going forward.

Alternate Scenario – Assuming the public thinks the Democratic Presidential Candidate is going to defeat Trump and the Democrats are going to control both parts of Congress, the stock market will be accelerating its downward spiral in Spring 2020 and drop thru the  20,000 level like a hot knife thru butter.  As this is the less likely scenario, I have not tried to determine how deep this bear market will be or how long it will last.  That will be easy to determine next Spring when this critical time juncture is occurring.

So, that is what Socionomics is forecasting for the next 20 or so months.  I am not giving my own opinion of the future.  The public does this for us.  It always has.  As time goes by and the waves unfold, it is possible to get more precise with price and time targets.

Since both scenarios above have the stock market topping this Summer/Fall, it only makes sense to me to get totally out of all stocks.  Whether or not I jump back in next Spring depends on how the waves unfold going into that timeframe.  One scenario (the most likely one) projects about a 35%-40% bull market.  The other scenario will be forecasting probably another 30%-40% bear market from the prices at that time.  Money is to be made either way.  In fact, the same amount of money can be made in either scenario.  I hope to be back here in about 9 months to explain what Socionomics is then projecting.  Do I go long….or do I go short.

I am sure almost no one makes a 2-year forecast of the future in some detail and puts it out in the public domain for all to see if it is accurate….or if they are wrong and a total fool for trying to predict the future..  But, I have spent my life doing this and not doing a bad job at it.  I put my savings and retirement on the line with the forecasts.  If I am wrong, I feel the pain.  If I am right (like I have been since Election Night 2016 re stocks and early 2000’s re gold), then it is very rewarding.

As an aside, I remember moving my wife’s retirement and my retirement to a new brokerage in 2004 when I took a new job.  We were 100% in gold investments.  Talk about ‘all in.’ :)  The new stock broker thought I was insane.  Where’s the diversification?  Gold was around $450.  We had got in below $300 a few years earlier.  By the time I left that job in 2008, gold had hit $1000.  He told me I had done better than anyone he knew.  You have to remember that by the Fall of 2008, Lehman Brothers went under and the stock market and real estate markets were crashing.  But, not gold.

In 2011, gold peaked near $1900.  I had gotten out a bit before the top admittedly.  But, was back in near the $1075 low in 2016.  Although, I think $1450 is the upside target, I just got back out last week as it hit new highs for the year.  I am not in the mood to wait around for the next $100 to the upside, as there is a good chance of a $100-$200 decline before this final top occurs.  I’ll sit and watch.  Can’t go broke sitting on the sidelines:)

Lastly, let me mention the Fed and interest rates.  Socionomics has shown that the Fed ALWAYS follows what the market tells it to do.  The public thinks the Fed raises rates and then the market reacts to it.  No!  That is the kind of junk the Fake News Media feeds people over and over.  Of course, the media is clueless about markets.

Factual data shows that when the Fed decides to raise or lower rates, the market has already made that move.  Right now, the markets are telling the Fed to lower rates 75bp thru the remainder of the year!  You don’t hear anyway talk about that, do you?  Some are calling for the Fed to lower rates (Trump included….like him or not, he reads what the markets are saying and thus knows the Fed should already be lowering rates.  He isn’t bullying them.  He isn’t trying to make some agenda come true.  He knows, like you now do, that the markets have already said the Fed needs to start lowering rates.), but most are just calling for 25bp.  That is how they will likely start.  But, if so, then it will take 3 of those reductions just to finally catch up with the market.

I’ll end it here.  As Paul Harvey would say, now you know the rest of the story…..

 

NEW INTERAGENCY ADVISORY ON EVALUATIONS

March 7, 2016 – For the first time since December, 2010, the Agencies have issued a statement on Evaluations.  I will include the FDIC link below, albeit the Federal Reserve and OCC have similar links.

My feeling is nothing new has been added.  There is a bit more talk about how to use tax assessments – hopefully, this will once again become more common now that The Great Depression II has run most of its course.   Also, they make it clear that market value must be of real property only.  FF&E in apartments and going concern properties must be valued separately, just like in appraisals.

Please pass the link below along to your bank contacts so everyone can stay informed.  Thanks.

https://www.fdic.gov/news/news/fi

nancial/2016/fil16016.html

A GUEST POSTER’S VIEW ON THE ECONOMY

February 1 – Following is my first guest post.  Bruce Cumming, Jr. is the author.  He can be reached at 941.926.0800 or bcumming@hettemasaba.com.

We would like to note that from an academic-business perspective real estate is viewed as a sub-discipline of finance, finance as a sub-discipline of economics and the classical economist such as Adam Smith and David Ricardo referred to their discipline as “political-economy” linking economies with the political mode of a country, state, county, or municipality.  The following is some economic theory and emerging issue that could impact real estate values.

