Housing bubble11/15/2023 ![]() ![]() ![]() In our macroeconomic narrative woven so far, we've posited that the market is inevitably heading towards a decline. Intriguingly, while historical data suggests a negative correlation between inflation and PE ratio, the recent inflation upswing hasn't triggered the anticipated response in the PE ratio, creating an unexpected divergence. ![]() Gold ( GLD) and Bitcoin ( BTC) hold promise in anticipation of a prolonged economic downturn and bear market, a scenario some label as the " Economic Reckoning". equities ( SPY) might be necessary in the short term. Nevertheless, this won’t be a straight line up, and moving away from currently expensive U.S. One should consider pivoting towards resources, climate change and innovation related investments. The focus should be on long-term secular growth stories and potential scarcities that rise above the business cycle. Navigating this maze requires a keen investment approach that embraces potential recession. The wealth generated by GDP growth has predominantly trickled upward, leaving the average worker marooned. The stagnation of wage growth for average American workers since 1975, juxtaposed with significant wage hikes in France and the UK, highlights a significant issue. These are the intersecting strands of the complex web we find ourselves in. In America, capitalism is grappling with issues like monopolistic practices, dwindling capital expenditure, stagnant wage growth, and profit margins inflated by a culture of under-investment and share buybacks. ![]() This combined with labor scarcity could have far-reaching economic consequences. The world is also experiencing a period of deglobalization, an inherently inefficient state, fostering inflationary pressure. Contrarily, Africa is experiencing a population boom that could strain societal stability due to inadequate agricultural resources, governance challenges, and escalating climate change issues. In the developed world, including China, we're observing a population deceleration, which threatens to deplete the workforce in the coming decades. The demographic shifts currently unfolding worldwide will also leave a profound imprint on the economy. This, in turn, gives the illusion of GDP growth, but it's a mirage caused by the increased expenditure for procuring the same quantum of resources. Resource scarcity will drive up costs, particularly for energy and raw materials. Each has the potential to detrimentally impact economies, lowering GDP and stoking inflationary fires. Overlaying these immediate concerns are two secular challenges: climate change and the looming end of cheap resources. The housing market, bonds, and other asset classes are all ensnared in the tendrils of what has come to be known as the "Everything Bubble." A simultaneous bubble across multiple asset classes amplifies the risk, a danger not unfamiliar to those who recall Japan's historic bubble implosion. It's not just equities that teeter precariously on the brink of a bubble. Today's economic landscape is marred by high levels of debt, a powder keg waiting to explode with each incremental increase in interest rates. This divergence between speculative and blue-chip stocks is not just symptomatic but indicative of the bubble's burst. The bubble we now find ourselves in has burst, and we're observing the swift unraveling of the most speculative stocks. Historical glimpses into market bubbles, notably those in 1929, 1972, 2000, 2006, 2021, and Japan's colossal misstep in 1989, reveal a pattern of common precursors: robust economic growth, heightened investor confidence, leveraging gone amok, and the malignant influence of fraudulent activities. With the specter of banking anxieties hovering ominously in the backdrop, markets are bracing for a period of volatility and turbulence. It is with a sense of prophetic inevitability that we entered into a new phase of this cycle - the bubble burst - last year. The cyclical dance of boom and bust has long been choreographed by central banks, an orchestration tracing back to the close of the Volcker era. Everythingpossible/iStock via Getty Images ![]()
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