German Property Market – A Real Estate Bubble?


Asking €747,000

QUESTION: Possible Correlation with ECM-peak in Nov. 2017? Mr. Armstrong, just today I became aware of your story and your life’s work. Your theory is captivating, especially in the light of a series of unsettling changes in my work environment. All of this near Nov. 24-25, a predicted turning point within your ECM forecast. I am a self-employed agent, working mainly on behalf of a … German finance [company] which specializes in selling mortgages for public housing projects ….

Since it´s foundation … [we] operated with a strict lending limit of 80%. Upon so-called “customer-demand”, those limits have now been raised to enable 100% lending at almost the same interest rates (Nov. 9. 2017) while additionally allowing fixed interest rates for 25 years and amortization terms up to ca. 40 years. I have seen even more outrageous offers from competitors. These factors, combined with the unnaturally low-interest rates caused by the ECB, enable almost every household to acquire a house of one’s own.

However, these amortization terms fail to include future investments and a possible future increase in interest rates. In my opinion, households with an average income have a high risk of debt overload or at least a risk of constantly living in debt. It seems to me as if the public model of never repaying one’s debt is slowly being transferred to the private sector.

My observation might just be a small part of the picture, probably a peak in one minor cycle you observe. Yet it does make me feel uneasy, for this peak correlates with your next predicted ECM turning point. Although the public opinion states the opposite, I fear a massive housing bubble on the German market. Even minor changes in interest rates or household income could cause substantial problems for the average homeowner.

I would very much like to hear your thoughts on this subject. Please excuse my rusty English, I did not have practice for a very long time. Thank you in advance for your response. Also, I want you to know that I have the highest respect for your resolve in those times of imprisonment.

From Germany, FW

ANSWER: Unfortunately, Germany has allowed its own housing bubble not much different from the USA that burst in 2007. Normally, like fashion, things tend to start in Europe and then migrate to the USA. In the case of real estate, the value of property in areas such as Bavaria was very cheap compared to international levels. The market has been rising since 1996. Even back in 2015, Sparda Bank (http://www.sparda-bw.de) was offering just over 1% fixed rate mortgages for 10 years.

Our timing models do suggest that there is a pause in the trend due here in November (4th quarter). There should be a decline of softening in the market going into the first quarter of 2018. Thereafter, the trend will shift and the next big turning point will be the 4th quarter 2018.

The risk of fixed rates even out now for 25 years will not be on the back of the home-buyer. That risk will belong to the lenders. Yes, the ECB with its negative rates has caused tremendous distortions in the debt markets. They were unsuccessful in creating inflation or expanding the economy. What they have created is asset inflation, which does not show up in the economic statistics as they are focused upon by the media.

The central banks are focused on DEMAND inflation. That has been defeated by any expansion in the money supply is sterilized by a net rise in taxation. Consequently, the consumer is buying assets and hoarding cash. They are not spending it frivolously in dinner, wine, cloths, and song.

The risk to the borrower will be the rise in taxation that then eats into their disposable income. Lending 100%+ to buy houses is insane. Those who have no equity are highly prone to default. As this group defaults, they increase the supply of property coming to the market and thus all prices are suppressed. This is the process that creates the major high in REAL TERMS.

The homeowner who has equity will lose short-term. However, the euro will crack and in this regard, a low FIXED rate mortgage that they can maintain will be a HEDGE against the currency. The market will shift from asset inflation and cross-over to currency inflation.

Nonetheless, in terms of INTERNATIONAL VALUE, the market is peaking now in November. Housing prices have risen to world standards so the foreign capital will back off and not see this as cheap anymore. As the euro declines, then the property in real value terms globally will also decline.

