A subprime crisis in four U.S. states was all it took to trigger the global financial crisis of ’08.
California, Arizona, Nevada and Florida.
All because slowing demographic trends and colossal debt have stretched our economy beyond anything rational or recognizable… and distorted the global economy into an uncontrollable, belligerent monster.
You see, there have been debt-fueled real estate bubbles in most developed countries around the world, with a few exceptions… like Germany. But one European bubble stands out above the rest.
It wasn’t just households in this euro zone country loading up with larger homes and speculating… neighboring countries had greedy designs on property there as well, snapping up vacation homes like kids in the candy store.
Now, as this bubble deflates in this European country, it holds the trigger that could tip the world into chaos…
I’m talking about Spain, of course. This chart shows the bubble that resulted there…
Like the housing bubble in the U.S., real estate prices in Spain began their ascent between 2000 and 2001. Unlike the U.S. bubble, the Spanish bubble inflated for longer, into 2007… and it went even higher than in the U.S.
And the intensity of the Spanish real estate bubble was such that construction rose to 13% of GDP at the peak of its bubble. In the U.S., construction only reached a peak GDP contribution of 6%.
Since the peak, Spanish real estate prices have fallen about 37%, with the fastest decline of just over 6% quarter-over-quarter in the first quarter of 2013.
Prices in the U.S. fell 34% at its worst before the recent speculation-driven rebound. Spain’s prices have yet to rebound at all. And they won’t. With an unemployment rate of 27% – more than 50% for the youth – the real estate bubble in Spain is nowhere near done deflating.
Remember, prices always return to where they were when the bubble started.
But Spain has another problem.
While it has the strongest spending wave in Europe, which peaks last, around 2025, its demographic trends were driven by an influx of immigrants, which helped fuel the construction boom.
Now these immigrant workers are unemployed and moving back to their home countries in droves. So much of Spain’s demographic advantage is crossing its borders… and that means real estate will continue to fall and its demographic boom will not be what would be projected into 2025.
Spain is stuck between a rock and a hard place. Its real estate crisis makes it practically impossible for the country to turn around, even with bailouts and stimulus. If Mario Draghi had not staunchly defended its bonds by threatening to crucify investors who were shorting them, Spain would already be more bankrupt than Greece and requiring massive bail-outs.
And Spain is simply too big to bail out like Greece, Portugal or Ireland.
If Spanish real estate keeps falling and unemployment stays high or even increases – all of which we expect to happen – then Spain is the most likely trigger for the next crisis. China’s bubble and the decline of commodity prices and emerging markets is the other likely trigger.
We’ll see the next global crisis beginning by the first quarter of 2014, at the latest.
Ahead of the Curve with Adam O’Dell
Traders have been chopped to pieces trying to trade the euro recently. It’s been up, down… up, down… and up again… all the while failing to develop a meaningful or lasting trend.