This sounds incredibly short-term-oriented and alarmist. Dead is a word to describe the end of something's existence.
Market turbulence is not a novel occurrence, nor are unsustainably inflated economies driven by cheap money and speculation.
The ramifications of reaching a point like that would be devastating, so yes, I think dead is not alarmist but appropriate.
The one time in history they have gone beyond 10% it took 2 years to go from 7.32% in Sep 1977 to reach 10% in October 1979, and then peak at 15% in 1981.
It's not impossible bonds will reach 10% again. But it seems unlikely, and it seems safe to think it would take 3+ years to get there.
https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...
The fed will have a choice: hike rates to slow demand (10%) *OR* keep rates highish and allow financing for more supply to come online (5%). Who the hell is going to finance new gas exploration at 10%?
Reads like they are referring to the Fed. Even if they aren't, US AAA-rated bonds generally track the Fed rate +1% to 1.5%[1].
So corporate bonds at 10% means the Fed rate is 8.5%+. I don't think this is realistic within the next 2 years.
[1] https://ycharts.com/indicators/moodys_seasoned_aaa_corporate...
Think of it this way - a person buys a 30-year bond yielding 10%. Then, for the next 30 years, no matter what happens to interest rates or prices, they will earn a 10% return on their original bond purchase, risk free.
Remember also that 30 years is approximately your adult working life, so a really long time that people tend to think of a “permanent”.
Is it truly permanent? No, but for purposes of discussion and financial planning, it’s close enough.
What are the realistic values here? I have no clue, but a good analysis should cover this.
The Fed doesn't care about the cost of servicing the debt. That's the US Treasury's job. By law, the Fed has the dual mandate to keep both inflation and unemployment low. That's it. Nothing to do with the cost of servicing the Government debt.
If the interest on the Government debt becomes too high, nobody will point the finger at the Fed. If however inflation is high (like now) or unemployment high, you can start hearing people accusing the Fed of gross negligence. In the extreme, the Chairman of the Fed may be sacked, then brought in front of various Congressional investigations, and may even find himself in contempt, or some other very unpleasant situation.
Bottom line: the Fed really cares about inflation, and doesn't give a damn about debt servicing.
Say demand quiets but the price of inelastic goods (gas and food) continues to skyrocket due to greater demand from developing nations who demand more resources to have a better standard of living. How will hiking to 10% fix anything?
Sure you'll kill demand, but you'll also kill financing supply which will only exacerbates the issue over the long run. We need more drilling, more refining, more farming now that Russia is out of the picture and the Saudis are playing games.
Hiking too far is actually a horrible policy choice, and Powell can make a cogent argument about it: he already has mentioned this in hearings. You can't address supply related constraints with higher rates. At some point, they might justify capping rates to finance the needed supply, and that argument smells like the yield curve control of the 1940s. I suspect this argument will become more palatable if we have high unemployment and high inflation. [0]
I have a feeling whatever policy rate they pick will aim to be slightly sub neutral (negative real rates) as they pray inflation resolves itself, while constantly pointing out they have no control over whether Brazil has a successful wheat harvest.
[0]: https://libertystreeteconomics.newyorkfed.org/2020/04/how-th...
They don’t care about the debt figure per se but they do care about the economic implications of that debt, and how other entities are likely to react to it.
then they would've realized they hiked too much. That's why the current Fed hikes are conservative - a lot of people are claiming that they are late, and should've done it earlier, but i think they are doing it right. Slow and steady, and be conservative.
The Fed wants to maintain a balanced, non-partisan position, as much as possible.
Granted, the rates the fed sets (and expectations of future rates) are strongly correlated to treasury debt rates, but they aren't directly linked.
It sounds from your comment like there is _nothing_ that won't be devalued, even gold. Is real estate worthwhile?
(Note: I am in the EU not US.)
The counter argument to this is that the above approach absolutely requires an iron discipline. And without experience non-professionals are prone to making very costly mistakes (e.g., invest on feelings, double down inappropriately, etc.). So, a general audience advice is usually: do not invest money you need within 5-10 years and do not make rash decisions; it is better to ride this train down and then hopefully back up than jump randomly. And diversify (across countries, economies, asset classes, etc.).
Just my 2c; not an investment advice!
> do not invest money you need within 5-10 years and do not make rash decisions; it is better to ride this train down and then hopefully back up than jump randomly.
Gaming the market successfully requires a ton of skill and knowledge, and even then you are not guaranteed success.
Most people are better off focusing on asset-class diversification (i.e. spreading money across many different kinds of asset classes - i.e. physical assets, securities, commodities, cash, etc) than playing just the stock market.
And even when playing the stock market, most people are better off focusing on "time-in-the-market" vs "timing the market".
On the contrary, for the past 20+ years the general advice has been to specifically aim for the alpha of zero ("just use index funds"), not for a positive alpha ("don't try to beat the market", etc.).
> No investor aims for a negative alpha, regardless of the economic climate.
Factors other than alpha are way more important for most people. Many retirees put a high value on low volatility or stability of dividends and are perfectly OK with getting a small negative alpha as part of the package.
Original hedge funds (before they joined a cutthroat trading jungle) set up with a similar goal in mind: a small negative alpha, but protected against the loss of the principal. And had plenty of wealthy investors who were happy with this deal.
Alpha becomes the critical parameter to optimize for when actively investing in times of turmoil (then a negative total return on a positive alpha on the down leg is a success). But few people actually do that, so few care about alpha.
The problem with inflation is that you need to protect yourself before the fact, and at this point, it's difficult to read to what extend the fed will respond with rate hikes and how much inflation we get going forward.
In my personal view, it would be stupid to hike to 10% since that will also cut off the needed supply response: this will decapitate energy, farm, and housing expansion while at the same time decimating all forms of wealth. But there is a possibility depending on how trigger happy the fed becomes.
More likely than not, they raise rates, but it stays below the rate of inflation (3-5%), so anything that yields above that range is a good investment. Anything below would be protective.
As for stocks, I'm looking at individual companies that are cheap with high cash flow that have macro tailwinds, but I'm still waiting. There are always bull markets inside of bears, but you have to look for them. Mind you, bear markets have vicious rally from time to time which fool people into getting an all clear signal. A bear markets job is to bleed everyones money dry, which is why I'd recommend people stay away until no one is interested in stocks anymore.
You need complete despair.
The only reason Volcker managed to bring down inflation is because he was willing to actually do what needed to be done. If borrowing money is cheaper than inflation, why would anybody not just continue to borrow money indefinitely? The Federal Reserve can fight inflation or it can fight a recession; it cannot do both simultaneously.
You have to decide which is a bigger problem: a recession, or inflation. The notion that you can walk a tight rope between the two is disconnected from reality. And while you continue to make inflation worse, you only make the inevitable recession worse. Tick tock.
> You need complete despair.
I agree. We are fucked.
Yes, understanding what's causing inflation matters. I'm not saying it doesn't. But when you have a crisis, you want to focus on mitigation first and then root causing it after the situation is averted.
Also you mention two possible causes of inflation. Limited resources and distribution, and companies deciding to raise prices because they can. What about the Fed printing money like crazy, flooding the M2 money supply? That's the one that's relevant to this conversation.
