Riding The ‘Slide’: Is This What the Next Bear Market Looks Like?

Submitted by ffwiley.com

Even as the Fed’s decision makers are beginning to worry less about recession and more about bubbly stock prices, we’re not yet moved by their attempts to curb the market’s enthusiasm. After all, the fed funds rate sits barely above 1%, which not too long ago qualified as a five-decade low. And other indicators, besides interest rates, aren’t exactly predicting the next bear, either. Inflation is subdued, credit spreads are tight, banks are mostly lending freely and the economy is growing, albeit slowly. It just doesn’t feel as though we’re close to a major market peak.

All that being said, we’re not so much about feelings as we are about delving into history (nerds that we are) and seeing if there’s anything we can learn. Let’s look at the last 90 years to see if any bear markets began under similar conditions to those today.

We’ll consider thirteen bears, as listed in the table below. (Our list may be different to yours, mainly because we use Robert Shiller’s monthly average S&P 500 prices, instead of daily prices, but also because we reset the cycle whenever the market falls 20% from a peak or rises 20% from a trough.)

Next we narrow the list by excluding bears that began during recessions, because we don’t think the economy is recessing as I write this (or recessing imminently—see here.) That removes the first three bears—those that began in 1929, 1930 and 1932. Every other bear began as the economy was expanding, which explains why market peaks are so difficult to predict.

We also exclude the bear that crossed the 20% threshold in June 1940 and can’t be separated from geopolitics. Hopefully, modern geopolitical risks won’t explode as they did then, but we can always return to the “WWII bear” if WWIII breaks out (presuming we’re alive and blogging).

After the exclusions, nine bears remain. We examine each one to determine how many were predicted by rising inflation, one of the strongest bear-market indicators. Rising inflation erodes purchasing power, invites monetary restraint and unsettles both lenders and investors. Judging by the next chart, it helped trigger at least seven of the nine bears:

The chart shows seven bears emerging from an inflation “shock” of 3% or more (referring to an increase from twelve months before a market peak to when stocks reached the bear market threshold of –20%). In each of those cases, it seems pointless to attempt to draw parallels to today. Inflation is currently below 2% and down almost a percent from January. Without an inflation shock in sight, we shouldn’t rely on the seven “inflation bears” to predict the future.

That leaves two bears we haven’t yet considered. In one of the two—the bear that began in August 2000—inflation contributed to the market’s reversal, but monetary policy and credit conditions were more telling. Policy rates rose, credit spreads widened and bank lending standards tightened—all before the market peak. Market conditions at that time were quite different to those today, as shown in the table below (which also includes the October 2007 peak for added context):

In other words, twelve of the original thirteen bears emerged from some combination of recession, inflation, world war, monetary tightening, and troubles in credit markets. In each case, market conditions were uglier than they appear now. The twelve bears tell us to be optimistic—they’ll continue to hibernate until conditions worsen. But we’ve yet to consider the 1962 bear, which finally supplies a potential match for today.

The lead-up to the 1962 bear looks eerily similar to 2017. Commentators called it the Kennedy Slide. Before the Slide, the market hadn’t fallen 20% on a month-average basis since 1946. And the bull gathered speed after JFK won the presidency. Sound familiar? Here’s a chart comparing the S&P 500 (SPY) in the three years after Kennedy’s election to the first ten months after Donald Trump’s election (there’s a joke somewhere in the respective trajectories, but we would like to keep our G rating):

Conclusions

The Kennedy Slide offers a reasonable guide to how a future bear could develop if key indicators remain benign. Consider that the Slide defied four fundamentals you wouldn’t normally associate with falling stock prices:

• Inflation was subdued, peaking at 1.3%.


• Monetary policy was close to neutral, with the discount rate at 3%.


• Growth was strong, reaching 7.4% in Q1 1962 and 4.4% in Q2, after Q4/Q4 growth of 6.4% in 1961.


