THE #FUTURE #OUTLOOKS - KEY AREAS OF #CONCERN AND #RISK

 

Economic and Markets 2023 Outlook

WARNING 

What Worked for the Past Decades Will Not For The Next

WHAT'S COMING - GLOBAL RECESSION? DEPRESSION? COLLAPSE? 

The era of easy money is over.

Russia’s invasion of Ukraine on February 24, 2022 immediately reversed a decades-long push for globalization as NATO pushed its pledged boundaries.

Rampant inflation proved more structural than transitory as record stimulus led to inflation. This is now causing global central banks to pursue aggressive interest rate increases to tighten monetary policy as they attempt to reign in runaway prices. Good luck.

You can’t sell a NFT picture of an ape or a rock for $1M anymore.

Crypto seemed to learn nothing from the Lehman collapse, while Sam Bankerman-Fried (FTX) seems to have learned everything from the late Bernie Madoff.

Buffett took Woods out to the…Woodshed.

Value investing is cool again, and consensus looks to play defense in the first half of 2023.

WHERE IS BUFFET INVESTING?

In the months ahead our BLOG POSTS are going to walk through what we think are the most important concerns for 2023 and beyond:

• Cash Flow Matters Not Earnings Multiples

• 
  

• Defensive vs. Cyclical Growth Asset Classes

• Energy, Materials, Minerals, Arable Land and 

• Other Key Resource Declines

• Beware of Crypto Currency and Blockchain Scams or the “Next New AI Thing”

• Collapsing National Economies and Currencies Events 

• 
  

Nature Bats Last - Climate, 2050 Limits to Growth, Extreme Overpopulation Exponentials - Foreshadow End Times?

The New Arena

For sure, it’s now all about rates and what their knock-on effects are. In 2022, the impact that rates had was most heavily felt in financial markets.

For equities (e.g. NASDAQ, et al) - it was the effect of a total multiple collapse amongst the growth names that saw the unprofitable tech basket wipe 60-90% off their values. Taking a basket of high-growth software companies, they started the year off trading at an average of 35x EV/Revenue and now trade at 7x. That is a massive collapse of confidence in growth.

In the fixed-income market - over the last decade, we were in an environment of “There is No Alternative”  and now we are in a market where “There are Many Alternatives”.  As rates increased, bond prices got crushed to the point where they put up the second worst year ever on record, (you have to go back to the Great Depression to get #1)

However, you can now find yield everywhere across credit and bond markets instead of having to fish into the nefarious barrel of the red-hot alternatives of scam and criminal markets. As more capital crowds around fixed income markets, lighter volume in equities and crypto hoaxes will cause higher volatility making for a bumpy ride this year.

Of course, rates do not exist in a vacuum and are a global central bank tool used to navigate exogenous factors, but it helps us frame how the reactive policies dictate our investment profiles and keeping in mind that above all else: 

Nature Bats Last and thus humanity cannot defeat the physical outcomes of Exponential Mathematics.

Cash Flow Matters

A lot of ETF and factor people will proclaim that this was the year of value investing and that value investing is back. What they’re really trying to say is that operating margins and cash flow matter, and we couldn’t agree more.

Or else...

2023 BRINGS MOTHER OF ALL COLLAPSES

Executive Committee

Woodgreen Tenants' Association

January 1, 2023

#TORONTO SUPER #REALESTATE #BUBBLE HEADING FOR MASSIVE #COLLAPSE

 

Toronto Is The Biggest Real Estate Bubble In The World, Vancouver 6th: UBS

A Swiss mega bank is warning the global credit bubble has produced a global real estate bubble. UBS published its 2022 Global Real Estate Bubble Index this week, and Toronto took the top spot. Vancouver remains in the Top 10, with the bank noting all of Canada is generally frothy. The recent price growth is attributed by a rapid expansion in credit, and that won’t last. As the economy slows, the last pillar holding up the market is starting to weaken.

Global Real Estate Prices Are Bubbly, Especially In Credit Bubbles

Global real estate prices are growing at one of the fastest rates in history. UBS analysts found prices in the 25 markets tracked for bubble risk have increased an average of 10% over the past year. It was the strongest increase since 2007, during the last global housing bubble. 

An accompanying surge in mortgage credit makes this an even larger concern. It’s the second year it was observed in the cities they track, occurring in virtually all markets. Soaring credit growth is typical of a real estate bubble. 

“The lending boom was conspicuously strong in the Middle East, the US, Canada, and Australia,” said UBS. “Since the pandemic we observe an increase in aggregate household debt relative to economic output in many of the analyzed economies.” 

EXPECT WORST HOUSING CRASH EVER - BANK'S AT RISK

Global Real Estate Prices Are Falling, Last Pillar of Support Is Weak

UBS explicitly mentions they don’t state whether or not a correction is coming, but they did highlight a concern. As interest rates climb, the economy slows, and home sales fall — there’s only one thing propping up the market, and that’s labor. 