Religious Persecutions have impacted Political-Economy


QUESTION: hi martin

question for you
if we fed the data and all the info you had on ISLAM – CHRISTIANITY – JUDAISM etc and all other religions into SOCRATES
and ask it …..what would its preferred choice be ……of RELIGION and what should the world follow…………what would SOCRATES say?
have you ever tried this thought experiment?
Regards
SS
ANSWER: Interesting question. I do not believe it would pick one for that is a subjective decision. It would forecast trends, but not which religion is better. What it does do is it will forecast religious upheaval, which is tied to economics. Change the economy and you create change in religion. The introduction of Communism followed Marx in banning religion.
During the 3rd century, it was the collapse of the monetary system of Rome that sparked the biggest wave of Christian persecutions. Why? The Pagans believed the gods were angry because the Christians would not pray to them. So the evils befalling upon the empire was blamed on the Christians. In turn, the Christain said their gods were impotent and only the true God would save them. Eventually, many Pagans left and became Christians praying for help.
Then there was the Spanish Inquisition headed by Tomás de Torquemada (1420–1498). Even the Pope came out against it. Nonetheless, the Spanish Crown used religion as the pretense to confiscate property and attacked both the Jews and the Arabs. This caused the Jews to flee mostly to the Netherlands. This is where banking and insurance became major in Amsterdam.
So religious persecutions have been had a major impact upon economics and the rise and fall of empires, nations, and city-states.

The Hidden Risk of Broker/Clearer


QUESTION: Dear Mr. Armstrong, Thank you for your work in “educating” us in your “University of the Conscious Investor”! My question relates to your “Trading a Vertical Market” report. I am slowly digesting this report which is truly fascinating and a must read for any rational minded investor. My experience tells me (and you have reaffirmed this within your report) that being able to trade correctly for the market is critical. In analyzing the correct actions we must take I have reached the conclusion that we must also investigate deeply the trading company we use and how any wild ride will impact their ability to actually fund the successful trades we have managed to get into and out of. I recently was issued new T&C’s for my accounts to accept and that makes for scary reading in the light of any major reset or mammoth gap or moves we anticipate. How would you recommend we evaluate the companies actually holding the bag to be able to pay up at the end of the day? This appears to me to be a most crucial question in the light of what Socrates is pointing out.

Be Well,

ANSWER: Yes, you are absolutely correct. Your broker/clearer is an additional risk.

 The kind of market conditions we are about to face will force questions beyond extreme volatility, no bids and the gapping of price and trade. What Traders must realize is that these extreme price actions themselves trigger increased margins, which again could trigger a liquidity crisis. Under such panic moves, prices can gap ‘without’ a trade and is worth remembering people sell what they can not what they should. This forces other markets to move just to raise cash. If market movements are violent everyone is pulled into the mix.

This is when you have to hope that every one of your fellow account owners (under the broker/clearer you are using) is liquid enough to honor margin requirements. This type of information is rarely going to be available to all and so makes many remain vulnerable.

Just to make you aware, it is possible that your money is vulnerable even if you do not have an open position and is just sitting with your clearer if they were to fail.

A lot of people lost money in the MF Global Scandal.

 

The Political Crisis in Germany Changes the Game


Merkel faces the worst crisis of her career and many behind the curtain are starting to wonder if she will even survive. The German Federal President Steinmeier could not actually order new elections immediately. The procedure in this regard is quite complicated in Germany. The earliest possible alternative would be to hold new elections come the spring of 2018. It is likely that the AFD is likely to gather even greater support from new elections. Nonetheless, the CDU will continue to support Merkel at least right now. However, the CDU has been severely weakened by the election and if we do not see new elections until the spring, there is a distinct possibility that Merkel’s support even within the CDU could collapse if they see the AfD will win even greater support.

The head of the Federation of German Industries (BDI), Dieter Kempf,  has chastised the political leaders calling on the SPD, FDP and Greens to form a coalition. The price that the SPD will demand is that Merkel leaves before they would consider any compromise. There is just bad blood now between the SPD and CDU. Of course, this makes it even more likely we see and even more difficult Brexit. The practical crisis is the fact that Merkel must attend to domestic issues and will not truly have the time or authority to assume a leadership role in Brussels.

This turmoil in German politics is actually shifting the stage to Macron. The uncertainty in Germany may be opening the door for Macron to reform the EU and the Eurozone pushing Germany to second place. The political fortunes for the EU may be far more uncertain than many suspects.

From a market perspective, political uncertainty in Europe still creates uncertainty in markets rather that confidence.

Are We Losing the Training Ground for Trading?


 

COMMENT: Dear Mr. Armstrong,

Really glad that you again warn us of impending famine moving into 2020 – 2030 and give us ample time to prepare though many still do not believe in your forecast. Your blog have done a great service to humankind.

