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How Much
September 18, 2019

Stock markets bring wealth and woes to investors around the world. It’s hard to imagine anything more exciting and fearful. Icons like Warren Buffet made billions of dollars investing in corporate stocks. Yet, we all remember the collapse of the market a decade ago. Even with the global market whipping around, the U.S. still dominates the world stage. But where do all the rest come in?

  • The U.S. stock market is 5x the size of the closest competitor
  • In fact, the U.S. is so large it accounts for just under half of global equity value
  • China makes up the largest emerging stock market with $6.32 trillion
  • Hong Kong, being one city, matches half the equity value of China at $3.82 trillion
  • Small established economies like Switzerland have enormous markets relative to their population

It’s worth noting the World Bank data does not include the U.K. and Italy. The London Stock Exchange’s estimated size is $4.7 trillion. The Italian markets are estimated at $0.65 trillion.

The global stock markets remain volatile as we enter a historically difficult month for equities. Investors worry the global trade war and continue to pile into bonds and gold for safety. Central banks continue to drive down interest rates to keep global growth alive.

Despite the massive changes in the global landscape, the major players remain the same. The U.S. accounts for nearly half of all the stock market value globally. The closest competitor, China, remains only 1/5th the value of the U.S.

So where do all the other countries we hear about stand? Our visualization lays out the equity value for each stock market by country.

Top 10 Stock Markets Around the Globe

1. United States - $30.44 trillion
2. China - $6.32 trillion
3. Japan – $5.3 trillion
4. Hong Kong - $3.82 trillion
5. France - $2.37 trillion
6. India - $2.08 trillion
7. Canada - $1.94 trillion
8. Germany - $1.76 trillion
9. Switzerland - $1.44 trillion
10. South Korea -  $1.41 trillion

It’s astonishing that many established European markets only make up 1%-3% of the global stock market value. The U.S. domination of the global marketplace explains why the U.S. Federal Reserve remains the focus of investors around the globe. Despite this, many central banks around the world have embarked on historic rate cuts into negative yields.

Yet, given the size of the U.S. market, if it heads into a recession, how could it not impact the global markets? Trade wars with China add to uncertainty and have already hurt their global equity values. Their economy has been racked by the tariff escalations. But notice the potential regional powers that exist. Should the East Asian countries band together, they present a formidable presence against the United States.

One thing remains certain. Based on the visualization, we know that the U.S. stock market drives other markets. That creates leverage in the trade wars, as well as ties the global markets to the United States.

But what do you think? Does the graphic represent the stock market or does it speak to the global economic influence?

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How to Win in Court
September 18, 2019

 

Know What the Law Says!

One of the biggest case-losing mistakes is mis-reading statutes.

If you don't know what the law says, you'll have a hard time getting a judge to agree with you!

Statutory language must be interpreted according to well-established "rules of statutory interpretation".

The rules of statutory interpretation are vital to winning your case.

You need to know how courts interpret what the law makers meant when they wrote the law!

Too many "assume" they know what a statute says, but the only opinion that counts is what controlling appellate courts say a statute says.

Appellate courts apply rules of statutory interpretation.

You must learn these rules ... if you want to win!

Judges should never be allowed to play games with lawmakers' words.

Know the rules of statutory interpretation.

For information on the "How to Win in Court” self-help course, click HERE

Website:  https://www.howtowinincourt.com?refercode=SR0094

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Hard Assets Alliance
September 18, 2019

I recently completed a visit to Australia where I was invited as the keynote speaker at the 2019 National Conference sponsored by ABC Bullion, one of the two largest gold refiners and gold dealers in Australia along with the Perth Mint.

ABC Bullion also kindly invited me to tour their facilities in Sydney. I visited five separate locations (out of a total of 15 in Sydney alone), which included refineries, gold bar casting facilities, jewelry design, trophy fabrication and secure storage. It was an intensive one-day crash course in all things gold outside of actual gold mines.
 
During these tours, I was able to observe state-of-the-art technology for the separation of gold from silver and other metals without the use of chemicals. These processes were invented by Russians, but are obtained under license from third-party intermediaries. Precise melting-point temperatures are combined with high-pressure gas to achieve the separation without the use of cyanide, chlorine or other chemicals.
 
