Bill’s Blog | October 12, 2023
I have been a student of multiple cycles for years (real estate, economic/markets, recessions, geopolitical/war, debt, weather, etc.), and seeing so many unfold currently is incredible. In my Wealth Foundations course, I provide an overview of many of the most critical cycles and how they will impact your ability to create and protect wealth. No one can claim they see 100% accurately (except God), but cycles provide a good guide as they are repeatable and observable in history.
There are both shorter-term cycles (years) and long-term cycles (decades to hundreds of years). Some cycles happen precisely, like the earth’s rotation around the sun every 365 days and the following four seasons. Other cycles are approximate, like the 500-year East/West cycle unfolding between China/BRICS and a growing East alliance against the USA/West partners. Some cycles occur once in your lifetime, others multiple times and some we never experience. I would encourage you to start learning about significant cycles. Today, I will focus on four critical cycles that are currently playing out.
War Cycle: Firstly, related to the war cycle, I must express my deep sadness and anger over the horrific attack against Israel on Saturday morning by the terrorist group Hamas, which brutally murdered over 1,300 innocent Israelis (elderly, women, children, and babies and men) and many visitors from over a dozen Nations. Plus, they have taken hostage approximately 150 men, women and children. Please pray with me for the safe return of these precious lives to their families. Governments worldwide are standing with Israel in support, and thankfully, Canada is among them. Sadly, this war will most likely expand in the coming days and months as Iran (the extremist/fanatic government, not the civilians, is behind this evil and funding and training the terrorists). It is also known that the Wagner Group (a private Russian military group paid for hire) also assisted Hamas in their training.
As I have warned in past Blogs, we are in the 100-year war cycle. War is ugly and unpredictable, and innocent victims on both sides of these conflicts sadly pay the price. Millions lose their lives, homes, careers, and families and often flee their country for safety. In recent weeks, we have seen the same tragedies of the Azerbaijan/Armenia war and the horrors of the Russian/Ukraine war this last year and a half. I expect more conflicts/wars as the 500-year East/West cycle plays out and the 100-year War Cycle unfolds. Geopolitical tensions continue to build in many regions, and new alliances are taking sides. Expect a very turbulent remainder of this decade and beyond!
I do not share these things to scare you but to help prepare and encourage you to protect your families and be proactive with your wealth. Going through these periods will be very challenging, as our forefathers experienced between 1914 and 1945. Again, history is repeating; we are the new actors/actresses on the stage. I will share several action steps at the end of this blog.
Markets Cycles: Many other analysts/fund managers and I have warned you to be defensive and properly diversify your wealth into the appropriate asset classes. Why? The most prominent Western stock markets are still highly overvalued. There is too much debt in the world! The rapid interest rate hikes are putting tremendous stress on the entire system. As we saw earlier in the spring, several large banks collapsed under the weight of poor management and too much debt. I expect more bank failures in the coming years.
It is also becoming more and more challenging to borrow money, which impacts businesses, real estate and the economy. Historically, the stock market goes up more than it goes down (usually eight years out of 10). However, extreme measures by central banks like QE, keeping interest rates too low for too long, and governments with unprecedented deficits have distorted the regular economic and debt cycles. These distortions have also created the severe inflation crisis we are currently experiencing. Businesses will find it more challenging to be profitable and eventually have to make significant cuts. The stock/bond market will continue to be very volatile for the foreseeable future. If the 1970s stagflation (high inflation, low growth and eventually significant job cuts) plays out, expect meagre returns from the markets (in most sections) for the next decade.
Real Estate: In much of the Western world, real estate has peaked. Real estate activity is at a 20-year low in Canada and the USA. With interest rates between 6 and 8%, very few people can enter the market. Ninety percent of Canadians cannot afford a home, and many landlords are gouging with their rent pricing. To me, this is not just unfortunate but shameful! People forget these are their neighbours, and they are hurting families and individuals with overpriced rents. To be clear, I am not against profitable landlords, but just gouging.
Real estate is just beginning to correct in some markets. I suspect there will be significant corrections in the coming months and years as many housing markets are still in extreme overvaluation. Historically, a healthy residential real estate market is 2.5 to 3.5 times the median household income of that community or city for detached homes. It is important to remember that you should not be paying more than 30 to 35% of your income for either rent or purchasing a home. Historically, the real estate market is approximately 18 to 20 years from trough to peak. As mentioned, we have peaked in most markets!
