CALIFORNIA’S “BOOM” ABOUT TO GO BUST

CALIFORNIA’S “BOOM” ABOUT TO GO BUST

By Joel Kotkin

As its economy started to recover in 2010, progressives began to hail California as a kind of Scandinavia on the Pacific — a place where liberal programs also produce prosperity. The state’s recovery has won plaudits from such respected figures as The American Prospect’s Harold Meyerson and the New York Times’ Paul Krugman.
Continue reading “CALIFORNIA’S “BOOM” ABOUT TO GO BUST”

U.S. Commercial Property Prices Drop for First Time in Six Years

U.S. Commercial Property Prices Drop for First Time in Six Years

U.S. commercial real estate prices dropped in January for the first time since 2010, a sign of weakening demand by investors after a six-year rally that pushed values to records.
Continue reading “U.S. Commercial Property Prices Drop for First Time in Six Years”

SAM ZELL EXPOUNDS ON THE ECONOMY, WARNS OF RECESSION

SAM ZELL EXPOUNDS ON THE ECONOMY, WARNS OF RECESSION

Sam Zell was recently interviewed on Bloomberg’s “GO” TV.  The beginning of the post are some selected quotes from the interview.  I also provide a link to the full transcript.

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By Mike “Mish” Shedlock

Wednesday morning, Sam Zell, billionaire chairman at Equity Group Investments, spoke with Stephanie Ruhle and David Westin on Bloomberg’s “GO” TV.

Zell discussed a wide variety of topics from the Federal Reserve rate hike, the risk of a near-term recession, real estate, energy, and various foreign investment ideas. The interview was before the Fed announcement.

I put a spotlight on some interesting Zell ideas. Everything below is a selected quote except for two comments by me in braces[].

Twenty-Two Ideas

  1. Economy: High probability that we’re looking at a recession in the next 12 months.
  2. Rate Hike: Interest rate hike is probably 6 or 8 months too late. I think that the economy is closer to falling over than it is to going up.
  3. US Dollar: Devalued currencies make it very difficult for the US to compete internationally.
  4. World Trade:  World trade is slowing. Currencies continue to be manipulated. You’re looking at the beginnings of layoffs in multinational companies. Weakness is going to be pervasive.
  5. Global Deflation: You can’t put aside China. You can’t put aside Europe. If China’s numbers turn out not to be as accurate as we think, China could go into a recession. That’s about as deflationary a scenario as you could possibly come up with. And one that would for sure impact growth and affect Janet Yellen’s decision.
  6. Fed Tools: “Uh” …  [as in the Fed has none]
  7. Asset Prices: Assets will get cheaper.
  8. Cash: With zero interest rates the penalty for holding cash is not very significant.
  9. Stock Market: Nothing cheap. A number of falling knives that have been obfuscated by Amazon and Facebook et cetera. If you take out those stocks, the stock market isn’t doing real well.
  10. Mexico:  Mexico is terrific. I think there’s extraordinary opportunity there.
  11. China: I don’t think China is growing as fast as it reports to be. And I think that the world has a significant deflationary risk coming from a slowdown in China which I think would impact the cost of goods all over the world.
  12. Brazil: Brazil is obviously suffering significantly. On the other hand, as an investor I’m always looking at where nobody else is willing to go. We’re there already and under the right set of circumstances wouldn’t have any problem investing in Brazil today. I just think you can’t lose sight of the fact that this is a country with 180 million people. It’s still growing. It’s self-sufficient in water, oil, food. It’s an extraordinarily badly managed you know entity. But the extraordinary part hasn’t changed. I’m somewhat of an optimist and I think this whole process will be a cleansing process.
  13. Oil: It’s not so much prices as it is specific opportunities. What makes the opportunity is the distress of the situation.
  14. Natural Gas: I’m probably more focused on gas than oil. And it’s, you know, it’s a little bit like real estate. I mean we made a fortune because we bought real estate at a discount to replacement cost. Well we’re buying gas in the ground, gas that’s been drilled. People have spent $10 million a well, we’re buying wells at dramatically less than that. So it’s the same kind of creating a competitive advantage by virtue of your entry price.
  15. Real Estate: It’s very hard not to be a seller. And so we’re in effect fulfilling in some respects our longer term strategy in AQR where we’re liquidating the remaining garden apartments we have.  I’m not a big fan of buying at these cap rates.
  16. Blackstone: Blackstone is just buying brick and mortar. And they’ve been able to raise staggering amounts of money. And they’ve got to put that money to work. That’s something we’ve never wanted to be in a position of having so much capital that it affects our decision-making on an ongoing basis.
  17. Currencies: I’m very concerned about what’s happening in currencies. I think that you know Bretton Woods in 1948 was the allies coming together and saying we can’t recover in the world without growing free trade. We can’t create growing free trade without stable currencies. So let’s make sure we have stable currencies. That worked for a long time. Now we have very unstable currencies. World trade is slowing.
  18. Dodd-Frank: I’ve never known of a single situation in my life where reduction in liquidity was a plus. And effectively Dodd-Frank has dramatically reduced liquidity and that’s a big negative. And that’s something we haven’t dealt with yet.
  19. Politics: The American people are extraordinarily angry. The American people are extraordinarily depressed. The last time we had anything like this in my opinion was 1979. [To a statement regarding Trump’s popularity Zell responded]:  It’s because you guys are sitting here in New York City and you’re not in Des Moines. And you’re not in Boulder and you’re not all over the country. And you’re not seeing the enormous disparity that has existed between you know the coasts and the rest of the country. We have a lot of very unhappy people and I think this election is reflecting it. And I think it will be very dangerous.
  20. Flat Tax: I think if I were given a straight choice I would be in favor of a simple flat tax.
  21. Government Bonds: I’m not a big lender of money to governments period.
  22. Climate Change: The level of certainty of exactly what is happening has a lack of humility and arrogance to it that scares me. As far as I’m concerned, conventional wisdom is my greatest enemy. And this strikes me as an awful lot of conventional wisdom.

