Apocalypse Later

The winner in a bear market is the guy that loses the least

–Richard Russell

Brexit is the buzzword du jour, and market players the globe over are telling each other the worst is upon us, get out of the market. Granted, anything can happen in the stock market, but the odds of a Grand Supercycle bear market beginning on news is slim. More likely, the mini-crash underway is a C wave within the correction that began April 20th. It should make a bottom well above the low of January 20th, and lead to one more new high sometime before Christmas. The key level is the January low. If that breaks, we can conclude that the big one is underway.

Not that there is any money to be made if the market rallies again to a new high. The nation is already in recession. The Fed is not owning up to it yet, but all we need do is look at the economic statistics to see for ourselves. When we do start down for good, there will be no place to hide but cash and short term treasuries. Both are despised by investors for their lack of return. They will eventually climb all over each other to get cash.

When we think about bear markets, it is understood that we refer to stocks. But this one is due to be an all-encompassing assault on values. So I want to put another asset in the spotlight: single family rental homes.

Black Swan is a term coined by N.N. Taleb for an unimaginable event for which the probabilities are understood to be so miniscule as to be incomputable. It arrives unexpectedly, has a major impact, and, afterwards, everyone agrees that it could have been anticipated, except it wasn’t, and the results are catastrophic.

The next Black Swan will be in single family rental homes. The Grand Supercycle depression now underway will strip values of every marginable asset. Anything that has loan value today is going down big time. Single family homes are especially vulnerable, due to the activity of hedge funds, who swooped in when the real estate market crashed in ’08 and bought hundreds of thousands of foreclosed homes low, creating portfolios of rentals. They continue to be major buyers even now. The effect has been to tighten the middle-class home market, providing upward pressure on prices, forcing many would-be home buyers into a tight rental market, driving rents up at the same time.

It won’t be long before hedge funds roll their portfolios of homes bought cheap into REITs (Real Estate Investment Trusts), leverage them for greater profits to the funds (and greater risk for the ultimate investors), and retain Wall Street investment bankers to market the REITs to the public.

Over the next 10 or so years, millions of investors will have these REITs foisted on them by their advisors. As the depression deepens, they will end up with investments that quit paying the promised dividend income and crash in value.

This is not a new story. It has been done twice in the fifty years I’ve been an investor. However, in the past, REIT portfolios consisted of shopping centers, commercial properties, and apartment buildings. Single family rental homes were not in play, so when these REITS crashed, private individuals owning rental homes mostly dodged the bullet.

This time, private individuals owning rental homes will not be spared. Middle-class neighborhoods all over the country have as many as forty percent of the homes as rental properties, mostly owned by institutions. In the past, the effect of rental homes in quality neighborhoods was not enough to desecrate the area. Given the magnitude of the depression underway, We should be prepared for twenty or thirty years of declining prices and rents. Not a happy prospect.

Right or wrong, this is how I see it.






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