The ACD Method

koolaid · Jul 9, 2016

Maverick74 said:
I've been asked to expand on my theories from above. So here you are. I believe the yield grab is coming from overseas from the over 10 trillion in debt right now that currently has "negative yields". They are buying our treasuries and our dollars and more importantly, they are buying our real estate. We do know this to be true. Money for example is fleeing China very quickly right now and the chinese are the single largest foreign purchaser of US real estate. In the 1990's we saw the same happen with Japan. What is interesting here is that home ownership is at record lows! You heard that right, we have less homeowners now in % terms since WWII. Yet home sales are going up! This is because fewer people are buying more homes and the buyers not living in these homes, they are investors. They are grabbing yield. They are buying Treasuries, and borrowing against those treasuries to get yield from baskets of home purchases. When the debt bubble pops, and it will, sooner or later, the real estate market will drop faster then it did in 2008. The only reason the buyer is long treasuries is to borrow against them to get the rental yield. If treasuries plunge, it will overwhelm the rental yield. They will dump the homes, sell their treasuries and move back into short term cash which will then offer a modest return. A negative feedback loop will ensue. The more treasuries drop, the more real estate drops. The more real estate drops, the more treasuries will drop. The FED will NOT step in to buy treasuries, if anything, they might actually have to begin selling theirs and instead bid up the front end of the curve.

Will houses go to zero? No, of course not, they will trade back to fair value which is the value at which wages at that given point in time sans credit will be able to meet the financing requirements. Currently homes are trading at massive premiums to wages which is why the appreciation has been so overstated on the coasts where incomes are high and almost non-existent in the middle of the country. There is a long way down. Real wages by the way have been dropping for a decade and will continue lower. Sooner or later the mean reversion will happen, it has to. The only reason it hasn't is because of the foreign buyer who is not making their purchase decision based on wages and affordability but rental yields. Why will this be worse then 2008? Because in 2008 the Fed had their entire balance sheet to work with and loaded the boat with MBS purchases. They will not have the same liberty this time around. In fact, the irony of it all is they may actually want rates to go higher at that point.

This does not have to be a bear item for stocks. It will simply depend on where we are at the time in the credit cycle. The debt bubble burst does not have to be bearish and could even be bullish for equities. Although I suspect the shock of it beginning to happen will get an initial bearish response. There will be further fallout though. Higher yields will crush commodities and oil. Most frackers and drillers are holding tons of debt that should be junk but they locked in low rates because even junk now barely goes above 3%. In the 1980's junk fetched 15% to 20%. But these frackers desperately need cheap financing and if rates spike they are done. Game over. Servicing student loans will become challenging as rates skyrocket. We currently have over a trillion dollars in student loan debt and those rates are variable! Another bubble pops. What about gov't debt? We roll that every year. As rates go up, the cost of servicing 18 trillion and counting is going to become prohibitively expensive.

Is there a way out? Of course. At the bottom. As the Roman Empire and all empires know all too well, all good things come to an end. What could make this painful is that the pop in rates will NOT be coming from inflation. Therefore wages might still be declining while the cost of borrowing goes up. This will only accelerate foreclosures. Once the process starts, it cannot be stopped until the bottom. Why were we able to cut the bleeding in 2008? Because it was a credit issue. The FED provided liquidity where there was none. Remember what drove up prices in 2008 was not the Chinese or foreign buyers, but the NINJA loans. Teachers making 35k a year were getting 800k mortgages. That is credit. When the credit came out of the system, so did the prices. This drop will not be a credit issue and that's why the FED will be challenged to do anything about it.

If you look at what's going on in London right now there are some similiar parallels. London property prices are tanking. But not because the economy is doing bad, it's actually pretty strong. It's tanking because many of the high salaried jobs in the CITY might be leaving. That is a "demand" issue, not a credit issue. And prices are plummeting. Remember, the economics of housing prices state that the house is an asset that is valued or derived from the salary of the owner supporting the asset. When salaries drop or leave, the value of the house must go down. If you arbitrarily lower salaries across the board, home prices have to come down eventually. Banks require the salary to get the loan.

Don't dismiss the idea either that housing prices don't overshoot to the downside. They more then likely will. In the long run of course this a good thing. Why? Because it will be very challenging to raise real wages going forward. Something has to give. Either wages HAVE to rise to support current housing prices or housing prices have to fall to a level that can be supported by wages. So in a way, the drop in housing prices will have the same wealth effect as increasing wages especially in the lower middle and lower economic bracket. The govt could never be able to raise minimum wages fast enough to keep pace with skyrocketing rents. So the solution, let housing prices drops and their corresponding rents to meet wages. Ultimately this HAS to happen. We can't tax our way out of this because it's a valuation issue.