M2 is only relevant to a point. The increase in the money supply does not, in and of itself, cause any change in prices at all. Individuals and corporations have to make explicit decisions to respond to what they can see of the M2 effect, and none of these decisions are a law of nature. Rents don't have to go up just because M2 grew. Landlords sense that they can, and then they choose to do so. They could choose not to do so, too, but they don't because we're taught that this would be irrational, or something.
The law is called supply and demand. If there are more dollars and the same amount of resources, the value of a dollar goes down.
Let's just agree to disagree. Cheers.
Is a certain amount of rate increase justified? Yes, you don’t want an inflation spiral to develop. Beyond that, we are going to have to live with a certain amount of inflation until the situation in Eastern Europe normalizes and the supply chains normalize after COVID. And the interest rates should be kept on the lower side so that companies can still finance solutions to this mess.
The latter is only possible if there is too much money in the system, the signal about wheat production gets lost. As the feds money printer doesn’t work evenly, those who are closer to it get more money. I can only speculate that eventually, like any corruption, the effect is to diminish productivity in the real economy in favor of a special class.
When your employee is making gigantic profits, asking for more in wages has no relationship to the money supply.
They won't "normalize" though (imho), as the reason is not really COVID anymore, it is China gaining ground and trying to do as much damage to the western economy as possible.
While they did not beat the index in the last decade, I'm fairly certain they will going forward or more importantly minimize the drawdowns.
devaluation of everything is a consequence of unsustainable economics and the fix is not to find a convenient hidey-hole for your money but to invest time, money and attention building a future sans witless speculation, profligate consumption, public and corporate unaccountability, and consumer monoculture
“Spend time at your church, and spend money to invest in a local private school” would line up perfectly w/ 75% of Republicans that I know, (and, if I may assume your views, probably does not line up with them); and yet I think it is a very similar line of thinking.
I am trying to orientate the way that I spend my money and my time more towards my local community. It’s surprisingly difficult. Not everyone does it. And we would be better off if they did!
spending time building a religious or spiritual community is fine by me, especially if it provides material services to the locality and a sense of civic responsibility
also fine with private schools although I do think they should cater to students without the means to pay exorbitant tuition (some provide tuition aid, in fact I went to one that did) and I think there is something to be said for allowing public schools some degree of curricular independence, which might make them more appealing to those who presently prefer private alternatives
really I think there's a lot most people can agree on and I hope we can begin to identify less with team R or D and reason from principles in our politics
> It’s surprisingly difficult. Not everyone does it. And we would be better off if they did!
totally agree, it's difficult but worthwhile!
good point
some skills will fare better or worse than others, the question is which
You’re not going to outplay market trends, and if you’re young/middle aged then it doesn’t matter any way.
This notion of passive investing that has been pounded into peoples heads for years is complete bullshit and has only worked because there was always someone else ready to pay more for the same asset and because rates were perpetually held low. Some points to consider:
(1) You have fewer millennials than baby boomers, as the baby boomers cash out from their vanguard accounts, who makes up for the difference?
(2) If the S&P 500 contains companies built for a certain macro regime (low inflation, low interest rates), and the macro regime is shifting, you can be penalized by owning a set of assets that do not provide adequate returns (Tesla is currently the 5th largest weighting in the S&P, they don't pay you squat.)
Go look at charts of the S&P 500 beyond the last 40 years when rates were more variable, you'll see the market can at times be a shit investment vehicle that might not give you a return by the time you retire and on an inflation adjusted basis has a negative return!
Buy low, sell high. Save cash and be patient.
What does this even mean? That you invested the only money you ever invested entirely in the relatively brief period of the dot com peak? Who does that? (Obviously not nobody, but ...)
To all effects and purposes, nobody does that. So what it really means is "the money you invested during that one period (perhaps a year or so), and likely only the money you invested in dot com and adjacent stocks, has yet to be made back". In the meantime, the other money you invested before and after the dot com peak has done rather well, unless you specifically made some particularly disastrous choices.
That's pretty common for a mortgage
If you went all-in.. had no money in before and never invested after. Sure..
Great advice. So, ummmmm, how long is patient enough? 18 months, 3 months? What's low? Is this the lowest it's going to get? If you have answers to all of this, I want to invest in your fund.
The Boomers are using or investing that cash, though. Sooner or later anyway. And that cash would flow to the current owners of the things they are patronizing.
It's not like they're investing in dry ice and then throwing it in the ocean.
Most people cannot play the stock market well, and even those who make it their day-job often don't end up playing it well. The reality is that the stock market is just too random to game reliably.
This is the first big downturn I've been prepared to invest in, so personally I'm going to buy more than usual. I see it as stocks being on sale.
Japan is the common counterexample. It is entirely possible the stock market will stagnate in the future as the era of American economic hegemony comes to an end.
That only provides a counter example to investing all your money into a single country. Unless you think every stock market in the world is going to do poorly, that's a reason to buy a globally diversified index fund (like VT), so even if American economic hegemony ends, you can pick up on growth of other countries.
Why does it have to be a western country?
> I don't wanna invest in China as that could be throwing money into a black hole.
There are countries other than just Western countries and China: namely, African countries and SEA countries.
https://www.statista.com/statistics/188165/annual-gdp-growth...
At any rate, GDP growth is currently negative for 2022 and China's economy is still projected to overtake the U.S. in a matter of years.
Whether real estate is worthwhile depends on your local markets. In some parts of Europe it might be. If you need a place to live, and you think the prices are reasonable (e.g. it's a market that hasn't seen crazy prices due to QE and low rates) and you can afford it then I'd definitely consider keeping in mind that it's also a long term play, not a short term one. If it's purely investment property the calculation is different.
The current trend is that stocks are going down in dollar value, not just in real value after adjusting for inflation. Are you saying you expect that to reverse?
EDIT: Just to be more specific, I'm pretty sure that in ~5 years you'll at least maintain your real value and in 10 years you'll have a decent real return. Pretty decent probability anyways. In 10 years you'll beat the 10 year bond and the housing market (or gold, or cash or bitcoin). I'm sure some sectors will over-perform and some will under.
Which is changing. Houses in sunnyvale went from 750k-1m and impossible to find one for sale to 350k (yes really!) and on the market for years around ‘08.
Nope. For one thing, there's the largest generation of the 20th century at peak retirement, cashing out of family houses that have gained huge amounts of value, and looking to move to amenity-rich locations.
For another thing, the investment industry, short of other options, has started buying houses to rent them (short or long term), squeezing supply and driving up prices in many markets.
For another thing, short term rentals (AirBnb, VRBO etc.) have had profound impacts on the availability of property in heavily visited areas (in fact, it's not so much absolute visitation rates, but vists-per-resident that characterizes this).
Other factors too. That doesn't mean the market can't crash, but it will be something very different from what happened in 2008.
They can only cash out if people are willing to buy. And fewer people will be willing to buy (at least at the prices the retirees want) with interest rates going up.
So the retirees will either put off their plans for a while in the hopes that things will recover, or will accept lower prices for their homes.
