The average house price in Dublin City is sitting at €512,000, and the average house price in Cork City is at €305,000. Monthly rental prices are above €2,000/month and €1,600/month respectively. There is a lot of talk in Ireland, both from government and the public, about the need for government to invest more money into building more social and affordable housing all around the country. The government is never as efficient as the market when it comes to getting something done properly and at the cheapest price, which is why it would not make sense financially to let the government build the new supply that is desperately needed. They have been talking for years about building enough housing to cool the market, yet take a look at where that has brought us – housing prices were up 14.4% in 2021 alone. If we break down what is actually going on in the housing market, it boils down to a simple issue of a lack of supply that can be relieved through cheaper means than the often proposed government built housing.

As of today, there are 3,245 properties for sale in Dublin City and 507 for sale in Cork City on daft.ie. That is one property for every 387 people and 433 people respectively. It’s even worse when you look at rentals: there is 1 rental for every 3,888 people in Dublin City, and 1 rental for every 11,000 people in Cork City.

Here is a look at that same ratio for other cities around Europe:

Barcelona: 1 property per 89 people, 1 rental per 301 people

Amsterdam: 1 property per 227 people, 1 rental per 588 people

Lisbon: 1 property per 36 people, 1 rental per 611 people.

Rome: 1 property per 83 people, 1 rental per 340 people.

Prices aren’t solely determined by the supply of housing – average salaries, quality of life, and other things factor into housing prices also – although it does have a very large effect on prices. There are two way to increase the supply of housing on the market: build new homes or renovate derelict properties. We are going to focus only on derelict properties today as both deserve their own separate article.

If you take a walk around one of the major cities in Ireland, be it Dublin or Cork, you will notice that above almost every shop there is at least two or three floors of empty or derelict space rotting away. Not only have all the derelict properties drained the supply of properties and in turn driven up prices, but they also make Ireland look like a country in serious economic decline. People are constantly voting against new buildings in Cork and Dublin because they will apparently ruin the city skylines (which are non-existent in the first place), but those same people say nothing about abandoned buildings all over the city centres. As Michael D. Higgins recently said, this is not a housing crisis, this is a housing disaster. How on earth can you leave these derelict buildings stay unoccupied, off the market, ruining the look of our cities in the middle of the worst housing disaster in Irish history.  It ruins the look of our great cities and gives off an impression of Ireland’s cities deteriorating year after year with nothing being done about it. Imagine what tourists from around the world think of when they think of Ireland. Greenery, nice restaurants and pubs, and overall a nice homey and welcome feeling. Instead what they are greeted with is three, four, five story buildings with the ground floor open as a shop or bar whilst the remaining 75% of the building is above rotting away looking like nobody has stepped foot inside since 1964.

The government don’t even know how many vacant houses there are, but it’s estimated to be above 200,000. Being able to bring just 10% of that inventory alone would flood the market with housing and push prices way down. Of course these houses need serious work done to them to become liveable and as others have pointed out, the costs of renovating these derelict properties are not worth it for landlords (which is why they remain derelict for so long). So now the situation becomes how can we get these derelict buildings renovated and turned into liveable homes when the costs of doing so are not worth it for those that own them.

The government needs to create both disincentives for holding onto derelict and vacant properties that haven’t been occupied in years, as well as incentives for owners of these properties to either sell them to people willing to renovate them or renovate and rent them out themselves.

First, we need to get rid of any taxes on doing up derelict houses. On top of inflated building prices, people are paying 13.5% VAT to do up a vacant property. A lot of the time it isn’t worth the hassle to renovate a property, and if the owner doesn’t have an actual need for it they will just leave it be derelict and see the value of the property rise year after year. We need to get rid of any taxes extra costs that may be discouraging derelict property owners from doing them up. Simply getting rid of the VAT will make it 13.5% cheaper to fix up a property.

We can also look at how other places have tackled similar problems of dereliction. Mussomeli in Sicily have been selling houses for €1 in an attempt to revitalise their city. The condition upon purchase is that you must spend a minimum of €17,000 on renovations, which should be finished within three years, and it must be in living condition. To be clear, we are not at all calling for properties to be sold for €1. We give the example of Mussomeli as it is a very creative way to revitalise properties that have been unused for years. The Irish government need to take a leaf out of Mussomeli’s book and launch creative ways of enticing derelict property renovations. We propose offering grants to people who own derelict properties and wish to renovate them in order to either sell them on or rent them out after they are in a liveable condition. The grants need to be easily accessible, unlike the current pathetic vacant property and upper floor refurbishment supports that have only been used by a handful of people across the country because of the amount of paperwork, red tape, and waiting involved. We need a clear and quick way of obtaining grants from government to do up these properties.

