July 1, 2024
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Guest commentary: WTF: Real estate off 60%, stocks off 80%


By John Grace

WTF, an acronym commonly known as ‘What the Fish!’ is used here to highlight the alarming state of the real estate and stock markets. 

Instead of getting high on hopium, let’s not trivialize the potential market downturns. 

The situation is grave: stocks may experience a drastic decline of 70-90%, and real estate could face a significant crash of 60-70%. 

This is not a matter to be taken lightly, but a serious concern that every investor, who values avoiding losses more than seeking gains, should seriously contemplate.

While most Wall Street strategists expect the S&P 500 to stay above 5,000 through 2024, it’s worth noting that renowned bear and portfolio manager John Hussman — who accurately predicted the 2000 and 2008 crashes — has reiterated his warning that equities could drop as much as 70% shortly.

Hussman’s caution is based on a combination of red-flag factors, including overextended valuations, divergence among individual stock sectors, and lopsided sentiment. 

He also points out the growing group of stocks hitting fresh 52-week lows, even as indexes themselves skyrocket, on Yahoo Finance. 

This underscores the importance of not just looking at how the market closed but also studying the details of breadth. 

It’s a warning sign when a few stocks post new highs while the majority of the market is Missing in Action. 

History shows that when investors focus on a relatively small number of stocks rather than the broader market, significant economic downturns have often followed. 

In a truly healthy market, many stocks will perform well instead of only a few.

In this chart, we can see the home real estate bubble bursting with its blowoff from 2006, about 34% across the U.S. 

Unlike most experts looking at real estate prices before the decline in the U.S., Dent Research forecast a contraction of 40% between 2006 and 2012. Like a canary in the coal mine, we shared that information with everyone who would listen. 

We also better-prepared investors than average for stock losses in 2008 and again in 2022.

Homeowners in the mid-West are delighted that their prices increased three times over the past 20 years and those on the coast enjoyed a dramatic increase of four times. 

The bad news is that average household income only increased 1.6 times, which is not at all encouraging for prices to continue to go to the moon.

“This time, the fall should be substantially more, likely the most in U.S. history, past and future. 

This chart shows the median everyday household prices and a return merely to the 2009 lows implies about a 57% decline. 

That means the average price skewed toward higher-end homes would go down even more, perhaps falling 60-70% for our precious McMansions and vacation homes,” said Harry Dent to Master Certified Financial Advisors and subscribers on May 21.

My goal is for you dear Investor to avoid being a distressed seller. Instead, I want you to be prepared to buy from distressed sellers, so you avoid regret and enjoy catching the next wave. 

Dent put it this way, “It’s the last chance to sell, especially that McMansion or that vacation home, the value of which will go down more than your average house. 

If you wait just a few years, you can buy back your dream retirement or vacation home at the bargain price of a lifetime.”

You’re either all in or all out with real estate, as there is no way to limit losses or hedge your equity, that you count as cash. 

Like Vegas, the chips only count when you exchange chips for cash at the cashier’s window. 

When it comes to creating a defensive strategy for your retirement accounts, especially with 11,000 people a day turning 65 and moving into the Twilight Zone of increasing Required Minimum Distributions for life from traditional retirement accounts, investors must prepare to avoid living with losses by limiting loss. 

Let us take note of Warren Buffett who said how happy he was earlier this year that Berkshire Hathaway holdings were approaching $1 Trillion. Not satisfied, Buffett noted that if he limited his losses the value would be twice as much. 

Now is the time to put your exit strategies in place.

• The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly. 

• John Grace is a financial planner and president of Investor’s Advantage in Thousand Oaks.