> For another thing, short term rentals (AirBnb, VRBO etc.) have had profound impacts on the availability of property in heavily visited areas
Is this true? Last I was reading about this (a few months ago), the number of housing units in San Francisco listed on Airbnb was around 8k, which is around 2%. Meanwhile, a report from this February estimated that over 40,000 residential units (10% of total) in SF were sitting empty in 2019 (and that number has likely been growing over the past 3 years, as it has been since 2013). Why are we all upset about short-term rentals when so many real estate speculators are sitting on more than 4x as many vacant properties?
I would guess partly because almost all of the short-term rentals represent either (a) previously long term rentals that are no longer available to people who live and work in that location or (b) new construction that doesn't address housing shortages.
The boomers heading into retirement situation is a reflection of 40-50 years of economic policy and has no connection with recent "cheap money".
Actual investment in single family and apartment housing is almost entirely tied to its low risk/return ratio compared with (the perception of a lack of) other options for investment at this time. The money sloshing around for investment is as much as function of the effective privatization of retirement funding as anything else.
The short term rental market is in part the perfect expression of how a relativel small number of wealthy individuals can totally distort a market to follow their own preferences, and reflects income/wealth inequality and lack of regulatory enforcement (they're freakin' B&B's people!) as much as anything else.
Cheap money has almost nothing to do with any of them.
Mostly to keep juicing the economy, which has steadily been needing it more and more to grow/less responsive to stimulus.
Folks I know who have done the AirBnB route were often getting mortgages and buying properties to let out, using the short term cash flows to pay the (low interest rate) mortgage.
Which makes sense as an investment, because the mortgage was cheap (cheap money) compared to current cash flows.
It has become more and more pervasive, until it stopped being able to make money due to saturation. Younger folks traveling around during Covid using AirBNBs helped (they were trying to avoid lockdowns and ‘dirtier’ hotels), but not sure how it is going to play out now.
Anyone who had a 30 year mortgage they got then is going to do pretty fine though as long as they have cash flow.
And speculation.
Bay Area has the highest price to rent ratios in the US. Rent really hasn't changed that much since 2020 and if the betting stops it'd make sense to go back to 2020 prices (which is like a 50% "crash" in parts of the Bay)
I’m sitting on $600k+ cash for a down payment and if I see townhouses correcting I’ll snatch one up immediately. And I am a very small fish compared to the wealth that’s around.
My personal bet is that the Bay Area will just stay at 0% growth until the market recovers.
A lot of speculators also bought assuming increasing property values, so if it’s flat for 5 years or whatever, then that’s going to nuke their gains. Meanwhile they’re paying out real cash every month.
The rental market in many previously hot areas (SF, South Bay) has taken a hit, but not sure where it will land long term.
Medium term there is a LOT less pressure with a lot of techies having relocated and remote work being accepted.
Don’t forget though that anyone who is a ‘bigger fish’ (looking to invest many millions or half a billion or so) in a high inflation environment is going to be looking for as sure a bet they can with as high a return they can.
And since money isn’t as cheap anymore, those are easier to find and get.
So while it may not be bad returns, it may be bad returns compared to something else (a new business, for instance).
This is already happening in the Midwest. Builders have stalled or trying to wait out this supply side shortage - the prices of all building materials have skyrocketed because of it and just in an adjacent neighborhood where they had torn down three houses, the lots are all vacant now and for sale. Builders who had planned to build huge mansions all pulled out and are now just selling the lots.
This has also had a ripple effect on down the amount of houses up for sale. My wife and I decided not to move and have remodeled our entire main floor and are now working on the bathrooms. We're staying put. I heard on a weekend real estate show they were saying two months ago, that out of the 15,000 houses/condo's/townhomes available, when you start to filter out townhomes and condos, then take out all the million dollar and above houses? You're left with less than 200 single and multi-family homes on the market. An absolute staggering number.
A lot of people on both sides are trying to wait this out. But like you said, its going to have some serious long-term consequences for everybody.
71 million alive in 2019 of 76 million born[0]. If the oldest boomer is 76 now, their life expectancy is over 10 years[1]. Most boomers have more years life expectancy than that i.e. most boomers will live longer than 10 years. And in a couple one will live longer, perhaps not releasing a house.
Aside: most people mentioning “boomers” normally are saying something offensive - similar to making inane stereotypical comments about disabled people as an example. The term is very American-centric, and in my country the word mostly is used offensively. We mostly don’t know what gen__ means either.
Edit: 25% of boomers don’t own a home. Today, white millennials are almost three times as likely as Black millennials to own their homes. If you are white, then every time you make a comment about a group that has it better off than you, lookout behind you. Goes double for complaints about the wealthy if you live in the US: you are the wealthy from the point of view of most people in the world.
Disclaimer: I am not a boomer.
1) food in this economy is still delicious so heart disease is still the cause of 50% of deaths, and
2) humans only have one copy of p53 from each parent, so everyone dies of cancer if Heart disease or <random> doesn't get them first.
Given 1 and 2, the boomers are on their way out. My mom (born 1953) might make it another 20 years, but my dad (born 1945) is living on borrowed time (20 pk-yr history and cancer).
I’ve always put most of my money into ETFs, mainly S&P500. It has served me well so far.
Just be prepared to be down with your portfolio for some time.
But hey, it’s the future, so no one can really say anything about it :) I at least am gonna see through this one.
Developers can save companies money - handy in a recession. Developers can sell their skills globally (that has negatives too though...). And if a software company is still running it needs developers to fix the bugs, support the system.
I work for one of the largest health care companies in the world. In the US, there are only three or four major health care companies and they're all massive. My company has repeatedly said its too big to move as fast as smaller startups who are coming in and disrupting one niche of the entire market.
For example, we have something like 4-5 different billing systems, none of which are able to talk to each other. They're monolithic, they're 10 years past what you would consider "legacy" software. So in comes all these companies building billing apps for health care companies. My company? We can't compete, so we're constantly buying other companies, and integrating their tech into our company.
Today in Health Care, startups with good ideas and good products? They're not lasting and are being bought up at a record pace. My company? Bought 15 companies last quarter, we're on pace to buy more this quarter. So instead of creating and building this tech in-house? They're just buying up these smaller startups and using their technology instead.
My advice? Build a decent product/app/platform for a niche area in Health Care and you'd be surprised how fast one of these companies will be knocking on your door.
https://www.medifind.com/news/post/problems-us-healthcare-sy...
Then start researching that particular topic. Take something like Healthcare Billing, and all the issues with it:
https://www.collaboratemd.com/blog/the-top-10-challenges-ass...
Then you take one of those issues and see if you can find a problem worth fixing. Develop a program or application around solving that particular problem. I'd also start looking at attending healthcare conferences and focusing on that issue and going to see what industry people are complaining about and see if you can get more insight from them. Start networking with people at the conferences.
It wouldn't take long to get an inside track through networking and research to find a niche where you can build something that will really get a companies attention.
RE is interesting because it's both an asset as well as something you can use. So if there's general inflation, it's got both upward pressure (because it's an alternative to rent from a consumer standpoint) and downward pressure (because bonds are an alternative to RE from an investment standpoint).
