Where are we in the real estate cycle?

Monday, 9 April 2018
Singapore
By Phil Anderson

  • Where we’ve been
  • What to look for next
  • So it’s back to the US president

US President Donald Trump met his first wife in 1977.

This tells us a lot about where the real estate cycle is going next. I’ll explain how later…

But to work out where we are — and where we’re headed — we have to work out first where we’ve been.  

Here’s the real estate clock. It’s got the time frames I think are applicable. (They were put there more than a decade ago I might add. It’s unfolded in a ‘timely’ manner so far.)

Readers of Cycles Trends & Forecasts will have seen it before, as well as my full analysis of it, and how it’s playing out this cycle. Things have gone, well, like clockwork.



chart image

Source: Cycles, Trends and Forecasts
Click to enlarge


The clock was originally for the US real estate market. I wasn’t the first to see this pattern and clear repetition. Homer Hoyt and Roy Wenzlick both observed it in the 1930s. It was then described by Fred Harrison in the 1980s and Fred Foldvary in the 1990s.

I just combined it with the stock market information and assembled it into a very handy ‘clock’.

Before we delve in further, let’s take a look at the markets…

Markets

On Friday, the Dow Jones Industrial Average closed down 572.46 points, or 2.34%.

The S&P 500 lost 58.37 points, or 2.19%.

In Europe, the Euro Stoxx 50 index closed down 21.85 points, for a 0.64% loss. Meanwhile, the FTSE 100 was down 0.22%, and Germany’s DAX index fell 0.52%.

In Asian markets, Japan’s Nikkei 225 index is up 167.32 points, or 0.78%. China’s CSI 300 is up 0.15%.

In Australia, the S&P/ASX 200 is up only 18.40 points, or 0.32%.

On the commodities market, West Texas Intermediate crude oil is US$62.32 per barrel. Brent crude is US$67.40 per barrel.

Gold is trading for US$1,333.15 per troy ounce. Silver is US$16.49 per troy ounce.

The Aussie dollar is worth 77 US cents.

Bitcoin is US$7,129

Where we’ve been

It’s now a documented fact that after 2010 in the US, rent prices rose.

That soon allowed a recovery in the price of established buildings.

This helped make it more profitable to build. Which in turn brought on more construction. Then banks recovered. 

It’s not hard to envision the dissolution by President Trump of Obama-era banking rules helping to expand the US banking empire again and eventually expanding credit…

And so here we are, at the stage of credit growth, around 9 o’clock on your real estate clock guide.

Akhil Patel, my colleague over at Cycles Trends and Forecasts UK, shows it this way.



chart image

Source: Ascendant strategy and Investments
Click to enlarge


The new Federal Reserve chairman, Jerome Powell, got a grilling from Congress on 27 February in his first Congressional testimony.

He remained well aware of who gave him the job though, in my humble opinion.

The US economy ‘remains strong,’ he said. When asked about that strength, he replied Some of the headwinds the US economy faced in previous years have turned into tailwinds.’ He added that his ‘personal outlook for the economy has strengthened since December.

And when asked if the tax cuts had led to wage rises Powell said it was ‘very hard to trace through’ the effects of tax policy.

Asked how much of the tax cuts would go to share buybacks and dividends as against onetime bonuses and raises, he replied ‘We don’t have estimates of that kind of thing.

Bulls***.

Watch carefully the lemons you’re being sold here. I’ll just say that I’d love to have been a fly on the wall when President Trump interviewed him for the job back in 2017. 

Powell deflected all politically charged questions about the US’ debts, the impact of Donald Trump’s recently announced $1.5 trillion tax cuts would have on those debts, and income inequality.

History tells you that central bankers never ever, never ever, tell you what you need to know at key inflection points in the cycle.

This isn’t hard is it? It’s not rocket science.

What to look for next

The most important economic indicator to watch going forward is the Yield Curve.

Here’s how it looks when you compare the 10-year treasury yield against the two-year. In this case we’re using US interest rate levels.



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Source: Business Times’ column ‘Chart Point’, 4 December 2017
Click to enlarge


This isn’t rocket science either.

Banks borrow short (taking deposits off you for which they pay you interest), to lend long (lending back to you if you want a loan or mortgage — at a higher rate and for a longer period of time).

It is better for banks that ‘the curve’ stays positive. The wider the better in fact. Again, if you don’t follow this, you can find out more in Cycles Trends and Forecasts, here. It’s important.

If the shorter end of the interest rate curve — the two-year rate — rises above the longer end of the curve — the 10-year rate — then we have what is called a yield curve ‘inversion’.

In the chart above, that’s when the line goes below zero.

History shows that when this happens, an economic downturn is not far away. You can even ‘time’ it. Again as the above chart ‘roughly’ shows.

Plus, history shows you that as we go further and further into the bullish part of the cycle — as asset prices rise further and further — you’ll start to see behaviour confirming that the peak is approaching.

You just have to read this as to whether we are approaching the mid-cycle, or extreme end of the cycle.

This is your single biggest advantage compared to what everybody else thinks they know.

