What should Investors expect from declining US residential Property & Stock Prices?
Marc Faber

Randall W. Forsyth ([email protected]) explained in a recent Barrons article that Trump Has a Big, Beautiful Reason to Push for Lower Rates. According to Forsyth, “The Federal Reserve held its policy interest rate steady this past week and maintained its median projection of two quarter-point rate cuts by year end, exactly as expected.

And nearly as predictably, President Donald Trump renewed his tirade against Fed Chair Jerome Powell for not slashing rates, adding increasingly personal insults and calling him ‘stupid’ and ‘truly one of the dumbest, and most destructive, people in Government.’

While nearly every president has preferred lower interest rates to bolster the economy on their watch, Trump's motivation in pushing for lower interest rates relates to his administration's top domestic policy priorities on taxes and spending. With the so-called One Big Beautiful Bill passed by the House of Representatives estimated to boost the nation's debt by an additional $3 trillion, the most intractable part of the budget is the interest expense on that burgeoning debt.”

On another note, the asset inflationary US economy after the GFC of 2008/2009 drove up stock and property prices. Some of the inflationary profits were spent on consumption and boosted US GDP numbers. However, as Wolf Ritter recently observed, Condo Sales Drop to Lowest in the Data, Supply Highest since Housing Bust. Single-Family Home Sales Below 1995, Supply Highest since 2016-Demand destruction on an epic scale, after the price explosion. And inventories are piling up. 

The point I really want to make is that as long as condo and home prices went up by 10% or more per year and as long as stocks rose sharply, US consumption was boosted by the wealth effect. But once these assets would fail to increase in price or even worse, once they would decline in price, I would expect rather rationally, for US consumer spending to contract.

Needless to say, that the Trump administration would not welcome such an outcome and therefore, the interventionist Mr. Trump and his henchmen will force the Fed to pursue expansionary monetary policies in order to support asset prices and specifically the stock market, which as a percentage of total wealth, has quite astonishingly become at least as important as the residential property market.

Now, I need to be very careful about what I am about to write because I would not want my readers to fall off their chairs. However, the fact is that for the first time in ages, I have something positive to say about Fed Chair, Mr. Jerome Powell, who has been reluctant to cut rates more recently because as Wolf Richter writes, “The Fed controls short-term rates. If the rate cuts come when inflation is increasing, they will cause long-term rates to spike. We saw this last year: 100 basis points in rate cuts, as inflation was re-accelerating, triggered long-term yields (10-year Treasury yield, 30-year mortgage rates) to spike by over 100 basis points — a massive surprise that the spooked bond market served up. That is why the Fed stopped cutting and started talking hawkish: to halt the spike in long-term rates. They succeeded. But a future dovish Fed, if inflation accelerates, could wreak havoc on long-term yields” (emphasis added).

The expectation of a dovish Fed has already had a negative impact on US asset holder because of the decline in the value of the US dollar against foreign currencies.

Now, let me formulate the problems the US administration is facing. The US dollar is under pressure despite US interest rates being higher than in foreign currency deposits or bonds. As an example, a 10-year US Treasury yields currently 4.23%. In contrast, a Swiss 10-year government bond only yields 0.4%. The Trump administration (at least the beautiful financial wizard Mr. Trump) would like to slash the Fed Fund rate to 1% from currently 4.25% to 4.50%.

So, when the constantly bragging and boastful Trump administration proclaims that the US stock market just made a new all-time high, my readers should be aware that the “new high” applies to a nominal dollar high but that the market is already down considerably in Euro terms and even more so against gold.

What would my dear reader expect from such a drastic cut in the fed fund rate? For the US dollar, the rate of inflation, the stock market and interest rates?

Whereas nothing is written in stone, additional steep fed fund rate cuts would most likely be negative for the US dollar. The question then would arise against what assets the dollar would lose its value? Against other paper currencies or against real estate, stocks, crypto currencies, precious metals or everything? Personally, I believe that the dollar will lose the most against precious metals as I have maintained for the last 200 years, but currently more so against silver and platinum than gold.

According to Tavi (Otavio) Costa, strategist at Crescat Capital, “Silver is on the verge of a major breakout, in my view, from one of the longest cup-and-handle formations I’ve ever seen.”

If the silver bulls are right and silver would rocket higher from a depressed level as I am constantly told, then we should also acknowledge that platinum is incredibly inexpensive compared to both gold (see last month’s report) and silver.

Therefore, though highly unlikely, should any of my readers still have no allocation to precious metals (as most fund managers would not have), my recommendation would be to gradually accumulate a significant exposure to platinum, which would appear to be “dirt cheap” and which would seem to have a meaningful upside potential (about 200%) with a limited downside risk (about 25%). Moreover, whereas I am well aware that the gold bull market has lifted its price considerably, I can’t really see the excessive speculation that one typically encounters near speculative market tops.

Finally, although I would have voted for Mr. Trump on two occasions, whenever he speaks, he reminds me of the words of one of history’s greatest social observers. Voltaire (1694 – 1778) wrote appropriately: “He must be very ignorant for he answers every question he is asked.” 

With kind regards
Yours sincerely
Marc Faber

Marc Faber is a contrarian. To be a good contrarian, you need to know what you are contrary about. It helps to be a worldclass economist-historian, to have been a trader and Managing Director of Drexel Burnham Lambert when the firm was the junk bond king of Wall Street, to have lived in Hong Kong for a quarter of a century, and to have a contact book crammed with the home numbers of many of the movers and shakers in the financial world.

Famous for his contrarian approach to investing, Marc Faber does not run with the bulls or bait the bears but steers his own course through the maelstrom of international finance markets. In 1987 he warned his clients to cash out before Black Monday in Wall Street; he made them handsome profits by forecasting the burst in the Japanese Bubble in 1990; he correctly predicted the collapse in US gaming stocks in 1993; and he foresaw the AsiaPacific financial crisis of 1997/98 and the resulting global volatility.

Nury Vittachi writes in "Riding the Millennial Storm": Faber has style. A ski racer in his youth, he remains a flamboyant character. He plays to the press, who call him Dr Doom; his monthy newsletter, always an excellent read, is called 'The Gloom, Boom and Doom Report'. He wears a ponytail, in defiance of the expectation (in Asia, especially) that investment managers should look conventional. His book, The Great Money Illusion, written in a hurry after the 1987 crash, was dedicated "to many beautiful and kind women whose names are better kept confidential".

 

 

 

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