Juggling Dynamite

Another day another urgent warning on climate catastrophe, this time from the UN, see World must triple efforts or face catastrophic climate change:

“New taxes on fossil fuels, investment in clean technology and much stronger government policies to bring down emissions are likely to be necessary. Governments must also stop subsidising fossil fuels, directly and indirectly, the UN said.

Gunnar Luderer, one of the authors of the UN report and senior scientist at the Potsdam Institute for Climate Impact Research in Germany, said: “There is still a tremendous gap between words and deeds, between the targets agreed by governments and the measures to achieve these goals.

“Only a rapid turnaround here can help. Emissions must be reduced by a quarter by 2030 [to keep warming to no more than 2C (3.6F) above pre-industrial levels] and for 1.5C emissions would have to be halved.”

Business–as–usual is the road to economic ruin.  Meanwhile a growing wave of lawsuits for damages caused will continue to plague the companies, leaders and individuals who perpetrate and enable the status quo.  Who of us is making active steps and daily choices now to lead the change needed?

We have been noting all year, that central banks were unlikely to hike their policy rates as hoped because economic weakness in the highly indebted global economy would cause them to pause, and then return to another round of accommodative experiments.

As I wrote here last week in Nearing the Pause that Won’t Refresh? every business cycle central banks optimistically hike rates with the stated goal of slowing the economy enough to prevent it from overheating and not so much as to trigger a recession.

And even though they have failed in this goal 12 of the last 13 tightening cycles, with a recession and bear market following all but one in the mid-1990s, hope springs eternal.  This chart shows the rate-hiking pause that preceded the last two recessions in 2001 and 2008 (grey bars).

It is typical for stocks to respond to pause news with initial jubilation, even while government treasuries are bid, and oil makes a 2018 low today. Only the latter two are admitting the vector of growth here. In a co-dependent dance, the more stocks rally at this point, the more likely the Fed will see room to hike further and therein lies the crimp of debt burdens amid falling cash flows.

After the initial surge of exuberance comes a revelation that central banks are eyeing a pause because profit margins are shrinking and the economy and market cycle have already rolled over.  If history holds, next comes a reality phase, when the cash crunch intensifies among highly levered participants, and asset liquidation resumes with full vigour.

Home prices are precarious to a deflating debt cycle in the US, Canada, Austrailia, New Zealand, the UK, Hong Kong, Sweden, and…well pretty much everywhere that humans have used excessive debt to drive up realty prices far beyond income growth over the past decade.  See:  The U.S Housing Boom is Coming to an End, Starting in Dallas for some good stats and charts.

We have to live somewhere.  Homes that one can carry for the same or less than the price of rent can be great foundational assets to have.  But the goal should always be to get it paid for as soon as possible and to keep other carrying costs well below our means.

A paid for home or office with income generating units within it that help cover the owner’s carrying costs, even create net cash flow–even better.  But using debt to acquire real estate that makes us cash poor or cash-flow negative is generally a bad financial decision that usually ends in trauma.  To prosper from bursting asset bubbles, we need to have low or no leverage personally, with liquid cash and our buy list, and then patiently wait for prices to go on clearance sale.  They always do in the end.

As we’ve been tracking here at PeakProsperity.com, the housing market is starting to look quite ill. After the central bank-driven Grand Reflation following the Great Financial Crisis, home prices are now beginning to nose over from their new bubble-highs. Has the Housing Bust 2.0 begun? If so, how bad could things get? And what steps should those looking to pick up values at much lower prices in the future be taking?

This week we talk with citizen journalist Ben Jones, property manager and publisher of TheHousingBubbleBlog — where he tracks the latest headlines and developments in the housing market. And given the stream of data Ben sees every day, he’s extremely pessimistic on home prices in most major markets worldwide. Here is a direct video link.