Thursday, 4 August 2022 — Albert Park

By Catherine Cashmore Editor, The Daily Reckoning Australia

[7 min read]

Dear Reader,

I rocked up at an auction the other week to bid on a property for some overseas home buyers.

It was a nice home — single-fronted Victorian, three-bedroom, two-bathroom, only 6km north of Melbourne’s CBD and surrounded by an abundance of facilities. 

This includes some of Melbourne’s best schools, shopping strips, and a few hundred metres from both train and tram stops.

The agent thought he had a couple of solid bidders on the property — with an expectation around $1.45 million.

But despite a fairly large crowd at the auction — no one but myself put up a hand to bid. 

It ended up passing in, to me, and through negotiation, I secured it below what the owners’ paid in 2019. 

Needless to say, they weren’t too happy.

But with rates forecast to continue to rise in the shorter term, there’s understandably a lot of fear out there. It’s holding people back.

The thing is — if you’re in the market to buy — it couldn’t be a better time.

For the vendors that must sell (and the ones selling this house had committed elsewhere), the market has already bottomed!   

Financially strapped owners will drop as far as they need to today to secure a sale. You just need to be savvy with negotiation and know how to identify a good opportunity.

But forget the price for a moment.

There’s a bigger lesson to glean here.

The value of productive well-located residential land is enduring.

Something Fred Harrison — arguably the world’s most accurate economic forecaster — uncovered when he penned his 2006 publication Ricardo’s Law: House Prices and the Greatest Tax Clawback Scam. 

It’s important you understand this concept because the price gap between richly facilitated locations and poorly facilitated locations, quite literally, determines the length of a person’s lifespan.

Evidence shows that those who monopolise the best locations, secure the difference between a healthy long life or an early death.

For example, if you live in London, surrounded by the best amenities, with housing equity some four times that of the UK’s northern regions, your average lifespan will be around 80 years.

But the further away from London you progress into the poorer northern regions, the worse your chances of a long, healthy life become. 

Life expectancy at birth by UK local authorities:

The same phenomenon has been evidenced by President of the World Medical Association, Michael Marmot.

In the ABC Boyer Lectures in 2016, he pointed out the following:

‘I had been studying health inequalities in Baltimore. In the poor part life expectancy for men was 63 years. In the richest part it was 83 years. A twenty-year gap in one city.  

‘If you live in the richest part of Baltimore and want to see what it is like to live in a place with male life expectancy 63, you could fly to Ethiopia…Or you could travel just a few miles..

‘Life expectancy for men in the poorest part of Baltimore is the same as Ethiopia, two years shorter than the Indian average.’

What I’m trying to emphasise here is that a well-located property will always have someone willing to pay more to secure the site in the bull phases of the property market.

But when everyone is running fearful, there are some golden opportunities to be had.

The market today reminds me of the 2018 downturn.

Lending practices were under the spotlight due to the Banking Royal Commission — with serviceability rates assessed at around 7%.

However, when the market turned in the second half of 2019, it was the sharpest recovery I have ever witnessed. All that competitive advantage disappeared almost overnight.

Land has enduring appeal — time the market right — and you can make substantial wealth. 

We don’t need to limit this concept to residential land either.

Warren Buffett has countered gold bugs over the years with a similar understanding of land’s enduring qualities.

In 2011, he suggested to investors that they put their wealth into the equivalent value of farmland (instead of gold):

‘A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be.

‘Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons).

‘The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond — (2011 annual letter for Berkshire Hathaway shareholders).’

That alone should give you some idea as to why Bill Gates has quietly snatched up more than 242,000 acres of farmland spanning 18 states. (As well as a stake in 25,000 acres of transitional land on the west of Phoenix, Arizona, which will be turned into a new suburb, I might add.)

Just a few weeks ago, he was additionally cleared to purchase 2,100 acres of rural North Dakota farmland.

Gates now has the title of the US’s biggest private-farmland owner. 

And there are many pots in Gates’ investment portfolio.

Including attempts to re-engineer the climate by spraying dust into the atmosphere to block the Sun. (It’s called ‘Sun dimming technology’. You can read about it here.)

And, of course, his desire to wean the population off depending on animals for food with the creation of fake meat and dairy products from plants (soy). (See ‘better than meat’, ‘Impossible Foods’ and ‘lab cultured breast milk’.)

You can come to your own conclusions regarding the agenda behind it.

But the timeless truth remains…

All of his investments depend on the location and resources of quality land!

The lesson?

Monopolise land and its natural resourses — and absent of significant land taxation (as promoted by the economist Henry George) — you monopolise and control the wealth it generates and the people it shelters and feeds.

Sincerely,

Catherine Cashmore,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

‘When someone says, “it’s not about the money”, it’s all about the money.’

Giants Manager, George Young

As we guessed last week, the two legs of American middle-class wealth, income and houses, are buckling. It’s still very early…but both seem to have begun downtrends. These are not isolated phenomena. Instead, they are among the many ‘dots’ that, when connected, look for all the world like Ursa Major…as in, a major bear market.   