I like the comment: “I think one of the problems in this discussion is that the word ‘shortage’ doesn't have a clear meaning. If gas is $6 a gallon, should we say there is a shortage of gas? If I get stuck in traffic on the way to work, can I say there is a shortage of roads? If I have to park 4 blocks away from my apartment, is there a shortage of parking?”
And a one-sided view on why your home is not an investment: https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terri...
Low-rate mortgages certainly aren't helping, but they're "not helping" in the same way that hucking an armload of kindling into an already-raging house fire is "not helping".
I'm cautiously optimistic that societal unrest from this will eventually forcibly neuter local zoning controls but short of that we're just going to keep subsidizing demand and kicking the can down the road as if people don't need places to live.
That could bring down rents and improve quality of life, and improve the suburbs as well. If you drive by a poorly-maintained house in the suburbs, that's probably someone who would live in medium density if it were available.
It’s like saying pouring water on a house fire is too extreme, maybe try an ABC extinguisher instead. The time for half measures is long past. If NIMBY home owners don’t like that there’s an apartment in their neighborhood, they can choke.
At some point, you just need to build. If some ideas don’t pan out… then people will move, investors will lose. At present, even in densely populated Boston, any type of housing will command a high rate.
Aside... where the heck is tech in building housing faster? Where's the prefab and automated assembly? Too many building regulations? Entrenched interests? Incredibly hard problem for large scale engineering?
https://constructionphysics.substack.com/p/why-its-hard-to-i...
-www.botbuilt.com - (W21) -Canvas -Built -AutoVol -https://www.diamondage3d.com/ -Entekra -Promise Robotics -Icon -Rent my backyard (YC)
Just watch, in a few years things will have changed quite a bit.
The more desirable areas will still have demand of course, but what counts as desirable is shifting.
New Zealand had a bi-partisan agreement at the national level to prevent city council level restrictions, which is going to have a massive impact on the number of apartments built. https://www.stuff.co.nz/national/politics/300433304/labour-n...
New rules that mean that property owners have a mostly automatic consent, if you build within the limitations. Councils and neighbours are mostly prevented from blocking development. There are rules/constraints on height, setbacks, shadowing (recession planes) etcetera, however the restrictions are not ridiculous.
Similarly, after the Christchurch earthquake (which caused a loss of about 5% of the housing stock), the government stepped in to force the local councils to allow more new development. https://www.mbie.govt.nz/dmsdocument/1088-housing-pressures-...
I would say NZ is fairly similar to Oregon if you want to compare size, population etcetera against the US. Although looks like NZ has more population in major cities than Oregon (Greater Auckland population 1.5M, cf Portland 650k). https://en.wikipedia.org/wiki/List_of_cities_in_New_Zealand
Will it work idk but if there's one thing the state is scared of it's voting boomer homeowners.
1: https://policyadvice.net/insurance/insights/mortgage-statist...
That's out of date, its above 5% now: https://fred.stlouisfed.org/series/MORTGAGE30US/
I just wanted to call out that must-sell (2008, falling market prices, unaffordable adjustable high-rate mortgages, low inflation) is different than can-hold (falling market prices, affordable recent low-rate mortgages, high inflation).
If you've got a fixed-rate mortgage at 3%, there are worse forms of debt...
Boomers all over Silicon Valley are still paying 1976 tax rates on their properties worth $2m+ now. Disneyland is a huge beneficiary[2], but ANY efforts to reform Prop 13, even just for commercial, are met with "slippery slope" arguments from the same boomer homeowners (and PR campaigns funded by real estate groups that benefit from it).
1: https://en.wikipedia.org/wiki/1978_California_Proposition_13
2: https://www.curbed.com/2020/10/prop-15-california-property-t...
Prop 13 limited tax increases to 2% a year, not zero. No one is paying 1976 rates.
How safe do you feel that a piece of paper saying that plot of land is yours will hold up when there's a raging mob threatening politicians to do something about homelessness/housing prices/AirBnB/Asset managers holding all the properties?
The political risk in the West is at Emerging Markets levels. We've seen G7 nations de-bank their citizens extra-judicially, seize assets and remove licenses, remove freedom of movement, create an entire second-class of citizenship, lock up people for committing no crimes. This is normal. No one is protesting. The media agrees as does Hollywood.
If I had anything beyond my one property in which I reside I'd actually be pretty scared. This stuff happens in Emerging Markets all the time: the government tells anyone with more than one property to pick one to keep. All foreign property owners have their property forfeit or taxed to the point where they are forced to sell.
These actions are not out of the realm of possibility in the West any more, especially with the current leaders. There will be no tears shed for the poor landlords and property owners who can only keep their principal residence.
Also, carrying costs of vacant properties are high. I'm predicting large writedowns of RE, and especially commercial RE in the coming 5 years.
Are you referring to things like "key workers" (I personally hate this idea)
The truth is under capitalism everyone cannot be a Capitalist. Please, I need you to think deeply about that last sentence. It’s not as simplistic as it sounds.
Until we treat housing as a cost and not an investment none of this will end.
[Alef] https://www.realtor.com/advice/finance/second-home-tax-benef...
[Bet] https://homeguides.sfgate.com/tax-deduction-multiple-homes-m...
It's not just a mob, it's a raging mob.
Granted that they're still younger and should be in a more risk-tolerant phase of life, but what I see in Millennials, and Gen Z especially, is a culture of growth-only, with no interest in boring old investments that are intended to earn and build value over long timescales. I think at least some of this has to do with the gamification of investing; in my Dad's time, a normal person couldn't just sit at a brokerage and watch a stock ticker all day. Free trading has intensified it by removing the barriers to full-time gambling. Remember that Millennials are a much larger generation and we're just still early in the period when they're growing wealth; I wonder if what we're seeing isn't the beginning of what it will take to change the culture... or if we'll continue to see endless bubbles because the steady-as-she-goes, long term investment mentality is just disappearing in the face of permanent FOMO. Sure, it's not glamorous, it won't make you a millionaire overnight, but that's really not what investing your savings should be about.
You're watching the unwind.
I just had a follow-up thought to my own post (too late to edit).
Maybe part of this culture is that many of the most aggressive young growth stock investors are not investing their savings. That is, what's been inflating these bubbles is inherited wealth being directed away from responsible investments and towards speculation. Contrary to what I'm saying, I do know a few people (not just Millennials) who have blown uncomfortably large portions of their actual earned income / work savings on bad crypto investments... but I still feel like people are more careful and conservative when they're investing money they actually worked to earn.
Or they were. Maybe the whole society tips over towards hype and FOMO when it's all we see online everyday.
Treasury bond yields are 3%, inflation is 8.5%, so in real terms you are guaranteed to lose 5.5% annually if you hold bonds.
Or basically instead of risk-free gain you are holding gain-free risk.
I think people who expect we're going to go back to pre-pandemic supply chains are vastly underestimating the difficulty of bringing a complex system like the economy up from a cold start. In my experience with complex systems that are much less complex than the economy (merely a few hundred million lines of code), it can't be done. You have to incrementally build a new system and then cut over parts of old system as their replacements start to function better than the old degraded experience.