• Credit spreads were testing 18-month lows of just above 1% (for the Moody’s Baa Corporate versus the 10-year Treasury).

Surely those cozy fundamentals explain the market’s rocket-fast recovery. Stocks reached a new all-time high in September 1963, just 21 months after the prior high. That’s the shortest period on record from one all-time high through a bear market to the next all-time high—faster even than the recovery from the 1987 crash.

And what might 1962 tell us about the future?

Well, as of now, inflation, monetary policy, growth and credit are only marginally less cozy than they were then. If that continues, we would bet on a rapid recovery from a Trump Slide, should one occur. But it’s important for inflation, monetary policy, growth and credit to remain nonthreatening. Any of those fundamentals could change rapidly, and they tend to correlate. (We expect monetary policy to be a particular risk within a couple of years, as discussed here.) Should the four fundamentals deteriorate, we would ignore the 1962 bear and turn to other bears for clues about what happens next. Considering the unprecedented period of monetary stimulus, we would then expect an ill-tempered bear, one that might resemble the bears that began in 1930, 2000 and 2007.

When we pass the next market peak, in other words, four key fundamentals should tell us whether we’ll “ride the slide” or experience something much worse.

JPMorgan: "Large Parts Of Society Are Not Seeing Any Growth In Income And Job Opportunities At All"

Last week, BofA"s HY credit strategist Michael Contopoulos, laid out a list of the four things that keep him up at night, which included:

1. Zombie Companies And Massive, Rising Student Debt Loads 

2. Sliding Used Car Prices, Rising Delinquencies And Subprime Defaults

3. Declining Loan Growth, Lack of commodity rebound and tighter balance sheet

4. Lack of Investment, No Small Business Creation And No Earnings growth

(there was more in the full article)

Having let the genie out of the bottle, just 24 hours later it was JPM"s turn to unveil its own answer to this same question, and in his weekly Froday note, JPM"s Jan Loeys said that when it comes to what "keeps the bank up at night" in the context of the bank"s economic outlook "regime change is the main risk."

While that in itself is hardly unexpected or new, what we found surprising is that even JPM now admits that "large parts of society are not seeing any growth in income and job opportunities at all and thus demand change"  and as a result "regime change could thus come from politicians deciding we have gone too far in the trade-off between stability and growth."

And in a preview of things yet to come, JPM concedes that "the anger of those left behind by slow and stable growth could lead to more populist measures that eventually give us both less stability and less growth."

Or, alternatively, just wait until all those who voted for Trump in hopes of a radical systemic overhaul, end up being disappointed.  That"s when the real regime change will begin.

Here is the full excerpt from JPM"s note explaining what keeps America"s most valuable bank up at night:

The most frequent question we receive from you today is: What keeps us awake at night? To us, the main risk to our strategy and markets is a change in what we like to call the regime we are currently in.

The regime we believe we are in is one of a slow and stable global expansion, with cautious economic agents, conservative fiscal authorities, and determined central banks that provide easy money, but retain strict control on financial leverage. We note there are many potential shocks, from political turmoil to policy errors, that could disturb markets, but we will treat them as just volatility that should not affect our strategy if these shocks do not change the regime we are in. The shocks that keep us awake are the ones that could change the current regime into another one.

• Regimes do not last forever. Some die because they do not deliver the goods to society and voters demand change. Some die of their own success. The Global Moderation Regime from the mid-80’s to 2007 brought good growth, low macro volatility and shallow recessions. The longer it lasted, though, the more agents assumed it would be forever, thus inducing them to apply less caution and more leverage. This ultimately made the regime vulnerable to a regional fall in house prices in 2006-07 that would otherwise not have done that much damage.


• We note the current slow-and-stable regime risks coming to an early end if too many economic agents are dependent on easy money, or if it does not deliver the goods to society. This analyst thinks the latter risk is more acute as large parts of society are not seeing any growth in income and job opportunities at all and thus demand change.


