Notes From The Field Sovereign Man.com
What To Do When Everything’s A Bubble
September 29, 2016 Santiago, Chile
Yesterday we talked about one small market in the US… but in fact there are dozens of cities across the world where property prices entering (or already in) a bubble.
San Francisco. Amsterdam. Stockholm.
Vancouver is infamous for its astonishing real estate bubble, which the government has tried to slow by slapping a nasty transfer tax on certain property transactions.
In London, prices are 15% higher than the previous real estate market peak in 2007. Yet income levels are 10% lower.
It’s the same in Hong Kong, Frankfurt, and a number of other major cities-- real estate prices have surpassed their all-time highs, yet income growth is flat (or negative).
People in Denmark are particularly troubled-- Danish home prices are well above their peak levels from 2006.
As a result, Danes have had to borrow extraordinary amounts of money in order to survive.
At more than three times disposable income, Danish household debt has set a new record among OECD nations.
Australia and New Zealand are experiencing a similar story.
The “average” home in Auckland now costs NZD $1 million (roughly USD $725,000), and household debt has soared to a record 163% of income.
In Australia, where home prices are also frothy, household debt is even worse at over 180% of income.
Then there’s China, where total debt has ballooned by 465% over the past decade.
China’s real estate market has grown become so ridiculous that a new project in the city of Shenzhen launched over the weekend selling tiny “pigeon lofts” of roughly 65 square feet for about $132,000.
The building sold out in single day.
Of course, it’s not just real estate. Debt itself is in a major bubble, worldwide.
Overall debt across the world has exploded, with more than $5 trillion of new debt issued in the first nine months of 2016 alone, putting this year on track to beat the previous record set in 2006.
Issuance of corporate debt this year has already passed its previous record high.
In the US, student debt and credit card debt are at record highs.
And many governments around the world, from Japan to Italy to South Korea to the United States, are surpassing all-time highs in their public debt levels.
Even in ‘safe’ countries like Canada, where national government debt is still low, both household debt and provincial government debt are at record highs.
Yet despite their shaky balance sheets, government bond prices are at all-time highs, and interest rates are at record lows (even below zero in some countries).
Investors are basically paying out the nose to loan money to bankrupt governments.
In addition, balance sheets at the world’s six major central banks (Federal Reserve, European Central Bank, Bank of Japan, People’s Bank of China, Swiss National Bank, and Bank of England) have hit record highs.
And commercial banks in the US have defied the “too big to fail” warnings and expanded their balance sheets to an all-time high that’s 46% higher than the 2008 pre-crisis level.
Many major stock markets are also showing signs of a bubble.
In the US, stock market valuations are right back to their 2007 levels, the previous all-time high prior to 2008’s spectacular crash.
And major stock indexes are at or near their all-time highs at a time when corporate profits have been falling for at least four straight quarters.
None of this makes any sense.
It’s clear that central banks have conjured trillions of dollars out of thin air, flooding the world with money and record low interest rates.
This money has fueled asset price booms in nearly every asset class and major market on the planet.
And devoid of any real supply and demand fundamentals, those asset price booms generally turn into dangerous bubbles.
No one can predict with any certainty when (or even how) this madness will end.
We just know that it will end, as has been the fate of all booms and bubbles throughout history.
Legendary hedge fund manager Julian Robertson recently said in an interview that this global bubble created by central banks “will be pricked, and we will all be hurt by it.”
I totally disagree.
That’s the wonderful thing about being a human being.
We have free will.
We have the power to educate and exercise that wonderful organ of soft nervous tissue called a brain, and use it to solve problems... like making sure we’re not victims of this bubble.
I’m not talking about trying to predict the future.
Or selling everything, hiding in a bunker, and missing out on all the wonderful opportunities that exist.
I’m talking about being smart.
Rational, thinking people take steps to understand the substantial risks that exist.
That’s the cornerstone of any good plan. Consider the downside first so that whatever you do makes sense no matter what happens (or doesn’t happen) next.
As an example, many of our premium members are invested in a special program that generates 12% returns paid quarterly, backed by assets that are worth more than 3x their investment capital.
In other words, if things go well, the investors achieve a safe 12% return.
If the deal goes south, there is AMPLE collateral to ensure that they don’t lose a penny, and that collateral is already under the investors’ legal control.
Another example-- some colleagues and I are working on a deal right now to take over a large foreign company at a steep 70% discount to its net asset value.
This is a really safe bet. Even if the asset prices fall, I have a tremendous margin of safety to ensure I don’t lose.
And if the asset prices remain stable, there’s a 70% built-in gain right from the beginning.
These types of opportunities are out there. They just take a little bit more work to find them.
Until tomorrow, Simon Black Founder, SovereignMan.com