It was a fascinating 2-hour interview. I stripped off the intro, the rest appears below. It’s well worth a read.

For the full transcript go here.

 

ALARM BELLS GO OFF AS 11 CRITICAL INDICATORS SCREAM THE GLOBAL ECONOMIC CRISIS IS GETTING DEEPER

ALARM BELLS GO OFF AS 11 CRITICAL INDICATORS SCREAM THE GLOBAL ECONOMIC CRISIS IS GETTING DEEPER

alarm-clock-public-domain-460x306By Michael Snyder

Economic activity is slowing down all over the planet, and a whole host of signs are indicating that we are essentially exactly where we were just prior to the great stock market crash of 2008.  Yesterday, I explained that the economies of Japan, Brazil, Canada and Russia are all in recession.  Today, I am mainly going to focus on the United States.  We are seeing so many things happen right now that we have not seen since 2008 and 2009.  In so many ways, it is almost as if we are watching an eerie replay of what happened the last time around, and yet most of the “experts” still appear to be oblivious to what is going on.  If you were to make up a checklist of all of the things that you would expect to see just before a major stock market crash, virtually all of them are happening right now.  The following are 11 critical indicators that are absolutely screaming that the global economic crisis is getting deeper… Continue reading “ALARM BELLS GO OFF AS 11 CRITICAL INDICATORS SCREAM THE GLOBAL ECONOMIC CRISIS IS GETTING DEEPER”

GOLDMAN SACHS CHIEF ECONOMISTS EXPECT 100 BASIS POINT INCREASE IN FED RATE HIKES IN 2016

A piece from Goldman Sachs economists Zach Pandl and Jan Hatzius: – Federal Reserve looks likely to begin raising short-term interest rates in December – Based on our economic forecasts, we currently expect the FOMC to raise the funds rate by 100bp next year:

  • Federal Reserve looks likely to begin raising short-term interest rates in December
  • Based on our economic forecasts, we currently expect the FOMC to raise the funds rate by 100bp next year
  • One hike per quarter
  • We see the risks to this forecasts as skewed to the downside at the moment

For economic growth in 2016:

  • US economy likely to be driven by domestic demand … in particular consumer spending
  • Forecast GDP will increase by 2.25% Q4/Q4 next year
  • Narrow and broad measures of unemployment have fallen significantly

Source: Goldman Sachs chief economist expects 100bp of Fed rate hikes in coming year

Based on this forecast by major economists, how do you see it affecting the real estate market?  Significantly?  Slightly?  Not at all?

