Less to Save, Less to Spend

Plus "free" Italian villas, out of whack tech, Swedish Gelato and plenty more...

(The Greek theatre with Mount Etna volcano smoking ominously in the background, Taormina, Sicily, Italy. Source: Getty Images)

Bill Bonner, reckoning today from Taormina, Sicily...

Sicily is warm. Dry. Sunny. 

The drive from Catania to Taormina was pretty with rose laurel in bloom along the highway and the sparkling Ionian sea on our right.

The countryside is beautiful, if a bit stark. It is a fashionable place, with large yachts anchored offshore…and fancy hotels on the steep hillsides.  

But inland, houses are free. Apparently, there are some available now in nearby Castiglione di Sicilia.

The birthrate in Italy (as in much of the rest of the developed world) is so low, many towns are being abandoned. Houses – their owners in old-age homes or already under the ground – find no buyers. Instead, they are left empty…with fading paint and windblown shutters.  

Towns die along with their residents.

Swedish Gelato?

A few years ago, an enterprising mayor had the idea of giving away the houses just to attract new residents. There was a catch, you had to spend some money to fix up the place…and live in it, at least for some minimal time.

Since then, many places have followed the example, adding to the inducement with cash to pay for the renovations. Most recently, islands off the west coast of Ireland are offering houses and as much as $100,000 to anyone who will move in.

Many people have taken these offers. There are towns here in Sicily, for example, whose inhabitants are almost entirely American, Dutch, German or Scandinavian.  They spend full or part time in their sunny new digs. And with the internet, many continue to work at their old jobs without interruption.

The only trouble is that one of the things that makes a place nice to live is the people who live in it. Take the Sicilians out of a Sicilian town and it’s no longer a Sicilian town. Where is the local bar? Where are the neighbors, speaking their distinct form of Italian? Where’s the panna cotta…the gelato...the ravioli neri? Foreigners can do a pretty good job of imitating these things…but it is not the same.

More about Sicily…as we discover it.

Today, we turn back to what a great economy the US has…but only to say it ain’t so.

Recall that the Fed funds rate was approximately zero for the 14 years, 2009-2022, with the after-inflation rate substantially negative. Now, the nominal rate is over 5%...approximately even with inflation.

Our hypothesis is that there is no way you can go from sustained interest rate falsification (setting lending rates far too low for far too long) back toward ‘normal’ without a serious rerating of capital values. By that we mean, if a stock was worth $100 when interest rates were sub-zero, it may be worth only half as much when they are near to 5%.

Back Into Whack

Why? Because an investor can now get a 5% return – with virtually no risk. Buying Nvidia, on the other hand, is practically an invitation to lose money.

Real estate…bonds, same story. The Primary Trend in interest rates turned in 2020 (or so we believe). Now, the higher they go, the less stocks, bonds, and real estate are worth.

But wait…the financial media tells us that all is hunky dory. As Tom put it yesterday, we’ve gone from ‘hard landing’ to ‘soft landing’ to no landing at all.

Take the stock market, for example. There is great excitement about the “Magnificent Seven.” These are the Big Techs. Together, they are supposedly worth $10 trillion.

The most magnificent of them is probably Nvidia. It makes the silicon chips that investors believe will power the new AI advances. But the AI-inspired super-boom will almost certainly fizzle…just like the crypto bubble…and the dot.com bubble before it.  

A form of artificial intelligence already powers things like ChatGPT and delivers blah blah on any subject you want. But like the breakthrough techs that preceded it, AI probably won’t contribute much to real, broad GDP growth. Most likely, at least one or two AI firms will turn into money makers…but Nvidia may not be one of them.

The Big Techs are very expensive. Unless something truly extraordinary has happened, they’ll almost surely be less expensive in the future. And when they go down, they will most likely drag the non-big, non-techs down with them.

Meanwhile, consumers are running out of money. Real incomes went down for more than two years. They’ve shown positive growth only recently…and the last revisions suggest that they may soon turn down again.

Mortgage payments are back to over 40% of median income – right where they were in 2007, when the last real estate bubble popped.  

Less to Save, Less to Spend

And now that the stimmies, giveaway loans, ultra-cheap interest rates, and tax cuts are visible only in the rear view mirror, the road ahead looks rocky. Consumers have less money to save.

Newsweek reports:

…the rate of savings among American households is rapidly falling. In February, the U.S. personal savings rate was estimated to be around 4.6 percent—much below the decades-long average of about 8.9 percent, according to the Bureau of Economic Analysis.

And they have less to spend. Here’s Stephanie Pomboy:

“How is this not the ONLY thing people are talking about today? The trend in weekly same store sales is F-ugly! And remember, this is NOMINAL. (The picture is even f-uglier in the context of soaring credit card borrowing.)” 

Charlie Bilello has more:

The Conference Board’s Leading Economic Index declined in May for the 14th month in a row. They are now calling for a US recession from Q3 2023 to Q1 2014, driven by tight monetary policy and lower government spending.

The two components in the Leading Index that are not currently portending economic weakness: the stock market (S&P 500) and Building Permits (increase in residential homebuilding activity). The other areas (inverted yield curve, credit, consumer expectations, new orders, etc.) continue to suggest a downturn is coming.

And here’s the conclusion of macro-strategist Gerard Minack:

In short, while several factors have delayed a prospective recession, most of them are temporary and will fade in the second half. Real GDI has fallen for two consecutive quarters, which is a strong signal that a second half recession is likely.

Recession coming? Stocks…real estate…bonds – all falling? We don’t know. But after seeing our hotel bill here in Taormina, we’re going to check out those free houses in Castiglione de Sicilia. We may need one.

Regards,

Bill Bonner

Joel’s Note: “Last year, the island was packed. We thought tourism was finally returning after the whole pandemic thing. But this year, I don’t know where everyone has gone. We’re only half booked. Not even. People are beginning to worry…”

Our rental car lady looked befuddled, but not concerned.

“Maybe they’re all in Italy?” your Editor at Large suggested. “We [the Bowman Family of three] were there a couple of months ago. Near Rome. The capital was overrun with tourists. Americans. Germans. Australians….”

The young woman stifled a grimace as she ran our credit card.

It’s true what Bill says. The pleasant, hillside comunes of Italy are disappearing. Indeed, the situation there has reached the level of national emergency. Last year, Italy recorded 12 deaths for every 7 births. A note issued by ISTAT (the country’s bureau of statistics) observed recently: “A major factor is the reduction and the aging of the female population in the 15-49 age group conventionally considered reproductive.”

Which stands to reason. Fewer children, ceteris paribus, means fewer future mothers. At just 1.24 children per woman (well below the “replacement level” of 2.1 children per woman), ISTAT forecasts that Italy will lose one-fifth of its residents within the next generation. That’s a “baseline” (read: rosy) prediction.

Tourists (and immigrants) do their best to offset the net population loss, but the situation is dire for Italy, specifically, and the rest of Europe, in general.

Might there be opportunities for intrepid, enterprising Americans – flush with mighty greenbacks and ready to cash out of a toppy market – to swoop in and snag a few of those €1 properties Bill was talking about? Perhaps there’s appetite among the BPR community for an “International Bolt Hole” report?

We’ve already got an “Overseas Escape Index” in the members section. Maybe an update is on the cards? Let us know in the comments section below. (And if you’re interested in the Escape Index report, it’s just one of a growing archive of special reports BPR members can access… including The Dollar Report, The Strategy Report, The Trade of the Decade and plenty more…)