It was also fascinating to observe the final stages of gold and silver bullion bar casting. These were entirely handled by robots without human intervention. Gold or silver beads of pure metal were poured into graphite molds and a top was placed on the mold. The molds were heated to high temperatures, which melted the bullion into the exact shape and size desired. The bars were then cooled and measured by weight before being etched with a unique serial number and the ABC Bullion logo.

I was not surprised to learn that much of the refinery output is sold to China. But, I was surprised to learn that many of the bars make a “round-trip” and end up back in Australia for secure storage. This can be verified by referring to the serial numbers on the bars.
 
In effect, the Chinese are converting dollars to gold and then diverting the gold out of China through various channels. This is easier than sending dollars directly out of China due to Chinese capital controls. The gold leaving China can go to many destinations including Singapore, Canada and Switzerland, but Australia is popular for this purpose.

This round-tripping of gold is one of the reasons China recently imposed a ban on private gold imports (although the ban was eased somewhat for those with special licenses granted by the government).

China’s voracious appetite for gold (despite recent restrictions) is one of many gold market developments I was able to learn more about first-hand during my visit Down Under. The local Australian demand for gold bullion is also at an all-time high, as is true elsewhere in the world.

With a bull market in gold firmly underway, what are the prospects for gold prices in the months and years ahead?

At Project Prophesy, we use third-wave artificial intelligence (AI) to offer readers the most accurate and powerful predictive analytics for capital, commodities and foreign exchange markets available anywhere.

First wave AI involved rules-based processing. Second wave AI involved deep learning as the iteration of rules produced new data that could be incorporated into the original rules. Third wave AI combines deep learning with big data as machines read billions of pages of information in plain language, interpret what they read, and add that to the big data input.

With Project Prophesy, machines are never on their own. Human analysts oversee the output and update algorithms as needed to steer the system on a smart path. Human+Machine processing is at the heart of Project Prophesy predictive analytics.

Project Prophesy relies on four scientific disciplines: complexity theory, Bayes’ Rule (a statistical method from applied mathematics), behavioral psychology, and history. A network of nodes and links is created with specific nodes conveying information from each of those disciplines.

Nodal input comes from data feeds, news services, exchange prices, and machine reading using systems such as IBM’s Watson supercomputer. Nodal input also comes from other nodes in a densely configured neural-type network.

Certain nodes are highlighted as containing actionable price information on stock sectors, fixed income instruments, commodities, currencies, and macroeconomic indicators generally.

Right now, the action nodes are telling us that the new gold bull market is intact and has far to run. To support this estimate, it’s important to take a longer historical perspective than the short-term rallies and dips that most analysts discuss. This longer perspective is illustrated in the chart below.
 

This chart graphs the U.S. dollar price of gold from 1970 until today. It illustrates two major bull markets, 1971-1980 and 1999-2011. It also illustrates two major bear markets, 1980-1999 and 2011-2015. Finally, the chart highlights a new bull market that began in 2015 and should continue for years.
 
It does not make sense to discuss bull and bear markets prior to 1970 because the world was on a gold standard for a century from 1870 to 1971. Prior to 1870, gold was simply money measured by weight and was not typically thought of in terms of currency equivalents. This pre-1971 gold standard went through many variations including the “classic gold standard” (1870-1914), the “gold exchange standard” (1922-1939) and the “Bretton Woods system” (1944-1971).

There were also periods when gold trading and gold shipments were suspended due to war and its aftermath including World War I (1914-1922) and World War II (1939-1944). Gold was occasionally revalued, for example, by France in 1925, the UK in 1931, the U.S. in 1933 and on a global basis in 1944.

However, all of these standards, suspensions and price resets were dictated by governments for policy reasons and were not the direct result of market forces. A true market for gold (albeit with government manipulation) did not emerge until 1971, so that is the appropriate starting point for considering bull and bear dynamics measured in dollars.

The first great bull market lasted from 1971 to 1980 and saw the price of gold go from $35.00 per ounce (the original Bretton Woods price) to $800 per ounce; a 2,100% gain in less than nine years. This rise was fueled by near-hyperinflation in the U.S. as the dollar lost half its purchasing power in a mere five-year period from 1977 to 1981.

The bull market was followed by a slow but persistent bear market that lasted from 1980 to 1999 and saw the price of gold fall 68% from $800 per ounce to $250 per ounce. This bear market was fed by extensive central bank sales including the infamous “Brown’s Bottom” where Gordon Brown, the UK Chancellor of the Exchequer (later Prime Minister), sold 395 tons of gold (more than half the UK’s gold reserves) in 17 auctions from July 1999 to March 2002 at an average price of $275 per ounce, near the lowest price for gold in the past forty years. Compared to today’s prices, this sale cost the UK over $17 billion in lost profits on gold.