If we bring in strong incentives to bring life back into dilapidated properties, we also need to disincentivise those that choose to not take advantage. In regular economic conditions we would not propose a tax on derelict properties, but the current situation in Ireland is a disaster, and has been a disaster for over a decade, therefore it calls for emergency measures.

We need to completely revamp the terrible vacant and derelict properties levies that are currently in existence. The government brought in the derelict sites levy and vacant sites levy in 2016, which was a complete and utter failure. Out of the €21 million owed from the derelict sites levy, just €210,000 was collected. There are too many loopholes and exceptions. Out of the €5.5 million owed from the vacant site levy, just €378,000 was collected. The levies are dealt with at local authority levels, we need to bring it in as a national tax so that the revenue deal with it and actually collect that money. These joke levies are nowhere near enough to bring properties onto the market. How does that rugby saying go again? “Use it or lose it”?

Look at Vancouver’s vacant property tax which brought thousands of empty properties back onto the market. They brought in a vacant property tax, which is 3% of the assessed taxable value of the property. We need to bring in something similar, and not some half-hearted attempt just to make it appear that the government is doing something. We need to push derelict property owners into making something out of their property or selling it off to somebody that will. A derelict tax needs to be brought in and needs to hit derelict property owners hard. Of course there should be exemptions to the tax, we are not advocating for somebody to pay a tax on their own property that they when the have future plans for it. This tax needs to target the hundreds of thousands of vacant and derelict properties that have been unused for years, which their owners have no plans to do anything with them.

In Ireland we have sadly grown accustomed to derelict buildings littering our city centres. But imagine going through Cork City or Dublin City and seeing life in every floor of every building. Outside of the fact it would hugely increase the supply of housing, it would make Ireland’s cities much more pleasant places to live and spend time in. It’s time the government stop talking about doing things to fix the housing disaster and actually go out and do it.

Today the fed raised rates by 0.75%, bringing the federal funds target range to 1.5% and 1.75%. In Powell’s speech after the initial decision, he said that the “next meeting could well be a decision between 50 and 75”, shutting down any expectations investors had of a full percent or greater hike – for now at least.

Our short-term trade from two days ago worked out, as the SPDR Gold Trust rose up over 1.5% and the Nasdaq went above 2.3%. Our rate prediction didn’t happen, but markets rose regardless because buyers felt safe to renter the market after a horrid couple of days of uncertainty.  We closed our positions soon after Powell began his remarks, as both gold and the Nasdaq began to pop.

Where do we go from here?

We believe that there is a high probability of increased speculation of future rate cuts as economic data coming out in the next days and weeks will likely show signs of a sluggish or declining economy. We remain heavily in cash, with our main position being options on the SPDR Gold Trust. We believe that the worries of inflation will be taken over by worries of an imminent recession. The Atlanta Fed issued new real GDP estimates today, with a forecast of 0% for Q2 GDP quarter-on-quarter, which would follow the -1.5% decline in Q1. What will the fed do when investors set their base case expectations to be a recession within the next 12 months or earlier?

It would be no surprised at all to us if it was a last minute decision to change from a 50bps hike to a 75bps hike after seeing the markets expectations change in days as a result of the CPI report. They couldn’t look weak on the inflation front, so they gave the market what it wanted, but that was likely just a way to temporarily calm markets. They certainly do not want this hike to be a precedent for more 75bps hikes, as Powell was quick to suggest the next decision would not be over 75bps. Since we already believe that the fed is trying its best to keep rates as low as possible while also making markets think they have inflation under control, we believe that they will switch to be more accommodative as soon as they get the chance. A recession is that chance.

The fed, like the rest of the market, is looking backwards rather than forwards. It often takes Wall Street consensus a while to catch up with reality, and this is a prime example. As Druckenmiller pointed out earlier this week, there has been no other time in recent history that the economy has been in this situation – there is no precedent to it. Powell, the fed, and the market are struggling to grasp what is actually going on and it shows.

Going forward, we think that the most likely outcome within the next year and a half is that Wall Street becomes more and more concerned with a recession, which will temporarily take away fears of inflation. Investors will equate a recession with lower prices, forgetting that the recession was created by the inflation itself. We see the fed hiking a couple more times, before calls for a pause in rate hikes and quantitative tightening due to a looming recession overshadow calls for more hikes due to inflation. To position ourselves for this situation, we are long gold and short the dollar. Our position could easily change if economic indicators show a different reality than the one we see as most probable, only time will tell.

In his book “Soros on Soros”, George Soros talked briefly about the tendency of currencies to move in large waves that span many months or years. If you look at the chart of EUR/USD for the past 30 years you see exactly that. We believe that we are at/near a turning point in one of those waves. Within this trade we see both technical and fundamental factors at play that point towards the same outcome, the euro appreciating against the U.S. dollar for the next year or longer.