Also pertaining to your recent article pertaining to skills needed to be a successful traders or fund managers. I tend to agree that going against majority view at important turning points require nerve of steel to pull the trigger. Not many can do it as emotions can overwhelm our decisions. Being a fund manager myself, I find that how we perform and react during bear markets, crisis and panic moments will distinguish me from others (my peers). During rising tide, our performance mask our real ability to handle crisis.

As you say, life is a journey of learning. Socrates provides a valuable tool for my investing journey while your blog helps in allowing me to view the world in different dimensions. I do make mistakes along the way but thank God I become a better investor as day goes by.

Regards,

SS
Malaysia

REPLY: Yes. Funds that are just a buy and hold are not traders. The regulation also creates much of the problem. Because we have the CFTC and the SEC, these two agencies do FAR MORE HARM than good. They each have their own lobbyists to retain and expand their power. I was once offered a fund to manage in the USA with $50 billion+. The problem that confronted me was the blunt fact it was a buy and hold affair. Because it was equity, it would come under the SEC. I would not be allowed to hedge using futures greater than 15% at the time or else I would then violate the CFTC rules and cross into a futures fund. This was all because of a turf war between the two agencies. In other words, if I saw an imminent crash, I could not protect my clients by hedging more than 15%. You had to sell outright everything, which would then also raise red flags. I turned down the offer for I felt my reputation would be destroyed because I would have to suffer a serious loss and could not prevent it. That was while hedge funds were created offshore because you could not trade everything do to regulation to create government jobs rather than provide the best management service for investors.

Because of the regulation, the field is dominated by buy-and-hold managers who have no real trading skill because they were never allowed to trade. Then you have exchanges closing the floor pits and going all electronic. It was the floor trading that forged the souls of traders. You could smell the blood from the screams on the floor. Today, that is reduced to just flashes of light. Actually trading with other people is who you learned to trade. Dealing Rooms were set up with everybody on one floor – not in cubicles. You heard the phones ringing on every desk when the markets were hot. It was that interaction that made great traders. Eliminating that human interaction makes me wonder if we are not losing the core of understanding markets.

NAFTA Round #5 Reaches Impasse on Critical Auto Sector – Canada/Mexico Balk At Rules of Origin…


$64 billion of the current annual trade deficit with Mexico stems from the auto sector alone.

For over a decade auto manufacturers have moved to Mexico in order to import parts from Asia, assemble and install them, and then ship the completed cars into the U.S. through NAFTA without duties (tariffs).

The U.S. auto ancillary business groups (parts suppliers) have been pushed out of competition in the auto sector by this corporate profit strategy.  Thousands of U.S. jobs have been lost in both the plant assembly and the ‘auto-parts’ manufacturing sector.

CTH has called attention to this bastardized supply chain for years.  Foreign auto-parts, made by foreign workers, assembled into U.S. owned manufacturing, and sold as U.S. automobiles. The weird supply chain and assembly process is essentially a multinational corporate scheme (in the auto sector) which exploits one of the loopholes in the 25-year-old NAFTA agreement.

If the assembly plant was on U.S. soil the foreign (mostly Asian) parts would be taxed as imported parts.  However, so long as the assembly is in Mexico (or Canada), the origin of the parts is currently irrelevant, and the finished automobile crosses the border into the U.S. avoiding the taxes using NAFTA.

Keep in mind, the auto manufacturing sector, not just U.S. assembly plants but also European auto-makers, have made capital investments into Mexico, based on this NAFTA loophole as part of their business model. They don’t want this cost/profit plan disrupted.

Along comes U.S. Trade Rep. Robert Lighthizer and U.S. Commerce Secretary Wilbur Ross and say: NO MORE.

If you are going to consider it a North American Free Trade Agreement vehicle,  then an established percentage of that vehicle should actually have to come from North America; just as importantly, that percentage should be high.

That’s the basic argument behind the “rules of origin” part of NAFTA. If you are going to call it a “North American vehicle”, then the parts should come from North America.  Makes rational sense, no?

The U.S.A. position is that half of content for ‘American-built’ autos should be produced in the United States; and the regional (NAFTA) vehicle part content requirement should be increased to 85 percent from the current 62.5 percent.

Mexico and Canada do not want rules of origin because they want to use their workers to assemble vehicle parts from other nations and sell into the U.S. as “American Autos”.  They correctly fear that if American cars must actually contain American content, and be assembled by actual Americans, then the American Auto-Manufacturers will move their auto plants to America.

