Cycles Predict Real Estate & Stock Crash

The great equities sell-off is just around the corner as almost every Dow 30 component stock has traced out a bearish parabolic pattern with enormous downside implications. Along with the stock market, real estate prices stand to suffer their worst decline since the Great Depression. Samuel J. Kress of SJK Capital has entitled his latest report "2002-A Dangerous Configuration," which is a very apt description of what's to come. His work largely confirms ours and with his permission we are reprinting at length a portion from his latest bulletin: " …a long term bear market began in the first quarter of 2000 and will last 3-5 years with 2002 and 2004 to be hard down years. September 24, 2001 identified the interim recovery bottom and advance as specious and merely a recovery in an ongoing bear market. January 3, 2002 identified the interim top and yearly high, and beginning of the next leg of the bear market. January 23, 2002 identified a short term bottom and peak around mid February. All the cycles will be in synch for a resumption of another serious decline.

"Currently, a short term rally should be underway. Although short term bias should persist until around mid March, the majority of the advance will most likely occur by next week. One must remember that with both the long and interim cycles in their declining phases, they will be leaning on the short term and the market could 'drift' down until around mid March when the market could begin to cascade. For the September bottom to have begun a new bull market, the Dow would have to exceed 10,500 by mid March. [We] view this as a minimal probability at best. The 10,200-10,300 area equal to January's peak will be a double top. Anything less than this would be ominous."

"For the year as a whole the high for the year most likely occurred in early January, and the low for the year should occur around mid November. The Dow has the potential to decline to the mid 7000s by mid November. It will be interesting to see where the market is in later April and the end of June. If the Dow declines to the mid 8000s by later April, this enhances the probability of the mid 7000s by the end of June and the mid 6000s by mid November."

Also to commence this year is the popping of the great U.S. real estate bubble. We have written about this in detail before but it seems not everyone agrees with our assessment. One reader who disagreed with our forecast for a real estate collapse beginning this year wrote, "We have a another year or two of much higher prices. It's not politically correct to see the public lose their money in their homes. Interest rates will be held down and fuel this boom for 6 to 18 more months. Higher commodity prices helped fuel higher prices of real estate in the 70's. Materials shot up and so did labor. We are not going into deflation if we're going to have inflation now. This is not the 30's and we just had more disinflation than you can shake a stick at. Although the bubble will pop, just not right now. You said it yourself with [gold and silver] prices rising so I don't believe your analysis on real estate. Gold and silver go up in inflation not deflation. We are going to experience inflation if silver rallies."

The reader's criticism is extensive, so let's answer each objective one by one. His first one: "It's not politically correct to see the public lose their money in their homes. Interest rates will be held down and fuel this boom for 6 to 18 more months." This statement implies that markets are controlled by government leaders' or central bankers' whim. It further suggests that interest rates are controlled by bankers rather than set by the market itself. Such is not the case. Sure it's not "politically correct" for those at the helm of authority to allow their subjects to experience financial catastrophe, but have we not seen it happen over the last two years? Was the financial establishment able to stop the NASDAQ from crashing? Or Enron from failing? Or Argentina's currency from collapsing? The lesson learned here is that when the long-term cycles are down hard, nothing can stand in their way from wreaking havoc. Just as a tidal wave can't be stopped, neither can a crashing market. So regardless of what those in power would like to see happen they will be powerless to stop a decline in real estate prices once it gets underway.

The second flaw in this argument is that "interest rates will be held down" a further 6-18 months. This assumes that central bank policy dictates interest rates. Just the opposite is true-the natural forces that create interest rates (viz., the cycles) dictate bank policy, that is to say, the banks are forced to follow interest rates and not the other way around. The interest rate is merely a reflection of the demand for loans. When the demand for borrowing money is high, interest rates go up. When the demand for debt is low, interest rates reflect this diminished demand by falling. It's all a measure of natural supply and demand. One other way of looking at it is to note that when the K-wave is up, interest rates are high; when the K-wave is down, interest rates are down. Since we are near the trough of the K-wave (deflation), interest rates will be naturally low and cannot rise to extraordinary heights, even if the bankers wanted it. For interest rates to rise would mean that a debt-plagued populace is suddenly demanding even MORE debt. Instead, we see that the present trend is toward trying to get out of debt.