The second great bull market lasted from 1999 to 2011 and saw the price of gold go from $250 per ounce to $1,900 per ounce; a 670% increase. This bull market was fueled by a combination of low interest rates (2001-2005) under Fed Chair Alan Greenspan and flight-to-quality dynamics during the mortgage crisis (2007), global liquidity crisis (2008), zero interest rate policy (2008-2015), and a new currency war, which produced a record low value for the U.S. dollar (2011).

Another bear market arrived in August 2011 just as dollar weakness turned to dollar strength. A persistently stronger dollar starting in 2011 and the promise of monetary tightening by the Fed starting with the “taper tantrum” in May 2013 were among the forces driving the decline.

As prices declined, gold miners struggled, mines were closed and gold mining rights and equipment were sold for cents-on-the-dollar, especially after the gold price crash in April 2013. The IMF added to the selling pressure by dumping 400 tons of gold on the market in 2010; another example of official manipulation of gold prices.

The turning point came on December 15, 2015 when gold bottomed at $1,050 per ounce, a dramatic 45% drop from the all-time high of $1,900. At that point, the third great bull market began. Almost no one saw this at the time because sentiment was completely depressed and many past rallies had been followed by new declines and new lows. Top gold analysts were still calling for $800 per ounce gold prices as late as 2017.

The point is, bull and bear market turning points are usually only seen in hindsight and rarely understood in real time. To our credit, we urged readers to buy gold at the $1,050 per ounce level and have been urging allocations to gold ever since. Gold has rallied almost 50% in less than four years as part of this new bull market.

The purpose of this long-term perspective is to illustrate the huge upside potential still remaining in this new gold bull market. The first bull market rallied over 2,100% in nine years. The second bull market rallied over 670% in twelve years. In both cases, the majority of the gains came toward the end of the bull market in a super-spike blow-off.

The current bull market is still in its early stage. A 50% gain in four years is impressive, but that’s just a down payment on what’s to come. If we simply average the performance of the past two bull markets and extend the new bull market on that basis, we would expect to see prices peak at $14,000 per ounce by 2026. Of course, even greater gains and a longer bull market are possible.

Jim Rickards

James G. Rickards is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He was the principal negotiator of the rescue of Long-Term Capital Management L.P. (LTCM) by the U.S Federal Reserve in 1998. His clients include institutional investors and government directorates.

His work is regularly featured in the Financial Times, Evening Standard, New York Times, The Telegraph, and the Washington Post, and he is frequently a guest on BBC, RTE Irish National Radio, CNN, NPR, CSPAN, CNBC, Bloomberg, Fox, and The Wall Street Journal. He has contributed as an advisor on capital markets to the U.S. intelligence community, and at the Office of the Secretary of Defense in the Pentagon.Rickards is the author of The New Case for Gold (April 2016), and three New York Times best sellers, The Death of Money (2014), Currency Wars (2011), The Road to Ruin (2016) from Penguin Random House.
 

Hard Assets Alliance was created as a cooperative of investment professionals who believe there's a better way to invest in precious metals. This is a guest perspective on the markets from one of these partners; we hope you enjoy it.

For information on Hard Asset Alliance, click HERE

Website:  https://www.hardassetsalliance.com/?aff=TWC

WealthCare Connect may receive compensation from Hard Asset Alliance for purchases make through links(s) on this website.

How Much
September 16, 2019

Despite signs of a global economic slowdown, it seems that there is no stop on tourism growth. For many individuals, traveling is an ideal way to experience new cultures, meet new people, and broaden horizons. At the same time, tourism is a major component of the economy for many countries. Our new visualization takes a look at which countries reap the greatest benefits from tourist spending. 

  • In 2018, the global tourism industry was worth $1.7 trillion.
  • Revenues generated from tourists have grown faster than the world economy.
  • The Asia-Pacific region saw the greatest growth in tourist spending, with a 7% increase year-over-year.
  • At $570 billion, Europe is the region with the most tourist spending in 2018.