This'll likely take a decade or two. Expect it to be a good decade for startups as changing relative prices make new business models viable against soaring existing prices. It's going to be very bad for consumers and for incumbents, though.
Is it a perfect estimate of inflation? No.
But I would trust it more than hot takes from non experts.
It seems to me the economy is delivering all it ever did and more.
https://fred.stlouisfed.org/series/PCES
There will be no global supply chain any more. Any country with a brain now knows they have to be completely independent of the West in every aspect. Sovereign assets must be within their borders. Currency reserves? Held at domestic banks as much as possible. Even within the West there needs to be some level of distrust because history shows that there are no perpetual alliances.
We are going to have several hundred supply chains that often don't interact, even if it would make economic sense for them to do so. This is tremendously inflationary and it's only just begun.
Economic sanctions in response to invading another country is a very different thing, and not a new thing.
Unfortunately this by itself isn't good for globalization, because it relies upon free trade, stable legal systems, and secure supply lines to work. So even if you get rid of the governments that seek to detach from the world economy, the goods can't get to consumers when they get intercepted by warlords.
I think that eventually the world may converge upon city-states as a cultural unit and corporate feudalism as an economic one, but it's likely to be an exceptionally bloody transition.
Bearing the cost of ones own defense and foreign policy, instead of outsourcing it to your host government, is incredibly inefficient and leaves you open to price competition from your government-sheltered peers.
That's the entire reason the global economy of politcal-economic alliances and trade policies was created: to benefit from global, lower-cost manufacturing while still retaining the benefit of government protection.
It seems more likely we'll revert to a multi-polar late-Cold War state of affairs, with global supply chains much more influenced by current military alliances.
Emerging defense technologies like drones, lasers, robots, micro-scale manufacturing, and self-driving vehicles - along with the latest generation of existing weaponry like MANPADS and anti-tank missiles - all preference the defender. They allow a group of relatively untrained and loosely organized defenders who know the terrain well to deploy extremely effective resistance against an attacker, as long as it's at short range. A drone swarm can quite literally destroy all hostile forces within an area without risking a single person, but it can't do this beyond say 100 miles out. These technologies are all for defense, not power-projection.
This has a similar effect as the development of the musket in the 1500s. The musket allowed relatively untrained militias to enjoy superior firepower over the knights and longbowmen that had trained professionally their whole lives. As a result, smaller city-states and colonies could defend themselves against the large standing armies that kings and emperors could wield, and so the feudal system collapsed. This reversed with rifles (their greater accuracy benefitted from more professional training) and modern armor & explosives (which required an industrial base and supply chain greater than any city could muster), ushering in the era of nation-states. Military technology is changing again, and that's why I believe the nation-state system is again going to revert to smaller decentralized units.
> They allow a group of relatively untrained and loosely organized defenders who know the terrain well to deploy extremely effective resistance against an attacker, as long as it's at short range. A drone swarm can quite literally destroy all hostile forces within an area without risking a single person, but it can't do this beyond say 100 miles out.
We already have this "drone swarm", we just call it a guided missile.
The hard part in fighting a modern army isn't killing them, it's finding them. The defender is inherently at a disadvantage in this regard because they have things to defend, which necessitate that they're position in the vicinity. Russia is struggling at the moment not because defenders are inherently advantaged but because they're relying on conscripts and relatively untrained soldiers.
> The musket allowed relatively untrained militias to enjoy superior firepower over the knights and longbowmen that had trained professionally their whole lives. As a result, smaller city-states and colonies could defend themselves against the large standing armies that kings and emperors could wield, and so the feudal system collapsed.
The exact opposite of what you're describing happened with the wide utilization of gunpowder. Pre-gunpowder, city-states and small kingdoms enjoyed relative independence due to the sheer expense of penetrating walls. Post-gunpowder, artillery (not rifles) required a whole professional organization to be utilized effectively, and formed the backbone of the army, so small states could no longer field or effectively defend against larger states, leading to increased centralization of authority, well before the creation of nation-states. "Makers of Modern Strategy from Machiavelli to the Nuclear Age" covers this transition pretty extensively.
Yes; this, and all of NATO is assisting Ukraine with G-2 (intelligence) and G-4 (logistics).
In other words, Russia created a military that was bad at being a military.
The only good thing that will come of this conflict is a revitalization in the study of military arts.
Changing topic: you said upthread “[people are] vastly underestimating the difficulty of bringing a complex system like the economy up from a cold start. In my experience with complex systems that are much less complex than the economy, it can't be done.”. Your personal example is irrelevant because it is a single person trying to restart an economy. Cities recover after earthquakes (my city Christchurch 2010) and wars (I have visited ex-Yugoslavia) due to many independent actors working, perhaps not so much due to your “command economy” example. Capitalist individuals route around damage. Although I admit effective centralised government helped Christchurch recover quickly.
- increased min wage
- supply chain disruptions
- China lockdowns: less goods on the market -> higher prices
- increased price on commodities and energy
All of this already included into current good prices, so there should be something more to push farther inflation.
When you have a supply shock on raw inputs, it takes time for that to make its way through the economy. Businesses along the way keep inventory, they've locked in forward contracts, they can eat the cost increases to avoid losing market share until they're sure the price increases are persistent. But eventually they realize that everyone else in the industry is facing similar price increases and they'll go out of business if they don't, so they raise their prices too. This eventually propagates down the supply chain as inventory runs out and new contracts are negotiated. The price increases of late 2021 were triggered by the initial shock of March 2020. The Ukraine war & China lockdown shocks of early 2022 aren't going to be seen until about 2024.
By the time businesses have adapted to this round of shocks, we may be dealing with new shocks like a war in Europe or the retirement of baby boomers.
It was the biggest shock: panic lockdowns across the world, not just initial. Chances are that supply chains have been adapted, and current localized lockdowns in China will not make significant damage. But we will see.
Fed was aggressively printing starting 2008, and we didn't observe much inflation, meaning those money didn't go to real economy, but went to some big investment speculations and real estate.
IMHO, we will not see a recession, we already are in a recession. What we will see a depression.
This is the first term 'p' in the Taylor rule, which corrects the nominal interest rate that the Fed sets into a real interest rate that accounts for inflation.
That explanation doesnt make sense when the basket of assets has a expiration date and/or significant storage or maintenance costs.
https://www.investopedia.com/terms/t/taylorsrule.asp
r = p + 0.5y + 0.5(p - 2) + 2
Where:
r = nominal fed funds rate p = the rate of inflation y = the percent deviation between current real GDP and the long-term linear trend in GDP
As I said, the FED is betting that inflation is being caused by supply chain issues alone. This is obviously not true. It will get worse, so much worse, because the FED is in fact acting too slowly.
https://www.chicagobooth.edu/review/what-makes-it-hard-contr...