Quiet U.S. Ports Spark Slowdown Fears – WSJ

America’s busiest ports reported a decline in imports during the key peak shipping season for the first time in at least a decade, sparking fears of a broader economic slowdown in the U.S.

The question is, what does a slowdown in economic activity mean to the economy in general, and real estate in particular?

 

Source: Quiet U.S. Ports Spark Slowdown Fears – WSJ

RENTS PUSH RETAILERS TO FRINGE LOCATIONS 

Retail tenants are moving out into fringe-street locations–locations that are parallel or perpendicular to a high street–to avoid rising rents.

LOS ANGELES—Retail tenants are moving out into fringe-street locations—locations that are parallel or perpendicular to a high street—to avoid rising rents. According to a new report from JLL, which GlobeSt.com has seen exclusively, high-street rents have increased as much as 100% in some markets. It is a trend that happens often in peak market conditions when rents begin to crest, and the fact that it is starting to happen now, indicates that we are at or approaching the peak of the cycle.

“Our business is as cyclical as it gets,” Jason Charms of JLL, tells GlobeSt.com. “When rents start to crest and break through levels of previous ‘peaks’ in the cycle, retailers are going to look at areas that can give them a bit more bang for their buck. There’s always going to be a trade off between sales volume and occupancy cost. For example, if the marketing exposure of being on a Rodeo Dr. isn’t important, the lower occupancy cost of being on Brighton Way may well offset the drop in sales.”

In Los Angeles, retail tenants in Santa Monica and Beverly Hills, where high street rents have skyrocketed, are looking for fringe spots where retail sales better justify rents. “We are starting to see retailers consider “fringe” areas due to purely economic reasons. Smart retailers are constantly on the lookout for the new, upcoming areas, in part due to price,” says Charms. “It’s becoming quite difficult to make money at some of the rent numbers we are beginning to see. The larger corporations can write off the occupancy cost as a marketing/advertising expense but the smaller companies don’t have that luxury.”

Charms is currently marketing a space at 420 North Camden, a fringe location of Rodeo Drive, near the Golden Triangle. Retail tenants who fall into this category—someone who is concerned about or can’t afford the high rents on Rodeo Dr. but want the prestige of the area and the traffic that overflows from Rodeo Dr., would be the perfect fit for the location, says Charms, who has been advising his retail clients to find these spots as a solution to the rental increases.

Outside of fringe street locations, Charms says that retailers don’t have many options for avoiding high rents. “The easy answer here is to talk ‘online presence this, digital sales that,’ but we are seeing strong data show that consumers still enjoy a full retail experience,” he says. “Downsizing their retail footprint is always an option. It says more about the overall economy than anything else.”

Savvy retailers are finding multiple ways to adapt at this point in the cycle. In addition to leasing fringe locations, some retailers are also leasing multiple spaces within a single dense urban submarket to control the path of travel and gain more market share.

 

 

 

 

Source: Rents Push Retailers to the Fringe – Daily News Article – GlobeSt.com

Continuation of Pessimism Not Warranted

By Natalie Dolce
GlobeSt.com

LOS ANGELES—With the amount of money the government was putting into the economy, it was inevitable that things would recover. We have regained 8 million jobs added since the bottom of the recession and the continuation of the pessimism and uncertainty isn’t really grounded. That is according to Hessam Nadji, SVP and chief strategy officer of Marcus & Millichap.

Nadji joined moderator Michael Desiato, moderator and VP and group publisher of ALM’s Real Estate Media Group, and other industry leaders at the recent RealShare Los Angeles event here on Tuesday. According to Nadji, “the notion that the US economy was out of the game is always wrong. We do find a way to come back.”

Having said that, Nadji says the growth rate isn’t anything to write home about. “But this moderate level of growth is here to stay.”

 

Panelists on the industry leaders panel say the moderate level of growth in the economy is here to stay.