Yesterday, we explored the ‘primary trend’. Once underway, it tends to last for decades. You can ignore it; you can fight it; you can deny it. But you can’t stop it.

Stocks were in a primary downtrend from 1966–82. Before that, the primary trend was up, from the bottom of the Great Depression until the mid-‘60s. The most recent bull market primary trend began in August of 1982 and continued until December 2021.    

If a new, bear market primary trend has begun, we’ll see real values for stocks go down for many years. Few baby boomers will ever again see equities so richly priced as they were at the close of 2021. 

Primary trends in the bond market are even longer. Bonds appear to have hit a major top in the summer of 2020, with the yield on the US 10-year bond down to 0.55%. The previous top occurred — get this — back in the late 1940s, 70 years ago.

A relentless trend

Markets move up and down all the time. Day to day…week to week…month to month. Often, there are countertrends that last for years. As we saw yesterday, it took four years of wiggling and waggling after 1980 before the primary trend — towards lower interest rates and higher stock prices — was clearly established. 

But a primary trend is relentless. And now, after four decades of rising stocks and falling interest rates, have we just witnessed the beginning of a new one? Probably. Because it’s about the money. The trend of the last 42 years was sustained by borrowing at lower and lower interest rates…with dramatic ‘saves’ by the Fed whenever a correction threatened. But those rescues are no longer possible.  

Let’s look first at jobs and housing for a minute:

Initial jobless claims have been rising since March and are now at a new high for the year. Shopify, 7-Eleven, Tesla, Vimeo, Rivian, Gopuff, RE/MAX, Redfin, Microsoft, Morgan Stanley — have all announced layoffs.

The job market was never as great as advertised. The index of total hours worked in the US economy is now at 119…exactly where it was in March 2020, which means there has been no growth for the last two years. If there are more jobs, it just means that income is being divided among more workers.

And hourly wages meanwhile just suffered their biggest decline in 15 years — with a 3.9% inflation-adjusted drop.  

Home sales plummet

As for housing, the ‘affordability index’ is back down to levels that haven’t been seen in 14 years. It’s the combination of wages, prices, and mortgage rates that determine how affordable a house is. And after spectacular increases in both prices and mortgage rates, houses are now as unaffordable as they were just before the last housing crisis — in 2007. Once again, the typical family cannot afford the typical house.  

And now, the ‘dots’ — showing a downturn in the real estate market — are coming together. NAHB’s ‘Housing Market Index’ just fell to a two-year low. Builders say they are reducing prices to ‘limit cancellations’.

Builders are becoming reluctant to put up new houses, with Housing Starts at a 14-month low in June (down 6% year-over-year). And new home sales are down 43% from their 2020 high. Existing houses, too, are no longer flying off the lots. Sales are at their lowest levels since June 2020.

Prices are still near record highs, up 40% since 2020. But the most recent reports tell us that they are beginning to sag. The median price of new houses dropped by 12% over the last two months. And it looks like a truce has been declared in the bidding wars. In January, nearly seven out of 10 houses drew competing bids. In June, less than 50% did.

When jobs and housing give way, households need to crack open their piggy banks…borrow…or cut back. The evidence suggests they are doing all of the above. Savings rates are down. Debt is up. And inventories of unsold merchandise are piling up at Walmart. That is what happens in a recession.

But what suggests to us that this is a primary trend, rather than a noisy, short-term feint, is this: for the first time in 30 years, the Fed can’t do anything about it.

Monetary boosters

Since the switch to a pure paper dollar in 1971, the Fed controls the money. And for the first time since Alan Greenspan came to Wall Street’s succour in 1987, the Fed can no longer salve investors’ hurts with easier credit.

After the Crash of ’87, Greenspan cut rates. Not fast enough, according to then-president George HW Bush, who said the sluggish economy cost him the White House. Greenspan wouldn’t make that mistake again.

In the downturn of the early ‘90s, Greenspan got out his machete and hacked off 500 bps (500 basis points = 5%) from the Fed funds rate. Then, by the time the Nasdaq bubble collapsed, he was good at it. Between 2000 and 2002, he lopped off another 550 bps.  

The next correction came on Ben Bernanke’s watch when the mortgage finance crisis hit. Bernanke knew how to play the game too; 525 bps were trimmed in three years. But then, Bernanke went further, with Quantitative Easing…then ‘Operation Twist’. 

And when it was Jerome Powell’s turn, his response to the COVID panic was almost automatic. Rates were cut down to zero. And the federal government used its ‘printing press money’ as though it had been dropped from a helicopter. Stimmies, Payroll Protection, unemployment ‘boosters’ — it was great fun while it lasted.

But then, consumer prices rose…and suddenly, it was a whole new ballgame. The Fed’s key lending rate was already near zero; how could it be cut further? And with inflation edging up towards the double digits, what kind of a fool would dare to cut interest rates now?

That is what we wait to find out. 

Regards,

Bill Bonner,
For The Daily Reckoning Australia