So what do interest rates have to do with a real estate boom? Not much considering that in a deflationary collapse there will be falling demand for virtually everything. In runaway deflation, debt-plagued consumers suddenly realize that there aren't enough dollars to pay the ever-increasing interest on their debts, including home mortgages. There is a sudden urge to sell everything "at the market" in order to raise the desperately needed cash. Do we really believe that as stock prices collapse along with consumer prices for most economic goods there will be a continued rise in real estate prices?

To believe such is to assume that real estate is a safe haven in times of economic turmoil and history teaches this is never the case. The bottom line is that anything that has been heavily mortgaged, and that has interest payments attached to it, will suffer in a K-wave collapse since the issue here is the lack of money. When the collapse really gets underway this year there will not be enough money to bid up real estate prices. Instead there will be untold thousands of homes coming up for sale at ever-falling prices as debtors try to raise cash to meet their obligations. We would not be surprised to see prime real estate coming up on the market later this year at 20-30% less current rates. By 2004 we will undoubtedly see housing prices below 50% current levels.

Another factor for consideration is that skyrocketing unemployment (which this year will undoubtedly see) will force many debtors to miss payments on their homes. If the buyer misses a payment the house can be thrown on the market for what it will bring. The chances are it may not bring as much as a single year's payment. That will mean that the owner is still liable for the remainder of the mortgage. The rest of his possessions may be attached and sold to satisfy the insatiable demands of usury banking.

Richard Hoskins, in his book "War Cycles, Peace Cycles," wrote the following about real estate in a deflationary market downturn: "Unemployment associated with the downturn in prices forces hundreds of thousands of couples to abandon their houses and double up with their parents. This throws tens of thousands of other homes on the market adding to the housing glut. There are just as many people as before, but they are living in fewer houses. The prices of homes plunge. Many of these houses are rented to allow them to produce some sort of income. This tends to force 'rent' levels lower and lower-a real boon to those who must rent.

"The prudent who have lived by the Law and who have not owed-and who have lived modestly and prudently-are now in position to be rewarded for their patience. They may awake one day to find the $100,000 house of their dreams thrown on the market for $10,000 or $15,000. The 'big spender' who was making the big house payments each year may have bankrupted. His house will go for whatever people pay for it."

The next argument is the real kicker: "Higher commodity prices helped fuel higher prices of real estate in the 70's. Materials shot up and so did labor. We are not going into deflation if we're going to have inflation now." All of this was true in the 1970s, but this argument assumes that we are repeating the inflationary cycle of the '70s when in fact we are not. As we've made abundantly clear, we are in the "hard down" phase of the deflationary cycle and we are not going to see higher commodity prices for some time. This argument contains the seeds of its own fallacy-it admits that real estate mainly profits in times of general inflation. We are not going to see price inflation for a long, long time. The simple way to prove this is to compare the total national debt outstanding, plus interest, to the available money supply within the United States. The figures don't even come close! There simply isn't enough money to satisfy the demands of usury. The country is leveraged to the hilt and nothing can stop the unraveling of this giant ball of debt. Therefore, we will not be seeing higher real estate prices.

Finally, the argument states, "You said it yourself with [gold and silver] prices rising so I don't believe your analysis on real estate. Gold and silver go up in inflation not deflation. We are going to experience inflation if silver rallies." Herein lies the root of the fallacy. This argument equates gold and silver with the broad commodities market. This is a mistake. While it is true that gold can be considered as a commodity, essentially it is much more than that. Gold and silver are pure forms of money. They are also the ultimate barometers for measuring inflation and deflation, and their prices tend to rise along both ends of the spectrum. Gold and silver are also safe haven investments whose purchasing power is relatively stable, and whose market price tends to rise extraordinarily in the face of economic collapse since it is the investment save haven of last resort. Gold will not collapse in the face of runaway inflation because it will finally be recognized for its true worth and inherent value. The same cannot be said for real estate, whose value is governed by the availability of money and the interest attached to it.