 

Panelist Marc Jacobs, managing director of Oaktree Capital Management, agreed, noting that the real estate market is on solid footing, at least in the near term. But there are early signs of caution out there, he warned. “It may not be real estate in general, but it might be corporate America that is loading up on cheap debt and will struggle to pay that debt back,” he said. “What will happen once the Fed starts pulling back?”

According to Eric Paulsen, CEO at Auction.com, property values are still below their peaks, so there are still opportunities there. “An improving transactional market is always a better market. We willcontinue to see more and more sales with moderate improvement in the coming year.”

On the apartment side, according to Nadji, if you look at the recovery, “you are on the money about the apartment recovery being the only one for a long time.” But what’s interesting, he said, are to look at the fundamentals. “We should be seeing a slow down, but we aren’t really seeing that. The math still works for the most part but the big question mark is exit cap rates.”

 

We have regained 8 million jobs added since the bottom of the recession and the continuation of the pessimism and uncertainty isn’t really grounded, said Nadji (right) with Xceligent’s Doug Curry (left) and Oaktree’s Mark Jacobs.

 

There are some overbuilding on the high-end apartment side, warned panelist Mark Jacobs, managing director of Oaktree Capital Management.

“You will still see rent growth on the apartment side,” added Paulsen, but you are seeing more on the retail and office side, he said. Investors are chasing yields, with a lot of money chasing fewer assets. So what do they do? They go to a different market, he said. “One of the reasons you are seeing a bigger movement in secondary is the availability of information out there among other things.”

One of the companies with that information is Xceligent. Panelist Doug Curry, CEO of the company, said that his company is trying to bring a different level of transparency to the market with data collection.

The biggest laggard in this recovery has been office, according to Nadji, because of the excess space that was never put back on the market, and companies are now growing into that space. But that is the place to now invest, he said. “The demographics in job creation look strong… It is the year of the office market. The turning point is there. You will see the office market come back fast from this point forward.”    [emphasis added]   

Paulsen agreed that office is the place to go right now, but what’s important to consider, he said, is what the product will look like. “You are going to have to cater to a different demographic.”

Deconstructing the U.S. Economy: The Non-Recovery

By: Eric Sprott

We are now in the 5th year since the “official” end of the Great Recession (the National Bureau of Economic Research (NBER), which officially dates U.S. recessions, said the recession ended in the second quarter of 2009), but it hardly feels like a recovery. Nonetheless, the media, sell-side economists, central bankers, the IMF, etc. all claim that the U.S. economy is now firmly out of the woods.

President Barack Obama said in his State of the Union speech that he believes 2014 “can be a breakthrough year” for the U.S. economy and the IMF, which raised its forecast for U.S. GDP growth in a report titled “Is the Tide Rising?”, now predicts growth of 2.8% in 2014.1

However, a closer look at the data suggests that things are not improving and that the U.S. economy remains frail. Many point to the unemployment rate as a sign that things are getting better. Indeed, it has been declining steadily for many years and now stands at 6.7%. However, what many seem to forget is that the unemployment rate is declining for the wrong reasons.

Yes, the U.S. has been adding new jobs, but a large share of the decline in the unemployment rate can be explained by discouraged workers leaving the labour force.2 This effect can be seen in the falling participation rate. Many argue that this decline in the participation rate is structural and is caused by population aging. This explanation is superficial and misleading.

Figure 1, shows the contribution to the total participation rate for various age groups. As shown in Figure 1, since January 2005, the participation rate has fallen by 2.9% (from 65.8% to 62.9%). Of this decrease, 1.3% and 4.7% were driven by the 16-24 and 25-54 age groups, respectively. The rest was offset by a 3.1% increase in participation by the 55+ cohort.

FIGURE 1: CONTRIBUTION TO U.S. PARTICIPATION RATE (%)
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Note: Sum of individual components adds up to total participation rate.
Source: Bloomberg, Sprott Calculations

This is reflective of a deep problem, as it suggests that baby boomers are failing to make ends meet and have to work for longer or even come out of retirement, and that the future workforce, those in their prime working years, are leaving the labour force.

Interestingly, without the “3% contribution” from the 55+ cohort, the labour force would have fallen below 60% for the first time since 1971, a period when the participation rate was starting to expand, driven mainly by women entering the workforce.

