The Next Great Depression Is Coming… Are You Ready?

Comprehending market cycles is a core investment philosophy of Empowered Provider, so much so that it is one of our underlying 5 Pillars philosophy. Put another way, it's a big deal around here. The more we dig into the long history of boom-and-bust cycles, the more we see that it runs like clockwork. Many authors have documented the 18.6-year real estate cycle over the last 200 years and gone on the record before economic catastrophe strikes, and when it finally does, they earn bragging rights. We are not talking about eternal pessimists like Harry Dent, who keep spitting garbage weekly about the next great calamity that never happens. A broken clock is right twice a day, so Mr Dent will eventually be proven right one day, too.

There is a long history of economists who have opposed the neoclassical economic tripe that mainstream academia has forced down our throats for the last century. These economic mavericks have unlocked our real estate / economic cycle, and they are the guys we need to listen to because our financial futures depend on understanding this crucial cycle.    

A Quick Summary of the 18.6-Year Cycle

The figure below shows a 6-to-7-year Recovery phase after the economy has bottomed, followed by a Mid-Cycle Correction. The Mid-Cycle Correction is short and typically lasts about 1 to 2 years. The last Mid-Cycle Correction we encountered was the coronavirus pandemic. Those investors that had the intestinal fortitude to purchase during the depths of the pandemic did very well indeed. We believe there is no such thing as a ‘Black Swan Event’; merely the cycle is ready for something to manifest as a crisis because valuations become unsustainable.   

The government's response during the Mid-Cycle Correction is throwing money at the problem to make it disappear. They stimulate with rigour and fire up the money printing presses, which unlocks inflation. Asset prices rise, and we are off to the races again for another 6-to-7 years, called the Boom phase. When governments realise they have over-stimulated, they crank up interest rates to reduce liquidity and slow the economy down. But the genie is out of the bottle, and the government overspending during the Mid-Cycle Correction sets the scene for the major Boom and ultimate Crisis.

Once the Mid-Cycle Correction has dissolved from our collective unconscious, we start thinking that the only way is up, and our experts have ‘fixed’ the problems of the past, and we are now all destined for prosperity. Barbeque conversations revolve around everyone doing well negative gearing to save on tax. The reason negatively geared property becomes all the rage is because land prices become unsustainable during the Boom, and yield is a residue of land value. Put another way, land becomes overpriced, and yields are squeezed to historical lows. Investors' only way of making an investment return is through capital growth, which is more uncertain than cash flow. Renovating for profit becomes the flavour-of-the-month as rookie flippers hit the market in droves.

Moving into the Winners Curse, Mainstream banks loosen credit standards and start advertising to customers to unlock equity from their homes for renovations and to buy a new boat so they can keep up with the Joneses next door. Exuberance kicks in, and hedonistic choices take over sound decision rationale. Everyone who takes on as much debt as they can afford think they are geniuses having resolved their financial future. The only fear that runs rampant during the Winners Curse is the Fear Of Missing Out (FOMO). Parents will urge their children to buy now before it’s too late, and pressure is on the government to assist first-home buyers with new schemes designed to combat the affordable housing crises. Everyone rationalises being mortgaged to the hilt because: ‘Prices double every seven years, so it doesn’t matter what it costs me each week; I am getting a tax deduction after all and great capital growth’.

But the problem is that every Darren, Wayne and Barry think like this during the Winners Curse. And that is why economic conditions are ready for the inevitable Crisis. When everyone is greedy, we must be fearful, for the Crisis at the end of the cycle is most severe. It takes four years to reach the bottom, and denial is the first stage of the Crisis. Most passengers on the Titanic thought she was unsinkable and didn’t flee, and ultimately perished due to their denial. For a few months before the peak, mouthpieces in the mainstream media will marvel at the modern economy and how the government of the day is a hero. This is the warning sign that screams - brace for impact.

When the Crisis finally arrives, many will be unable to hold on to their properties due to job cuts at this time. Many will be forced to sell if they can. Many will need a ‘mortgage- snorkel’ because the value of their mortgage will be more than the value of their property. Blood will be in the streets, and now is the time to buy real estate. The only catch is that banks are going out of business and aren’t lending until the crisis abates. It is the next great depression, and it's frankly terrifying.      

So, how does one protect their family from losing their ass during the next great depression?

The answer is cash flow because it is king (this is yet another core investment Pillar of ours).

Rebalancing your portfolio before the bust will be a once-in-a-lifetime opportunity to become tremendously wealthy. That is if you have the intestinal fortitude to act at the right time. You will do fine if you don’t follow the masses going into the Winners Curse loading up on negatively geared property. If your investment property puts money in your pocket each week, you can hold it for the long term. If it costs you each week to hold it, and your cash flow dries up because you get laid off during the economic downturn, you must sell, but there won't be any buyers around. Except for the cashed-up savvy investor ready to pounce with cash, the only problem is they are few and far between, and they won’t have a lot of buying power if they must pay cash for every property they purchase (remember, banks aren't lending during this time).  

During the Global Financial Crisis, which started in 2008 and ended in 2012 (four years to the bottom; see diagram above), investors who owned commercial property with government leases, like Centrelink offices, did exceptionally well. The cash kept flowing because the government could print cash to stay in business, and that’s exactly what they did (the problem is that our children and grandchildren will be paying the debt forevermore with their taxes, but that’s a discussion for another day).    

We believe that the family home is the safest store of wealth and that being personal debt free should be at the front of mind for all providers. Make a plan now to reduce personal debt before the inevitable crash so that you don't need to sell the family home in a panic to remain solvent.

If you are fortunate enough to be start to storing wealth in other assets, high income producing assets that put money in your pocket during any market conditions makes the most sense. It is important to work with a competent property strategist leading up the the Crisis phase.

Conclusion

If you have capacity, now is the time to act. It will be too late if you wait on the sidelines until the economic conditions appear ‘perfect’ because the mainstream media only marvel at the modern economy during the Winner's Curse. Land prices will inevitably go up, and yields will tighten further. Ignore the mainstream media garbage saying the economy is about to melt down at any minute; this is noise. 200 years of documented history proves that an 18.6-year cycle marches on like clockwork. You have about two years to get your financial house in order, to survive the next great depression with your family's wealth intact.