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Yes, there is definitely a gap between wages and home prices...but the solution isn't devaluation. The simple truth is that prices in desirable areas will always be in demand. People have to move...and that's what they are doing. Most of these foreign purchases are paid for in cash...and if debt...it is borrowed and denominated in the foreign country. I know a few asian students whose parents are pretty wealthy and send their kids studying abroad here...they encourage their kids to find a suitable partner to get married...and then they begin to slowly transfer their assets over here. This is very true in the northeast...I can't say for the west coast but I can only imagine it being even more true over there. I disagree that foreign purchases are borrowed money in search of alpha or rental income. Most of these families are wealthy in their origin country....they are uncertain of the political and social situations...and are looking to purchase US assets to park their money.

koolaid · Jul 9, 2016

Maverick74 said:
Sooner or later, price reverts to the mean.

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This is uncharted territory...no one knows

koolaid · Jul 9, 2016

Maverick74 said:

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I do believe there is a correction...but that's like saying that there is a correction in equities, in bonds, gold, or any rally or sell off. Of course, there will be a correction. That's not saying much.

Definitely not trying to instigate. I just want to hear your reasoning as well as everyone's and also present the other side. I've read a good chunk of this thread and feel that you're probably one of the most intelligent traders here on ET. Just my 2 cents.

Maverick74 · Jul 9, 2016

koolaid said:
I do believe there is a correction...but that's like saying that there is a correction in equities, in bonds, gold, or any rally or sell off. Of course, there will be a correction. That's not saying much.
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No, no, no......I'm not talking about a correction and I'm not even talking about housing really. We are in the biggest debt bubble in the history of the world. Housing is just the tail on the doq. We are in uncharted territory. Over 10 trillion in negative yielding debt is absolutely unheard of. Nobody is talking correction here....lol.

koolaid · Jul 9, 2016

Maverick74 said:
No, no, no......I'm not talking about a correction and I'm not even talking about housing really. We are in the biggest debt bubble in the history of the world. Housing is just the tail on the doq. We are in uncharted territory. Over 10 trillion in negative yielding debt is absolutely unheard of. Nobody is talking correction here....lol.
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Definitely not trying to instigate. I just want to hear your reasoning as well as everyone's and also present the other side. I've read a good chunk of this thread and feel that you're probably one of the most intelligent traders here on ET. Just my 2 cents.

Maverick74 · Jul 9, 2016

koolaid said:
Yes, there is definitely a gap between wages and home prices...but the solution isn't devaluation. The simple truth is that prices in desirable areas will always be in demand. People have to move...and that's what they are doing. Most of these foreign purchases are paid for in cash...and if debt...it is borrowed and denominated in the foreign country. I know a few asian students whose parents are pretty wealthy and send their kids studying abroad here...they encourage their kids to find a suitable partner to get married...and then they begin to slowly transfer their assets over here. This is very true in the northeast...I can't say for the west coast but I can only imagine it being even more true over there. I disagree that foreign purchases are borrowed money in search of alpha or rental income. Most of these families are wealthy in their origin country....they are uncertain of the political and social situations...and are looking to purchase US assets to park their money.
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I think you are not reading my posts. I'm not talking about foreign individuals. LOL. I'm sorry, I'm not trying to be obtuse with you, you are just not reading anything I've posted.

koolaid · Jul 9, 2016

Maverick74 said:
I think you are not reading my posts. I'm not talking about foreign individuals. LOL. I'm sorry, I'm not trying to be obtuse with you, you are just not reading anything I've posted.
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I am reading it and feel that is what you are driving home. I feel that it's not really accurate. That's just what I got out of that.

Maverick74 · Jul 9, 2016

I agree "individuals" are not buying treasuries and using the collateral for home purchases. I'm talking hedge funds, banks, governments, pensions, etc.

Maverick74 · Jul 9, 2016

The data has been presented. You interpret it as you wish.

endicottsteel · Jul 9, 2016

Maverick74 said:
It's almost unheard of to have Bonds, equities and Gold all rally together as they are completely contradictory. But yet they are. We are in a very dangerous situation here because you need one of these markets to ultimately absorb the money flow from the others when they pop. But if you have 3 asset classes and all three are over valued, where do you go? While stocks are not in bubble territory, they are at the high end of their value range and all the dividend stocks are trading like internet stocks from the late 90's. Of course the logical answer would be Gold will absorb all the money but if the debt bubble pops and we get higher yields, that means on a value basis Gold will become insanely overvalued very quickly. I have some theories here and they are all VERY bad. LOL.
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you are absolutely correct, if people think gold at $1900 was pricey post GFC you aint seen nothing yet. People need to make sure they buy physical or physical backed. shits about to get real.