• Regime change could thus come from politicians deciding we have gone too far in the trade-off between stability and growth, and that it is time to let companies and banks loose, through deregulation and tax reform/stimulus. Alternatively, the anger of those left behind by slow and stable growth could lead to more populist measures that eventually give us both less stability and less growth.


• The alternatives to our Slow-and-Stable regime could thus be called Growth, and Populism. Slow-and-Stable has been good for both equities and fixed income, with equities outperforming. A Growth Regime could boost equities even more, but would likely hurt fixed income badly as it would bring more inflation and monetary policy tightening than investors are prepared for. Populism would likely hurt both equities and bonds.

The Criminalization Of Financial Independence

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

Independent enterprises are a source of political and financial independence... and any independent class is dangerous to the ruling elites.

Just as the "war on drugs" criminalized and destroyed large swaths of African-American and Latino communities, the "war on cash" will further criminalize the few remaining avenues to financial independence and freedom. The introduction of "entitlement" welfare in the 1960s generated a toxic dependency on the state that institutionalized worklessness, a one-two punch that undermined marriage and family in America"s working class of all ethnicities.

The "war on drugs" launched in the 1970s turned millions of American males into felons with severely restricted rights and opportunities in mainstream America.

Now we see the same destructive pattern repeating with "disability" being the new "welfare" and "legal" synthetic heroin (oxycotin etc.) being the new street-smack that lays waste to entire communities. Once you"re dependent on the state for disability and synthetic smack, you are owned by the government, lock, stock and barrel.

When the temptation to sell your $3 Medicaid prescription for synthetic smack for a quick $1000 becomes too much to resist, bang, you"ve got a one-way ticket into the Hell of America"s criminal "justice" system. Do you see the pattern? Offer the blandishments of "free money" and nearly free synthetic smack, and the vulnerable populace is quickly reduced to a dependent state of worklessness and addiction.

Needless to say, an addicted, ill, workless populace that is herded into the grinder of the criminal justice system isn"t going to create any political resistance. They have their hands full just trying to stay alive and avoid being sucked into the voracious maw of the criminalization meat grinder.

This is the context for the upcoming "war on cash" and the criminalization of financial independence. Every conventional means of remaining financially independent of the state-cartel-banking system is being restricted and criminalized, the better to herd everyone into centrally controlled institutions.

Those attempting to escape the political-financial pen are threatened with the other pen--the penitentiary.

Any form of resistance draws punitive criminal sanctions. If you attempt to resist the unfettered search of your property, your resistance is instantly criminalized.

If you resist the seizure of your property on some trumped up charge, your resistance is instantly criminalized.

If you resist being hassled for "driving while black," your resistance is instantly criminalized.

If you resist being shunted off public spaces while staging a political protest, your resistance is instantly criminalized.

Three charts help explain the criminalization of financial freedom. Wages as a percentage of economic activity (GDP) have been falling for decades. Wage earners are under pressure, and this generates dissatisfaction that eventually finds political expression. This is dangerous to the ruling elites, so criminalizing dissent, resistance and financial independence become essential tools to cow and control the masses.

Independent enterprises are a source of political and financial independence--and any independent class is dangerous to the ruling elites. The "solution" to the ruling elites is to crush independent enterprises with burdensome regulations that carry punitive penalties, raise junk fees (licensing fees, permits, etc.) to levels that make it difficult to remain compliant, and criminalize cash-only and home-based enterprises.

No wonder new business growth is a shadow of its former robustness. If you try to launch a legally compliant enterprise, the costs crush all but the most successful. Any less than fully compliant enterprise has been criminalized.

The upper 20% of wage earners are the tax donkeys that must be corralled so they can"t escape higher taxes. Whatever wealth they"ve accumulated must also be available for taxation, for this reason: as the super-wealthy sequester their immense wealth in legal tax dodges such as philanthro-capitalist foundations, this leaves the lion"s share of taxes to be paid by the upper-middle class / professional / technocrat / entrepreneur tax donkeys.