Confirming behaviour that a peak is near, includes things like:

  • ‘Highest ever’ prices paid for art and/or antiques
  • ‘Largest ever’ IPOs and company floats
  • Megolamanic/messianic behaviour of leaders of the world (they want to rule forever and believe themselves solely fit to do it)
  • Extensive — and large — bidding wars for key assets
  • And of course the world’s ‘tallest’ start to open

All of the above is now in progress. Do the opposite.

You can start building a cash position now. If history repeats (as I believe it will), all the above-listed behaviour will drive the world economy into its 2019 peak, then slowdown.

Rising interest rates bring the above behaviour to a stop. Those involved will not see it coming.

History suggests the extreme approaching for 2019 is mid-cycle.

I am not expecting this slowdown — if indeed it happens — to be serious.

Here’s one of the reasons why:

Too many people are waiting for it.

Canada’s largest alternative asset manager certainly is. He’s even told everyone. His company, Brookfield Asset Management, is currently selling off assets so that it will be ready to pounce in the next down market

They sold about $12 billion in mature assets in 2017. They’re going to sell-off even more for 2018. They have $285 billion under management. They won’t be the only ones.

Continuing for 2018 you should watch what happens with Chinese companies like HNA and Dalian Wanda. And you should watch the current bidding war for British satellite broadcaster SKY. (Comcast wants the SKY assets, so does Disney).

Simply watch and learn. It will place you in good stead for the behaviour that repeats into the real extreme of 2026. (It’s always the same at peaks.)

I showed in my book how the real estate cycle develops and I spent a lot of time dealing with crowd behaviour at impending extremes — both at the top and at the bottom.

For the current cycle then, check this out…

Across middle America, in the towns big and small that voted overwhelmingly for Donald Trump, his most ardent, and financially comfortable, backers are opening stock-market accounts or beefing up existing ones, according to interviews with more than a dozen advisers and brokers.

‘They were spurred on by a stream of presidential tweets crowing about, and taking credit for, the gains throughout 2017.

That was reported by Bloomberg on 6 March. In Trump country, the stock bulls are freaking out their brokers, apparently.

That’s defining behaviour of a stock market peak in the making. All the newbies come in at the top. In fact, it’s what creates a top.

Wall Street professionals will give them all the stock they want…

Then US stock markets will tank. If you know your history, you will have seen this before. If you haven’t, read my book.

We’re getting even more defining behaviour…

General Electric has plans to build what would be the world’s largest offshore wind turbine. It’ll be three times taller than the Statue of Liberty. And almost as tall as the Eiffel Tower.

Ritz-Carlton, Marriott International Inc’s flagship luxury brand, has just unveiled their latest cruise offerings.

Its ships will offer luxuries largely unheard-of on cruise lines: airy, open-flow common areas, intimate restaurants that offer around-the-clock dining, and guest suites with high ceilings and twin bathroom sinks. 

Note how none of this was on offer in 2012. That was the wrong time in the cycle; when no one had any money, or for those that did, they were too frightened to spend it.

Note the psychology going on here. This is the cycle.

Here’s a photo of a house in one of Melbourne’s outer eastern suburbs, Box Hill.



chart image
Source: Phil Anderson
Click to enlarge


Melbourne’s middle class suburbs are full of such places: weatherboard or just plain old run-down fibro cement houses sitting on large blocks of land.

They’re just ripe for development whenever they come up for sale.

Development like this can go on for years in Melbourne — and indeed right around Australia.

So it’s back to the US president

Did you notice the very complicated extra ‘provision’ that was inserted — absolutely last minute — into the tax bill that the US government has now put into law?

The last-minute change will permit real estate businesses to take advantage of a new tax break that’s planned for partnerships, limited liability companies and other so-called ‘pass-through’ businesses.

It combined elements of House and Senate legislation in a new way.

This last-minute provision will significantly benefit the ultra-wealthy real estate investor,’ reported Bloomberg.

And that includes a president who’s been adamant that the tax legislation wouldn’t help him financially.

We started this month’s newsletter with the fact that President Trump met his first wife in 1977.

That was the year when Trump married Ivana Zelnickova, a 28-year-old model from Czechoslovakia.

It’s also the year Eastern Bloc security service records suggest the KGB may have opened a file on one Donald Trump.

There’s nothing sinister in that though. He was, after all, marrying a girl from a communist country…

And it wasn’t easy back then to get such a girl out of such a country. But note the time frame.

Trump’s first visit to Soviet Moscow was in 1987. Is it any wonder he gets a reminder of this, 360 months (a cycle) later, in 2017?

(The top level of the Soviet diplomatic service arranged Trump’s 1987 Moscow visit.)

Trump went back in 2013. 8 and 9 November. A real estate man chasing real estate deals, surrounded by a bevy of beautiful women all aspiring to be crowned Miss Universe.

Timing suggests he’s the right man at the right time for this current real estate cycle.

You might like to count 72 months from 8 November 2013.

And then also count 30 months from his inauguration.

That places summer 2019 (northern hemisphere) as key months to watch for major emotion that may affect markets.

It’s also the months our 2018/19 roadmap (available to all Time Trader subscribers) suggests we watch, going into our likely market peak.

It’s all coming together. Just like the clock suggests it should.

Find out more here.

Phil Anderson,
For Port Phillip Insider