Robert Shiller: 'Wild west' mentality is gripping housing, stocks and crypto
cnbc.com
cnbc.com
The good news is: They pretty much succeeded with that. We're all still here despite revenue generation for whole industries being frozen for more than a year.
The bad news is: All that liquidity mostly ended up in just a few hands, and now it needs to go somewhere: The recipients at the end of the chain keep outbidding each other for a finite supply of value-keeping assets. Everybody is flush with cash with no place to park it.
It may look like a "bubble of everything", but it's just the biggest increase of monetary supply we've ever seen in a long time.
What to take from there and what will happen next, I don't know though. The usual relief valve of raising interest rates won't work anymore without making the debt level quickly unmanageable for governments. Usually I have a hunch on what will happen next, but this time I'm stumped.
I also may be completely wrong.
Answer: there is, it's just asset inflation, not consumer inflation.
Still, if real estate is one of those assets, that should have filtered down to the consumer level. Is it isolated away from most consumer real estate? Or has the real estate fraction of CPI actually been rising while something else is falling to compensate? (The latter should be easily testable, but I don't have time at the moment.)
The best analogy I can make is Ecuador, which although one of the poorest countries in SA has very high prices on average. It was explained to me that this is because government salaries are pegged to a certain rate, and that basically forms the middle class. All the poor cannot buy stuff anyway, so the high prices don't really matter in that sense.
But we've come into an unprecedented situation where a lower and lower share of overall money is actually used in transit instead of being parked. You don't really notice all that invisible money, because in practice, inflation is really only tangible on the circulating part, that's why the overall supply increase doesn't _feel_ like inflation.
That circulating part of money already has shrunk further and further, now probably down to single digit percents. What will happen if a big fish actually tries to cash in a large chunk of that invisible money for goods and services? No clue. We're in completely uncharted territory.
One of the easiest ways to increase money velocity is to have progressive taxation BTW
If history is any guide this wealth will be kept locked up and passed down to the next generation in perpetuity. And so on and so on, until a war destroys the capital base, kicking off a new cycle, or a revolution takes place (exceedingly unlikely, despite how much people talk about it).
People talk about this level of wealth inequality as if it's unusual and destabilizing, but the gini coefficient of the Roman empire was frequently higher and it lasted for well over a thousand years.
Indeed, I think it's quite likely that we're simply nearing the end of an anomalous period of history starting with WW2 where movement between social classes was unrestricted.
What economists call inflation, wage and price inflation, was something like 13-17% total over 10 years. Where everything else more than doubled.
We get gaslighted to only think about the wage and price inflation year over year rate. But not the the total relative change in prices over time. The latter is the important part.
As someone on here said years ago, "I love my iphone but I worry about health insurance."
What good is cheap frivolities if the necessary building blocks of life are skyrocketing.
Also official reasoning about housing costs ignores that there are huge variations in that prices people have to pay to house themselves. The focus on average market rates hides the reality on the ground.
That's a concern primarily to wealthier people who already have assets, and for them, the increases are double-edged swords. Them that has, gets. Them that doesn't -- i.e. young but upwardly mobile people -- are forced to play that high-risk game.
The genuinely poor weren't playing that game to begin with, and could never retire, so they were always out of luck. The only thing they have going for them is social security, i.e. wealth transfer. It's not much, but the alternative would be absolute poverty, which is what it looked like in the early 20th century.
I'm more concerned about them then about whether the wealthy stay wealthy, or even whether the young and upwardly-mobile can get assets.
Incoming poetry:
It’s 2021, and we are basically giving interest free loans to people and anyone can buy a house. Right now since there’s fewer houses, the check on that loan is that those with cash or higher down payment get the house (the sanity check being that those with actual finances get it). When we make more houses, then it will be the same type of free for all over again.
The economy is nuts. Lots of jobs won’t exist going forward. I don’t think everyone taking out a mortgage today will easily be able to make payments 7 years from now, even with 0% interest.
Stocks have done really well in large part due to record profits and earnings from large firms. Look how much $ Disney makes for example. Consumer spending , intellectual property, click ads, recurring revenues on high margin digital products ..all that stuff.
The fed is a contributing factor but not the only one. Crypto did really well in 2017 despite the fed raising rates.
I don't know. Lots of stocks and indexes that they are a huge % of are up because their revenue is actually really, really up.
