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Part II – We Are Concerned About The Real Estate Market

In this second part of our research into the potential collateral damage, the Covid-19 global virus event may cause in the housing and commercial real estate markets, we want to start by sharing some information that severe cracks are already starting to appear in the entire system.

Hedge funds and banking institutions may already be feeling the pressure to attempt to contain the losses that are piling up (source: https://www-bloomberg-com).

An extended decline in the global markets will continue to place pressure on institutional financial markets, banks, hedge funds, and other traditional lending and investment firms.  Investors will start to pull investment capital away from risk (out of the markets and funds) and may expose some of these larger institutions’ excessive leverage and risk exposure in the process.

This is almost exactly what happened with Bernie Madoff when his firm, Bernard L. Madoff Investment Securities, collapsed in December 2008.  As long as there was no pressure on his firm from clients pulling out capital or asking too many questions, he was allowed to continue running his Ponzi scheme.  Once investors started pulling capital out of the firm and questioning the transactions/reports, it became evident that it was all a house of cards and would come crashing down quickly.

If larger investment firms and hedge funds are attempting to “buy the dip” at this point in time, we believe they are making a grave mistake.  We believe the downside risks associated with the Covid-19 virus event are just starting to unfold and the collateral damage that may come from this massive global shutdown that is currently taking place will be unprecedented.  We don’t believe there has been anything like this happening in any recent history – even WWII pales in comparison to this event.

News is starting to hit the wires about large investment firms and Real Estate investment companies sounding the alarm  The one news item out this weekend that caught our attention was this one from https://www-bloomberg-com. The fear is evident in the short content of this news article.

“Loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and homeowners, landlords, developers, hotel operators, and their respective tenants and employees,” he wrote.

Just take look at the foreclosures in the major cities starting to spike in the maps below. This was before the virus closed down most businesses, and everyone losing their jobs. Give the fact that 70% or more of the world lives pay-check to pay-check, foreclosures and real estate values are likely to plummet lower to an extreme similar to how overpriced they are now.

I have talked about his in some presentations, and in videos in the past how real estate is grossly overvalued and when the music stops, prices will tumble. Huge opportunities for those who can preserve their capital until the recession matures enough will be able to buy real estate, businesses, and equipment for pennies on the dollar, but this will take another 1-2 years from now I imagine, but it will be great for those with money on hand when things get ugly.

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CURRENT LOS ANGELES FORECLOSURE MAP
(SOURCE: ZILLOW.COM)

CURRENT SAN FRANCISCO FORECLOSURE MAP
(SOURCE: ZILLOW.COM)

CURRENT NEW YORK FORECLOSURE MAP (SOURCE: ZILLOW.COM)

Many of you may remember my Crunching Numbers article from just a week ago where I attempted to model what I believe would be the likely outcome of US GDP over the next 5+ years?  Well, it now appears others are following up with their own predictions for US GDP.   Based on some of the expectations within this Bloomberg article, my predictions pale in comparison to these comments.  Source: https://www.bloomberg.com

Now, let’s try to be realistic about how this entire process is likely to take place.  We know the economy will find a base (at some point) and attempt to recover from this virus event.  The question is what does that base look like and where is the bottom?

We won’t really know where the bottom is in the global markets until most of the unknowns have been processed, most of the collateral damage has been identified and processed, and consumers realize the bottom is in sight.  At that point, there is a real chance that the global markets will begin a recovery process that may eventually push to new all-time highs.

What we’re concerned about right now is the Q1 and Q2 economic activity and how that relates to consumer markets, credit markets, existing business enterprises and the potential collateral damage to hard assets like homes, commercial real estate and other foundations of wealth.  We believe the first few dominos of this event will be the collapse of jobs, earnings, and consumer spending.  The longer the global stays in a mostly shutdown economic environment, the greater the risks these critical numbers will implode – possibly taking with it the rest of the economy.

We believe the suspension of Foreclosures for a potential 12 month period may not reduce the total number of foreclosures across the US, we believe it may compound the problem.  The suspension effort is designed to help people stay in their homes if their incomes become threatened or lost.  But the reality is that a Foreclosure suspension will simply start to build larger and larger numbers of properties in foreclosure (waiting for the suspension to be lifted) while home prices potentially collapse.

We’ll dig into more data in Part III of this article and attempt to illustrate the data we believe will point to a clearer picture of how all of this may unfold in the near future.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for short-term swing traders.

Visit my ETF Wealth Building Newsletter and if you like what I offer, and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
www.TheTechnicalTraders.com

Crunching Some Numbers – Our Researchers Share Their Data – Part II

Continuing our earlier multi-part research post related to our extensive number crunching and predictive modeling systems expectations going forward many years, (Part I) this second part will highlight some existing data points and start to discuss the concepts of what the Covid-19 virus event may do to the immediate global economy.  Remember, in the first part of this article, we shared research related to the US Fed Funds Rate (FFR) and how the Covid-19 virus event may create an environment of economic malaise over the next 12 to 24+ months as well as potentially disrupt the population and deficits over a 5+ year span.

