SIC 2019: Day 3 Recap

John Burns

John Burns Speaking at SIC 2019

The third day of SIC 2019 featured a magnificent presentation from Grant Williams covering his bearish views of the Australian housing market and the Aussie economy at-large, the bearish macro views of Felix Zulauf, geopolitical opinions from George Friedman, a focus on (housing) demographics from a panel of real estate experts and (political) demographics from the incomparable Neil Howe, and much more. Key themes: long bonds (both domestic and in the CANZ countries), bearish commodities and emerging market currencies, bullish US real estate.

Grant Williams


  • Australian Housing Market: “Down Under Pressure”
  • Australia has enjoyed 3-decade Chinese tailwind
  • Overcrowding into a small portion of the country (6 cities). Huge impact on Australian house prices.
  • Housing affordability is a real problem.
  • Australian houses overvalued by 61%. Huge departure from the mean.
  • Mortgage debt to GDP is essentially 100%, Australians are heavily indebted to their homes.
  • 12% of mortgages are 10x income. Almost 50% are 6x income.
  • Weekly earnings have stagnated.
  • Disposable income sideways for a decade.
  • Huge decline in discretionary spending. Increase in essentials.
  • Housing market is Australia’s most vulnerable point. Very fragile.
  • Chinese purchases of Australian real estate (15% of market at peak) made extremely difficult on both ends. Sydney and Melbourne hardest hit.
  • Aussies reliant on BOMAD: Bank of Mum & Dad
  • Construction industry 9% of Australian workforce. 3rd largest employment sector in the economy. Unemployment #s likely to increase.
  • AUS employment market anything but robust. Chinese slowdown also impacting all sectors.
  • Increasingly likely Australia going to dip into recession.
  • Banks are woefully prepared for housing slowdown. $1.6T exposure to mortgages.
  • No escape at this point. Recession will ripple through the economy. Everyone will be effected.

Felix Zulauf


  • Demographics not well understood today. Growth declining, so countries competing for market share. Hence tariffs, etc. We have entered a period of rising conflict in trade and in politics.
  • Put the business cycle in this framework. Trade conflict not the reason for the slowdown. Tariff and trade problems just compounding the slowdown we have seen. Slowdown result of tightening. Classic slowdown in the two major economies – US & China
  • This whole rally from the December low, is countertrend.
  • In May, I think we have started the second decline in this bear market environment.
  • Risk is not like in previous cycles (inventory and real estate). This cycle we have a credit problem. The recession will probably hit once the stock market is close to the lows. Markets will decline before economic slowdown. Opposite of conventional thinking.
  • Deflationary bias.
  • If Fed eases, then we could see a lengthening of the cycle. Fed move is key. Expecting a possible low in the stock market sometime in fall. How banks react will determine market direction.
  • Next bear market will be much different than in ’08. Expect multi-year bear market, not massive waterfall decline. Will be more volatile environment.
  • Time for passive investing over. Need to be much more focused on specific trades.
  • Current asset allocation:
  • Biggest asset allocation is fixed-income. My biggest conviction right now is long US Treasuries.
  • Will use next uptick in equities to go short.
  • Long gold. Due for a medium term rally. Depends on Fed. If Fed does not move decisively, will be a fake breakout.
  • Central Banks have not lost control. It’s just that they usually makes major mistakes at turning points.
  • Euro has become a structurally weak currency.
  • Switzerland trying to prevent the strengthening of the Swiss franc. Swiss have increased their balance sheet by 14x-15x
  • Crowd is usually wrong at turning points. I use sentiment indicators.
  • Short-to-intermediate term – Emerging markets will decline more than developed markets. If CBs ease, then EMs a possible space for higher beta.

H. Woody Brock


  • Suffering today not from capitalism but a bastardization of capitalism.
  • Crisis of capitalism: Lack of perfect competition implies greater returns to capital and lower returns to labor. New monopolies in Tech sector imply excess returns to capital at expense of labor. Lack of opportunity equality.
  • Increased concentration ratio has exploded via M&A. Monopoly rents in tech sector.
  • The temptation to crack down on monopolies very large. Taxation to offset monopoly profits. Tech companies perpetually reporting zero profits will be taxed on revenue (has started in France).

George Friedman


  • We are going through a radical restructuring of foreign policy. Trump is not really the one to talk about.
  • The US is an empire. Compared to the rest of the world US has so much military and economic power.
  • Since 1992, US has struggled with the question of how to pull back from international involvement.
  • As the US got stronger relative to the rest of the world, the military force got less effective. After WWII, US became regionalized and localized in foreign destinations. Decision making became less centralized.
  • US does not have a model for controlling its empire.
  • Two forms of war: military war and economic war.
  • 25% of world economy is US.
  • US exports only 12% of GDP. Half of that goes to Canada and Mexico. Outside of North America, US exposure to exports is only 6% of GDP.
  • In Germany, 50% of GDP reliant upon exports. (World’s 4th largest economy.)
  • US is largest importer in world. US is the customer, creates political leverage.
  • Us is using its economic power to war with smaller countries that we do not want to go to military war with.
  • US Navy is much more powerful than Chinese.
  • China exports 4% of GDP to US. We import less than 0.5% of GDP from China. US does not need China; China needs US. We can withstand trade war easily.
  • US using dual model; economic and military.
  • The only President since WWII that did not take the US to war was Eisenhower . . . and, now, Trump. Both were personally very bellicose.
  • Free trade negotiations have more to do with avoiding military conflict than protecting US economy. This is why we are revisiting these WWII era trade agreements.
  • The fundamental conflict with China is who controls the Pacific Ocean.