"The FAAMGs reported aggregate 1Q sales of $321 billion, some $24 billion or 8% above consensus, for year/year growth of 41%." (via zerohedge). That's huge.
The pandemic brought about a scarcity of raw materials, scarcity of labor, and scarcity of shipping, all of which have contributed heavily to price increases. The trade wars brewing between countries have also contributed to scarcity.
We've had times of massive government spending that coincided with strong deflationary pressure too. So it cannot be the case that all government spending leads to inflation. If we work entirely under that assumption, the we'll never address the problem because everyone will continue to keep wacking on the wrong thing.
If we want lower lumber prices, the solution is to boost lumber production and imports. Not to halt government spending.
Except the scarcity is largely driven by increased demand due to government stimulus.
Look at the 5y chart of retail sales numbers here, and how it jumped significantly right after covid hit.
https://ycharts.com/indicators/us_retail_sales
The reason inflation hasn't shown up much in modern times is because supply chains are more elastic than they used to be, and are able to scale to meet new demand quickly. This way suppliers make money via increased volume rather than by raising price.
However, we're now seeing shortages in goods that are hard to scale up quickly. For example, the chip shortage.
In general, there are three ways out of a supply shortage.
1) Increase supply. Pretty straightforward. Setup a new factory or scale up production in existing factories.
2) Fall in demand. Perhaps could happen due to fading government stimulus and effective wages declining. However, lots of major corporations are raising wages significantly to compete for unskilled labor due to the current labor shortage. You will find a lot of articles if you google this... so waning stimulus may not be enough.
3) Raise prices. Look at any Supply/Demand chart, one of the axes is price. If supply isn't sufficient to meet demand, price tends to rise until the two are in equilibrium. Otherwise the supplier is leaving money on the table. Assuming increasing output is non-viable.
My take is that 1) and 2) are mostly out of the picture for the chip shortage in the short term. I doubt new fabs or production capacity can be scaled up quickly to meet the backlog of demand in a reasonable timeframe... though I'm not an expert in the space. We'll likely end up with 3).
Beyond specific shortages, shipping costs in general have skyrocketed, likely beyond the margin of many goods we import, which necessitates price increases on its own. Check the Baltic Exchange Dry Index.
There's so much more that can be said here, but will avoid writing a huge essay :)
How do we know this? The economy swung heavily in favor of labor and wages have been on the rise for a while now, since before the pandemic even. The previous president was celebrating how quickly wages were growing during his tenure.
https://tradingeconomics.com/united-states/wage-growth
You can see there that wage growth from 2017-2020 was the longest sustained period of growth above 4% since 2004-2007. Given that, a solid explanation is that people are making more money now, thus spending more.
Unfortunately, y-charts doesn't go back far enough to really give a long term picture. But even looking back 5 years, the increase of the past few months is pretty much exactly the size of the gap left in march 2020. For all we know, this spike in retail spending is merely pressure being released from the huge loss in retail spending encountered last year. By October, the numbers could very well be back at that normal trend line.
The USA was in the middle of an economic bull run when it crashed right into the side of the worst pandemic most have ever seen. The momentum of that growth is still there, but the economy has been tossed around by supply chain issues, reduction in new labor, and workers migrating between industries in an already tightening labor market. We have to appreciate that the economy experiences growing pains, and that the government is not the be-all, end-all of economy growth.
Frankly the data is self evident.
Of course other factors may be at play too such as change in consumption habits due to unique circumstances, but it can't be denied that stimulus money handed directly to people will increase consumption.
Savings rates are at highs as well, in conjunction with increased spending. Which opens the door for even more spending if we do get a surge in demand with reopening. I don't have a stance on whether or not that additional spending will materialize, but it would increase the velocity of money.
I live in Indiana, near the Louisville Ford truck plant. There is a humongous derelict WW2 munitions plant in my city that was largely overgrown with weeds and rusting factory-type buildings. The Ford truck plant is now parking trucks on this property because they can't be finished due to the chip shortage.
Personally, I don't care for all the electronic crap that is in cars these days. It's one of the reasons I still have an 18-y/o Honda. So if they dial back on the amount of electronic garbage (chips) in a car, I'd be more likely to buy one.