This type of event is very similar to war (think WWII) in the sense that consumer spending changes, population growth, and levels change, GDP changes and deficits change for all involved.  Our researchers modeled the GDP levels from 2017 will now with the intent of attempting to identify probable outcomes of GDP output throughout the world over the next 5+ years.  Throughout these types of events, a massive capital shift takes place where consumers within areas impacted by war shift their spending and purchasing habits to address the immediate real needs of their attempted survival.  Speculation vanishes.  People only spend on things they are confident they can afford to risk their money on.  Anyone who is able to take advantage of the displaced or disparaged has a real opportunity to create some real gains if they don’t become the next displaced or disparaged individual.

Here is some data we used to model what we believe will happen over the next 2 to 5+ years as a result of the Covid-19 virus event.  We are using this global data as a basis for our modeling going forward and attempting to align 2018 and 2019 data with that reported by the St. Louis Federal Reserve data.  Our objective is to attempt to identify the scope and extend of any potential change in economic cycles going forward and to prepare our friends and followers of what to expect.

This data illustrates the scale and scope of the total global GDP output of all the nations on the planet for 2017.  It is important to understand that China and the United States are the two biggest GDP producers of all nations.  Between the US and China, both nations produce roughly 40% of the world’s total GDP annually.  When you consider all nations producing more than $1.5T in annual GDP on this graphic, these 12+ nations (including OTHERS) produce nearly 78% of the world’s total GDP annually.

The nations that make up this list of top GDP producing nations are:

These nations (and the group of nations listed as OTHERS) total almost 80% of total annual GDP across the entire planet.  Keeping in mind that we are attempting to model the Covid-19 virus event, which nations are likely to be the hardest hit on this list?  Obviously China, Japan, Germany, Italy, South Korea, and the United States are all prime targets of the Covid-19 virus event.  Brazil, Canada, France, India, and Others are secondary targets for GDP disruption.  Yet, their proximity to the price candidates makes them fairly easy targets for future GDP disruption related to the Covid-19 virus.

The point we are trying to make by illustrating this is that 80% of the world’s total GDP is at risk over the next 24+ months related to shifting consumer spending, central bank activities, asset valuation levels and much more.  We’re not talking about 4% or 5% of the world – we’re clearly showing you that 80% of the world’s total economic output is within the cross-hairs of this virus event.

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Our modeling suggests the 2017 GDP levels presented by the image (above) and the subsequent yearly REAL GDP levels presented by the St. Louis Federal Reserve deliver this data as a basis for our modeling system.

Our attempted modeling of the Covid-19 virus event across global economies is based, in part, on what happened in the 2008-09 Credit Crisis event.  Throughout that span of time (2008 to 2009), US GDP fell -3.36% over 12 to 16 months.  The difference between this Credit Crisis event and the Covid-19 event is that the Covid-19 event appears to be disrupting a broader segment of economic sectors across dozens of nations/cities all at once.  Whereas the Credit Crisis event resulted in somewhat isolated asset and economic contractions related to banking, insurance, credit, and assets – the Covid-19 virus event appears to be much broader in scope and consequences.  Our researchers believe the Covid-19 virus event will reach nearly every segment of the global economy in some way or form – causing some type of economic disruption either in supply, demand or overall consumer activity related to the sector/economic component.  Therefore, we believe the scope of the contagion event related to Covid-19 will be, at a minimum, 2x to 3x the scale and scope of the Credit Crisis.

We’ve come to the conclusion that the disruption to earnings, revenues, expenses and other economic factors across a broad spectrum of global economic outputs may look something like this.

This image has an empty alt attribute; its file name is image.png

We believe Q1 and Q2 of this year will be a disaster for almost all nations.  We believe there is a chance Q3 and Q4 2020 may see a moderately strong recovery (or the start of a recovery).  We believe winter 2020 and into 2021 may bring further influenza type illness and may begin the process anew.  Or, we believe the recovery process may be somewhat stalled in 2021 as we believe the fallout from the previous year may still be taking place across multiple asset classes and corporate level and banking/insurance level industries.  We believe that by mid-2022 and early 2023, the global economy will begin to find a solid foundation for future economic growth and that global GDP may begin to move higher overall.

We are basing our modeling process on the information we have gained from our experience in the markets and from living through the 2008-09 Credit Crisis event.  Far too many people fail to understand the contagion event process that takes place when consumers abandon traditional spending patterns as income levels become more “at-risk”.  As we’ve suggested many times in previous articles, consumer spending and the “flock mentality” is not something to underestimate.  Current GDP levels are calculated mostly by consumer spending activity.  Think about what that means going forward.

Here are some St. Louis Federal Reserve data charts that we used in attempting to model these results.

A potential further decrease in M2 (velocity of money) throughout this Covid-19 virus event is very likely.  This is one of the primary reasons we believe this event may last more than 24 months in total span.  We believe the continued decline of the M2 velocity level is a very strong indication that historical levels of economic activity (1965 through 1995) simply are not present in today’s global economic world.  This complicates how money is used within the global market – it is being engaged as active money transactions by a -30% ration than 1995 levels. If M2 continues to decline, we believe the consequence of this move will relate to an even slower recovery from the Covid-19 virus event.

In the next part of this article, we’ll explore the real data points and outlier expectations of the 2020 Covid-19 virus event.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for short-term swing traders.

Visit my ETF Wealth Building Newsletter and if you like what I offer, and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
www.TheTechnicalTraders.com