My economic predictions

From reading and listening to multiple sources I have an understanding of what will happen to the economy in the next few years.

Right now, the recovery from the 2008 Great Recession hasn’t produced any real income growth and true unemployment is much higher than stated when you consider the workforce participation rate is the lowest since the 1970’s.

I believe we are actually in a depression and that the recovery has only benefited the holders of assets (stocks, bonds, real estate etc.) basically the rich have got richer and the middle class and poor have gone down.

This period of economic expansion is the 2nd longest on record and we are due for another recession.

However, the Federal Reserve in the US is not ready for another recession. They have desperately been trying to raise interest rates now, without pricking the bubble doing so, so that they have some ammo to lower rates when the next recession happens.

Normally to spur a recovery from a recession, the Fed will lower interest rates 3-4%, encouraging borrowing to get the credit cycle going again.

But right now they are only at about 1%. They can’t lower 3-4%.

They should have raised interest rates years ago, but Ben Bernanke instead did QE 1, 2 &3 that pumped a bunch of money into the system.

They missed the boat, their chance to raise rates to normal is basically gone.

Now the economic indicators are showing declining growth, getting ready for a recession.

Raising rates into economic weakness will trigger the next recession.

All that money Helicopter Ben printed didn’t go into the real economy, instead it went into blowing bubbles in stocks, bonds, real estate, fine art, etc.

The real economy is doing quite poorly.

My time frame for the next recession is late 2018 to early 2019, give or take.

I expect the trigger for the next recession to come from corporate bonds. More specifically, US Shale oil debt. The US shale oil industry hasn’t made a dime in profit and is actually losing billions of dollars to maintain. They have hundreds of billions in debt coming due in the next few years, with no way to pay it back. I doubt investors will want to roll-over the debt, when the industry hasn’t made any profit. Basically, the industry is running a Ponzi scheme of corporate debt.

There could be other triggers, the worst being a war with North Korea.

But if nothing catastrophic happens, I see shale oil bonds as the first domino.

When the recession happens the central banks of the world will not have the resources to fight it this time and will need to be bailed out themselves.

This will be done by the International Monetary Fund (IMF) with printing trillions of world money, SDRs (Special Drawing Rights).

SDRs are given to each country by the IMF in proportion to the size of their economies. Their value is determined by a formula including the US dollar, Euro, Yen and now the Chinese Yuan. Countries can trade SDRs for other currencies, eg. China can trade US dollars for other countries SDRs.

This flood of money will have a huge inflationary effect on the world and especially the US dollar.

Most Americans have no idea how privileged they are being able to just print money to buy real stuff and the world just accepts it. The rest of the world needs to make stuff to trade for US dollars so they can buy other stuff.

Once the SDR replaces the US dollar as world reserve currency, all those US dollars will go back to America, causing a tsunami of inflation. Americans will have to actually sell things to be able to buy things from other countries. But the US factories left years ago and aren’ t coming back.

Unfortunately, most US citizens will be in for a terrible financial shock. 2008 will look like a trip to Disneyland in comparison.

You can prepare by buying gold and silver in private storage.

At home and in the bank are not safe.

Do not trust the banks, the banks will be closed possibly for months and you will not be able to access safety deposit boxes.

Bank machines will limit how much money you can withdraw at a time.

All western countries have now passed bail-in laws. Your bank account will be used to bail out the banks.

You should have emergency rations and some cash on hand from now on.

If you are someone who has cash when the banks are closed, you will be able to buy things at insanely low prices as people sell everything to be able to raise cash.

At first, all the money printing will not cause inflation. After seeing their retirement account shrink to nothing, baby boomers are going to save everything and the real economy will continue to contract.

It won’t be until the psychology of the masses changes and they feel they have enough money saved to be safe again that they will begin to spend again.

And once that spending starts to expand the economy (2020-2025?) inflation will be a raging beast and uncontrollable at that point. Central banks will have to raise interest rates like crazy.

People who have jobs won’t be able to borrow nearly as much for mortgages, the supply of money chasing houses will go far down.

And at the same time, way more people will be foreclosed on because they will not be able to afford mortgages when their rates reset. Sellers will far outnumber buyers and demand for housing will go way down.

This will be a perfect storm to buy rental real estate cheaply.