But that’s not all; many of those in their early 20s, seeing how hard it is to find a job, are staying in college for longer, amassing outrageous levels of student debt in the process. This is obviously not a sustainable solution. Delinquency rates on student loans (the bulk of them insured by the U.S. Government) are now at all-time highs (Figure 2). Most of these student loans have been securitized and sold to investors with the Government’s stamp (sound familiar?).

FIGURE 2: STUDENT LOANS % 90+ DAYS DELINQUENT
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Source: Bloomberg, Sprott Calculations

For all the rest (ages 25-54), the participation in the labour force has also been declining, although at a slightly slower pace. Nevertheless, the average U.S. consumer is still worse off than it was before the Great Recession. Real disposable income per capita (Figure 3) is lower than it was at the end of 2005 while, over the same period, health care costs have increased from 10.0% to 11.5% of GDP (Figure 4), thereby reducing funds available for discretionary spending.

FIGURE 3: REAL DISPOSABLE INCOME PER CAPITA
INDEX 2005 Q4 = 100
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Source: Bloomberg, Sprott Calculations

FIGURE 4: HEALTH CARE SPENDING AS A % OF GDP
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Source: Bloomberg, Sprott Calculations
Not surprisingly, lower disposable income and discretionary spending levels for the average American are reflected in declining retail sales growth (Figure 5 shows the year-over-year growth rate in retail and food services sales).

FIGURE 5: RETAIL AND FOOD SERVICES SALES
YEAR-OVER-YEAR GROWTH
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Source: Bloomberg, Sprott Calculations

Moreover, since the summer of 2013, when the Federal Reserve lost control of the bond market (see our article “Have we lost control yet?”, June 2013)3, we have seen a clear deterioration in demand for credit dependent purchases. Since these purchases are mostly made on credit (mortgages, car loans), increases in interest rates have made them unaffordable to many customers. Thus, because of the large and sudden increase in interest rates, housing sales have slowed significantly, as can be seen in Figure 6. Similarly, car sales growth has been on a declining trend since it peaked in mid-2012 (Figure 7).

FIGURE 6: U.S. HOME SALES
YEAR-OVER-YEAR GROWTH
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Source: Bloomberg, Sprott Calculations

FIGURE 7: US AUTO SALES
YEAR-OVER-YEAR GROWTH
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Source: Bloomberg, Sprott Calculations

On the supply side, things do not look rosy either. The U.S. composite PMI has been more or less flat for the past 3 years (Figure 8) and has suffered a sharp decline since its August 2013 “peak”. Other indicators, such as the durable goods new orders have been growing at a declining pace (Figure 9).

FIGURE 8: ECONOMY WEIGHTED MANUFACTURING & NON-MANUFACTURING COMPOSITE PMI
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Source: Bloomberg, Sprott Calculations

FIGURE 9: US DURABLE GOODS NEW ORDERS
YEAR-OVER-YEAR GROWTH
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Source: Bloomberg, Sprott Calculations

To conclude, numerous indicators of the state of the U.S. economy point to a non-recovery:

  • The participation rate is low and supported by baby boomers working more or coming out of retirement.
  • Students (the future labour force) are defaulting on their loans in record amounts.
  • Disposable income is still below its pre-recession level.
  • An ever increasing share of disposable income is being spent on health care, crippling discretionary spending.
  • Higher interest rates are further depressing discretionary spending (home and auto sales).
  • All of which is resulting in anemic business and economic activity.

Claims that the U.S. economy is suddenly rebounding have been made before. They are misleading at best and fallacious at worst. It would not be surprising to see further deterioration, which would force central planners to initiate additional unconventional intervention (i.e. Quantitative Easing).

Post-scriptum:
Wow! In a recent Bloomberg article, Andrew Gracie, an executive director at the Bank of England (BoE), was proposing that in the event of a bank failure, regulators could suspend derivatives contracts affecting the failed bank on a global basis.4 He further argues that “The entry of a bank into resolution should not in itself be an event of default”. In other words, the solution proposed by the BoE to deal with a bank that fails and that has entered in a mountain of derivatives contracts is to suspend the market.

