Global crisis-time to sell Shares and buy a Property?

I have been asked an interesting question as to what is the state of the economic crisis vesrus the past and if one should dump stocks and buy a property.



It does make sense to have a property in an investment portfolio just as well as having other asset classes (Plotted on log scale so that percentage gains are apparent (rather than nominal gains with 2002 as we are back to 02 valuations). Yet the the timing of selling may not be a good one:




In short, a dollar invested in stocks has produced gains that BEATS all other asset classes. On average, equities have returned 7% per year for the last two centuries. Cash has become worthless, while gold, interestingly, has proven itself a near perfect store of value. One dollar of gold purchased in 1800 has returned nearly exactly that – one dollar nineteen cents. (This may be the most compelling argument for those who maintain that gold is the ultimate hedge against inflation.) So, whilst the stocks are down massively now, is the glass half full or half empty?


Here is a 100 year picture:






We know one thing for sure-they will keep going zig-zag for another 100 years. Here is another look at his equity return line for the last 40 years.







What can be seen here are the dips and jabs above and below the regression line that mark the overbought and oversold moments in market history since 1970. Deeply oversold markets in 1974 (40.7% below trend) and 1981 (40% below trend) were only worsted by the grand-daddy bear market of 1932, which brought equities 42% below trend (not shown).


See the resemlence between 1973-74 and 2008-09. Every time the markets dip to such level, a new RUN commenses.Wharton Business School Finance Professor Siegel conducted a statistical analysis that shows that the 2008 bear market has brought stocks 43.1% below trend, pointing to a bear market relatively worse than anything we have seen for the last 200 years!
Does that mean stocks will not fall further?


Absolutely not-we had worse economic and solcial climates, wars, etc. Things can fall apart (as nearly everything eventually must). And we have certainly entered a new era where the results of unprecedented central bank meddling will reap consequences unknown, unintended and likely dire. But, at the same time, investors must also be aware that two hundred years of history has a momentum of its own – and must also be reckoned with. In fact, my personal view is that the banking fall-out was driven by Ultra-Rich who indirectly control governments, driving the banking sector under complete government control.

Here is Jim Roger's view

Therefore, should we regress to the mean that Professor Siegel’s work points us toward, we could be witnessing the index back where it was. Conversely, Siegel’s work indicates that there’s no historical precedent for indexes to fall significantly from these levels. Figure out what history means to you, and take that for what it’s worth.



Banking Crisis....just another one. According to an IMF database, there have been 124 “systemic” banking crises since 1970—episodes in which bad debts soared across the economy and much of the banking sector was insolvent. Most of those crashes were in the developing world. But the list also includes half a dozen rich-country crashes, from Japan’s slump after its property bubble burst in the late 1980s, to the Nordic bank crises in the early 1990s. All involved deep recessions, required massive government intervention to clean up bust banks, and led to big increases in public debt as economies shrank while government spending soared. But the speed of recovery differed dramatically; Japan endured a decade of economic stagnation, whereas South Korea returned to growth within two years of its 1997 banking disaster.

Whether or not any of these trends will continue into the future is a point of debate for another time. What is most interesting for us at this juncture is the absolutely straight regression line that marks the return in equities over the period in question. It is to this straight line that we now turn our attention.

During 1973, short term rates increased right up until the end of August when they temporarily peaked at 8.67%. They had been steadily increasing since February 1972 (When they were just 3.2%). Does this sound familiar? In response to a slowing economy and a looming recession they then spent the next 12 months to August 1974 in a tight range between 8.67% and 7.12%. During this time Gold rallied strongly from US$105 an ounce to US$152.50, an increase of 45% (It got as high as US$172.25). It remained strong until the stock market consolidated again towards the second half of 1974 after a lengthy fall. From August 1974 to December 1976 interest rates eased from 8.96% back down to 4.35%, during which time the stock market embarked on another post recession rally (Similar to the one following the first recession in 1970). Gold's rally continued until December 1974 when it peaked at US$193 before embarking on a severe correction that took it as low as US$104.38 during August 1976, a fall of close to 46% or all of its preceding gains. My guess is with short term rates being reduced to ease the recessionary conditions, the inflation problem was played down by the Fed and the investment public flocked back into the stock market at the expense of Gold. History later proved that this easing of interest rates only exacerbated the inflationary pressures to the point where they could no longer be swept under the carpet. The Gold price towards the end of 1976 commenced what to this day has been the most spectacular and longest rally in Gold market history. A record that I strongly believe will be broken in the years to come. Looking at resource sector is still worthwhile, otherwise just stick to aussie INDEX funds as the resources are a large chunk of it.






