Stephen Aust MarketCycle Wealth Management

Stephen Aust MarketCycle Wealth Management

Housing, the Secret Bubble of the 2020 Decade

MarketCycle Wealth Management

 

 

I’ve written a long blog this month but “The Boss”*** says to not cut anything out, so FYI, the print function is at the bottom of the web page.

For the past two decades I’ve had a policy of living below my means.  This means that I drive a Mercedes sports car that I bought used rather than new.  No one wanted to buy a manual “6 speed stick shift” because of their fear of not being able to text and also shift at the same time, so I picked it up on the cheap.  It also means that I rented the small & modest home that I have lived in for the past 17 years.  The rent was only $575 per month for the main farmhouse on almost 2000 acres of open meadow with a private 20 acre lake and a caretaker that was paid for by the actual “homeowner,” the wealthy Dupont family.  The situation was difficult to leave.

But seeing interest rates hit 2.25% (fixed-rate) for a fairly long-dated mortgage was just too much to pass up on.  So, one month ago I bought a farm at the base of Shenandoah National Park here in Free Union, Virginia.  I’ll use the bank’s leverage to my advantage.  MarketCycle’s system of indicators showed me the exact interest rate low point and I also used that to my advantage.  The new property has secluded & protected mountain views and a 3 bedroom guest house that will become an AirBnB and also act as a place where (global) clients can come for a (free) 3 day extended-weekend to visit and enjoy the park as well as the exciting local university town of Charlottesville, Virginia (13 minutes away).  I have not met most of my clients in person, so this will be a good opportunity for all of us to meet and talk in a relaxed atmosphere.  This guest house will take until the summer of 2021 to get ship-shape and ready for visitors.  Well, that’s the plan, anyway.

I am in no way bragging, but I do feel very fortunate.  Last night I went out to view the Milky Way Galaxy with its nearly 400-billion stars; from here it looks like a white streak across the middle of the sky and it had been a long time since I had seen it this clearly.  Then I awoke this morning to see the mountain peaks sticking out above the cloud cover.  What a sight.  My ‘hobby’ is bicycling and this area is as good as is Vermont; riding past the local horse farms is really uplifting.  And the breeze always drops out of the mountains to the west; you can actually smell the fresh ozone in the air.  Again, I do feel very fortunate to be able to enjoy and to protect and to share this special acreage.

The below photo shows what lays just beyond our backyard: Shenandoah National Park with its 200,000 acres where every animal, insect and plant is protected.  These mountains were originally formed 500-million years ago and, at the time, were as big as the Alps or the Rockies.  They are now tree and rock covered and are slowly pulling back into themselves in an eternal cycle of life and death and renewed life.  Creation and dissolution and renewed creation… the cosmic breath that applies to everything, ourselves included.

 

And a few minutes away is the (normally peaceful and historic) university town of Charlottesville, Virginia.  This is the site where the budding U.S. Second Civil War had its humble beginnings in mid-August of 2017 as newly emboldened Neo-Nazi, KKK, White Supremacist, Oath Keeper, QAnon** and Proud-Boy idiots carried racist flags and marched against the town in their “Unite the Right” rally.  (The resultant street battles continue even today in cities across the United States.)  Their latest ploy was to attempt to kidnap, try and then execute the female Democrat Governor of Michigan.  They were arrested just before they could act.  On October 13th, the FBI announced that the Democrat Governor of my home state of Virginia, Ralph Northam, had also been a planned target.

**  QAnon:

 

This next photo has a sort of beauty to it, but it actually shows a thousand hate filled people descending on our town (from all over the United States) in the middle of the night and marching past (Founding Father) Thomas Jefferson’s Rotunda.  They chanted:  “Jews will not replace us” although their real target was literally anyone with a different skin color or origin or belief than what they had themselves adopted.

The day immediately after their late-night march was filled with massive street fights and one innocent girl from town, Heather Heyer, was murdered as James Alex Fields, a member of the far-right Vanguard America, purposely slammed his car into a crowd of random local townspeople.

Few people realize the importance of this skirmish that occurred in Charlottesville.  The unexpected night march held a certain quality of terror.  For the past four years, racists and ‘Confederates’ and Nazis have felt that it is both safe and acceptable to come out of hiding.  I had never seen actual Nazi salutes before.

 

A photo from just before the barriers broke, where a thousand people rushed at each other using anything that they had at hand as a weapon, even the United States flag.

