PRICED OUT OR PRICED IN?
Are you worried about being PRICED OUT of real estate because interest rates are going to zoom?
Or are you anxious about being PRICED IN because the commodity bust is widening?
A solution to these stressful thoughts is to move more to cash.
If rates do zoom you will be able to move cash into higher rates of return or if the asset value bust continues, you will be able to buy more value.
The charts above show the ongoing DEFLATION in consumption prices and wage earnings. The top panel is the MIT Billion Prices Project which tracks online in real time the high-frequency price data, as well as the US inflation index (CPI). The lower panel is the U.S. FRED chart of Y/Y total private average hourly earnings of all employees with the data plotted year over year to gauge the momentum. Both series are clearly down since the 2009 Pit of Gloom.
Without wage inflation, price inflation evaporates with every actor's change in sentiment from bull to bear.
Gallup Poll January 12, 2015
45% (U.S.) say it's a good time to find a quality job (the highest since 2007 prior to the bust and the Pit of Gloom)
The Low point on this measure was 8% in 2009 (after the pit of Gloom) and in 2011 (after the top in Commodities)
Ukulele Orchestra - Should I Stay Or Should I Go
We wait for the November real estate data to come in without much expectation that there will be major changes in seasonal price or volume levels until the market in real estate has had another month or so of looking at global sell-offs in housing related commodities.
Global price dumps are breaking down more supports and next up into the spotlight could be the high yield market in energy bonds. The chart on the left is from Barclays via alliancebernstein.com.
Notice on the chart mashup at the top of this post that steel looks to be a better bet than wood for building that next hovel. As the video below claims, a 20% construction saving can be had using steel prefab components on site.
22 Shipping Container Buildings
Check out this photo gallery of steel container buildings.
The 2009 Pit of Gloom looks like the beginning of a global shipping bear and with the plunge, steel container prices are falling as well.
"The best tar-sands companies need to get $50 per barrel for their oil to break even. The rest need between $50 and $90 per barrel. Today, a barrel of bitumen sells for just $56."
November 10, 2014 Quote from Matt Badiali, editor of S&A Resource Report
"Investors in Canadian oil sands are at a heightened risk of companies wasting $271 billion of capital on projects in the next decade that need high oil prices of more than $95 a barrel to give a decent return.", the Carbon Tracker Initiative (CTI) revealed today."
November 4, 2014 Quote from Carbon Tracker Initiative
THE TRUE COST OF OIL
Garth Lenz, November 2011 TEDx Victoria BC
Lest we forget—lest we forget!
Rudyard Kipling 1897
North Americans are consuming more than they produce.
I was interviewed on BNN yesterday, and the last thing I said was that if Canadian real estate investors are betting on nominal inflation in housing prices in Calgary - it is a pretty good bet - because Alberta has very high (22% above national average) employment earnings that have been rising at 5% per year since the March 2009 Pit of Gloom compared to Ontario earnings rising only 2% per year during the same period. After I got home from the studio I began to think about oil, the energy sector and the boom & bust cycles of Alberta oil. What could disrupt the boom?
Always provocative is Stephen Colbert and his guest last night was Elon Musk (Youtube not available in Canada, but here is Elon unveiling the New Version of the All-Wheel-Drive Tesla Model S with dual drive and auto pilot: Video From Bloomberg TV Oct 10, 2014).
The disrupters are innovation (Musk etal), a rising supply of energy (U.S. fracking & China's solar panel ramp up) and the strengthening U.S. Dollar. If you are making a leveraged bet on continuing price rises in Calgary housing, it would be prudent to match your amortization to your wage earning contract. A sudden shift down in tar sand grade demand would force the weak hands to sell their real estate. The collapse in the BDI is due to the real price of oil dropping, an over supply in vessels, a strengthening of the U.S. Dollar, a global trade slowdown and disruption via innovation as an old generation gets replaced with the new.
1980 Oil peaked at US$35 per barrel ($100 per barrel today) Source
1986 Oil dropped from US$27 to below $10 ($58 to $22 today)
1986 Average U.S. Inflation was 1.9% Source
2014 Average U.S. Inflation is 1.7% Source
1.00 2014 US Dollar = 0.54 1986 US Dollars (using GDP Defaltor)
1.00 2014 US Dollar = 0.47 1986 US Dollars (using CPI Defaltor)
US$ Index peaked at 164.72 in February of 1985 Source
"Hedge Fund guys are the new Japanese."
Old time realtors who worked through the flat market of the 1970's and the 1980's bust in Canada will remember offers made on over priced listings that included some cash, some financing and lots of jewelry, boats, cars and overvalued art. It's what happens when over leveraged investors realize that a declining asset price without an income stream would be better traded for over priced real estate.
The chart above shows the share price of Sotheby's Auction business since the later 1980's. Five peaks have been set and the last three since the 2008 blowout have been on a trend of lower highs. In the pit of gloom of 2009, the BDI share price hit the 2003 and 1988 lows.
The chart captions on the 5 peaks refer to the 2011 New York Magazine article by Marc Spiegler; "Five Theories On Why the Art Market Can't Crash and why it will anyway." In brief Marc underlines the bull argument for investment in art:
1) The Expanded Art World
At the time of the NY Magazine article (May 2011), BDI was in an early sell-off phase and went on to become a 50% art lesson.
The chart above shows Sotheby (BID) and its anagram BDI (The Baltic Dry Index) heading south as the Shanghai Composite Index (SSEC) collapses into 2006 and 2001 lows.
The reversal is underway even as headlines trumpet new highs on selected pieces of art.
"Christie's racks up $745m in one night (a record) and the bubble keeps inflating: This week's mega-auctions are once again reaching obscenely high prices, with a Barnett Newman selling for $84.2m and a Bacon triptych close to that. Why is there no sign of a crash?" Jason Farago, May 14, 2014 TheGuardian.com
I think he means "Hedge Fund guys are the new Japanese."
An observation from February 2014 on the Vancouver Gallery scene by artist Win Seaton:
Many of these properties (Art Galleries along Granville St) have been purchased by offshore owners and as a result the average gallery space on the street is more than $10,000 a month. This increase combined with the decline in art sales makes it is easy to see why the migration (of Galleries) away from the area. Of course a few of the major galleries remain run by the same owners, like Heffel Fine Art Auction House – the key word here being ‘auction’. Along with ownership changes of these properties, the market has changed to reflect the demands of offshore buyers with deep pockets.
The auction is replacing the gallery as an expedient method to monetize art. As Win points out "Rental fees for Canadian art is a tax deductible business expense and the purchase of Canadian art can be a depreciable asset."
Clips from the movie "Exit Through The Gift Shop"
The Asian Miracle is not going to be canonized this year.
The chart mashup shows that commodity returns can peak during war and the rumors of war.
Since the Arab Spring, the Tiger Mom has become Mommie Dearest.
"War" by Edwin Starr (Original Video - 1969)
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'