The visualization and trends are based on a report released by the UN World Tourism Organization. The map above shows the biggest international tourism receipts (tourist spending) in 2018. Each country is proportional to the value of its tourism receipts. Countries that attract more tourism receipts (such as the U.S. and Spain) appear larger, while countries that have fewer tourism receipts (such as El Salvador) appear smaller. We also color-coded the countries by region, as shown in the map legend. All monetary values are expressed in USD.

Top 10 Tourist Destinations by Money Spent 

1. United States - $214 billion
2. Spain - $74 billion
3. France - $67 billion
4. Thailand - $63 billion
5. United Kingdom - $52 billion
6. Italy - $49 billion
7. Australia - $45 billion
8. Germany - $43 billion
9. Japan - $41 billion
10. China - $40 billion

Popular tourist destinations are subject to changes due to a variety of factors. Notably, media trends have surged to shape the new attractive destinations for tourists. For example, the UK city of Birmingham has seen a dramatic increase in tourism due to the popularity of the British drama “Peaky Blinders,” which takes place in the Midlands city. In addition, the political situation within a city can play a major role on its tourist performance, as shown by the negative effects that political protests have had on Hong Kong’s tourism industry. While developed countries in the West tend to have the highest tourist spending, developing countries like India are also gaining a larger share of tourism dollars. It is yet to be seen how fast-developing countries will reshape the tourist landscape in the future.

Finally, not everybody is happily welcoming tourists in their home city and concerns about overtourism abound. Being a courteous traveler and respecting the local culture will go a long way toward providing not only economic benefits to different countries, but also fostering international goodwill.

What country is next on your travel list? Please let us know in the comments.

HowMuch.net is a cost information website 

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Hard Assets Alliance
September 16, 2019

 

Hard Assets Alliance was created as a cooperative of investment professionals who believe there's a better way to invest in precious metals. This is a guest perspective on the markets from one of these partners; we hope you enjoy it.

China and the United States are meeting for trade talks, sparking a major market rally that finally broke the averages out of their collective funk.

 
Will the two countries kiss and make up? It’s unlikely. But one thing’s for sure: we are all sick and tired of this trade war.

“Escalating U.S.-China trade tensions have been the biggest equity headwind for months, so a relief rally on news high-level trade talks are planned for early October is no surprise,” said Alec Young, managing director of global markets research at FTSE Russell, via Bloomberg. “The bottom line is that stocks need earnings growth to move forward, and you can’t get that without progress on U.S.-China trade.”

The Chinese Ministry of Commerce confirmed the talks will happen sometime in October. Chinese media sources are generally optimistic about the outcome of the talks, according to CNBC. The Dow Jones Industrial Averages was equally enthused, jumping more than 370 points Thursday. A rally of less than 2.5% will place the Dow back at all-time highs.

How badly did the recent volatility spook traders? For an answer, we turn to

precious metals…

As stocks ricocheted in a violent range last month, investors turned to precious metals and other safety trades.

I noted in late August how gold and precious metals investments were taking charge as wider price swings afflicted the stock market. In fact, gold flipped the script and began outperforming the S&P 500 on the year as of Aug. 1.

     
But silver was the real tell.

 
The poor man’s precious metal finally caught a bid this summer and started to outpace gold — a surefire sign that speculators are finally finding their way back into the precious metals trade.


“Silver is also gaining 4.0% today which is more than twice as much as gold's 1.3%.” John Murphy noted on his Stockcharts.com blog earlier this week. “That isn't something new. Although gold led the rush into precious metals during May and June, silver took the lead during July and August.”


Murphy’s chart shows the shift perfectly as silver began to catch a bid back in July:

 

 

As you’ve probably guessed, the metals trade became a little frothy as trade-war gloom clouded market outlooks. Now that stocks are settling back into a bullish groove, the safety-seekers and metals speculators are taking profits.  

 

We’ll have to watch to see where buyers step back. Remember, major comeback rallies are typically fraught with violent reversals and shakeouts. Judging by the incredible run we’ve witnessed in the precious metals space this year, the current pullback could continue before finding support.


Sincerely,

 

Greg Guenthner


Greg Guenthner is the editor of Rude Awakening Pro and Seven Figure Signals.

 We hope you have enjoyed this article by our guest writer. For your convenience, you can click here and you will be directed to Hard Assets Alliance where you can open an account or fund you existing account today.

 

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How to Win in Court
September 16, 2019

Don't end up like this poor fellow!

He's trying to offer documents he's been counting on to win his case.

He's trying to present them for the first time on the day of the trial.

