Thursday, August 15, 2024

Bill Bonner, "The Most Predictable Crisis Ever"

"The Most Predictable Crisis Ever"
In the Covid panic of 2020, people realized that they no longer needed to 
go to the office. This led to a spike in office vacancies and a big drop in prices.
by Bill Bonner

Poitou, France - "First, it appears that Warren Buffett is doing the same thing we are - moving to Maximum Safety Mode. Charlie Bilello: "Berkshire’s Cash Pile spiked to a new all-time high of $277 billion, increasing by a record $88 billion during the 2nd quarter. $75 billion of that came from stock sales with Berkshire selling nearly half of its position in Apple. Berkshire Hathaway is now holding 25% of their Assets in Cash, the highest percentage since 2004 and well above its historical average (14%)."

Why is Buffett selling Apple? Bilello points to the obvious reason - it’s gotten far too expensive. Today’s price is thirty times earnings and nine times sales, the highest level in the company’s history. Apple has been a marvellous success. Buffett bought his stake in Apple in 2016, when the stock was trading around $25. Now, it’s $220. What is the likelihood that the price continues to go up?

We don’t know, but the more expensive a company is, the more marvelous it must be. Taking the long view, marvels always cease. Apple was founded 48 years ago. It was a leader in the Internet Revolution. But the revolution may be over.

Aztec Real Estate: We’ve spent this week looking at the big picture... and the role of problem solving in causing societies to decline. How and when the Big Picture comes to bear on the Little Picture is our subject for today.

The price of real estate in the Aztec capital, for example, must have taken a tumble when Cortés massacred the inhabitants. But until his brigantines appeared on Lake Texcoco there was little sign of the coming catastrophe in Aztec asset markets. The same was true for the handsome houses of Pompei, covered with hot ash when Mt. Vesuvius lost its top in 79 AD. The loss was sudden... unanticipated... and catastrophic.

So too was the more recent crash in US commercial real estate. In the Covid panic of 2020, people realized that they no longer needed to go to the office. This led to a spike in office vacancies and a big drop in prices. Business Today: 'US real estate on fire sale': Another Washington DC office building sold at 75% discount: "Another Washington DC office building has just been sold at a massive 75 per cent discount, a real estate entrepreneur said on Sunday. The 175k sq. ft. tower at 1101 Vermont Avenue sold for $16 million, he said, adding that the building was last sold for $60 million in 2006. "

But wait. What’s this? Arabian Business reports: "Dubai office market records significant upsurge in Q1 2024, according to Savills. Grade A office rentals registered an average annual increase of 14%, with specific markets experiencing hikes up to 30%.

Location still matters. Here’s another detail, from Business Insider: "A record 128,000 millionaires are expected to move countries in 2024, according to a new report. Data from Henley & Partners shows the UAE has the largest predicted inflow of millionaires. This is the third year the UAE, dubbed a "wealth magnet" by the firm, topped the list.

We’ve visited Dubai. Horrible place. Hotter than Hades... and no charm or taste anywhere in sight. Like Las Vegas, only worse. But the rich are burrowing in there... not in New York, Paris or London. They’re moving to the burning sands of the United Arab Emirates... a ‘semi-constitutional monarchy’... not to the US, France or England. Why? Is the world’s center of gravity shifting away from The West? That appears to be a Big Picture trend... perhaps already showing up in property prices.

Not all Big Picture trends and events are surprises. Most - including some of the biggest catastrophes in financial history -could be seen coming for years. America’s rendezvous with bankruptcy, for example, has been called ‘the most predictable crisis ever.’ And for good reason; it is mathematically... scientifically... empirically proven that when you spend more than you earn, year after year, bad things will begin to happen. And yet, while the Big Picture is clear about where this bus is headed (not in detail, but in general)... the historical record provides little hope of a route change. Tune in tomorrow..."

Research Note, by Dan Denning: "On this day, fifty three years ago, US President Richard Nixon interrupted Bonanza to announce that he had ‘temporarily’ suspended the convertibility of the US dollar into physical gold for foreign investors. Inflation and a balance of payments crisis had led to a run on US gold reserves. Nixon, like Vice President Kamala Harris apparently intends to announce tomorrow, also enacted price controls.

In December of 1971, via the Smithsonian Agreement, Nixon devalued the dollar from $35/ounce of gold to $38/ounce but did not lift the ‘temporary’ suspension of convertibility. The dollar was devalued again in October of 1973 when the statutory price of gold (the price at which, by law rather than market prices, the US Treasury values the gold it owns) was raised to $42.22/ounce.

At this point the Bretton Woods system of fixed exchange rates between currencies that had been in place since 1944 was effectively over. The Par Value Modification Act, passed in 1976, formally removed any link between the definition of the dollar and a weight or value of gold. The value of the fiat dollar (rather than the gold dollar) has since been determined by a global system of floating exchange rates. One result of Nixon’s decision is a stagnation in the value of wages and compensation to workers since 1971."
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