"interest rates sharply, and keep them high for several years, even if that causes a painful recession, as it did in the early 1980s in the United States, United Kingdom, and much of Europe. How much pain, and how deep of a dip, does it take to stop inflation and to keep inflation in check? The well-respected Taylor rule (named after my Hoover Institution colleague John B. Taylor) recommends that interest rates rise one-and-a-half times as much as inflation. So if inflation rises from 2 percent to 5 percent, interest rates should rise by 4.5 percentage points. Add a baseline of 2 percent for the inflation target and 1 percent for the long-run real rate of interest, and the rule recommends a central-bank rate of 7.5 percent. If inflation accelerates further before central banks act, reining it in could require the 15 percent interest rates of the early 1980s."
Although I wouldn't go as far as to say we are in stagflation, it seems like the current environment wouldn't be an optimal place to use the rule. Ultimately I think the Fed took a view and have stuck with that, for better or for worse, and they are valuing consistency over diverging economic models.
= 1.5p + 0.5y + 1
For that matter, the 0.5 is also a parameter, and is basically saying "Weight the goals of full employment and stable prices equally." If, say, you wanted to weight Fed policy 80% toward controlling inflation (to a target of 2%) and 20% toward maximizing employment, the equation would be r = p + 0.2y + 0.8(p - 2) + 2.
https://home.treasury.gov/policy-issues/financing-the-govern...
I'd say that yes, we have a much bigger problem on our hands than the relative yield of a treasury bond.
https://www.twitter.com/JeffBezos/status/1525309091970699265
I personally believe that the vast majority of the inflation we are seeing today has nothing to do with government debt/deficits, so the government reducing its deficit will have minimal impact on inflation.
However, a lot of people do believe, or at least claim to believe, that inflation is almost entirely being driven by government deficits, in which case corporations paying more in taxes would certainly have an impact on inflation, so tying the two together is certainly not misinformation, and if this view is correct, then it will reduce inflation.
You’re on to an important point, but your statement is inaccurate. Firstly, it’s a fall in the rate of interest that is equivalent to a rise in the present value of a future cash flow. And vice versa. Notice this has nothing to do with “high” or “low” interest rates (whatever that means, exactly), but a change in the rate of interest. Secondly, this is not related to speculative stocks. All companies with an expected future income are affected by this, ie. almost all companies in existence.
Someone just starting their career benefits from cheap assets, high rates mean down payments will probably be cheaper, stock declines don’t matter if you don’t hold stocks. High inflation means their wages relative to debts such as student loans or first mortgages will increase.
Retirees with fixed incomes might get crushed. These folks were pushed into stocks and alternatives due to low interest, declining assets remove income and high inflation reduces the real value of the income.
There are a lot of people in between who will experience churn. However given the current demographics of the US, having two groups experiencing different versions of the economy will pose political as well as economic challenges.
This has more to due to impact of inflation and less so just a function of a dividend and rates.
New all time high
> Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price!
What does this mean? What is negative return relative to price?
https://ycharts.com/indicators/sp_500_monthly_return
Yours is unweighted, but return of the S&P in Dec 2021 4.36% The dividend yield about 1.37% The price ~4600.
4.36/1.37 - 4600 indeed very less than zero.
The relationship means nothing to me.
I must be getting this all wrong.
Bear markets typically have several short covering rallies of large magnitude on the way down. Use these rallies to unwind your portfolio. Use the dips to buy hard assets and stocks with high yield that can withstand inflation (honestly everyone's margins are probably screwed). Make sure you leave some portion of your portfolio to hedge. Never overstay your welcome. Risk management is key.
> it's a huge danger once a populace learns it can vote itself money. Charles Munger [1]
(This follows him saying that "inflation is how democracies die" and is followed by several historical examples)
I know several committed voters of the previous administration and an almost universal complaint of the current administration is how their _personal_ wealth is being affected. We don't [yet] have a positive sum economy: in order for someone to win, someone has to lose. In the case of the previous administration, it's future generations.
[1]: https://youtu.be/GNTczyGLdhc 3:26
It pales in comparison to the $9 trillion in QE over the past decade given to the largest banks.
Second of all, QE isn't money given to the banks. When we have a deficit, the government sells bonds to banks. "Naturally" this would drive up interest rates for businesses because unlike the government, they can't issue an infinite number of IOUs and have to compete for a limited amount of liquidity. If interest rates rise too much, businesses will be forced to shut down, especially when people spend less money during a pandemic. Quantitative easing is a tool that allows the Fed to lower interest rates purchasing by these bonds back from the banks. The more debt the government issues, the more debt the Federal Reserve needs to purchase in order to lower interest rates. Basically, the root of the problem is that Congress is incapable of balancing a budget.
Remember that the cutoff for stimulus was from prior year's taxes. This means you could have been making 6 figures in 2019, and then be making significantly less due to covid job loss or reduction when stimulus was handed out. As a matter of fact, stimulus helped my family greatly even though we made 6 figures in 2019. So following through on your claim would have meant my family suffering. YMMV.
[1] https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were...
Shrinking the money supply is an awful idea. If money supply shrinks is decreases investment, increasing unemployment. Commerce stops (because people assume there money will be worth more in the future so they reduce spending) which increases unemployment more.
There's a reasonable debate to be bad about tax rates for wealthy people. I don't think any economist on either side of politics thinks decreasing money supply is a good idea.
Institutions such as Fed are now completely detached from their mandate and instead under bureaucratic capture devoid of any meritocracy. There is a revolving door between Fed officials and Banks/capital management firms. Bernanke, Powell, Kashkari, Yellen, Brainard - these are poster children of corrupt kleptocracy with revolving door arrangements between Fed and firms like Citadel, Goldman, Pimco. At least Bernanke had economic background. Powell doesn’t even have so. And his messaging has been super confusing with very little forward guidance which constantly confuses the market. I am not sure what qualifications even they attach to these utterly detestable individuals working for Goldman, Citadel, Pimco, and Brooking when they hire them. Oh let me guess, they work for the same people that fund our executive and legislative branch officials.
there is a risk free alternative to stocks
The value of that money depends on how scarce it is.
The government constantly raises and lowers that scarcity at will.
Sometimes the government decides to double the supply in just a few years:
https://fred.stlouisfed.org/series/BOGMBASE
So it seems highly risky to me.
The inflation for two different assets traded in the same currency are equal, so there’s not much of a comparison to be made there.
When I lend 2022 dollars to the government, I give away a certain amount of buying power.
I don't know if I will get that buying power back when I get my 2032 dollars.
The government does not always have the capability to pay me back my buying power. It cannot create value at will. It can create money at will. But the more money it creates, the less value it has. So it cannot create value at will.
No asset is risk free. Bonds are a relatively less risky asset.
>The government constantly raises and lowers that scarcity at will.
Nope. Notes, Bills, Bonds are auctioned.
Just like doubling the money supply every couple of years seems to be the new normal since it started in 2008?
> How is holding a bond risk free? It is a promise to give you a certain amount of money at a certain time in the future.
I Bonds. They are guaranteed not to lose purchasing power and not to have a negative return. Unless the U.S. government defaults on its debt obligations. That is as close to risk free as one is going to get :-)
Imagine Tesla would hand out a certain type of share that after 10 years turns into 2 shares. Nobody would call that a risk free return. Because you don't know how much dollars you will get for those two shares.