Real Estate Panel: John Burns, Barry Habib, Joe Anthony


John Burns

  • Demographics are Key
  • 6% tailwind of renters entering market
  • 11% tailwind of entry level buyers
  • 7% less move-up buyers
  • 2% tailwind of empty nesters
  • 34% increase in those over 65
  • Government mortgage policy is subsidizing homeownership
  • Mortgage Origination: Much less risky than 2006, but riskier than 2002
  • FHA taking the place of high risk loans (low down payment, low credit score)
  • US Down payment price range – 33% of America putting down 5% or less.
  • Housing cycle conditions vary by market

3 Investment Opps:

  • Disruptive Construction Technologies
  • Contiguous Rental Home Neighborhoods
  • Urban retail center and parking lot reuse (apartments, etc).
  • Bearish on homeownership over the long term.

Barry Habib (MBS Highway)

  • Mortgage rates headed lower, and this will be good for housing.
  • 100% correlation between rate of unemployment ticking higher and subsequent recession. Recessions create lower interest rates, and recessionary decline has always created a subsequent housing boom. Any forthcoming recession not concerning for housing over medium term.
  • Market is hot; there is record volume, especially for homes under $300k, VERY HOT.
  • Homes in the $300k-$1M range remain in a hot market if priced well.
  • The $1M+ market is. slow
  • The past housing crisis was a supply/demand issue because of demographics. (See graphic). The decline in birth rate in the 1970s led to a decline in families looking for homes in 2006-2008. Meanwhile, today, there is a demographic tailwind of new buyers coming up who were born in the late ‘80s.

Neil Howe


  • Donald Trump: Making voter turnout great again.
  • Young people voting hugely democratic.
  • Millennial voter participation on the rise.
  • Asians have been the fasting shifting voter pool – shifting heavily democratic.
  • Income less important than it used to be for voter groups.

Outlook for 2020:

  • Republican support is the 45-65 age bracket.
  • Democratic support is the 65-80 and under 40 bracket.
  • Republican leadership relatively young; democratic leadership very old.
  • Facts are revealing the nature of the underlying dynamics.
  • Lenin: “There are decades in which nothing happens, and then there are years in which decades happen.”
  • American Revolution, Civil War, New Deal WWII were the three defining moments of our country’s history. We are approaching a similar cycle in time.
  • Millennials believe in community, and they want order. We are now in that crisis period.
  • Green New Deal makes the Democratic Party the party of the fourth turning. National mobilization.

George Friedman (also on panel)

Upward mobility, which is built into the American system, is frozen.

3 issues that are salient in the minds of the public:

  • Disappearance of middle class
  • Disappearance of dream of generational upward mobility
  • Pricing power and anti-trust issues. Anti-trust is going to be the bigger in the 2020 election than at any time since 1912

Jared Dillian


  • Two sources of stress with respect to money: debt and risk
  • People are massively underallocated to bonds.
  • Low rates have made inflation actually go lower via cheap capital for VCs. VCs use cheap capital to create deflationary influences (e.g. Uber prices that are lower than taxi prices while remaining completely unprofitable)
  • CANZ – Canada, Australia, and New Zealand. These are the countries that will lead global growth lower, lead interest rates lower. All three have housing bubbles, all have economies based on commodities. If they go into recession, the rest of the world will be one year behind.
  • Uber is experiencing a margin call. They will not have the financial latitude to get where they want to be.
  • Playing the Canada housing market via bonds is a slam dunk trade.
  • I wish gold was acting like Bitcoin. In an environment in which MMT is being seriously discussed, gold does well under big deficits. Theoretically gold should do well.
  • Very positive on mortgage REITS. Implicit in mortgage REITS is the yield curve steepening. Hands down my favorite trade is the yield curve steepening.

Dillian

Josh Ayers


  • I’m the sacrificial bull here.
  • Domestic bank margins are at cycle highs vs EM bank margins.
  • Eastern European banks at 10x-12x earnings represents a great risk/reward profile. These banks have domestic currencies with high correlation to the Euro, and therefore less currency risk than other emerging markets.
About the author

I am the founder of fibonacci.com and an avid trader. I am also the co-founder of Texas Precious Metals, a top US precious metals company. In 2006 I was a contestant on The Apprentice with future president, Donald Trump. I live in Texas with my wife and five children, where I spend my time dodging snakes, changing diapers, and charting.
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