Short term rentals are lucrative. Owners can earn many multiples of their costs per month on the short term rental market. Significantly more lucrative than traditional long term rental properties.
...and finally, the ridiculous bonus depreciation rules.
Borrow at low rates, secure cash flow into the future, and write off 100% of eligible improvements the year you spend. Yeah, no shit the housing market is going ballistic.
The market is so wild that it doesn’t even make sense to make a down payment. Just take the PMI.
It started with companies, they had to optimise to compete. As we created a data economy they had to use it in order to optimise that bit further to remain competitive.
Then in continued with our work. Employers optimised employee resource usage, specialising people, monitoring what they do.
Then it moved into people optimising their own work – an obsession with productivity, but it eventually became an obsession with optimising our long term lives – homes, investments etc. The crypto bubble is people looking for get-rich-quick schemes because they need them, everyone else has a side-hustle, good investment, home that's skyrocketing in value, so you have to as well in order to "compete". Just extrapolate out 10 years and you could be poor if you don't get this thing right now that is appreciating in value by 20% a year.
It's crazy. It worries me.
A great example in my life is sailing. I love it, but it's definitely not the best way to travel around our local islands. It's slow, uncomfortable, and kinda difficult.
But, I'd take a sailboat over a motorboat most days. It's enjoyable to "trick" the wind to bring you where you want to go. You're continuing a tradition of boating that goes back around the dawn of civilization. But is it the fastest? Hell no.
Some would argue we don't actually need to do very many more things. There is no simple answer to "What is the human condition?" While we've discovered tendencies in our our natural psyche to design and build, we have many other needs that, I argue, should be balanced.
Just because we're plunked into existence on a planet, does that mean we must be compelled to ignore our desires for peaceful, sustainable existence and instead turn our energies toward empowering everyone to get more accomplished? This goes double when the things we do to help our brother or sister help those in charge 10 times as much. This desire for freedom from divine or overwhelming rule is part of how my country (US) was (ostensibly) formed. We didn't leave England/Europe to form a hyperefficient economy. We left it to escape the weight of an out-of-control social system. [0]
I would argue that in addition to our proclivity for solving puzzles and building, we're gifted an awareness giving us the ability to pick and negotiate which of our desires we will attend to. This awareness is often blunted by those who have a stake in suppressing it. But I argue that spreading and growing this awareness will result in our choosing the things to do most relevant to ourselves rather than our masters. This would include a curtailing of relentless optimization.
Usually at this point, one is challenged with arguments about ceasing tech development leading to an end of healing of suffering through e.g. medical research. However, we can demonstrate that the majority of human medical suffering is actually a result of our misguided abundance. The bulk of our diabetes and heart diseases cases owing to our poor diet, for example. Nor does it mean we must give up medical research entirely. In fact, with our priorities shifted (slowing the throttle on space exploration, for example), we would likely be in a better position to research rare and painful birth defects.
There comes a time to put one's foot down and say, "I will not participate in x/y/z because it doesn't benefit individuals sufficiently."
[0] Imagine facebook and other corporations taking the place of the medieval church, adjudicating marriages and property rights. Is it really that far-fetched?
People who desperately need cash aren't speculating huge amounts on crypto. The speculative bubbles are driven by people with extra cash they can gamble on speculative investments.
Crypto has been pushed a way for the little guy to fight back against wall street, but in reality it's a big business for traders with high bankrolls. Someone investing $1000 into crypto and making 10X gains is phenomenally lucky, but $10,000 isn't going to buy them a house. Many of the biggest winners in crypto are the very wealthy individuals who could afford to gamble $10K or even $100K on an ultra speculative investment because losing everything wouldn't appreciably impact their wealth.
It's also important to ask where the money is coming from when someone claims high crypto gains. If someone bought $1000 of DOGE and sold it for $10,000 later, where did the $9000 profit come from? It comes from new entrants buying DOGE. It's often the casual retail investors who are late to the party, cashing out the early buyers with their purchases.
I understand why you are worried, because it is hard to see how this plays out.
That might seem awful, but that was standard life in the 80s. My parents' families ate out like once a year growing up, never had cable, drove cars until the wheels fell off. My mom had handmade clothes growing up because clothing was still kind of expensive back then, so her grandma would make them new dresses in the summer for the upcoming schoolyear, then sweaters and such in the winter time.