 

But that event represented only one 24 hour period in our town’s history.  On a happier note, the below photo shows the bricked-in historic (pedestrian) downtown mall which usually hosts free concerts and 100,000 happy & laughing strollers on a typical Friday or Saturday evening.  World class theater, music, educational and food scene and a citizenship where people normally just seem to get along regardless of their differing political leanings.

 

 

So, housing’s bubbly start?  Bubbles are good investment opportunities up until the time that they pop, and bubbles can last for a long time.  I’m not the only one currently buying a house.  U.S. home sales shot up 50% in July and the same amount again in August.  September numbers are likely to be the same.  Sales are now as high as they were just before the gigantic housing bust that started in 2007, although I expect this new bubble to continue to inflate for years to come (in a zig-zag pattern, just like stocks).

Right now, because of the pandemic, 7% of ALL mortgages are in forbearance (pre-foreclosure) and 17% of all mortgages in the U.S. are >30 days delinquent.  The result?  Big institutional money is coming in from all directions to take advantage of the situation; money is piling into single family houses as an asset class.  The goal is to turn these delinquent houses into rentals.  Boomers and millennials are shifting toward renting (away from the big cities) because of the lower responsibilities, costs and maintenance.

Delinquent U.S. homeowners are currently being protected by a “Covid-19” moratorium on foreclosures, but they will eventually be forced to deal with the reality of realty.

Who are the corporate vultures that are moving in?  JPMorgan, Blackstone, Bookfield, Invitation Homes, American Homes 4-Rent… but also Zillow, Redfin and OpenDoor; all giant players with $-Billions at their disposal and the ability to issue (bond) debt and to borrow from Private Equity at near 0% fixed-rate interest rates.

This new housing bubble will inflate for years to come before adding to the distant, gigantic, slow-motion “almost everything pop” that I expect all of us to eventually endure as the 2030 decade eventually approaches. 

MarketCycle’s client accounts hold a carefully selected non-commercial REIT (Real Estate Investment Trust) in order to take advantage of the real estate bubble that I see happening… and it generates a leveraged (and floating-rate) 7% in interest on top of capital growth that matches or outpaces the S&P-500.  What’s not to love.

 

 

MARKET SUMMARY:  Large-cap U.S. growth stocks still lead in relative strength, although small-caps are achieving a near-term and temporary bid and mid-cap momentum stocks may offer a sort of “sweet-spot” between the two.  Global stocks will likely perform better than they have during the past 10 years.  China and India are showing signs of strength, however still lagging in strength relative to the United States.  REITs, preferreds and convertibles are strong and these leveraged plays offer very high income and dividends (we bought these at a huge discount to net-asset-value in late March).  Inflation has been rising for months, but should take a near-term break.  The USDollar will likely gyrate sideways, but it will not collapse as many suggest.  Gold should also gyrate sideways in the near and intermediate timeframes.  Commodities may perform well as the economy gains steam.  Commodities will offer some hedging benefit against just holding gold.  U.S. Treasuries will be problematic, except during periods of increased (measurable) risk.

So, housing’s bubbly end?  In my opinion, if home prices don’t collapse along with stocks at the end of this current decade, then the price collapse would likely occur in the mid-2030s as inflation reaches its astronomical peak.    

Even in the strongest of times the stock market can periodically pull back a bit based on unexpected negative world events and news reports.  Although newly reported corporate earnings are exceeding expectations, volatility may remain high for the next few weeks in response to the U.S. election and its likely contested conclusion.  Investors have now reached a “too bullish” level, so the stock market naturally wants to pause… the stock market does best when the majority of people are a bit afraid.  Perhaps I shouldn’t say this, but when clients call me and they express a bit of trepidation, in an odd way it makes me even more bullish. 

Measurable risk, after being “below average” for the past 7 months, is now slightly higher at what I would still call “average.”  The potential for decent near-term stock gains is still in place and the potential of intermediate-term & long-term stock gains remains “well above average.”   If Congress and the White House toss another few $-Trillion of taxpayer money at the corporations (and thus the markets), and they are talking about doing this, then stocks may go up rapidly regardless of any negative news events or “too bullish” investors.  Anyone that is out of the market because of their fear over the elections would miss this potential giant stock market jump.  Real odds are still skewed to the upside.