The Fundamentals

The thesis is simple, we’re betting that the European Central Bank will be able to fend off inflation better than the Federal Reserve. Since the start of 2021, the euro has fallen over 15% against the dollar, which matches up exactly with the S&P 500. This is less a result of a correlation between the S&P 500 and the euro, but more about investors getting out of equities and flooding to the so-called safety net of the dollar.

The dollar is anything but a safety net. True inflation in the U.S. is close to 20%, and the economy will collapse if rates get anywhere close enough to reduce it. Luckily for the fed they will have an excuse to put a halt to the rate hikes and quantitative tightening when it becomes clearer that the U.S. is in a recession. Last week the Atlanta fed revised its estimate for Q2 GDP growth to 0.9%, which would follow a -1.5% decline in Q1. Averaging those two figures and you have a two quarter period where GDP decline: the definition of a recession. We think GDP growth will be well below the 0.9% prediction, which would offer the fed an excuse to slow down their current tightening cycle.

Rising prices, falling employment & productivity, and a nation with too much debt are the perfect ingredients for a mega inflationary storm. We refrain from using the word hyperinflation yet because that gives the idea of end of the world, but it isn’t outside the realm of possibilities. The fed funds rate will never get above 3% because it spells doom for the economy. We believe that double digit inflation tied with a recessionary economy is the most probabilistic situation going forward, which is the reason for our bearishness on the dollar.

Once the realization of the dollar no longer being a safe haven sets in, all investors will be flooding out and looking desperately to find the next safe haven of a currency. The euro has been depressed for a while, due to investors giving the fed too much credit in its ability to fight inflation as well as the Russian invasion of Ukraine – the euro is down 6% since the invasion. Once it is understood that the dollar is a confidence game built on a house of cards, we expect the euro to largely strengthen against the dollar.

The Technicals

As you can see in the graph below, the EUR/USD pair has been bound in a large range since early 2015. We are currently at the bottom of that range, which can be volatile and is why we urge caution. Picking bottoms is a fools business; this is not what we are doing. In mid-May the euro reacted well to the resistance of $1.035 that dates back to late 2016, which was a positive sign for us before initiating this trade. We have taken a small position at $1.05. A small position because we place a high probability on the dollar making a final push higher against the euro – as is often happens in tops and bottoms. In a case where the euro pushes closer to parity with the dollar, we will enter again to make our position larger.

In conclusions, we expect the euro to eventually break the $1.25 level – though this may take some time. As this is written, the euro buys $1.05, and we admit that it is very possible that the pair steer closer to parity in the near future. This is why we are cautious when opening this position. We will slowly add to this position as the weeks go on, because trend reversal in foreign exchange markets often take months to materialize.

The consumer price index numbers are out for May and they’re not pretty. Total CPI was up 1% month-on-month in May, and core CPI (total CPI minus food & energy) was up 0.6%. That brings the respective year-on-year totals to 8.6% and 6%.

The transitory inflation gig has been up for a while, yet a lot of people are still hanging on. Many people pointed towards Target’s warning of lower earnings last Wednesday as they told investors they had a 43% year-on-year rise in inventory. This was taken the wrong way by a lot of investors on Wall Street, thinking that this was good news on the inflation front because it meant that Target would be slashing prices to sell down its bloated inventory. This, however, is the conclusion you come to when you look at surface level data and nothing more.

Target saw post-lockdown spikes in consumer spending on discretionary goods as consumers had money in the bank from stimulus checks. They mistakenly took this spike as a permanent trend and decided to load off on goods expecting consumers to continue spending on these goods. After a few quarters of elevated discretionary spending, consumers’ have been forced to slow down because of inflationary pressures on core expenditures such as food, energy, gas, cars, housing, insuring, etc.

Compared to May 2021, food prices are up 10%, average house prices are up over 20%, average gas prices are above $5/gallon when they were $3.07/gallon last year. Inflation is destroying true purchasing power of the middle class and that is why Target – and other major stores – have increasing inventories. It’s not because of disinflation, but because consumers don’t have enough money to spend on discretionary goods because a higher percentage of their earnings is being spent on essential items.

People are also failing to realize that once Target sells its excess inventory, it will not be maintaining the same high level inventory as it does now, which means that the sales they may be putting on now are only a temporary price reduction.

What does this mean for interest rates?

The Federal Open Market Committee are meeting on June 14th and 15th, and consensus expectations are for another 50 basis point rate hike. This would follow the 25 point hike in March and 50 point hike in May, bringing the federal funds rate range to 1.25% – 1.5%.

Goldman Sachs said that this morning’s inflation numbers have changed their expectations for this year’s rate trajectory: “we now expect the Fed to hike the funds rate by 50 bps in September (vs 25 basis points previously), in addition to 50 basis point moves in June and in July”.