The coming War on Cash is also designed to bring in black-market cash from the bottom 40% who use cash businesses as a tax avoidance tactic. The state will leave no stone unturned in its campaign to close off any escape routes--except of course for those available to the super-wealthy and corporations which contribute the big bucks to the politicos" re-election campaigns.

There won"t be any legal assets that will not be exposed to taxation. As for precious metals--imagine a "wealth tax" that is first imposed on millionaires. Who will say that "taxing the rich" is a bad idea?

Then the definition of "rich" will be adjusted downward. Anyone owning gold is "rich," correct? So laws will be passed requiring all forms of wealth must be declared.

Anyone who fails to declare their wealth and pay a "wealth tax" on it will face punitive criminal charges.

The "wealth tax" will start small, and high up the food chain. Then it will quickly move down to include everyone with any assets of any kind. If you reckon this farfetched, check back in 2020, if not sooner.

The problem isn"t taxation per se--it"s preserving the freedom to become financially and politically independent that"s increasingly at risk. Once it becomes too complicated, costly and onerous for a working class household to start and operate an enterprise, small-scale capitalism is dead--strangled by the state at the behest of self-serving bureaucrats, elites and corporate cartels.

The US Economy is Rolling Over

Yet another “unmassaged” data point has shown that the US economy is rolling over.

If you’ve been reading me for a while you know that one of my biggest pet peeves is the fact that headline US economic data (GDP growth, unemployment, inflation, etc.)  is massaged to the point of being fiction.

For this reason, in order to get a real read on the economy, you have to look for economic metrics that are unpopular enough that the beancounters don’t bother adjusting them.

Case in point, look at the latest employment trend for S&P 500 companies (H/T Sam Ro).

For the first time since the Great Recession, employment growth has turned negative at S&P 500 companies. Also note the divergence between this metric and the headline unemployment rate.

This is confirmed by tax receipts (another unmassaged data point). The argument here is simple: when employment is growing, more people are paying taxes and tax receipts rise. When employment is falling… tax receipts drop.

What is the above chart telling you?

The reality is that the “Trump trade” or the idea that the US economy is about to explode higher based on Trump taking office, is completely and utterly off-base.

At best any policies Trump implements will begin to have an effect 12 months from now. And those investors who are trading as though GDP growth of 5% is here now are about to get annihilated.

If you’re looking to profit from the REAL impact Trump’s Presidency will have on the market (and the massive opportunities this situation presents), we’ve put together a Special Investment Report outlining three investment strategies that will produce major returns as a result of Trump’s economic policies.

It’s titled How to Profit From the Trump Trade and we are giving away just 1,000 copies for free.

To pick up your copy, swing by

http://phoenixcapitalmarketing.com/trump.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

The 'Soda Police' Just Learned A Valuable Lesson About Taxes

Submitted by Daniel Mitchell via The Foundation for Economic Education,

I don’t like tax increases, but I like having additional evidence that higher tax rates change behavior. So when my leftist friends “win” by imposing tax hikes, I try to make lemonade out of lemons by pointing out “supply-side” effects.

I’m hoping that if leftists see how tax hikes are “successful” in discouraging things that they think are bad (such as consumers buying sugary soda or foreigners buying property), then maybe they’ll realize it’s not such a good idea to tax – and therefore discourage – things that everyone presumably agrees are desirable (such as work, saving, investment, and entrepreneurship).

Though I sometimes worry that they actually do understand that taxes impact pro-growth behavior and simply don’t care.

But one thing that clearly is true is that they get very worried if tax increases threaten their political viability.

This is why Becket Adams, in a column for the Washington Examiner, is rather amused that Mayor Kenney of Philadelphia has been caught with his hand in the tax cookie jar.