 

 

 

And now, just to upset people, I’ll talk a bit about Covid-19, since it continues to have such a big impact on the economy and on people’s lives.  The death rate from Covid-19 is declining as the virus slowly mutates into a weaker version.  It’s more contagious and it is spreading faster, but more importantly, it is weaker with each passing day.  As I stated months back, this virus does not want to kill its host, its goal is merely to reproduce and to be able to use the same host again in the future.  Lucky us.  Even with confirmed cases climbing, the global daily death rate has fallen by almost 40%.  So, deaths are falling even as case numbers are climbing.  The fatality rate as a percentage should eventually be in line with the flu and other common viruses that we just have to live with (they each individually kill roughly 2500 per day globally).  Perhaps like the common cold which is also a coronavirus, the death rate will drop significantly.  This would be very welcome news.

The Hospital Administrators Association is now reporting a gigantic leap in the percentage of Covid-19 positive patients (that are entering the hospital for other reasons such as heart surgery) that present with no symptoms; these people do not even know that they are “sick.”  This evidence also suggests a virus that is highly contagious but rapidly weakening, with it being a ‘non-event’ for an ever increasing number of people.  Regardless of your vigilance, there is a chance that you have already had Covid-19 and didn’t even know it because your immune system did its job of constantly and silently protecting you.  The multiple levels of our innate defense systems are stronger than we realize.  

As I predicted months back, Dexamethasone (a strong steroid that was created in 1957) is becoming one of the main medical treatments for Covid-19.  The TV show, 60 Minutes, talked about this on October 11th.  We have to be aware of its mental side-effects of mania (euphoria), which becomes agitation, which becomes anger, which leads to depression… but it is still a good outcome as compared to death and it should only be given to people that are spiraling downward.  President Trump said that he felt 20 years younger after being given Dexamethasone for his Covid-19 infection.  Most prescription drugs have side-effects that are worse than the condition that the drug is attempting to mask.  So, we have to be very careful to remain under the watchful care of a doctor when taking this powerful drug because mania (feeling euphoric) almost always gives way to agitation, anger and then depression.

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*** In case you’re wondering who The Boss mentioned above is, I saved this young cat (shown below) who endured living its first year with a rough man that is now in prison because he murdered someone; even the man’s son told me that he is glad that his dad is finally locked up for life.  This cat then spent its second year locked in a pitch black, filthy, tiny and either freezing cold or unbearably hot ‘junk’ storage unit.  Food and water were thrown in once per week by this “second owner” and the door was immediately closed shut again.  When I found out, I literally just took her and then told him that I had his cat and that I was not going to give it back.

She’s exceedingly smart and polite and patient.  It took her awhile to realize that we were not going to hit or hurt her.  Initially, if your hand happened to move above your waist, she would immediately squat down and squint her eyes, waiting for the coming physical assault.

But now she continually purrs and sits by my side, reviewing my blogs as I write them, occasionally telling me to shorten them or to stop talking about Covid because “life’s too short, even with nine lives.”  She seems to fully comprehend how much better her life is now.  Even after all of these months she still doesn’t have an official name, so I just call her “The Boss.”  Perhaps that is now her name??

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Biden’s Tax Plan Simplified

 

MarketCycle Wealth Management

UPDATED on October 18th. 

The number one comment that I currently receive in emails and phone calls from clients, both Republican and Democrat, is that they worry about the effect of Joe Biden’s tax proposals if he is elected to lead the United States and that is what this month’s blog is all about.  A full 75% of Wall Street’s Chief Investment Officers are betting on a Joe Biden win and have positioned their client’s portfolios accordingly.  As I write this on September 1st, Biden is still ahead in the polls amongst likely voters, although this lead may not last since the country is so sharply divided right down the middle and roughly 45% of U.S. citizens do not bother to vote even in the best of years.  It is abundantly clear that 100% of President Trump’s core will vote (and likely in person), so the reality is that either candidate could win.  Because of the high amount of mail in ballots from Democrats, we may not know the actual winner for days to weeks after Election Day.  And of course, the results might be challenged.

Regardless, we have to keep in mind that stocks and politics are not the same thing.  I remember that when President Kennedy was assassinated, and this was an extremely bad political event, the stock market actually went up.

 

UPDATED CHART!  The following chart shows the changing betting odds on a Trump or Biden win from March 1st to October 18th.  Trump is shown in red and Biden is shown in blue.

 

 

TAX PLAN:

President Trump’s tax plan has already been enacted during the past four years, although he now promises to also eliminate the ‘Payroll Tax’ that is designed to maintain Social Security and Medicare… this move would likely kill both programs by 2023.

