On Sunday, June 28th, 1914, Archduke Ferdinand was shot and killed in Sarajevo.  That assassination sparked a chain of events that directly lead to the “war to end all wars,” a description for World War I.  Clearly very few people anticipated that the many treaties between countries would eventually plunge much of the world into war and cost millions of people their lives.  It is always so much easier looking at history and giving 20/20 hindsight commentary as opposed to looking out in front of the ship to predict where we are going.

Similarly, a few of us saw the housing bubble as unsustainable and publicly predicted a crash.  I knew it would end badly but foreseeing the exact timing and trigger is almost impossible.  Therefore, I made my financial bets on the trends that seemed obvious.

The housing bubble was caused by rampant speculation and lenders willing to finance anyone with loans larger than the value of the properties at rates that were artificially low.  In other words, the math did not work and greed replaced rational thought on all levels (government, lenders, builders, investors).

I confess that the government’s reaction to the housing and subsequent economic crash took me by surprise.  Historically, our regulators have forced companies into insolvency and let the market clean the carcasses.  In this downturn, new phraseology was born, “too big to fail” and “ quantitative easing.”  The housing crisis did not go to the depths that it would have had the market been left untethered.

Dear reader, before you shoot me an e-mail or letter complaining about my supposed political stance, I am not advocating or criticizing the policies of the past or the present.  I am looking at the facts as I see them and am gazing out at the horizon ahead of us so that I may predict the most likely scenarios.  This allows me to gauge my investment decisions accordingly.

How many times have you heard someone say that if they could go back in time, they would pick the winning lotto ticket and be set for life?  With proper foresight, some of those numbers ahead of us might reveal themselves.

Compass reading

Almost every country in the world is spending more than it is receiving in taxes.  In other words, borrowing against future tax receipts:

•  Almost all governments are raising taxes and are cutting spending.

•   Interest rates worldwide are far lower than the historical average and in some countries as record lows.

•   Many countries are buying their own debt (printing money).

•   Unemployment worldwide is higher than the historical average and thusly real wages are stagnant.

•   “Austerity” and “Sequestration” are becoming kryptonite to politicians everywhere.

Focusing on the United States for a moment, sovereign debt was expanded to soften the blow, particularly for banks and Wall Street investors.  Austerity isn’t punishment and instead is a consequence since the almost $17 trillion borrowed is actual and not notional debt.  While I wish this were a bill that would never need to be paid and was of no consequence, I am planning for that Archduke Ferdinand moment and the likely ramifications.

I can’t predict in what form or when the camel backbreaking straw will come but let’s look at some likely outcomes:

• Economic shocks do not come in the form of a slow trend and instead manifest themselves in crisis’s.

• Higher taxes (through increases and less deductions).

• Less government spending and services.

• Higher interest rates.

• Technological innovations which will lead to lessened need for labor.

• A severe economic downturn

• Inflation

• The next big thing (the internet was the last one and the next one may be energy related)

Since almost none of the talking heads who are arguing about the economic events of the day have correctly predicted anything previously, I would encourage you to picture the world in the lens of the outcomes I just listed.  While it may be emotionally painful, it is vital that you see an apartment purchase in this light so that you avoid real financial discomfort.

As stated in recent articles, there are attractive apartment opportunities out there and as someone who has several offers pending right now, I wish you happy hunting!