Philadelphia Mayor Jim Kenney fought hard to pass a new tax on soda and other sugary drinks. He won, and the 1.5-cents-per-ounce tax is now in place, affecting both merchants and consumers, because that’s how taxes work. Businesses pay the levies, and they offset the cost by charging higher prices. That is as basic as it gets. The only person who doesn’t seem to understand this is Kenney, who is now accusing business owners of extortion. “They’re gouging their own customers,” the mayor said.

Yes, consumers are being extorted and gouged, but the Mayor isn’t actually upset about that.

He’s irked because people are learning that it’s his fault.

Philadelphians are obviously outraged by the skyrocketing cost of things as simple as a soda, which has prompted some businesses to post signs explaining why the drinks are now so damned expensive. Kenney said that this effort by businesses to explain the rising cost is “wrong” and “misleading.” The mayor apparently thought the city council could impose a major new tax on businesses, and that customers somehow wouldn’t be affected.

In other words, it’s probably safe to say that Mayor Kenney has no regrets about the soda tax. He’s just not pleased that he can’t blame merchants for the price increase.

Even the IMF is Skeptical of High Taxes

The International Monetary Fund, by contrast, may actually have learned a real lesson that higher taxes aren’t always a good idea. That bureaucracy is infamous for blindly supporting tax increases, but if we can believe this story from the Wall Street Journal, even those bureaucrats don’t think additional tax hikes in Greece would be a good idea.

IMF officials have said Greece’s economy is already overtaxed. New taxes that came into affect on Jan. 1 are squeezing household incomes further. Economists say even-higher income taxes—in the form of lower tax-free income allowances—could add to a mountain of unpaid taxes. Greeks currently owe the state €94 billion ($99 billion), equivalent to 54% of gross domestic product, and rising, in taxes that they can’t pay.

Here are some stories to illustrate the onerous tax system in Greece, starting with a retired couple that will probably lose their house because of a new property tax.

…the 87-year-old former economist and his 81-year-old wife are unable to repay the property tax imposed on their 70-year old house, a family inheritance. The annual tax is around ‎€33,000, but Mr. Kokkalis’s pension—already cut by half—is €28,000 a year. The couple borrowed money when the tax was imposed, initially as a temporary austerity measure in 2011. But they are already behind on nearly €200,000 of tax payments and can’t borrow more. Mr. Kokkalis says the state is calculating tax based on outdated property prices that have since collapsed, and that if he tried to sell the house now, nobody would be interested. “They impose taxes on an imaginary value,” Mr. Kokkalis says. “This is confiscation.”

I’ve already written about this punitive property tax. The good news is that property taxes generally are transparent, so people know how much they’re paying.

The bad news is that the tax in Greece is far too onerous.

And I’ve also noted that small businesses are being wiped out in Greece as well. The WSJ has a new example.

Tax increases under previous rounds of austerity have put a middle-class lifestyle beyond reach for many. “Our only goal now is survival,” says arts teacher Mimi Bonanou. Until recent years she also made a living as a practicing artist, selling her works in Greece and abroad. But increasingly heavy taxes that self-employed Greeks must pay at the start of each year, based on the state’s often-ambitious forecast of their incomes, have forced her to rely on teaching alone.

All things considered, Greece is a painful example that a country can’t tax its way to prosperity (though some politicians never learned that lesson).

Moreover, it’s nice to have further evidence that even the IMF recognizes that Greece is on the wrong side of the Laffer Curve.

And if a left-leaning bureaucracy is now willing to admit that excessive taxation can lead to less revenue, maybe eventually the Republicans on Capitol Hill will install people at the Joint Committee on Taxation who also understand this elementary insight.

The Eight Forces That Are Pressuring Profits

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

These eight forces are structural, and cannot be erased by tax cuts or policy tweaks.

If there is any economic assumption that goes unquestioned, it"s the notion that profits will remain robust for the foreseeable future. This assumption ignores the tidal forces that are now flowing against profits.