Big mistake!

His documents can do nothing unless they are admitted as "admissible evidence".

He will lose ... needlessly!

He thought he'd be tricky and surprise his opponents.

He hid his "evidence", waiting till the last minute to "spring it" on his opponent at trial, hoping it would be too late for his opponent to respond effectively.

Bad idea!

Ambush rarely works at trial ... no matter what you see on TV or the movies

If you don't get your evidence in before trial, you'll likely not get it in at all.

Then you will lose ... needlessly!

You only get one bite at the trial apple.

Never trust that a document will be admitted ... even if it's sealed with royal wax imprinted by a king's ring and draped with silk ribbons.

If you assume you have "evidence" to spring on your opponent at trial, you are playing a dangerous game, risking everything for no advantage whatever.

Evidence that isn't admitted isn't evidence!

Authenticate your evidence before trial.

For information on the "How to Win in Court” self-help course, click HERE

Website:  https://www.howtowinincourt.com?refercode=SR0094

WealthCare Connect may receive compensation from Juris Dictionary for purchases make through link(s) on this website.

 

Hard Assets Alliance
September 13, 2019

The Gold Sellers’ Cartel Is Dead and Now Everyone’s Buying

Not many have ever heard of the Central Bank Gold Agreement, CBGA, also called the Washington Agreement on Gold, but it’s an interesting side note to the history of government manipulation of gold markets.

The agreement was first signed in 1999 and was renewed for five-year terms in 2004, 2009 and 2014. The signatories included central banks in France, Germany, Italy, Netherlands and Belgium and the European Central Bank as well as non-eurozone central banks in Switzerland and Sweden.

The U.S. was never a member of the agreement, but it did supervise the implementation of the agreement closely as did the Bank for International Settlements (BIS). The CBGA is a gold seller’s cartel similar to the notorious “London Gold Pool” of the late 1960s.

During the long gold bear market (1980–1999), central banks were active sellers of gold. There was some fear that the selling would spin out of control and hurt the value of remaining reserves more than was already the case.

 
The CBGA set limits on total sales and individual sales by member countries as a way to allow some ongoing sales without sinking the entire market. There was only one problem. The sales had largely dried up by the time the agreement was put in place.


After “Brown’s Bottom,” named after U.K. Chancellor of the Exchequer Gordon Brown, who sold about half the U.K.’s gold reserves at an average price of $275 per ounce between 1999 and 2002, there were few significant sales of gold by the CBGA signatories except for 1,000 tons by Switzerland in the early 2000s and 400 tons by the IMF in 2010.


There have been no sales by any signatories since 2010. The agreement is up for renewal in 2019, but it has long been a dead letter. As of now it’s being reported that the agreement is being allowed to lapse.

 
Of course, other central banks, including Russia, China, Vietnam, Turkey and more, have been voracious buyers of gold since 2009. As of now, the age of central bank gold sales is officially dead and the age of central banks as gold buyers has returned. This is just one more reason why gold prices have been on a tear.

Regards,

Jim Rickards

James G. Rickards is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He was the principal negotiator of the rescue of Long-Term Capital Management L.P. (LTCM) by the U.S Federal Reserve in 1998. His clients include institutional investors and government directorates.

His work is regularly featured in the Financial Times, Evening Standard, New York Times, The Telegraph, and the Washington Post, and he is frequently a guest on BBC, RTE Irish National Radio, CNN, NPR, CSPAN, CNBC, Bloomberg, Fox, and The Wall Street Journal. He has contributed as an advisor on capital markets to the U.S. intelligence community, and at the Office of the Secretary of Defense in the Pentagon.Rickards is the author of The New Case for Gold (April 2016), and three New York Times best sellers, The Death of Money (2014), Currency Wars (2011), The Road to Ruin (2016) from Penguin Random House.

For information on Hard Asset Alliance, click HERE

Website:  https://www.hardassetsalliance.com/?aff=TWC

WealthCare Connect may receive compensation from Hard Asset Alliance for purchases make through links(s) on this website.

How to Win in Court
September 13, 2019

 

What is the goal of legal writing?

Impress the judge?

Confuse the opponent?

Or, win the case?

In law, the goal is to win!

Every word, spoken in the courtroom or written on paper filed with the clerk and served on the other side, must aim toward a specific goal.

Any words NOT aimed at the goal must GO!