The auto-industry, who have invested tens-of-millions in the current scheme, wants to keep the entire source of origination a hidden secret from the public.  They are not too keen on American consumers finding out that Japanese, Chinese, Indonesian, Korean and Vietnamese parts are actually behind the American badges.

Additionally, the European Auto-Manufacturers who are also building in Mexico and Canada don’t want to lose the NAFTA loophole that lets them assemble outside the U.S. and get their vehicles into the American market.

The current system employs lots of Mexican and Canadian workers who assemble foreign parts into American vehicles that are then sold into the U.S. as “American Cars”.

If “rules of origin” are forced upon them, there’s no incentive -beyond labor- for the U.S. auto corporations to continue making cars in Mexico and/or Canada.  Simultaneously, the vast majority of the assembly is now automated (with human assistance), so the labor costs are currently smaller as a percentage of the overall cost of manufacturing.

Automation and modern efficiencies in human assisted robotics mean the labor cost incentive is not as valuable as it once was for manufacturing.  In the modern auto-era it’s the quest for cheaper parts that is now driving the business model; hence, the “rules of origin” exploitation.

MEXICO CITY (Reuters) – Canada and Mexico will rebuff the United States over its demand for tougher NAFTA automotive content rules, top officials said on Monday as negotiations to renew the treaty bogged down with only a few months to go.

[…]  Canadian and Mexican negotiators will address the U.S. auto demands on Tuesday, the final day of the fifth round of talks to update the North American Free Trade Agreement, chief Mexican negotiator Ken Smith told reporters.

Although the talks are due to wrap up in March 2018 after a seventh and final round, they are deadlocked over a series of hard-line proposals the United States unveiled at the fourth round last month.

“It’s definitely slowed down from the previous round,” said a Canadian source with direct knowledge of the talks. “There has been no progress in the contentious chapters.”

Canadian and Mexican officials have complained repeatedly about what they see as U.S. inflexibility. A spokeswoman for the U.S. Trade Representative declined to comment.

Mexico and Canada fear Trump will follow through on a promise to pull out of NAFTA, causing disruption and economic damage. The Canadian dollar edged lower against its U.S. counterpart on Monday, in part because of concerns about the negotiations. (read more)

This is where we must fight the lobbyists.

You must remain engaged and understanding of the issues within these and other trade disputes.  President Trump is wearing the bullet-proof vest, but you must engage your congressman to let him/her know you support the administration and their objectives in these Trade deals.

Your congressional representative is being lured with millions of millions of dollars from lobbyists who work for the multinational corporations.  They will try to retain their financial position.  YOU must educate yourself and your family on these issues.

Together we must engage and fight.  This is the president we have been waiting for.  Don’t expect he can do this on his own.  Make your voice heard.

Embattled Angela Merkel Indicates New Election Preferred Over Minority Governing…


Stunningly even Chancellor Merkel herself admits her immigration intransigence is the leading reason for her inability to form a coalition government.  Yet she is so committed to the ideology of ‘open borders‘ she will tender no compromise.

In an effort to leverage political blackmail against her opposition Merkel prefers the route of another election rather than trying to govern from the minority position.

BERLIN (Reuters) – Chancellor Angela Merkel said she would prefer a new election to ruling with a minority after talks on forming a three-way coalition failed overnight, but Germany’s president told parties they owed it to voters to try to form a government.

The major obstacle to a three-way deal was immigration, according to Merkel, who was forced into negotiations after bleeding support in the Sept. 24 election to the far right in a backlash at her 2015 decision to let in over 1 million migrants.

The failure of exploratory coalition talks involving her conservative bloc, the liberal pro-business Free Democrats (FDP) and environmentalist Greens raises the prospect of a new election and casts doubt about her future after 12 years in power. (read more)

It really is remarkable the level of entrenched ideology amid those who carry a far-left world view.  The position of Chancellor Merkel is reflective of visible authoritarianism within a democratic assembly of government.  There is apparently no limit to what Merkel is willing to do in order to retain her individual political outlook without concession.

Not surprisingly, the media fail to call out this representative reality; behavior which is, ironically, exactly what media falsely accuse President Trump of doing.