Any discussion of corporate profits must start by noting the astonishing rise in U.S. corporate profits since the heyday of the late 1990s dot-com boom. From $800 billion to $2.4 trillion in a few years is not just extraordinary--it"s unprecedented.

Yet rather than wonder if this incredible spike higher is temporary, the financial media assumes nosebleed-lebvel profits are a new and wonderful plateau that can only move higher in the future.

This confidence ignores the systemic tidal forces working against profits.

1. Higher costs of capital. Another blithe assumption is that capital will cost almost nothing to borrow, as far as the eye can see, and that the demand for low-yield corporate debt will remain insatiable.

The yield on bonds is rising in important markets, and while many observers reckon rates will soon return to zero (or less than zero), others see the potential for a trend change from declining rates (a 45 year trend) to rising rates.

Rising borrowing costs pressure profits.

2. Rising wages and labor overhead. Even if wages remain stagnant, the overhead costs of labor--healthcare, workers compensation, pensions, etc.--are increasing for structural reasons. Factor in global pressure to raise minimum wages and competition for the most productive labor/skillsets, and the cost of labor is rising on multiple fronts. Rising labor costs pressure profits.

3. Urbanization. An unprecedented number of working-age people have migrated from largely self-sufficient rural economies to high-cost urban economies that require much more cash income. As Immanuel Wallerstein has observed, urbanization pushes wages higher, regardless of the era or the nation experiencing the urbanization.

While cheerleaders focus on the higher income of these tens of millions of new urban dwellers, and on the potential for corporations to sell them more products and banks to lend them money, low-wage workers spend the vast majority of their income on rent, food and transport. Beyond these essentials, opportunities to earn fat margins selling to the urban poor are scarce.

4. Expanding competition and market saturation. Have you noticed how companies are getting into everyone else"s business? You see all sorts of non-building supplies being sold in Home Depot, for example. With sales stagnant in the developed world and in emerging markets hit by recession or currency devaluations, expanding into established markets is seen as one of the few ways to grow sales and profits.

There is an upper limit to this trend, of course. McDonalds can grow sales by opening branches in Walmarts, and Starbucks can expand sales by opening a shop in every Target, but we"re clearly reaching saturation on retail outlets everywhere. As for online sales--everybody"s trying to expand their online sales, but often at the cost of lost bricks-and-mortar store sales.

5. Trade wars and de-globalization. Profits have soared for corporations that have mastered long global supply chains that serve a wide range of regional markets. Any disruption in these long supply chains due to geopolitical tensions, trade disputes or domestic pressures to relocate production back in the home country will increase costs incrementally.

6. Higher taxes. The rotation from relying of monetary expansion (quantitative easing, bond purchases, etc.) for growth to fiscal expansion (borrow and spend for infrastructure, etc.) will eventually require higher taxes on labor and capital to fund the higher fiscal spending. Higher taxes pressure profits.

7. Debt saturation. Debt has been rising across the board for the eight years of "recovery," and a slowing of debt expansion means there will be less money available to spend on goods and services. Slowing debt and slowing sales pressure profits.

8. Decline of the wealth effect. Most of the wealth effect--the psychological sense of feeling wealthier and thus more prone to borrow and spend--is concentrated in the top 5% of households that own most of the assets that have bubble higher over the past eight years. (A lesser wealth effect has trickled down the next 15%.)

The wealth effect"s influence on consumption is readily visible in this chart that shows spending by the top 5% has pulled away from the spending of the bottom 95%.

Should the bubblicious asset classes that have experienced strong gains--stocks, bonds and housing-- suddenly encounter turbulence or an actual downdraft (gasp), the wealth effect will quickly wear thin, potentially impacting the biggest spenders that have been driving corporate profits.

These eight forces are structural, and cannot be erased by tax cuts or policy tweaks.

