Juggling Dynamite

Extreme monetary accommodation and share buybacks have extended the last three economic expansion cycles since 1991, but magnified savings and investment deficits through the economy at the same time.  For one important example see WSJ:  Long Bull Market has failed to fix Public Pensions.

Pension liabilities (in yellow below) have compounded faster than assets (in blue) over the last 20 years, while contributing workers have stagnated and the number of retirees looking to withdraw has doubled.

At the same time, individuals have fallen further and further behind in their saving goals with each bear market, even as they move closer to retirement.  The obvious and little acknowledged reason that boom/bust cycles are so devastating to savings was explained last week by Maine Public Employees Retirement System executive director Sandy Matheson:

“The first thing you have to do is make up what you lost, and it takes years. And then you have to make up what you didn’t earn on what you didn’t have. It’s a pretty steep climb.”

The best course is for individuals to proactively control and limit risk exposure before loss cycles hit so that we don’t lose money and have liquid cash to buy investment assets once they retrace to good value.  At that point income yields are two and three times higher than those collected near cycle highs, and we don’t waste years just trying to make back losses.

Bleakley Advisory Group’s Peter Boockvar and CNBC’s Rick Santelli discuss monetary policy and economic growth. Here is a direct video link.

Low-interest rates, lax-lending and speculative fever, drove a boom in property demand, size and opulence over the past decade in most of the world’s major cities.  Now home prices are unaffordable for most and debt is maxed out everywhere, just as aging owners are looking to cash out and lower expenditures en masse.  The predictable result is a massive supply of expensive properties with few able and willing buyers, and this is having similar effects everywhere.

A significant drop in prices back to more affordable levels will be part of the solution, but even then the scale, maintenance, taxes and annual fees on many properties will continue to make them unappealing to a more frugal population focused on expense and debt-reduction as well as higher personal saving rates.  This will continue to put pressure on industries, companies and economies that are today highly-levered on the space.  See Stockholm’s high-end apartment prices struggling under sinking prices and demand:

The troubles are also raising warning flags for the broader economy. The booming housing market has been a key component of the fast growth in recent years, but is now emerging as one of its greatest risk. Some economists see construction dropping 30 percent from 2017 to the end of this year, taking a significant bite out of economic growth…

Michael Grahn, chief economist in Stockholm at Danske Bank A/S, predicts home prices have further to fall, which will kill more projects and may possible mean the end of some of the smaller developers.

“Producers have been building too expensive homes during a number of years when people were willing to pay no matter what,” he said. “That time is over, they will struggle to sell those expensive homes.”

Meanwhile luxury homes in Greenwich, Connecticut are repricing amid similar dynamics, see  Wealthy Greenwich Home Sellers Give in to Market Realities:

The median price for a home in Greenwich dropped by 16.7% last year to $1.5 million in the fourth quarter of 2018, according to a recent report by brokerage Douglas Elliman. On the luxury end of the market, characterized by the top 10% of sales, prices dropped by 18.8%. Mr. Miller said that trend continued into the first quarter of 2019, estimating that the median price was down by more than 25%.

The average time a luxury home sits on the market in Greenwich is 357 days from its most recent price adjustment, Mr. Miller said. The only segment of the market performing well appears to be smaller, entry-level homes close to the train station, which are being snapped up by a new generation of buyers. The lowest priced condos currently on the market in that area start at around $330,000, according to Zillow.

In some cases, re-purposing will be needed to convert inefficient single-use properties into multi-family/multi-purpose.  Necessity will be the mother of invention, as usual, and the restructuring process is likely to continue over the next decade, if not longer.