Most of what I've seen from pro se people (and quite a bit from the dozens of lawyers I had to deal with since 1986 when I first started as a licensed attorney) read more like a long-winded story.

Legal writing is NOT "story-telling"!

EVERY word has a purpose.

Every word that does nothing to achieve your goal of winning will work against you!

Say what needs to be said and then STOP!

Aim EVERY word at your goal.

You don't need a "novelist's eye" or a "bartender's ear", like Jimmy Buffett.

Think of legal writing as if you are assembling the parts of a powerful engine

that must propel you toward your goal ... WINNING!.

Unnecessary parts get in the way! Get rid of them!

Write smart.

For information on the "How to Win in Court” self-help course, click HERE

Website:  https://www.howtowinincourt.com?refercode=SR0094

WealthCare Connect may receive compensation from Juris Dictionary for purchases make through link(s) on this website.

How Much
September 12, 2019

When comparing the economies of different countries, one of the most common methods is to use “purchasing power parity.” Purchasing power parity (PPP) compares international economies by standardizing the prices within a "basket of goods”. In other words, PPP accounts for the differences in standards of living (such as the different costs of a carton of milk) when comparing countries' production. Taking it one step further, our new visualization looks at the GDP of countries around the world in terms of PPP. In this chart, we use current international dollars, which has the same purchasing power as the dollar has in the United States.

  • Measuring GDP by PPP takes into account the cost of living around the world, rather than relying on market exchange rates to compare the economies of different countries.
  • In 2018, the world economy by PPP was $136.48 trillion.
  • Asian countries represent more than 40% of the world’s GDP by PPP.
  • The U.S. and China represent a third of the world’s GDP by PPP.

The information from this visualization comes from the World Bank, and the most recent numbers are from 2018. The size of each country in the visualization is proportional to its relative GDP by purchasing power parity. The countries are also color-coded by continent to illustrate the geographic distribution of the world’s production. All values are expressed in U.S. dollars.

Top 10 Countries by GDP at PPP

1. China - $25.36 trillion - 18.58% of World’s GDP
2. United States - $20.49 trillion - 15.02% of World’s GDP
3. India - $10.50 trillion  - 7.69% of World’s GDP
4. Japan - $5.48 trillion - 4.02% of World’s GDP
5. Germany - $4.51 trillion - 3.30% of World’s GDP
6. Russian Federation - $3.99 trillion - 2.92% of World’s GDP
7. Indonesia - $3.49 trillion - 2.56% of World’s GDP
8. Brazil - $3.37 trillion - 2.47% of World’s GDP
9. United Kingdom - $3.07 trillion - 2.25% of World’s GDP
10. France - $3.07 trillion - 2.25% of World’s GDP

Last month, we published a visualization that illustrated the world’s economy by GDP in current U.S. dollars (GDP that does not account for cost of living and uses market exchange rates to compare different countries’ outputs). You’ll notice there are a few differences between the visualization showing the world economy by nominal GDP (right visualization) and the world economy at PPP (left visualization). Notably, the U.S. has the largest share of the world’s GDP overall, but China has the largest share of GDP at PPP.

The World Bank data also shows that the GDP at PPP in the U.S. has grown every year since the Great Recession. However, after ten years of expansion, economic growth in the U.S. is finally slowing. But some think that the job growth is still enough to retain economic stability and continue to increase GDP. 

Similarly, China’s economic slowdown has been noted internationally, especially its decrease in exports. China’s Central Bank has taken action by reducing its reserve requirement ratio in order to encourage more lending and kickstart more production. More signs of a global economic recession are showing, as the economic performance of countries such as Japan and India have also failed to impress. The global economy is still growing for now, but these trends could be a harbinger for changes ahead.

Did anything surprise you about the differences between GDP and GDP at PPP around the world? Please let us know in the comments.

HowMuch.net is a cost information website 

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RiXtrema
September 12, 2019

 

Why do we care about Housing?

Property is the most expensive item most Americans will ever purchase. So, we will sacrifice a lot of additional spending to keep a roof over our heads. Observing the housing market is an excellent gauge of consumer confidence and financial health. It is integrated into nearly every economic sector and makes up a significant chunk of GDP (15% of GDP).  The construction of new houses is, surprisingly, a small portion of the housing market, 3-5% of GDP. Rent and mortgage payments, then, make up 12-13% of GDP, as it is the most significant yearly expense of most households.