 

Joe Biden’s tax plan is fairly easy to understand and, in my opinion, it would be easy for most people to tolerate.  If implemented, it would raise an additional $4-Trillion over the coming ten years; this is enough to cover the recent pandemic-caused increase in debt.  Anyone with an earned income of less than $400,000 per year pays no additional tax and may actually see some benefit.  Information to the contrary on social media is fake & false.  Small businesses also benefit.  Most of the tax increases affect only the top 1%.

 

Biden proposes 16 steps to his tax overhaul program:

  1. Increase the marginal tax rate back to 39.5% (from 37%) for anyone earning more than $518,400 per year.
  2. Increase the capital gains (investment) tax from 20% to 39.5% for anyone with an earned income of more than $1-Million per year. **  [If re-elected, President Trump plans to cut the capital gains tax for anyone with a salary higher than $1-Million per year from 20% to the 15% tax on sold-asset profits that most investors pay.]
  3. An increase in the corporate tax rate.  President Trump lowered it from 35% to 21%.  Joe Biden wants to push it up to a still low 28% as a sort of “meeting in the middle.”
  4. There are many companies, like Amazon, that pay no taxes.  He wants to implement a minimum tax of 15%.  Companies would still be able to carry net operating losses forward.
  5. There would be a minimum tax of 21% (up from 10.5%) on the patents of multi-national corporations.  These are often held in tax-haven countries.
  6. Simplify small business income deductions… increase the ability to use deductions in any small business that makes up to $400,000 per year.
  7. Re-institute the 12.4% payroll tax (that pays for Social Security and Medicare) on anyone making more than $400,000 per year.  The concept is that even though the rich do not need Social Security or Medicare, they should still pay their fair share toward it.
  8. Eliminate the stepped-up basis in estates.  Heirs would no longer inherit assets that had increased in value without paying tax on the profits and this includes both investments and homes.  One effect would be for individuals to no longer do “buy & hold” in their investment accounts and IMO, this would be a good thing.
  9. There is some talk about instituting a tiny transaction fee on all investment trades.  The effect would be to lower volatility in the markets while bringing in a truly huge amount of tax revenue from day traders and high-frequency trading hedge funds.  Client accounts in MarketCycle Wealth Management might have to pay as little as $1 per year toward this fee… fairly insignificant.  I’m a big proponent of this fee.
  10. Banks with over $50-Billion in assets would be required to pay a yearly fee to strengthen the FDIC insurance on all customer’s accounts in all banking institutions.
  11. Itemized deductions to 28% regardless of one’s tax bracket… meaning that if you give $100 to charity, you can take $28 off of your taxes.
  12. Child care tax credit raised from $2000 to $8000 for any dependents under the age of 13 or for any person that is a disabled & dependent adult.
  13. Institute tax credits for any first time home buyers of a one time $15,000 deduction to be used toward mortgage payments or bank fees.
  14. Increase the incentives to contribute to a retirement plan such as an IRA or SEP.
  15. Maintain the Payroll Tax so that people will continue to receive the ‘old age’ safety nets of Social Security and Medicare that they have pre-paid for all during their working years.
  16. Made in America?  Biden wants to add a 10% surtax on the profits of any company that deliberately makes goods overseas that are then sold back into the United States.  He wants to decrease the taxes of these same companies that move manufacturing back to the United States and that create jobs in the United States and he wants to permanently close loopholes created by President Trump that allow these same companies to game the system (some currently pay 0% tax).

** = The top 1% own more than 50% of all stocks, so the increase in capital gains taxes on anyone earning a salary of greater than $1-Million per year would bring in a lot of tax revenue. (Data from the Federal Reserve):

 

I just watched a very important and well done documentary on Netflix that explains why we, as a people, may be so politically divided:  The Social Dilemma

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MarketCycle Wealth Management | Stephen Aust
MarketCycle Wealth Management, LLC is a Registered Investment Advisor. Information presented is for educational purposes only, is not considered an individualized recommendation or personalized investment advice, may not be suitable for everyone and does not intend to make an offer or solicitation for the sale or purchase of any securities. All investments involve risk and unless otherwise stated, are not guaranteed. Past performance or performance charts are not a guarantee of future performance. Portfolio performance charts are shown net of fees so the management fee, brokerage fees, trading fees and ETF fees have already been subtracted. Current performance may be higher or lower than that shown and differing accounts may show different results. Investment returns and principal value in client accounts will fluctuate. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Be sure to consult with a tax professional before implementing any investment strategy.