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Musings Report 2020-17 4-25-20 Why Assets Will Crash
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Why Assets Will Crash
The increasing concentration of the ownership of wealth/assets in the top 10% has an under-appreciated consequence that will unleash an almost karmic payback for the narrowing of ownership of assets.
Most of you have long been aware that the bottom 90% own very little other than their labor (tradeable only in full employment) and modest amounts of home equity that are highly vulnerable to a collapse of the housing bubble. (The same can be said of China's middle class, only more so, as 75% of China's household wealth is in real estate, more than double the percentage of wealth held in housing in U.S. households.)

As the chart illustrates, the top 10% own 84% of all stocks, over 90% of all business equity and over 80% of all non-home real estate. The concentration of ownership of assets such as vintage autos, collectibles, art, pleasure craft and second homes in the top 10% is likely even higher.
The more expensive the asset, the greater the concentration of ownership, as the top 5% own roughly 2/3 of all wealth, the top 1% own 40% and the top 0.1% own 20%. In other words, the more costly the asset, the narrower the ownership. (Total number of US households is about 128 million, so the top 5% is around 6 million households and the top 1% is 1.2 million households.)

This means the pool of potential buyers is relatively small, even if we include global wealth owners.
Since price is set on the margins, and assets like houses are illiquid, then we can anticipate all the markets for assets owned solely by the wealthy to go bidless--yachts, collectibles, vacation real estate--because the pool of buyers is small, and if that pool gets cautious due to a drop in net worth/unearned income, there won't be any buyers except at the margins, at incredible discounts.
As we know, in a neighborhood of 100 homes currently valued ar $1 million each, when a desperate seller accepts $500,000, the value of the other 99 homes immediately drops to $500,000.
Since few of the current bubble-era asset valuations are supported by actual income fundamentals, then the sales price boils down to a very small number of potential buyers and what they're willing to pay.
Houses have a value based on rent, of course, but rents will drop very quickly for the same reason: prices are set on the margins. The most desperate landlords will drop rents and re-set the rental market from the margins. If demand plummets (which it will as people can no longer afford rents in hot urban markets once they lose their jobs), then vacancies will soar and rents will crash as a few desperate landlords will take $1200/month instead of $2500/month.
Due to the multi-year building boom of multi-family buildings in hot job markets (which inevitably leads to an over-supply once the boom ends), there are now hundreds of vacancies where there were once only a few dozen, and thousands where there were previously only hundreds.
As millions of wait staff, bartenders, etc. who made good money in tips find their jobs have vanished, all the urban hotspots will see mass out-migration: Seattle, Portland, the S.F. Bay Area, L.A., NYC, Denver, etc. as demand for rentals will evaporate and rents will be set on the margins by the most desperate landlords. Everyone holding out for the previous bubble-era rent will have $0 income as their units are vacant.
(Tech start-ups and Unicorns are melting like ice cubes in Death Valley, and tech-sector layoffs are already in the tens of thousands. This wave of highly paid techies losing their jobs will become a tsunami, further reducing the pool of people who can afford rents of $2,500 to $3,000 for a studio or one-bedroom apartment.)
The concentration of ownership of assets generates a self-reinforcing feedback that further depresses prices: since the top 10% own most of the assets of the nation, they are most prone to a reversal of "the wealth effect." As their assets soared in value, the top 10% felt wealthier and more confident in future gains, enabling them to borrow and spend freely on home renovations, new vehicles, luxury travel, etc.
Once even one class of assets plummets in value--for example, the recent decline in the stock market--the wealth effect reverses and the top 10% feel poorer and less confident about future gains, and thus less enthused about borrowing and spending. The demand for other costly assets quickly evaporates, further reducing the wealth of the "ownership class," which further reduces their desire and ability to buy bubble-era assets.
The high-priced assets owned by the top 10% will be the assets least in demand due to their high cost and potential for enormous losses: nothing loses value faster in a recession that narrowly owned assets such as vintage cars, art, second homes, pleasure craft, etc.
Once assets start sliding in value, the reverse wealth effect quickly dries up demand for all asset classes with narrow ownership. Since these assets are illiquid--that is, the market for them is thin, with buyers few and far between--the prices are set by a very shallow pool of buyers and desperate sellers.
Consider a pleasure craft that retails new for $120,000. In the boom era of rising stocks and housing, a used boat might fetch $65,000. But as the wealth of the small pool of households able to buy and maintain a costly craft evaporates, the number of qualified buyers evaporates, too.
The seller might be aghast by an offer of $35,000 and reject it angrily. Six months later, he's praying someone will take it off his hands for $15,000, and in another six months, he'll accept $500 just to get out from underneath the slip-rental and licencing fees.
This is how it happens that boats that were once worth tens of thousands of dollars are set adrift by owners who can no longer afford to pay slip fees, and vacation homes are abandoned and auctioned off for overdue property taxes: the market for these luxuries dries up and blows away, i.e. goes bidless--there are no buyers at any price.
Once housing and real estate valuations fall, that will trigger a decline in the value of all other costly, narrowly owned assets, which will reinforce the reverse wealth effect.
This is the karmic payback for concentrating ownership of assets in the hands of the few: when their bubble-era priced assets plummet in value, the bottom falls out of all assets with narrow ownership. The price of superfluous assets such as boats, vintage cars, collectibles, art and vacation homes can quickly fall to a fraction of bubble-era valuations, destroying much of what was always fictional capital.
The Federal Reserve reckons it can "save" the bubble-era valuations of junk bonds by being the "buyer of last resort," but it will end up being the "only buyer."
The public will eventually have to decide if the nation's central bank should be bailing out assets owned only by the financial elite while the upper-middle class watches its assets collapse in value.
Highlights of the Blog
AxisOfEasy Salon #1: Hypernormalisation, Legitimacy and Simulacrum (1-hour podcast with Mark J. and Jesse H.)
No, This Is Not Another 1929, 1973, 1987, 2000, or 2008 4/24/20
Here's Why the Economy Won't Recover--and No, It's Not Covid-19 or the Lockdown 4/23/20
What's Collapsing Can't Be Saved: Our Fraudulent Economy 4/22/20
False Reading: The Fed's Equities Light Is "Green" But the Economy Is Crashing 4/21/20
Here We Go Again: When Bubbles Pop, Only the First Sellers Avoid Destruction 4/20/20
Best Thing That Happened To Me This Week
After several years of failed efforts to sprout Scarlet Runner green beans, two plants are flourishing and we have our first small beans on the vine. Small victories are still sweet.
From Left Field
Transition Towns, Re-localisation, COVID-19 and the Fracking Industry
The Use and Abuse of MMT
Pathogenic Priming Likely Contributes to Serious and Critical Illness and Mortality in COVID-19 via Autoimmunity
The future will be socialist — or it will not be at all
This is a lesson not an outcome
Counterculture Conservatism
We Need to Rethink Our Food System to Prevent the Next Pandemic
Miami is shattering heat records during a wildly-warm start to 2020, even by Florida standards
Coronavirus: Japan doctors warn of health system 'break down' as cases surge
The age of stability is over, and coronavirus is just the beginning
How Much Money The Fed Must Print Now - $100 Trillion (via Rick A.)
On Squirrels And Viruses: Why Economy-Shattering Decisions Require The Ultimate Confidence
Young and middle-aged people, barely sick with covid-19, are dying of strokes: Doctors sound alarm about patients in their 30s and 40s left debilitated or dead. Some didn’t even know they were infected.
"We don't see things as they are, we see them as we are." Anaïs Nin
Thanks for reading--
charles
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