Just as demand for rental real estate will be skyrocketing.

I believe that the stock market will not be as safe and people will not trust it for a while. It may take decades for a recovery to nominal values.

Why are Vancouver house prices so high?

I think most residents might end up blaming rich foreigners for outbidding locals for houses.

I don’t see that as the initial cause, however, they have certainly had an affect on the high end of the single family house market.

However, the vast majority of homes in Greater Vancouver are bought by locals willing to pay huge sums for housing enabled by extremely low interest rates that allow them to leverage their income to buy million+ dollar homes.

Foreigners account for a small percentage of the number of homes bought. I see them doing this for two reasons.

  1. They saw that house prices were going up and jumped on the bandwagon, speculating (correctly so far) that the price will keep going up. Basically investing in a tangible asset, like buying gold.
  2. They come to live here as a permanent resident as well, because the word on the street is that the Canada Revenue Agency (CRA) will turn a blind eye to them hiding their world income.

So they can live in Canada as millionaires, pay less taxes than refugees, and the government refuses to enforce the law because it is easier and more fruitful to chase local small business owners, who provide a greater return on investment for CRA auditors per hour than trying to fight millionaires with lawyers and going all over the globe trying to prove someone’s world income.

I can’t blame the rich permanent residents too much, even though they are breaking the law. If I could get away with not paying income tax would I? I don’t know if I can answer that honestly, because I haven’t actually had the opportunity.

I do blame the government and the Canada Revenue Agency. They know about the problem, and deliberately choose to ignore it. Probably because these millionaires are giving political contributions (bribes). But that is only speculation.

Middle class ends up paying all the taxes again.

Back to housing, wealthy foreigners have out-bid locals for the most expensive houses. And that certainly has had a ripple effect through the market. But locals are overpaying for the majority of homes. Why?

Interest rates and lack of supply.

They aren’t building any new houses close to Vancouver. Almost all the land is already built on, any available land is going to condo towers. Despite all the towers going up, new condos are apparently not keeping up with population growth.  Basic economics 101, lower supply increases prices.

Interest rates are near all time lows after the great recession. Europe and Japan have experimented with interest rates below 0%. But weird things happen at that point (you pay the bank to keep your money?!)

Interest rates have started going back up again in the USA. They are trying to get them back up again before the next recession hits so they have the ability to lower them again, crazy as that is.

When interest rates go up, the bank will lend people less money for mortgages based on their income. This means less money will be chasing homes, which will bring the prices down.

You can see this is already starting to happen in the Vancouver region, especially at the high end of the market.

However, when the next recession hits, the Bank of Canada will lower interest rates back to 0% and if Vancouverites still have their incomes, they will be able to borrow more money from the bank again. And house prices may come back up again.

But these extremely low interest rates will not last forever. My parents once paid 18% on their first mortgage. Imagine your term ends and you went from paying 2% interest to only 6%. Can people afford to pay triple their mortgage payments?

Once the interest rate climb begins these spectacular home price appreciations will start to drop just as dramatically. People who bought at the top will be underwater on their mortgage (owe more than their house is worth). And the difference between here and the USA in 2008, is that Americans could simply walk away from their mortgages. Canadians who overpaid will be stuck with the debt even if the bank forces them to sell their house because they broke the terms of the mortgage by being too underwater. (Read the fine print).  People could be left hundreds of thousands in debt with no house to show for it.

New homebuyers though will finally have an opportunity to buy at more reasonable prices.

Why London and UK home prices are so high?

Britain has a tax law that allows for non-domiciled residents to pay no income tax on their world (outside UK) income.

Instead they pay a relatively small static amount of tax (not a percentage) for this privilege.

Non-domiciled according to the tax law means that they have a home in a different country that they maintain and plan on moving to in the undetermined future.

So the mobile global rich want to live in the UK to avoid paying a percentage on their income.

They come to live mostly in London and bid up the property prices. More money chasing the same amount of product (in this case housing) causes the price to increase. This has a ripple effect as those who would have bought in London buy elsewhere, and increase the prices there, and on it goes.

It is very difficult for someone born in Britain to get this status, but a few millionaires have, so the middle class is left paying all the taxes and can’t afford to buy a house. It’s a win-win. 🙁