When Assets (Such As Real Estate) Become Liabilities

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

It will be the middle class that accepted the notion that "real estate is the foundation of family wealth" that will be stripmined by higher taxes on immobile assets such as real estate.

Correspondent Joel M. submitted an article that struck me as a harbinger of the future: In Greece, Property Is Debt:

"At law courts throughout Greece, people are lining up to file papers renouncing their inheritance. Not necessarily because some feckless uncle left them with a pile of debt at the end of his revels; they are turning their backs on what used to be a pillar of Greece’s economy and society: real estate.

Growing personal debt, declining incomes and ever higher taxes as Greece’s depression grinds on have turned property and the dream of easy money into dread of a catastrophic burden.

After many years in which only very valuable properties were taxed, many Greeks went from paying almost no taxes on real estate to not having enough money to pay.

In 2010, property taxes accounted for 0.26 percent of gross domestic product, while this year they are around 2 percent, according to state budget figures. "Suddenly, the state treated the Greeks as if they were rich, at the precise moment that they ceased to be rich."

Among the many disruptions of the past few years, this one shows how traditional conceptions — and a sense of security — can be shattered. With a history full of wars, bankruptcies and rampant inflation, Greeks had always seen land as a haven.

But it is private debt — at 222 billion euros last year — that may prove an even greater danger. This shows in government revenues. With the unified tax, ownership of every kind of property is now subject to taxation.

It will be very difficult for the Greeks to get out from under this mountain of debt. Delinquent loans, which at the end of June made up 31.7 percent of all housing loans, were a mere 5.3 percent of the total in 2008."

The self-reinforcing dynamics in this narrative profoundly reverse time-honored concepts of value: assets that once held or gained value now carry high costs of ownership and lose value.

1. Governments desperate for tax revenues raise property taxes, which add costs that eventually depress sales and future price appreciation.

2. High debt levels and high property taxes trigger foreclosures and forced sales that further depress the market with high inventories of unsold/unrented homes.

3. As sales decline, appreciation can no longer be counted on to enrich owners. Instead, owners fear declines in value and higher taxes. This further depresses sales.

4.  High debt levels become even more burdensome as property values fall.

5. Rather than offer a means of building and protecting wealth, real estate becomes a liability that destroys wealth via payment of taxes and declines in value.

While it can be argued that Greece is a unique situation--a cumbersome, costly bureaucracy of land transfer coupled with soaring taxes--perhaps Greece is simply early to the party.

Governments everywhere are facing fast-rising pension and healthcare costs, and the need for more tax revenues will skyrocket once the global recession trims income, payroll, business and sales taxes.

Additional taxes on assets that can"t flee the country--i.e. real estate--become extremely attractive.

Once an asset class shifts from being a means of wealth preservation and appreciation to a financial risk and burden, a self-reinforcing feedback loop reduces demand and increases supply, pushing prices lower--a decline that then causes more people to sell before prices drop further.

The nightmare scenario for recent buyers is a sharp tax increase that crushes the market value of their home, putting them underwater, i.e. their mortgage is greater than the value of their home. Faced with ever-increasing property taxes and further erosion of value, what"s the advantage of holding onto the property?

Anecdotally, stories of owners destroying buildings to lower their property tax appraisal emerged in America"s Great Depression, as owners desperate to lower their property taxes destroyed their assets (buildings on the land) as the only available means of keeping their property.

Which asset class attracts new taxes will be different from nation to nation, but we can anticipate that governments will go after assets that are currently considered safe and that can"t flee to low-tax havens.

Mobile capital can flee to safer, lower tax climes, and the super-wealthy can buy legislative tax breaks on their wealth. It will be the middle class that accepted the notion that "real estate is the foundation of family wealth" that will be stripmined by higher taxes on immobile assets such as real estate.

This essay was drawn from Musings Report 45. The Musings Reports are sent exclusively to major patrons and contributors ($5/month or $50 annually) every weekend.