The same with dollars. You don't know how much Tesla shares you will get for those dollars.
E.g. if supply chains were restored and suddenly there was a lot more product to purchase that would cause prices to fall.
My HCOL region is seeing a big change in the RE market as Mortgage interest rates hit >5%
Really? 2.5% bonds in a 7% inflation environment is an attractive bargain?
This part didn’t compute:
> Bonds will be wrecked […] because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
I'm pretty sure Russia disagrees, and it remains to be seen how China and other foreign holders of US treasuries will look at US (and other foreign) bonds in the future.
Have their been high interest rate countries with asset bubbles? E.g., dutch 1600s interest rates or 16% during Tulipmania.
That's very hard to know, but to be clear it's negative real rates that drive the bubbles. There's much more incentive to speculate when cash is a hot potato. For example Japan is much less bubbly these days than in the 1980s, even though nominal interest rates are lower now.
> Have their been high interest rate countries with asset bubbles? E.g., dutch 1600s interest rates or 16% during Tulipmania.
Presumably, that's why Tulipmania was confined to tulips, instead of spreading euphoria to absolutely every asset class. Even with high rates it's absolutely possible to have local bubbles in things like tulips, beanie babies, or Dogecoin. It only takes the promise of high real returns. When real interest rates are negative, even the promise of zero real return becomes mouthwatering.
Real rates are usually negative. Real interest rates defined as the Nominal Rate - Inflation. Japan has a negative nominal rate right now.
Let me put that a bit more precisely:
And yet people keep saying that nobody can time the market…
* You don't know the long term path of interest rates. Even the Fed Chair doesn't, because they don't know what will happen with inflation. (They do know the short term timing though, which is why they're not supposed to trade.)
* Even if you're expecting a correction, you don't know when the correction will occur or by how much. It could stay aloft like Wile-E-Coyote after the fundamentals drop out, or crash early in anticipation of the fundamentals changing.
* And when it does fall, you don't know where it will land, nor how many times it will bounce along the way down.
My original comment was a mechanics related comment in which liquidity (credit + cash) pushes up asset prices and not rates (although there's high correlation especially in the past 20 years in the US).
This is based on my understanding of Ray Dalio. https://www.youtube.com/watch?v=PHe0bXAIuk0
There is a correlation between liquidity and rates, but it's an inverse correlation. That's Open Market Operations 101.
Besides, if your macroeconomic goal is to reduce inflation (which is the reason for raising interest rates in the first place), one subgoal should be to reduce the volume of loans that are being issued. After all, bank-issued loans are new money, which adds to demand, which helps prop up inflation. That's Monetarism 101.
My example of the Fed with high interest rates and a lot of QE was a way to see where our disagreement would appear. It's similar to the great recession where there were interest rates lower than they are now, but because the private sector wasn't extending credit (less Cash + Credit); there didn't appear to be any asset bubbles.
The volume of mortgage backed securities is based on who can and want to get loans. During the great recession it was hard to qualify for a mortgage even though many people wanted to do so.
> The volume of mortgage backed securities is based on who can and want to get loans. During the great recession it was hard to qualify for a mortgage even though many people wanted to do so.
"Want" is a difficult word. I want a private island, but I can't afford one. So my contribution to effective demand for private islands is zero. In the same sense, I don't think the effective demand for mortgages was particularly high during the great recession. But anyway, we agree on the observation that low interest rates and low mortgage volumes can go hand-in-hand.
One point where I think we differ is the direction of causalities in central bank behavior. My point is that central bank QE causes low interest rates (but low interest rates don't necessarily cause QE). The upshot is that while "low interest rate policy, no QE policy" is possible, "high interest rate policy + QE policy" is not possible. The two policies would be in logical conflict with each other.
I'm sorry to be that person, but what sort of effect if any might that have on crypto markets?
and to cause a dam burst it's enough for a trickle of retail investors to start doing this. and .. bam. you saw the last few weeks. (as others notice that there's less and less chance of making money they also withdraw to minimize risk)
Why? Also, isn't it in contrast with:
> it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
You even say that bonds would be a good deal
But if you actually buy that bond, and the rates keep going up, then new bonds will be an even better deal than the bond that you bought, and so to sell it you'd need to sell at a discount ("wrecked").
I feel like this misses a sense of scale. Sure, everyone loses, but some choices must be superior to others in a rising-rates environment.
Yep, I did well, and I loved to show people AMZN stock price graph, like “can you identify the dot-com crash here?”. But I believed in the company then. Big question is: should I believe in the AMZN now?
Personally, I’ve stopped using Amazon when they started to support censorship - I’ve grown up in a totalitarian country and things likes censorship are revolting to me. I never suffered after leaving Amazon using Walmart for goods delivery and B&N for books. So Amazon is not unique and irreplaceable anymore.
So, let’s ask people who continue to use Amazon - how the company is doing these days? Do you think it will go on growing?
The best option I see following a similar path is TSLA. They currently have 2% of us auto sales. The energy business is tiny, AI/FSD is controversial, but if it works it will be worth a lot.
P/E is 40 currently. Historically very large companies have had P/E between 4-30. So the question is what is Tesla's earnings in 2030 and what will average P/E be across all large companies.
AWS, in my not-quite-amateur opinion, will remain dominant in the industry. The best IAM of the big three, incredible availability and they aren't undercut on price by their kitchen sink adversaries.
Azure has Office and AD integrations, GCP has some ML advantages. But AWS is strong long term. They're peak IBM.
Also, there were a lot of other companies that people believed in that didn't fare so well.
You are being very optimistic to assume your pick is the one to not only survive but thrive.
In 1998 Greenspan cut rates due to the Asian financial crisis and worries over Y2K which blew up the dot com bubble. Then they slashed rates down to nearly ZIRP and held them low which blew up the housing and finance bubbles that deflated in 2008.
None of this started in 2008.
What is different this time is the wage inflation and the unionization drives that we're seeing. The Fed is likely to hike rates much more aggressively in order to stop that from taking off.
When you talk about inflation, though, asset prices and commodities don't matter anywhere near as much as wage inflation. And wage inflation is high due to the low number of job seekers, likely a result of other factors like death and disability due to the pandemic removing workers from the workforce and boomers retiring. As a result the rate hikes are likely to be more severe and the downturn is likely to more severe.
I would be worried that this downturn looks more like a depression than a recession. Of course it may just unwind as before and as the economy pops they slash rates and do ZIRP and the rich people buy up even more of the economy and the cycle continues.
I think there's a good chance the average Millennial gets pretty decimated by the next downturn and crypto should get tested and there's a pretty good chance that the Ponzi all unwinds and goes to zero (which will destroy all the Millennials using crypto as a 401k). I'm still not sure that crypto has gone up enough so that a few billionaires couldn't rescue it and keep the game running though.
I still think we're going to see a relief rally short term though and that the downturn won't really take off until 2023/2024 when the yield curve inverts. We're not quite there yet.
We've also had prices being out of whack with fundamentals for decades, that is also nothing new. Also don't go predicting hyperinflation or raising long rates. That has been predicted for decades as well, and it never happens. The Fed raising rates is designed to cause a recession and disinflation. Long rates won't rise and long-term inflation will remain contained. We're not in the 70s and we're not going back to the 70s.
