New Systems of Thought Have Arrived
On January 31st 2022, my best friend’s wife was miraculously able (in my view) to give birth to their twin boys. The apartment they lived in became too small for their larger family of five, as they also parent a 6-year-old daughter, so they moved from the 9th floor to the 15th floor of the same building to a bigger apartment.
On the 9th floor, their neighbors were of a similar age and just having children of their own, when they decided to leave their apartment for a larger one 20 minutes away.
He told that they recently invited them over for a Saturday morning breakfast, after not seeing them for a few months.
The husband, who runs their family office (these are 3rd generation real estate moguls, who own hotels, residential and commercial buildings in Europe), told my best friend about how much has changed for him in the past three years.
At first, their office buildings and hotels suffered from grave losses during the 2020 and 2021 lockdowns and tourist restriction measures. Next, just as the re-opening occurred, they were short on staff, dealt with inflation and now are facing a severe recession.
He asked him about the investments the family office is making; he said that they’re hardly making any, since generating 6%-8% on real estate is not attractive when bond yields are at 5%, and that developing new projects with the funding costs of today’s world is suicide.
As you can see from the chart below, just recently produced from Blackrock’s 2023 recession warning booklet, the FED’s tools of jacking up interest rates to unimaginable levels, just a year ago, has served to collapse the housing sector into a complete freeze.
Courtesy: Zerohedge.com, Blackrock
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The problem is that by making home ownership unaffordable, instead of MORE AFFORDABLE, the Federal Reserve has forced families into renting. The available supply is tight, so what has happened, de-facto, by way of unintended consequences, which all centralized forms of governance are responsible for, is an engineered flow of funds to one form of real estate market.
Developers aren’t looking to take on new construction projects and homeowners can’t afford to buy, so the supply of homes isn’t increasing and the whole industry is stuck in the mud.
Only the Federal Reserve can untangle this web of constrained funding resources, but it will take 2-3 years for the free markets to eliminate the shortage of homes, if not more.
Said differently, what the FED needs to start considering is what Elon Musk is warning about, namely, that when inflation is stubbornly high, the central bank can’t unravel the tightening by easing into stagflation.
This predicament is the reason that Credit Suisse and others believe that for the first time since WW2, the hegemony and usefulness of a global standard of exchange, the dollar, is no longer unquestioned.
There are more and more voices mentioning the still clandestine plan of the Kremlin to begin asking for payment in gold, as a way to bypass the €60/barrel price cap.
We think that gold’s price action shows that the FED and, more importantly, Wall Street, understand that inflation will not be beaten down and that gold and silver are important portfolio hedging tools.
If Putin goes through with his plan, Credit Suisse thinks gold could double to $3,600. We personally think the most realistic price target is $2,582 for this bull market, but are happy to be wrong in this case and see gold rise to over $3,000/ounce.
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