According to the Austrian business cycle theory, central banks (such as the US Federal Reserve System and specifically its Federal Open Markets Committee) can set interest rates too low for too long, which can create an artificial boom and distort the accuracy of data on a trend line basis, often causing what is termed “malinvestment.”  According to an article by Mauldin Economics, based upon a graph of the US 10-Year Treasury Rates going back to 1790, 10-Year Treasury Rates over the long-term averaged just less than 6% and the average over the last 50 years was 6.58%.  The current 10-Year Treasury rate according to the US Department of the Treasury is 2.06%, or about 394 basis points below the 200-plus year average rate and 452 basis points below the 50-plus year average rate.  The Federal Open Markets Committee just increased its rate for the first time since December 16, 2008, on December 17, 2015.  The Federal Funds Rate has been between 0% and 0.25% for 7 years.  The Federal Funds Rate is now between 0.25% and 0.50%.  The US stock market has been in rapid decline so far in January of 2016.

The McKinsey Global Institute’s report, Debt and (Not Much) Deleveraging, dated February 2015, reports that between 2007:Q7 and 2014 worldwide debt have increased from $142 trillion to $199 trillion, an increase of $57 trillion, or 40.14%.  Debt has not been liquidated during the so called Great Recession, but has been increased, thereby potentially distorting asset values.

It should be noted that the Green Street CPPI:  All-Property Index (which was started in December of 1997) was 22.7% higher in December of 2015 than in December of 2007, its previous peak.  Green Street tends to focus on investment grade real estate and is tightly tied to the capital markets.  The Moody’s/RCA CPPI, which focuses on repeat sales of properties greater than $2,500,000 in value, saw its last peak in 2007:Q3 (165) and reached that same level in 2015:Q3 (165).  The trough reported by this index was in 2009:Q4/2010:Q1 (96), so the index has increased 71.88% from trough to peak.

Austrian economists theorize that the artificial monetary boom ends when bank credit expansion finally stops, which is when no further investments can be found which provide adequate returns for speculative, or “Ponzi” borrowers.  The Austrian business cycle theory asserts that the longer the artificial monetary boom goes on, the more speculative and “Ponzi” the borrowing occurs, the more errors and waste committed, the longer and more severe the workout period (e.g., bankruptcies, foreclosures, and short-sales) until equilibrium is achieved through market-based price discovery.

The Austrian business cycle theory is one of the precursors to the modern credit cycle theory, which is emphasized by Post-Keynesian economists at the Bank for International Settlements and by mainstream academic economists such as the late Hyman Minsky (PhD/economics, Harvard).  Post-Keynesian Minsky taught at Brown University and the University of California at Berkeley among others.  Minsky’s financial instability hypothesis is translated to real estate markets by borrower type.

Minsky theorized that a key mechanism that pushes an economy toward a financial crisis is debt accumulation by the private sector.  He identified three types of borrowers:  hedge borrowers, speculative borrowers, and “Ponzi” borrowers.

„      Hedge borrowers:  can pay both interest and principal loan payments from current cash flows (e.g., traditional mortgage).

„      Speculative borrowers: can pay interest only loan payments, but must regularly roll over the principal (e.g., interest-only loan).

„      “Ponzi” borrowers:  cannot pay interest or principal, and depend upon asset price appreciation sufficient to refinance the debt (e.g., negative-amortization loan), only asset price appreciation keeps the “Ponzi” borrower afloat.

If “Ponzi” borrowing is widespread enough during a credit boom when asset prices stop raising rapidly the “Ponzi” borrower can no longer operate profitably (or at all) and once asset prices start to decline the speculative borrower may not be able to roll over their loan principal and could face a technical, if not a real default.  The final financial domino is the hedge borrowers who are unable to find loans despite the apparent soundness of the underlying assets.  The market begins to unravel, that is to say, a “Minsky Moment” occurs.

Former PIMCO managing director Paul McCulley (MBA, Columbia) is credited with coining the phrase, “Minsky Moment,” when referring to the point in any credit cycle, or business cycle when investors begin having cash flow problems due to the spiraling debt incurred in financing speculative assets.  At this point, a major sell off begins because no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in prices driving market clearing asset prices down as well as a sharp drop in market liquidity.  The “Minsky Moment” comes after a long period of prosperity and increasing asset values, which has encouraged increasing amounts of speculation using borrowed money.

Austrian economist Ludwig von Mises (PhD, University of Vienna) who taught at New York University theorized that a financial crisis emerges when consumers seek to reestablish their desired allocation of saving and consumption at the prevailing interest rate.  The ensuing recession or depression is the process by which the economy adjusts to the errors and wastes (malinvestment) of the boom, or bubble.

It remains too early in the current cycle to confirm that a “Minsky Moment” has occupied, or if the current stock market activity is a short-term correction that will rebound in a few weeks, or months.

It should also be noted that during that during the last downturn vacant land decreased in value at a far greater rate than improved properties that could be income generating.  A paired repeat sales analysis study that we conducted indicated that vacant land was declining at a rate of about 1.35% per month (rounded) versus improved sales that were declining at a rate of about 0.75% per month (rounded).  Land was declining in price at an 80% greater rate than improved property.

Generally, entitlements are only worth about what they cost during a normal market and are “usually worthless” during a downturn, such as we recently experienced.

The current macro-level economic activities have not yet impacted real estate values, they may and they may not.  Time will tell…