The thing to be MOST worried about is political. Since the 2008 crisis there's been a rise of people who just seem to want the system burn and where they won't bailout the system in the event of a financial crisis. That increases the chances that the economy could really lock up and institutions could fail. There are a lot more crazies in power.
At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break. I think its way too soon to call it as broken though. The commodities inflation that we're having right now is not that unprecedented (and a lot of it is ultimately transient and due to bullwhip effects) and the Fed is showing that they're going to take action to stop it. That means that we're likely to just have another recession then another long period of ZIRP and asset bubbles and crazy valuations continuing again.
>The Fed is likely to hike rates much more aggressively [...]
I agree, and they're about to start letting the balance sheet run off too, though at half the rate they accumulated.
My question for the wonks here: will it be difficult or expensive to hold rates above, even say, 5% for very long if needed? US national debt is over $30T. Assuming inflation persists and rates are raised to 5%, the approximate steady-state cost of servicing the debt is $1.5T/year, more than pre-pandemic US discretionary spending, and more than 33% of federal revenues. I asked a friend about this and they said not to worry, it takes a while for the national debt to roll over, but looking this up it seems most US debt is in instruments with a horizon of less than a few years.
also, I imagine Debt:GDP is not the most appropriate stat here but in the 1970s it was 30-35% and now we're over 120%. Some other countries are over 200%. And in a recession, by definition the denominator gets bigger. Or maybe the broader question is at what point does national debt matter?
I sort of feel the Fed is playing everyone's expectations, talking to cool things off and even name-dropping Volcker while hoping to keep interest rates more at 4% than his 20%. I'm not crying conspiracy or complaining -- if it works they could get their soft (now "soft-ish") landing.
isn't this a bit more complicated than that? for example in housing though the prices are propped up by the tech companies (and startups), which can pay all those high salaries thanks to their valuations and cashflows (which are fueled by cheap credit, eg. credit cards). but also low rates allowed people to get bigger mortgages. so in that sense the fundamentals (cashflows) are there, but things with limited supply blow the fuck up, whereas wages barely moved up in comparison, and PCE was slightly below 2% (which was the target).
> There are a lot more crazies in power.
very underappreciated risk.
> At some point the cyclical game that we're in with engineered recessions, low rates, low risk premiums, cheap money, insane valuations, asset bubbles, etc has to break.
yes, but also these valuations are so high because the expected cashflows are also high, because almost everything (not just tech) is global and the world got a LOT richer (eg China)
the risks are structural (politics, eg. wars, crazy tariffs, brexit), but the potential for solving them are too (easier migration [eg Japan], more trade harmonization [US-EU], education and healthcare reform [US])
Why? There's an easy way out of depressions / recessions.
NIRP and QE Infinity part III.
NIRP sure sounds better than "war", which is another commonly used method.
And for now, even crypto?
I think a lot of people calling for a great crash will be disappointed this time around.
What will happen to the housing market?
This will cause low supply -> high prices -> people who didn't buy are very screwed: they will face high prices together with high interest.
In any case they won’t want to sell for a mortgage that effectively costs the same over a 30 year loan with a higher interest rate.
VC backed companies will start dropping like flies and the market will flood and salary requirements will drop fast.
If a homeowner rents their place for more than it costs them in mortgage + property taxes and makes $200 on top, that's fine and quite a nice deal. However you're suggesting they're also subsidizing their own rental and +$200.
That only makes sense if they're renting well below their means or in a different market entirely while their home is in an ultra prime location. If not the renter of their home should simply have rented out the place the owners are living at a substantial discount.
New Orleans has wild real estate. It’s not San Francisco but it’s way above the average income here and swings wildly from neighborhood to neighborhood. Home prices flip radically even just a few blocks over. We’re talking $400k->$800k if you move 5, maybe 6 blocks. Sometimes fewer than that - saw a near-turnkey place go for $500k and another for $900k 2 blocks from each other right by me about 3 or 4 years ago (obviously the latter was very nice new construction, but you get the point).
They own in a solid neighborhood, one that was “up and coming” 5 years ago, and rent in an average one (it’s in a higher risk flood zone which factors in a ton). Irish Channel vs. midcity, if you know the area at all.
They don’t have kids and see their rental as a place to sleep. It’s small, barely what I’d qualify as enough for two people. But it works for them so power to them I guess. Making out like bandits.
I get why you’re skeptical but it’s not like I’m lying here. Not sure why I would? The whole point of this anecdote is to show how crazy these interest rates were.
Like it or not there's a lot of chaff to cut in software engineering. How many of these SaaS businesses can survive, and how many engineers bought nice homes with massive salaries that might go poof?
it will be very small fraction of homeowners: those who bought in in last 2-3 years. All others will be significantly over water, and may take equity loans instead of selling houses to preserve low mortgage interest rates.
> Eventually
Eventually maybe. FED gave 20T free money to current home owners in addition to existing tax incentives, how long it will take to chew through them? Maybe generation?
I think most people are doing fixed rate loans in this economy, right? Genuinely asking. I think I might be misunderstanding this aspect of your point here.
Leverage is much more expensive (from sub 3% mortgages, we already have 5%+ rates), which means buyers can afford less, plus significant withdrawal of “cash” buyers from the market who were really just borrowing against their (now much smaller) equity positions.
I wouldn’t want to be in a forced sale position anytime soon.
The problem is more that prices are very high and supply remains very low.
Mortgage payments set a ceiling on how high property prices can rise. However, people seem to be willing to spend more on mortgage payments than they probably should, so it’s likely that this ceiling hadn’t been reached yet.
The other factor is simple supply and demand. A large factor in 2008 was a large inventory of housing that came on the market. As far as I’m aware, there is no current corollary in the US now.
1. We had zero percent interest rates. This causes the value of assets with cash flows out into the future (think speculative tech, Tesla) to accelerate.
2. We had massive herding in megacap tech. These valuations are high in part because for a decade you would not have beat the index without having these names in your portfolio.
3. These valuations blew up even further because of call squeezes during the 2020-2021 bull. Tesla even managed to get itself into the S&P.
5. Then in December, the megacaps we're squeezed further until the S&P 500 had a negative return relative to price!
A lot of this occured because people remained under the impression that bond yields would never normalize. Now that they have, there is a risk free alternative to stocks.
Now for the next complications: Ukraine + Russia, economic war with China, inflation, how the fed will respond, gas prices.
If inflation continues and the fed becomes aggressive with hiking, all assets are dead. Bonds will be wrecked, stocks will be wrecked, cash is wrecked, even gold (depending on how aggressively they hike) will be dead because it's actually a really good deal to buy bonds when they yield north of 10% (if we get there).
Say the fed decides not to hike as aggressively and inflation slows, then you'll be holding the S&P 500 likely for yield than growth. In the case of a recession or further inflation, that yield may be at risk depending on the sectors you're invested in.
In this context the correction in names like Target make perfect sense. The dividend was near zero at it's price before the cut. Same thing happened in a company like Newmont mining.