The 2008 Financial Crisis is unique because it involved the destruction of one of the United States’ most resilient industries. Neither the dot-com crash nor the 1997 Asian crisis dented the housing market. Usually, when home prices go up, people feel better off and feel more confident. Likewise, when house prices go down, people are more likely to cut down on spending and forego making personal investments. Home prices grew steadily from 1990 to Q1/2007 and, with them, people were looking for ways to make extra cash with the equity in their homes.  So, refinance applications soared leading up to the crisis. Consumer confidence drove high borrowing and refinancing but adjustable-rate mortgages undermined the financial benefit and came back to bite owners (Indicated by those ominous black bars in Figure 1). 

What goes up must come down

Funny enough, with home prices increasing steadily for over 10-years, people forget that whatever goes up must eventually come down. Maybe when investors are investing more in deteriorating mortgages, they cross their fingers and hope for the best. Regardless, these entrenched expectations of housing appreciation met low-interest rates and financial innovation to push home prices up at an accelerated rate after 2003. So, with a little financial invention, subprime and non-prime mortgage origination jumped in 2004, and the share of junk mortgages in mortgage-backed securities increased until it reached 80% in 2005 and 2006.

Home prices grew outside the United States, but it was the financial innovators who “built an inverted pyramid of leverage on the narrow fulcrum of ongoing domestic home-price appreciation” (Obstfeld and Rogoff).

Six million Americans lost homes during the Great Recession, and it takes a long time to rebuild that credit shock. As these Americans reenter the market, their wages have barely kept up with inflation and increased competition, from Millennials, is crowding the market.

Look at Where We Are

This month, August, the average rate on a 30-year fixed loan hit a 3-year low, 3.6%. Refinancing applications are up 12% at the beginning of August. Both metrics indicate a healthy housing industry and expectations that the good times will keep on rolling. Yet, while the situation is very similar to 2007, there isn’t the same level of risk. The weaknesses are more nuanced, and the links which make the housing sector a sound economic indicator are deteriorating. 

There will not be a mortgage crisis anytime soon because new home buyers, millennials, are not traditional consumers. Millennials value flexibility, they marry later, and debt binds them more than any other generation. So, the industry will not have the gas to spin out of control. Millennials will reach financial maturity having witnessed the economic crisis affect loved ones, and that risk aversion is tough to shake – an availability heuristic

Investors are starting to make up a higher percentage of home sales – at an all-time high and concentrated in lower-end markets. Private equity firms, like Blackstone Group Inc., bought loads of foreclosed properties after the crash and rented them back to the disgraced former owners. Investors concentrate purchases in high-growth areas, and these areas see less demand and slower price growth compared to regions without property investors. So, this investor activity may give additional stability to the market, if properly leveraged – albeit it creates problems for renters unable to buy their own home.  

No equity in a college degree

Not only is debt a problem, post-college wages are persistently stagnant and the rise in contract labor are challenges for financial planning. Homes are 39% more expensive than 40 years ago and, despite low interest rates, buyers are priced out of rising houses because incomes have not increased with the price of houses. The mortgage crisis of 2006 seems to be impossible to repeat because people can’t afford homes or must save to reduce debt – making investing in mortgage-backed financial instruments more secure. 

Low mortgage rates and high employment should make a healthy housing market, but the opposite is most likely the case. Entry-level homes are in short supply, as shown in Figure 2, because of competition from Millennials and investors burned by 2008 foreclosures, which have now rebuilt their credit. A repeat of the mortgage crisis is unlikely mainly because of restrictions on financial instruments and lending. The housing market, though, shows how wage stagnancy and household debt remain barriers to the pursuit of a culturally-iconic American investment. 

Marketplace analogized the likelihood of another recession as rolling a 6-sided die – eventually, the wrong number will come up. Economists suggest a 1-in-3 chance that the U.S. economy will shrink next year. Sure, another recession will happen eventually, but the devastating effect of the last financial crisis has led us to expect the next recession to be just as bad. This is not necessarily the case, and there is little evidence to suggest recessions match the magnitude of the expansion period. Recessions have a history of varying durations and employment severity (Figure 3). 

 

The leveraging instruments that kicked the housing market into overdrive are not present today. But that doesn’t mean that every debt market is free from such systemic risk. In Part 1, I touched briefly upon the corporate debt crisis, and Part 3 of Recession Deja Vu will continue this risk narrative. You can follow this series and learn about our Financial Planning Software on our blog,