Negative Rates Could Trigger Another Housing Bubble

April 7, 2016

Sweden is already in the mature stages of experiencing a housing crisis. Take a look at the chart below. Home prices are surging…simply because it is cheap to borrow money. The lower the interest payments, the more you can borrow. Hence, individuals throw caution to the wind and start chasing property, because they believe prices will continue trending upwards. What they forget is that no market can trend upward forever. 

More and more nations are embracing negative rates.  So as rates move into negative territory, it will have the unintended consequence of fuelling another housing bubble. And suddenly a property that appeared to be out of reach could be within reach, only because the monthly payment seems affordable.  Eventually, the US is going to lower lending standards. And when they do, expect the housing market to explode as there is a lot of pent-up demand. The public has been shut out of the markets for a long time.  Consequently, when you give someone freedom after locking them up for a lengthy period, they go insane.  Subsequently, that is what lies in store for the housing market.  The Fed has laid the path out, which was planned years in advance.  Take a look at the Swedish housing market as depicted in the chart below. The Chart for the US and UK housing markets will look 5 to 10 times worse.

The map below illustrates how the war on interest rates is gathering momentum.

Source: The Telegraph

Additional dangers of negative rates

As more nations embrace the era of negative rates, no nation is going will be in a position to resist. The slogan will be “surrender or die”. Therefore, nations will opt for surrender…as no one wants to die.  Negative rates will also fuel a massive new round of share buybacks. The Fed is trying to put on a brave act, but you can already see them backtracking from the strong stance they took last year. Now, they are stating that all is not well…and the economic outlook is weaker than expected. They will have no option but to join the rat pack; in this instance, resistance is futile.

The corporate world has gone a massive share buyback binge…and this binge is not showing any signs of letting up.  It allows corporations to borrow money for next to nothing -- and then use these funds to buy back massive amounts of shares, which will boost the EPS (Earnings Per Share).   Negative rates will provide rocket fuel to the share buyback programs.  Corporate debt will soar to insane levels; if you think today’s levels are insane, you are in for a rude awakening as debt levels will soar beyond anyone’s imagination.

The following video illustrates property prices surged an average of 50% in the past ten years. This is how bubbles start.

Suggested Plan of Attack

We live in a world of extreme greed, where our government seems to favour corporation fraud. Against this backdrop, you need to do that which seems insane from a logical point of view.  All strong market corrections should be viewed as buying opportunities.  From a mass psychology perspective, this is still the most hated bull market in history. And until the masses enter, it is destined to run a lot higher than most envision.

Additionally, it would be advisable to hold a core position in Gold, because at some point in time Gold will start to react strongly to this massive form of currency debasement. Currencies are being destroyed on a global basis at a level never seen before. This will not end well. But as we have pointed out many times before, being right does not equate to market success. One has to look at the time factor -- and most individuals do not have the staying power to bet against the Fed. Wall Street is full of tombstones of good men who were right…but could not stay solvent long enough to benefit from their insights.  Hence, we would not bet the house on Gold…and nor should you. No matter how good an investment appears to be, one should never put all of one’s eggs in one basket.


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