How 10% of the People Can Make a Difference & Real Estate’s Role


QUESTION: Dear Marty,
First I would like to thank you for all the help you provide especially for us little guys.
I’m from Barcelona, and happily attended the release of “The forecaster” when you were there a few years ago.
I’m under 30 and working my butt off trying to save what I can while paying rent with my partner on a smallish 50m flat (which has become prohibitevely expensive for young local people as rents are at all time highs).

Following your recomendations I’ve put my small savings into movable assets (US and European equities).
With regards to the chart you posted on Spanish Real Estate I was surprised to see the price still so near the bottom of the Housing Crisis. I live in Barcelona and prices are in most cases near or at all time highs for most of the city neighborhoods (of course in € nominal prices wich have dropped quite a bit in $ terms) but as you move away from the city the recovery has been more modest to say the least.

In Barcelona price increses are mostly due to foregneirs moving in and maybe also because people here don’t ussually invest in the stock market but instead put savings into RE (despite the housing bubble people have a big chunk of retirement savings into real estate).
RE is not cheap to say the least but I’m wondering wether I should contract a 30y fixed mortgage and buy a house. My biggest fears are two:
– If long term mortgages dry up I may find out in mkt to mkt loss positions on the house as prices might collapse.
– If the economy declines I have the risk of maybe being fired but still chained to a mortgage.
I fear the later specially since my father has been recently notified that he is going to get fired. The company he works for has decided to fire all employees who are up to 13y!!! close to retirement age (and will probably replace 1/4 of the workforce with cheaper labor).
Given the above do you think it’s still a good time to buy in the big Spanish cities like Barcelona using a fixed mortgage or that you might be better off renting and waiting for the collapse.
Thank you
A.

ANSWER: Barcelona is one of the most beautiful cities in Europe. It is even one of the best places to live. In terms of local earning power, yes, rent in Barcelona is high. In terms of international value, they are cheap, which is why you have so many foreign investors who have poured into your city. Even economically, Barcelona is extremely productive and this was in part behind the reason for the separatist movement. It also had its own history of separatist movements from the Roman Empire (see Maximus 409 AD).

You have noticed the foreign buyers. As the euro drops, the value of property will look cheaper to a foreign investor than domestic. If you stay in the city proper region, this will have an international bid based on currency. In real terms, of course, the property will decline in value. However, this is more of a short-term trend. We all need a place to live. If you can buy with a FIXED rate mortgage, then you will be better off and certainly do not do floating rates. The risk with banks remains that they will stop lending on property as loans turn bad and political turmoil unfolds. Soon it will be an issue of whether Spain will stay in the euro, or whether the euro even exists. The property in the rural area will always be cheaper. So it depends upon what your personal goals might be. Rural property where you have a bit of land and can grow some food is not a bad hedge. But it has been getting cold even in Spain, a country that normally supplies Europe with food during the winter.

We will be heading into a currency crisis. Tangible assets are the way to survive. The biggest problem with real estate is that you cannot take it with you. So keep that in mind. We need a place to live so that is the bottom line. You do not want all your wealth in one asset. You are young enough to survive the major government reset. That will happen. I remain hopeful that if enough people understand the causes behind this crash, then we can make a difference and push back against tyranny.

Make no mistake about it. Government will ALWAYS act in its own self-interest to survive. There has NEVER been a single government that has EVER admitted it is wrong. They must always suppress the people to survive. Remember one thing: even in the USA, there were only three presidents who ever won slightly more than 60% of the popular vote. So, about 10% of the people really decide the fate of nations. We do not have to convince 100% or even 50%. We just need that 10% to make a difference.

Farmers going Bankrupt – A Prelude to a Boom?


Part of the cycle for a commodity boom is typically preceded by a commodity depression in which the productive capacity is reduced. We are witnessing that in the agricultural sector. Additionally, extremely cold weather continues. Bankruptcies in the farming sector have been on the rise since 2014. These are the pre-staged events that are required to create a commodity boom for the next cycle — the reduction in supply.

LIBOR v SOFR Interest Rates


QUESTION:Dear Martin:

Do you have any concerns for the equity markets from the upcoming conversion from Libor to SOFR (the secured overnight financing rate). A recent article from Business Insider highlighted the following:

“Libor, linked to about $350 trillion worth of financial products, will be replaced by an alternate pricing benchmark for everything from mortgages to credit cards.”
“Replacing Libor will be lengthy and problematic, and is one of the key themes to look out for in 2019 as financial services and asset managers start transferring to new systems.”
“Thousands of existing contracts will need to be renegotiated causing a huge operational and financial burden that will consume legal teams for months.”
“Market structure experts cite the need to amend existing contracts to include “fallback” clauses which which specify what happens when Libor disappears. This is comparatively easy for loans, but for derivatives, swaps, and options, amending existing contracts could potentially lead to legal battles.”
This conversion seems like it could get awful messy.

Regards,

ML

ANSWER: Ever since the London Interbank Offered Rate (LIBOR) scandal, there has been one faction that has sought to eliminate the powers of banks to manipulate the LIBOR rate. This is similar to ending floor tradings in financial markets. Yes, LIBOR has been used to price trillions of dollars’ worth of loans, derivatives, and a lot more. The Federal Reserve moved to actually intervene and prevent a handful of banks to fix the interest rates. The Fed created a group in response, known as the Alternative Rate Reference Committee (ARRC), which has created a new benchmark dollar interest rate. This new rate is known as the Secured Overnight Financing Rate (SOFR). Actually, since April 2018, SOFR has been used for a growing number of bond offerings by large institutions including the World Bank, MetLife, and Fannie Mae. Europe is also moving to create a new benchmark rate that includes the Bank of England, Central banks in Europe with the ECB, Japan, and even Switzerland. This new group is also constructing new benchmark rates. However, there is another reason the Eurozone is taking this giant step. This is a major effort to take the dominance of trading away from Britain in light of BREXIT.

Now as for a crisis, no, that is about as likely as Y2K Millennium bug. Borrowing will take place under SOFR without a problem. The issue will be more with past contracts. That will tend to be a court issue if rates rise under SOFR or old contracts are converted involuntarily. The real issue will be concerning the manipulation of SOFR by governments as they have done with Quantitative Easing. The banks were never able to manipulate LIBOR to the extent of changing the trend. Front-running to elect stops etc. were the “manipulation” tactics. With governments involved, then we can see false trends and real manipulation. The banks could never manipulate LIBOR, suppress the rate, or increase it out of competition.