This year I have been giving greater attention to macro economic trends. I have observed a sharp change in the way people distribute their money which has a readily predictable outcome. Additionally, it will produce a marked contrast in asset distribution. People are choosing to no longer support an unskilled workforce. Society in large part has ceased to patronize businesses that regularly use a cleaning service, they are making purchases using technology rather than sales clerks and they have dramatically reduced patronage of restaurants which largely support an unskilled workforce. That workforce is going to be severely impacted and that acute impact will have a broader reverberation throughout the larger economy over the next few years. But there is a way in which you can protect yourself.
Contrary to the doom and gloom scenario I have briefly composed this economic shift will provide great opportunities to increase richness and will be of general benefit to society as a whole. Following a dramatic shift in monies and assets, wealth will increase for all a few years from now.
The orchestration of this economic capitulation is made possible through a collaboration of government, super corporations and the media.
The triggering event to this impending shift is moratoriums or deferments on various financial obligations such as payments on installment debt satisfaction schedules, and prohibitions on evictions or foreclosures. These, of course, do not unburden the obligor from the underlying debt. As these temporary deferments -- which were set to last about 1/3 of the way into the greatest level of permanent job elimination -- expire many of the debtors will not have set aside the withheld money and their payments will lapse. That is when repossessions, evictions, foreclosures and bankruptcy filings will substantially increase.
Not only will out-of-work home buyers lose their homes to foreclosure but so will investors who relied upon rental income from out-of-work tenants to make their mortgage payments on those investment properties. Median home prices and rents are already declining in numerous major metropolitan areas. The sudden liquidation of properties into this existing decline will greatly exacerbate the problem. But it will provide fantastic buying opportunities. Opportunities that won’t arrive until the flood of properties to hit the market arrives as orchestrated.
As people lose their jobs and payments come due they will restrict spending. This will reduce employment opportunities. If they lose their homes they will most likely move in to an existing occupied home. That sharing of home space also reduces spending. The property owners who lose the rental income and are able to continue to make the mortgage payments will have to cut spending elsewhere. Those who can’t make the payments will have those houses enter the market through foreclosure sales also. These effects will build upon each other. This is why the 2008 financial downturn wasn’t severely felt until mid-2009. This time I think the real estate market will be harder hit. I think the impact on commercial properties will be more severe this time.
In 2009 people simply reduced spending overall and that contraction was spread across the entire business sector. However, this time consumers are deliberately tartgetting brick and mortar commercial enterprises on which to reduce their spending. The bright spot for retail consumer spending is store liquidation sales which are in or headed into Chapter 11 bankruptcy [reorganization] or Chapter 7 bankruptcy [liquidation]. These sales will also exacerbate the problem. When consumers can buy products at a 50-80% discount through a liquidation then they don’t buy at full price from a retailer who isn’t facing current financial pressures. The limited dollars that consumers will have -- as government payments abate and payment moratoriums are lifted while unumployment remains steadily high -- won’t be spent at currently strong retailers. A secondary wave of brick and mortar bankruptcies will follow because of this dynamic. Those are the businesses that greatly support the urban commercial real estate market. These businesses will later be liquidated through bankruptcy and more jobs will go along with them.
All of this culminates in asset building opportunities for everyone. Those who have been evicted from their homes through nonpayment of rent or through foreclosure will likely be able to find new accommodations by sharing with others in the abode and for expenses. They also get to buy goods at highly reduced prices. This deflationary period provides opportunities for both families sharing a residence to save money and build upon their cash reserves.
The flood of real estate set to hit the market rapidly will push prices lower than had the evictions, foreclosures and bankruptcies been allowed to occur naturally as there would have been fewer and they would have spread across a greater span of time. Those people holding cash will be able to buy homes, multi-family housing or commercial real estate at greatly reduced prices, especially in urban areas.
The availability of homes for purchase and lower residential and commercial rental prices will result in a windfall to all buyers and renters. Additional savings will come through a greater reliance on shared housing and shared living expenses. Travel expenses have been reduced and will likely remain so.
As people adjust to a more frugal [and incidentally healthier] form of living their richness will increase as should asset appreciation. This economic downturn is a wonderful opportunity for all. Those who are disciplined enough to take advantage of them will reap the rewards.
To not be adversely impacted by this economic contraction one should always follow my long standing advice of keeping the cost of two years worth of necessary living expenses held in cash before making discretionary purchases. That is, once you have saved enough cash to provide for your survival for two years then it is acceptable to spend money on goods or services not necessary for survival. Such expenses as eating at restaurants, various forms of psychotropic drug use [alcohol, tobacco, coffee etc], fashion clothing, decorative items, amusements, or a new rather than used automobile should be deferred until this cash reserve is fully funded.
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In closing, I provide the very simple advice on how to avoid foreclosure that I was providing to people just over 10 years ago. Pay cash.
In a broader sense, do not take on debt or financial obligations for which you do not have the cash or liquid assets to fulfill.
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