The 60s/70s/80s were not some golden era. People struggled then as now. Economies shifted, jobs migrated from one region to another, cities decayed. They suffered through inflationary periods, deflationary periods, shortages, surpluses, etc.
I don't think so, and people had more time to spare and did more together.
His advice: "Population will continue to grow - but you can't make more land."
https://www.nytimes.com/2021/05/22/world/global-population-s...
I wonder what we can learn from what is happening in Japan?
Source?
Tri-State area in the Northeast is a good example of ‘almost, but no cigar’. Sure, you can live in some parts of Connecticut/NJ/Upstate and commute to NYC, but I feel like it should be a lot better.
Bullet trains would expand what’s possible. Imagine living in Philly and commuting to NY or vice versa in a reasonable amount of time.
Building (no pun) our way out of this mess is one way, but not enough. We need better/faster travel, and unfortunately that initiative should have started 10 years ago. We’re too behind on that front, so I’m not optimistic about the housing market being properly saturated with houses to keep the frenzy at bay. The places where they will have to build are not viable if you need to get to an economic center daily.
Edit:
One thing I think the federal government can incentivize is to subsidize companies to not have a large headquarters anywhere. Find a tax break for companies to create distributed offices across at least 3-5 states. That’s a great way to let people relocate in a safe way (same company, different office), and help build new economic centers.
The only thing that changes within the span of a decade or even a single lifetime is desirable vs undesirable land. Purchasing property isn't as much of a "sure thing" as everyone believes. Housing prices are dictated mostly by local policy and speculation rather than physical space.
The Fed can't print any kind of land, why such specificity?
But that land won't have farmable topsoil.
(a) adding IP (gengineering crops to grow more efficiently
(b) driving down the cost of inputs (light/water/nutrients)
(c) making production really dense to offset the cost of building a skyscraper even more than just buying cheap farmland
I'm curious how much more cost efficient vertical farming can really get.
And of methods for doing that, irrigation is the most effective. This speaks directly to Liebig's Law of the Minimum, which states that whatever factor is most critical in limiting plant productivity is the one whose adjustment will have the greatest impact on productivity. For plants, water is a cheap addition, it's frequently the critical missing factor in increasing land productivity, and will literally take you from 0 to 100% alone.
(https://en.wikipedia.org/wiki/Liebig%27s_law_of_the_minimum)
By this reasoning, "vertical farming" is taking land as the limiting factor and literally requires building more land, substrate, water, sunlight, and nutrients in order to increase areal productivity. This is close to a maximally expensive expansion option. To date, vertical farming has been utilised only on very high-value crops, or those for which freshness is at an absolute premium. (Fresh crops can be moved across and between continents in days or hours, though quite often a 14-day transport with refrigeration retains freshness.)
For bulk cereal staples, overall land area remains the principle limiting factor, with sunlight, water, topsoil, fertiliser, and pest control as principle inputs. Weather is another key factor, with freezing, damaging storms (hail, winds), and heat as major concerns.
That's a bit of a stretch, no?
The cost of the Fed printing money is effectively zero, there are substantial costs associated with building and maintaining such structures.
Looking at industry data, e.g. https://ccorpinsights.com/costs-per-square-foot/ we can see that construction costs per livable square foot go from $300 for single story to $600 for midrise to $800 for highrise.
[0] https://www.theguardian.com/commentisfree/2021/apr/05/bill-g...
It's inevitable that people will eventually choose Bitcoin, but maybe this is the event that makes people think and it will happen sooner.
That being said, people probably shouldn't be buying houses while waiving inspections.
But if you try to rush in now, the supply is abysmal leaving you to make significant compromises, and there’s a real chance this winds up being a bubble that bursts giving you a major equity loss.
Unless you are levered 5/1 on equities as well, in the scenario. But you can get margin called on leveraged equity, not so on housing, so risk profile is quite different. Also depends on locale the house is bought in.
Real home prices have now reached an ATH in recorded history, per Shiller. Real as in inflation adjusted.
You should consider too that we had two 50% drawdowns in equities in the past 20 years, and current valuations rival dotcom days on the S&P.