Now look at the Dow Index in the US from 1970-1990 above. The charts tell a very interesting story. it shows America (as well as the global economy) survived without huge gains from the stock market. Millions of Americans purchased homes from 1970-1990. Today, many of those same homeowners are losing their homes. Whilst we have not seen many Australians loosing homes, US experiences numerous foreclosures assisted by severe job-losses, factory closures and banks wanting to get out by selling at losses for whatever they can get.





Here is a long list of houses for sale in detroit after GM shut it's car plant:



http://www.realtor.com/realestateandhomes-search/Detroit_MI?sby=1




They take Amex over the phone and some prices arfe $1 per house - would you like 1000 homes for $1,000???




Some feel this is a joke or a crazy notion of a complete housing meltdown, yet wait......we had worse situations in the past 100 years, didn't we? People will still need to live somewhere? Life always goes on. For those non-believers we point out that Automotive industry is cyclical, as well as peoperty is also cyclical. US companies announced in 2008 the closing of 1,223 993 jobs, a figure surpassing by 57 percent the total number of layoffs in 2007 and the highest figure over the past five years, according to Challenger, Gray Christmas consulting firm.
Household names such as Caterpillar, (CAT) Home Depot (HD) and Sprint Nextel (S) said Monday that they are laying off a combined 35,000 workers in moves that stressed the severity of the worldwide recession and kicked off what is likely to be a week of gloomy earnings announcements, further job cuts and dismal data. Corning said it is cutting 3,500 jobs, or 13% of its payroll, etc.

The news ratchets up the pressure on the Obama administration and Congress as lawmakers debate an $825 billion stimulus package intended to save or create millions of jobs. Far more job cuts are likely as consumer and business spending tumbles amid what many economists say is the worst recession the USA has seen since the Great Depression. With the economic stimuls [packages in nmost countries mirrowing the US (eg $42b Rudd's package here in Oz), thhe cycle will re-emerge eventually. If the workers get jobs again, can they afford more than $1 for the house to live in? You bet!



Are such property panics rare? No.



Let's look at Japan. Japanese real estate is literally selling at 1980s prices. Rents in Tokyo are up 30% in the past two years. There's a huge incentive to borrow and buy real estate, as "cap rates" (essentially the rent minus the costs of upkeep) are 4%-6%, while the cost of borrowing money is only 1.5%. There is no supply... vacancy rates in Tokyo real estate are tight at 2.6% and there isn't much new building taking place.




Japan's house prices tumbled throughout the 90's and only in recent times have they began slowly to move in a positive direction. This chart shows the land prices for Japans Urban areas from 1964 to 2007. Land prices are the most common way of measuring Japan's house prices.



This crisis, like most others in rich countries, emerged from a property bubble and a credit boom. The scale of the bubble—a doubling of house prices in five years—was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan (see first chart). So did commercial-property prices. In absolute terms, the credit boom on top of the housing bubble was unparalleled. In America private-sector house debt soared from $22 trillion in 2000 (or the equivalent of 222% of GDP) to $41 trillion (294% of GDP) in 2007 (see second chart).








Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.
As the world’s biggest debtor, America headed into this bust in a very different position from Japan, a creditor nation rich in domestic savings. Nonetheless the macroeconomic trends in America look more like those that existed in Japan than other crisis-hit countries. Most big banking failures, from Sweden’s to South Korea’s, were created or worsened by a currency crash. Tumbling exchange rates raised the real burden of foreign-currency loans, forced policymakers to keep interest rates high and pushed up the fiscal costs of bank rescues. (Because of the rupiah’s collapse, for instance, the clean up of Indonesia’s failed banks in 1998 cost more than 50% of GDP.) But, by boosting exports, a weaker currency also offered a route to recovery and eventually things normalised.







Look at art an asset class-do you believe museums will shut down and Van Gogh and Michelangelo will sell for $1? Doubt it!