But this misses the point. As usual, regulators try to patch things up instead of proposing true solutions. What they are effectively proposing is to suspend reality, yet again, and pretend that there are no problems. This is even worse than suspending mark-to-market! How ironic that the same regulators who allowed this to happen are the ones who ask the market to suspend reality.

1 http://www.imf.org/external/pubs/ft/weo/2014/update/01/
2 See the January 2013 Markets at a Glance,“Ignoring the Obvious”: http://www.sprott.com/markets-at-a-glance/ignoring-the-obvious/
3 http://www.sprott.com/markets-at-a-glance/have-we-lost-control-yet/
4 http://www.bloomberg.com/news/2014-03-04/boe-seeks-derivatives-pact-to-prevent-a-repeat-of-lehman-cascade.html

Household Incomes now equal to 1989 Levels – Rising Rents Bring Back Feudalism Society

The Fed surprised markets on Wednesday with their taper head fake.  Was it because the economy is booming?  No.  Was it because household incomes were growing?  Not exactly.  Was it because inflation is non-existent?  Not if we look at rents or medical care.  In fact, going through the Fed’s statement it is largely holding back on the taper because of fear of budget negotiations in Congress.  That is, we are hitting our debt ceiling yet again and the Fed wants some leverage here.  Yet the larger signs all pointed to a taper if we consider that rents are rising at nearly twice the rate of the overall CPI.  Also, the Census figures for 2012 were released and household income adjusting for inflation is now back to levels last seen in 1989.  Lost decade?  Try a lost generation.  Also, recent data highlighted that the wealthiest in our country are capturing most of the income gains and given this trend and the Fed’s taper-less September, the feudalism trade is fully on.

Household income

The Fed is the housing market.  Investors are dominating the market and this is their number one client.  It is no surprise that a moderate rise in rates has essentially clobbered the “normal” home buyers out in the market.  Regular buyers need every piece of help buying a home because household incomes have done this:

MedianHouseholdIncome

The above chart shows a full lost decade (24 years of weak income growth).  Even in real terms, household income has plunged since the recovery started in 2009:

2007: $55,627

2008: $53,644

2009: $53,285

2010: $51,892

2011: $51,100

2012: $51,017

The Fed is largely playing the market and ironically, these moves are likely to continue the wealth disparity in the US further as investors once again plow into the real estate market to chase yields.  For regular households, more income is going to go to housing on the rental front:

Rent vs CPI

Keep in mind that rising rents with falling incomes is not exactly a good combination.  Rents are rising at nearly twice the pace of the overall inflation rate.  This divergence has accelerated since 2012.  The Fed has made a one way bet here.  The Fed is operating under a QE forever scenario.  Take a look at the Fed balance sheet and tell me if you think a taper is in serious consideration:

fed balance sheet

The Fed is largely playing one big confidence game.  The too big to fail are even larger today.  Real estate investors are virtually half the market in 2013.  Even in expensive California nearly one-third of all home sales are going to investors (in Las Vegas it is closer to 60 percent).

Reconcile all the facts coming out this month:

-Household incomes adjusting for inflation are back to levels last seen in 1989 (24 years ago – a lost generation)

-50 percent of income generated in 2012 is going to the top 10 percent of earners (highest ever since the early 1900s)

-Rents are rising much faster than overall CPI

-Investors are gobbling up an incredibly large share of all real estate purchases

There has been a serious disconnect going on since the recovery hit and these kind of divergent data points suggest we are in a mania like mode.  Investors are largely chasing yield even on many deals that simply do make sense (i.e., cap rates are simply not panning out in many markets).  The Fed taper is merely a magician’s trick.  The Fed can’t taper to any large degree.  It is an end-game in the mortgage market.  The Fed is the housing market.  The Fed is largely focused on helping member banks so it is no surprise that banks are doing exceptionally well and many financial institutions are the largest real estate buyers in the current market.  For now, the investor trade will continue to play out even if people with common sense realize this is simply one giant shell game and the Fed is on its way to a $4 trillion balance sheet.  Doesn’t seen so farfetched that we are entering a modern age of feudalism.

Dr. Housing Bubble
http://www.doctorhousingbubble.com/federal-reserve-taper-household-income-lost-generation/?