The Canadian housing market crashed in the early 1980s when interest rates hit 22%. The central banks crushed inflation with excessive interest rates, and the housing market bottomed and then started an 18-year rise. There was a minor correction in the housing market in the late 1990s in many parts of Canada, and then we have been on a massive upswing since 2000. There have been a few minor downturns, but the primary trend has been up to where we are today with extreme overvaluation. As I have previously mentioned, the high cost of housing is not sustainable.
As you know, interest rates have a massive impact on real estate, and I see the trend of higher rates for many years to come. The combination of overpriced homes, unaffordability, over-regulation, lack of market participants, recession, and high interest rates is the perfect storm for a sizable correction or even a crash in many housing markets. Remember, this is not the end of the world; it’s just cycles playing out.
Debt: I have warned clients and friends for over a decade to minimize debt or get out of it. Why? We have a super debt cycle coming to an end. What does that mean? Well, there has to be a purge of all the excesses built up over the last 50-plus years. If you want to learn more about this, please review Ray Dalio’s excellent work on the subject. In addition, we have the most significant debt-to-GDP ratio in history, 365%, which is not sustainable.
There are also short-term debt cycles (5 to 7 years), so we experience one or two corrections or a market crash every decade. The problem is that our financial system was designed for ever-expanding debt. The shorter cycles only expose the worst debt offenders, but the debt bubble continues to build. Central banks ensure this by lowering rates after every crash or correction, and most of the population joins in the next debt binge until we have excessive bubbles, and then a purge repeats.
I mentioned earlier that fiscal policies (government) and monetary policies (Central banks) interventions can distort or extend cycles. We have had both in spades (stocks, real estate, recession, debt, cycles have been extended). We have not had a meaningful recession in 14 years, but the normal historic timeframe is 4 to 5 years!
Knowing exactly when the next bubble will burst is impossible, but many warning signs exist. The bond markets foreshadow big trouble as long-term yields rise rapidly and bond returns crash. Yield curve inversion (where short-term bonds have higher yields than long-term bonds) is another signal that a recession is at hand, and we have this. The manufacturing index (PMI) has been declining and below 50, warning of recession. Canada has had four quarters of negative growth. Slowing economic activity is a global phenomenon, and the EU, Britain and many countries are already in recession.
When you put all of this together, with the threat of war expansion, overvalued stock/bond and real estate, high interest rates and inflation, there will eventually be significant debt defaults. We are already seeing bankruptcies on the rise for individuals and many businesses in Canada and the USA.
- Please be attentive to these warnings and be willing to adjust your spending and wealth plan.
- I recommend that every Canadian/USA family or individual have at least three months of essentials (food, toiletry, medications, and emergency supplies). Why? The world is becoming increasingly unstable economically, geopolitical risks are rising, and weather patterns from two cycles are creating major havoc worldwide. People who live in earthquake zones, as I do, need to be always prepared. I am not suggesting you panic, live in fear or horde; systematically build up extra supplies at each grocery shop till you reach your goal. What I teach, I have done myself and for well over 15 years.
- Evaluate your current financial and investment situation, and be willing to make adjustments. The cycles we are increasingly experiencing should be getting your attention! Seek wise counsel from those with a long-term perspective and understand the history of the last 100 years and market cycles.
- I encourage you to have a defensive wealth plan, proper diversification, and an active portfolio manager. Building up cash is wise, and once we have a significant correction, you can go bargain-hunting with high-quality dividend stocks and select commodities. I also use Life Insurance products with guarantees and over 5% returns to protect capital.
- If we enter into stagflation, which I believe is highly likely, old strategies of the last forty years will not work! Buy and hold is dead! Be willing to learn what works in high inflation, market shocks, and when there is too much debt.
- Almost weekly, I purchase gold and silver for clients. Why? For starters, central banks have been on a significant buying binge of gold for the last decade, which accelerated in the last two years. Why? Though they will not publicly acknowledge that another severe financial crisis is at hand, they are preparing, and so should you!
- I know I am a broken record, but I encourage you to keep learning and understanding how the financial system works and, as importantly, what to do as significant shifts happen. For those who did not join me on Saturday for my webinar with Florian Grummes from Germany, I encourage you to listen to his wise counsel and insights: https://youtu.be/Qr5XFoHx4pA
I wish you the best for the remainder of 2023,
Bill Westmacott is an educator, an insurance broker and a wealth solutions provider.