Merkel Vows to Run Again


After the failure to form a new government, Chancellor Angela Merkel has made it clear she has no intention of withdrawing from the race. New elections in Germany are looking ever more likely. Merkel appeared on TV on ZDF and said that she had not thought of resigning. Federal President Frank-Walter Steinmeier urged the parties to make a new attempt to form a government. The SPD, however, reiterated it will not agree to a grand coalition.

The Approaching Famine


The most serious forecast that we see from our computer models has been a rise in agricultural prices caused by Global Cooling – not Global Warming. Crops cannot grow without the sun and water. Historically, when the weather turns cold, the crops fail.

There is no question that food prices will rise during periods of war when crops cannot be planted and armies require food on a priority allotment.

However, Mother Nature sticks her finger into the pot to stir things up. The famine cycle is also an 8.6-year frequency, but the volatility aspect comes in units of 12 rather than 6.

   

Our database on wheat from 1259 forward (excluding our data on the Roman Empire grain prices), reveals that there is a serious risk of famine from 2020 onward. It appears that we may very well enter a 12-year rally into the year 2032. Our Bifurcation Models are reflecting also a gap in time between 2020 and 2031 suggesting a trend appears to last for that period of time.

The downside of taxation, and particularly inheritance taxes, has driven farmers to sell their land to conglomerates just to pay the inheritance taxes. This has resulted in genetically altering crops to increase yield. While genetically altered crops do not really appear to present a major health concern as many seem to argue, the real danger is the fact that during the past 100 years, 94% of the world’s edible seed varieties have vanished.

The downside of socialism which has attacked the rich, we have sacrificed the historical model in our food supply for corporate decision making that bribes politicians handing them their needed money to remain in office with each election. The consequence of this corruption has been the concentration of our food supply into an ever-shrinking basket of diversity. Today, 75% of the world’s food comes from only 12 plants and 5 animal species (see source). This lack of biodiversity has seriously increased this risk of widespread crop disease, and throw in the climate change turning colder, corporate decisions are not the way to protect society. Corporate boards are typically dominated by lawyers and accountants. They are not scientists nor do they even make proper decisions for investment or currency hedging. Corporations will never be able to cope with a sudden change and then make decisions that will impact the world. Major companies, such as Monsanto, could find themselves in control of the fate of human existence with the decisions being made by lawyers and accountants fixated on their bottom-line.

The period ahead, 2020-2032, appears to offer something much more different. While politicians keep pushing Global Warming because they can tax emissions, the risk of a monumental human disaster lies in the opposite direction.

The entire theory of Ice Ages emerged after the discovery in 1772 of wooly rhinos and mammoths were frozen in ice with plants still in their stomachs. Suddenly, science woke up and came to the shocking realization that climate can change drastically with no notice.

We have the technology today to drow food inside without even soil. This is something one should consider to put in your basement as 2020 approaches on the horizon.

 

Will Spain be the First to Default on Pensions?


The Pension Crisis is brewing rapidly and we will begin to see this make headlines much more so around the world. There is hardly a country not in trouble (Norway the exception), where pensions are underfunded as governments have relied upon tax revenue. As the crisis in Spain brews, it will be the pension crisis there which blows the lid off of the entire problem. The Spanish pension system is moving rapidly toward a major crisis threatening its collapse. The Madrid government needs to issue debt to close the huge gaps as, without new debt, the pension crisis would have a meltdown this year. The question becomes when will buyers of debt realize that it is not even backed by economic growth.  This is similar to a person without a job borrowing from the bank just to pay the rent. What governments have done in the management of pensions is criminal for anyone in the private sector.

Spain faces a major social crisis as we cross the threshold of 2018. The situation keeps getting worse by the day. For years, the Spanish government, like so many others, has been using funds from its pension reserves to finance expenses elsewhere in the budget ever since 2012. Billions have been used to offset the widening deficits in the welfare system. Consequently, the pension fund has collapsed from 66 billion euros in 2011 to only about 15 Billion euros in 2016. At this rate, Spain goes into default in 2018. The crisis materializes when those who buy debt suddenly see there is no possible way to repay the debt from future revenues. A default becomes possible when there is NO BID for new debt.

This is how it will begin. The peripheral economies will go bust and then a contagion begins as traders look around and say –OMG! They are all the same!