I'm not saying to sit it out, but there is kindling in place for potential big drawdowns. Impossible to time, but one catalyst could be persistent inflation forcing the fed to ratchet up interest rates faster than people expect.
yawn... he and others have been warning of a housing bubble since 2013 or so. But prices keep going up, especially since Covid. Even if the market was to cash, it would probably not revisit those lows. What this means is, if you wait for a lower price, you may never get it even if the market crashes. Maybe he along with the rest of the financial media and experts need to admit they are clueless about predicting the future. The useless financial media in jan-feb were certain GameStop would be low double-digits by now...so much for that.
Crypto is just for the fun on human madness, like Pamplona bulls.
It really requires too much text to go into all the details, but some points to consider:
1) We've had two drawdowns of more than 50% in equities in the last 20 years. Great stock performance over the past decade may have blunted memories of this for most.
2) After both drawdowns, the fed immediately dropped rates and performed some level of QE to stimulate the economy. If we experience another crisis event, it seems they've largely run out of ammo. Interest rates are already close to 0 and Fed is actively buying (e.g. printing money) 120B in bonds/month.
3) Despite the monetary stimulus, it took many years to break even in the indexes. If you bought at the peak of dotcom, it would've taken you something close to 10 years just to breakeven.
4) S&P valuations are near dotcom bubble peak by some metrics, such as the Shiller P/E ratio. This is often justified by low interest rates, which has truth to it, but is also importantly predicated on rates remaining low.
5) 20% of companies in the S&P are now considered "zombies". Effectively meaning that due to extremely low interest rates many companies have taken on large amounts of debt. If bond yields rise, they may no longer be able to service this debt.
6) The US govt is in a similar position. They sell treasuries to fund policy measures. Often the buyer of these have been free market participants, such as US citizens and foreign countries. However the Fed has been increasingly monetizing this debt. By monetizing, I mean they effectively print money to buy treasuries to fund US govt programs, which increases the money supply. The govt would also be in a sticky situation if rates rose significantly. Foreign countries have been increasingly net sellers of treasuries.
7) Real home prices are at an all time high in recorded history, surpassing the housing bubble peak. According to Shiller.
8) IF inflation presents itself in a big way in the next few months, the Fed may be forced to pull the rug on the whole thing by ratcheting up rates faster than people expect. Potential catalyst for a drawdown/sell off type of event.
Now there's two primary camps. One thinks that the fed will ignore inflation and leave rates low to avoid rising yields that could cause problems with private/public funding. They seem to signal this strategy somewhat with their recent policy shifts.
Another camp believes that if the data is bad enough, the Fed will be forced to act. If inflation expectations become unanchored, it tends to become self fulfilling. People rush to spend money to stay ahead of inflation, thus pushing up prices. This can be pushed by the private markets rejecting the rates on bonds, forcing the Feds hand to either print money to buy even more bonds, or to raise rates to make US treasuries competitive.
Of course there's a third camp that believes inflation will be transitory and not materialize in a significant way in the data. In this case rates can stay low and we follow Powell's gentle liftoff approach.
I don't say these things to spread fear, but people should be aware of the state of the economy. I think the Fed has done a great job at keeping the engine running in the short term, but I fear we're now backed into a corner should another economic crisis arise.
When assets skyrocket, usually business formation and funding goes down.
Banks have better data but anecdotally this is what is happening
Ideally if somebody in here works for the big boys such as JPMorgan , Wells Fargo or Barclays and wanted to decipher such phenomenon you'd look at something like:
(Turnover in business bank account opened in the past year - outgoing payments to insiders,beneficial owners and companies controlled by insiders and beneficial owners) / GDP
Yet another metric of risk taking:
No. of hires + no. of people who quit. This gives you an idea of how confident business are in their growth and how confident people are in their personal growth.
Of course stuff like the stimulus and paying people to stay home distort stuff so much that such data can't be compared to say 2005
I’d be curious to see some graphs exploring the correlation between startup funding round sizes and the various asset prices including crypto.
Meaning outflow from business bank accounts older than 5 years should be really high and inflow in business bank account younger than 1 year should be high as well (all as % of GDP)
As much as people like Bezos claim "it's always day one" they won't risk the company on moonshots like they did back in the days.
Partially because they feel they can't win as if the big bet were to be successful then you can't cash on it because the antitrust would immediately dissolve a 5 trillion dollar company.
The only crazy coked dude out there still pushing is Musk, but he has a taste for picking industries which make terrible businesses, and I think will retire before any of his companies generates positive FCF