It doesn’t matter which country you’re looking at, but global labor is suddenly short right across the world. “The robust labor market therefore remains the last pillar of support for the owner-occupied housing market in most cities,” wrote the bank.  

They add, “With a deterioration of economic conditions, this too is at risk of faltering. Indeed, we are witnessing the global owner-occupied housing boom finally under pressure, and in a majority of the highly-valued cities, significant price correction” 

NO JOKE: BUT POSSIBLY A THOUSND TIMES WORSE THAN 2008

TORONTO AND VANCOUVER POSITIONED TO LEAD HUGE VALUATION CRASH

Toronto and Vancouver Real Estate Are Two of The Biggest Bubbles In The World

The Canadian real estate bubble dominated the list, with two cities in the top 10 —  only matched by Germany. Toronto pushed higher, to take the top spot of the world’s largest real estate bubble. Vancouver held on to sixth place, where it was found in last year’s report. 

The bank warns the shortage narrative may have applied in the past, but this isn’t quite the case now. “The housing boom has become more of a countrywide phenomenon and is therefore hardly driven by a shortage of construction,” he said. 

BMO recently made a similar assessment in an interview with us. The bank’s senior economist said strong fundamentals supported the market, until the recent low rate boom hit. Home prices had surged far in excess of any fundamental support, and the bank now expects a significant correction to balance this excess.

BUFFET WARNS THIS WILL BE WORSE THAN GREAT DEPRESSION

PLEASE GET PREPARED

#ECONOMIST - #GLOBAL #HOUSE PRICE #SLUMP TO AFFECT EVERYONE

              

              A Global House-Price Slump Is Coming

It won’t blow up the financial system, but it will be scary

Over the past decade owning a house has meant easy money. Prices rose reliably for years and then went bizarrely ballistic in the pandemic. Yet today if your wealth is tied up in bricks and mortar it is time to get nervous. House prices are now falling in nine rich economies. The drops in America are small so far, but in the wildest markets they are already dramatic. In condo-crazed Canada homes cost 9% less than they did in February. As inflation and recession stalk the world a deepening correction is likely—even estate agents are gloomy. Although this will not detonate global banks as in 2007-09, it will intensify the downturn, leave a cohort of people with wrecked finances and start a political storm.

The cause of the crunch is soaring interest rates: in America prospective buyers have been watching, horrified, as the 30-year mortgage rate has hit 6.92%, over twice the level of a year ago and the highest since April 2002. The pandemic mini-bubble was fuelled by rate cuts, stimulus cash and a hunt for more suburban space. Now most of that is going into reverse. Take, for example, someone who a year ago could afford to put $1,800 a month towards a 30-year mortgage. Back then they could have borrowed $420,000. Today the payment is enough for a loan of $280,000: 33% less. From Stockholm to Sydney the buying power of borrowers is collapsing. That makes it harder for new buyers to afford homes, depressing demand, and can squeeze the finances of existing owners who, if they are unlucky, may be forced to sell.

MONTHLY HOUSE PAYMENTS EXPLODE

The good news is that falling house prices will not cause an epic financial bust in America as they did 15 years ago. The country has fewer risky loans and better-capitalised banks which have not binged on dodgy subprime securities. Uncle Sam now underwrites or securitises two-thirds of new mortgages. The big losers will be taxpayers. Through state insurance schemes they bear the risk of defaults. As rates rise they are exposed to losses via the Federal Reserve, which owns one-quarter of mortgage-backed securities.

NOT SO BAD???

Some other places, such as South Korea and the Nordic countries, have seen scarier accelerations in borrowing, with household debt of around 100% of gdp. They could face destabilising losses at their banks or shadow financial firms: Sweden’s central-bank boss has likened this to “sitting on top of a volcano”. But the world’s worst housing-related financial crisis will still be confined to China, whose problems—vast speculative excess, mortgage strikes, people who have pre-paid for flats which have not been built—are, mercifully, contained within its borders.

WILL THE CRASH SPREAD BEYOND UK?

Even without a synchronised global banking crash, though, the housing downturn will be grim. First, because gummed-up property markets are a drag on the jobs market. As rates rise and prices gradually adjust, the uncertainty makes people hesitant about moving. Sales of existing homes in America dropped by 20% in August year on year, and Zillow, a housing firm, reports 13% fewer new listings than the seasonal norm. In Canada sales volumes could drop by 40% this year. When people cannot move, it saps labour markets of dynamism, a big worry when companies are trying to adapt to worker shortages and the energy crisis. And when prices do plunge, homeowners can find their homes are worth less than their mortgages, making it even harder to up sticks—a problem that afflicted many economies after the global financial crisis.

MUNGER SAYS IT WILL WIPE OUT GENERATION

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