Total Private and Public Debt Worldwide - Debt Deflation, not Inflation, is the Near Term Risk (Lacy Hunt, Van Hoisington)

"...debt deflation – not inflation – is the biggest near-term risk...the famous characterization of inflation ultimately depends on stable or rising monetary velocity… sans sufficient monetary velocity [see below], inflation does not materialize." Dr. Lacy Hunt (via Mauldin conference)

*Money Velocity*: "...the even more important velocity of money (V) rejects the argument that monetary policies are gaining traction. Velocity, or the speed at which money turns over, links M2 to the level of nominal economic activity. With the money supply expanding at 5.6% in the latest year, it would be reasonable to expect the same growth rate in nominal GDP if V were stable. Unfortunately, since 1997 velocity has been falling, and in the last twelve months it has dropped by 3% to 1.57, the lowest level in six decades (Chart 4). While velocity is influenced by a myriad of factors, the rate of change of financial innovation and lending for productive purposes affect its direction. If debt generates an income stream that repays principal and interest and creates other activities, it will tend to expand economic activity and cause V to rise. Student, auto and other loans for consumption (which represent the bulk of the increase in consumer credit in 2013) do not meet the necessary criteria, so debt is merely an acceleration of future consumption. This will tend to inhibit the borrower’s ability to increase consumption in the future. Further,  new regulations on our financial industries are discouraging financial innovation, and this will bring further downward pressure on velocity."

(http://www.hoisingtonmgt.com/)

Income Inequality Ultimately Adjusts Itself? Dent's Demographic View

The Super-Rich Will Get Their [Derriere] Kicked

"...Gallup just conducted a recent poll on what Americans think is the best place for long-term investments.

I don’t have to tell you that most people are always wrong about such things. In fact, there is nothing better to bank on than going contrary to popular opinion.

Fifteen years ago, I would’ve bet that poll showed stocks as number one. But I knew before I saw the results that it would not be stocks… it would be real estate.

Here is how this common logic works: They aren’t making any more land… so prices can only go up!
And here’s why that common logic is flawed…

It doesn’t adjust for technology and the means to build more real estate on the same land.

And, more importantly, it doesn't adjust for slowing and even contracting demographic trends in most of the wealthiest countries in the world.

Most people think the next great real estate boom is just around the corner. This would seem logical, because real estate prices have gone up for most of our lifetimes.

Two major trends have caused this illusion:

1.     The Bob Hope generation returned from World War II as the first middle-class generation in history able to afford homes and mortgages with GI benefits to accelerate home-buying.

2.     The massive baby boom generation followed and put unprecedented demand pressures against limited supply (especially in coastal areas). This resulted in home prices ballooning into the greatest bubble in modern history.

To get the clear and simple long view, just look at this chart from Robert Shiller, one of the few mainstream economists I respect and follow.

See larger image

This chart is brilliant, because Shiller painstakingly (with a lot of student slaves, I presume) adjusted home prices in the U.S. for both the size of the home and the quality of the features. He produced a great and realistic analysis!

It shows the only major bubble in real estate in the last 120 years, from 2000 to 2005.

The insight from this chart is crystal clear: Home prices do not appreciate with the economy or even long-term shortages of land (as there is always somewhere else to build). Instead, they appreciate with inflation or replacement costs.

Adjusted for inflation, home prices are relatively flat — which means you get a “zero” real return.

Holy cow, Batman! You mean real estate is not an appreciating asset like stocks or bonds?

The common wisdom of people who think real estate is the best long-term investment falls into the category of most people usually being wrong!

I have been preaching for over a decade about real estate not having the prospects it used to. I warned in my newsletters in late 2005 that the U.S. real estate bubble was peaking (Shiller and I were the only ones to predict this), and it did, in sales and in prices in early 2006.

In Chapter 3 of my latest book, The Demographic Cliff, I show in greater depth why “real estate will never be the same.”

When I account for real estate lasting forever — adjusting for dyers (at age 79) who sell versus peak buyers (ages 41 to 42) — real estate “net demand” did peak in 2006, and after bouncing a bit into 2013, it declines again for decades off and on.

In Shiller’s chart above, it would look like we are near the long-term “flat” trend again for real estate adjusted for inflation. And we got closer in 2012.

But real estate does not ordinarily bubble as much as stocks or commodities. This has been the greatest, and most global, real estate bubble in modern history — thanks to unprecedented baby-boom demand pressures and ultra-low interest rates.

After such a bubble, real estate prices are likely to head toward the lower range of values in the global financial crisis I forecast ahead, as they did during the Great Depression of the 1930s.

My analysis of U.S. home prices strongly suggests that home prices could drop another 34% to 44% from the limp rally since 2012, to merely erasing the bubble gains from January of 2000 onward.

This is not the time to buy real estate, especially not in prime cities like London, New York, San Francisco, L.A., Miami, Vancouver, Toronto, Sydney, and Melbourne.

The high-end is much more vulnerable than the low-end, as appreciation has come back much more strongly. The most affluent are like Alice in Wonderland in the wake of massive central bank stimulus — which has kept their bubble going and, as a result, will peak later in their spending cycle.

The richest billionaires in the world think there is no better place to put money than in condos that are in major financial city centers, priced at $10,000 to $15,000 per square foot.


In the end, the smart money becomes the dumb money, because they have nowhere else to put their cash, except in the most expensive real estate in the world... ."

Harry S. Dent Jr.
(www.dentresearch.com) 

How and When the Economic (Housing) Bubble Will Burst

President "Bobby": Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?

[...Long pause...]

Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.

President "Bobby": In the garden.

Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.

President "Bobby": Spring and summer.

Chance the Gardener: Yes.

President "Bobby": Then fall and winter.

Chance the Gardener: Yes.

Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy.

Chance the Gardener: Yes! There will be growth in the spring!

Benjamin Rand: Hmm!

Chance the Gardener: Hmm!

President "Bobby": Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I've heard in a very, very long time.