Yet, as rate hike expectations increase across the board, gold is up over 1% in the first hours of trading, possibly a sign that some investors are starting to lose faith in the fed’s ability (or willingness) to fight inflation. As the months go on, we believe more investors will adopt this view of the market. Little 50 basis point rate hikes will never stop an 8.6% official inflation number – with the real inflation figure is closer to 20% if you factor in true housing/rent prices instead of using the farcical owner’s equivalent rent that is used in the official CPI.

We expect inflation to continue its current trajectory for the foreseeable future, with the fed coming under increasing pressure to speed-up the pace of hikes. The fed will likely speak about speeding-up hikes because it will temporarily calm markets, but it will never act on it. The fed’s aim right now is not to fight inflation as people mistakenly believe. If they fight inflation the economy is done for, because as we have discussed previously, the economy just can’t take it. Their true aim is to calm markets using words, and words only. It will become clear in the coming months that stagflation is here, and a recessionary economy will give Powell an excuse to slow down or even rollback rate hikes before they becomes detrimental to the U.S. At which stage gold will likely be well above all-time-highs as fear of spiralling inflation occupy everyone’s mind.

Since Nixon broke the dollar’s tie with gold, the U.S. government has tackled every financial downturn by reducing interest rates and flooding the system with money. The economy recovers, stocks rise, and everyone’s happy again. It happened during the dotcom crash, the financial crisis of 2008, and the Covid-19 crisis. But what happens when the downturn itself is caused by flooding the system with money? What happens when the medicine causes the sickness? What is the remedy?

Federal Reserve committee members were adamant in 2020 and 2021 that inflation was transitory. It was just a result of businesses reopening from lockdowns they said. It’s now the start of June 2022, with the latest U.S. official inflation print sitting at 8.3%. The last time it was at that number was January 1982. As a result, Federal Reserve committee members have come out to say that they had made a mistake in saying that inflation was transitory, while peddling the classic excuse of “nobody saw it coming.”

Three days ago former fed chair and current treasury secretary Janet Yellen, who was adamant that inflation was transitory and that nobody had anything to worry about, told us “I was wrong then about the path that inflation would take. As I mentioned, there have been unanticipated and large shocks to the economy […] that I, at the time, didn’t fully understand.” Current fed chair Jerome Powell apparently realised inflation wasn’t transitory in December, saying “I think the word transitory has different meanings to different people, to many, it carries a time, a sense of short-lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean”, a politician’s way of admitting he was wrong.

While anyone who knows their stuff knew that inflation was never transitory to begin with, somehow nobody at the fed predicted it. None of the fed’s 18 rate-setting member’s expected inflation to be above 2.5% in 2021; it finished the year at 7.0%.

Are these fed members actually this incompetent? I don’t believe so; I think they’re trying to delay the inevitable. Think of it like this: if these central bankers did indeed make an honest mistake and have now realised that inflation is running away from them, why on earth are rates still below 1% when inflation is well above 8% and looks to be continuing higher? Back in 1982 the average federal funds rate was 12.24%, today it is a measly 0.77%. If the fed truly wanted to tackle inflation, rates would be on their way up to what they were in 1982. Yet, they’re currently still below the rate that Alan Greenspan dropped them to in order to get out of the early 2000s recession. Again, with all the talk off a hawkish fed, and two rate increases in three months, rates are still below what was thought to be extremely loose policy in the early 2000s.

The market can’t handle even the smallest of rate increases anymore as everything is built upon a foundation of low rates; the S&P 500 has fallen 14% from its peak, and the Nasdaq has fallen 24%. The real reason for the fed’s inaction, however, is not the market’s reaction, but what will happen to the economy following a series of large rate hikes. U.S. federal debt is sitting at $30.4 trillion, and in 2021 the amount of interest paid on that debt was $562 billion at an average interest rate of 1.5%. The weight average maturity of the debt has dropped from 70 months to 65 months, meaning higher rates will affect debt repayment even more. As Stanley Druckenmiller has pointed out, if the 10 Year Treasury Yield rises to just 4.9% – which would be a pretty average rate historically speaking, although it hasn’t been there since 2007 – the house of cards falls down, because the interest expense on federal public debt will reach 30% of GDP, which is enough to wipe the U.S. clean out.

The fed is now stuck between a rock and a hard place, where they must choose between either raising rates to stop inflation which in turns kills the U.S. economy via national debt interest payments, or letting inflation run rampant which in turn kills the economy via spiralling inflation. This is precisely why they have not acted quickly on inflation. They either already know the dollar is done for and just trying to delay the day of reckoning, or they’re hoping inflation dies out itself – which it won’t.