3 Things I Think I Think - Housing Bubble 2.0, Passive Investing And Hyperinflation
Summary
- The buyers are mostly high creditworthy wealthy people. There hasn't been a big building boom. In fact, supply is tight.
- Passive investors would rather let corporations be corporations and take whatever return they generate along the way.
- A lot of the current narratives about inflation seem to be based on very poor understandings of inflation dynamics.
Here are some things I think I am thinking about:
Is the Housing Market a Bubble (Again)?
I'm starting to see a lot of chatter about a housing bubble 2.0. So I went on Twitter and asked people what they thought. There were tons of smart responses if you want to review them. Ben Carlson also wrote a nice piece about the state of the housing market. I think Ben gets the big picture right. Basically, this isn't that much like 2006 because:
- The buyers are mostly high creditworthy wealthy people.
- There hasn't been a big building boom. In fact, supply is tight.
There's a lot more to the story, but that's the basic gist of what's going on.
I'd only add that the current price boom seems to be more about COVID than anything else. In other words, I think that future demand has been pulled into the present because of COVID. So, as things normalize we might see some giveback, but I'd be surprised if prices fell much past the trendline trajectory of prices from 2012-2020. In other words, the torrid pace of appreciation is unsustainable, but that doesn't mean the same downside risks are present that existed in 2006.
If you held a gun to my head, I'd bet that home prices ease up some in the coming years and rents actually rise a bunch. I've noted in recent weeks that the buy to rent ratio is fast approaching its 2006 levels, but this can correct in 3 ways. House prices crash. Rents surge. Or a bit of both. I'd guess that we're gonna get a bit of both with much more emphasis on the rents surging piece.
Passive Investing is Wrecking the World (Again).
Every few years we get one of these articles about how passive investing is gonna wreck the world. I've written A LOT about indexing myths. So my head explodes a little bit every time this narrative keeps popping up. Regulars know that I am hyper focused on operational realities of the financial system. It's pretty much my whole focus - understand things at an operational level. And discussions about "passive" investing tend to be based on somewhat basic misunderstandings. For instance, "passive investing" cannot even be a thing since everyone must deviate from the one true passive portfolio (the Global Financial Asset Portfolio). More importantly, everyone can't be a passive (I should say less active) investor because passive investing relies on active traders and market makers to make the markets that allow passive investors to be passive.
But the thing that bothered me about this specific article was that it so clearly contradicted itself. The author starts by arguing that passive investing is problematic because a few big firms control the indexes and there's nobody behind the scenes setting prices (which is wrong because passive needs active market makers and traders to work in the first place). But then it ends by saying that passive could be bad because 12 firms control US stocks and share voting rights and that these firms aren't very active in voting. Well, which is it? Are they too powerful or are they not exercising that power? More importantly, who cares if they do own the voting rights and don't act on them. After all, that is perfectly consistent with the concept of passive investing since passive investors don't believe in intervening in corporate affairs to try to "beat the market". Passive investors would rather let corporations be corporations and take whatever return they generate along the way.
Anyhow, I have a feeling I'll spend most of the rest of my life discussing the same 5-10 financial myths so thank you for suffering through this with me.
So. Many. Bad. Hyperinflation. Narratives.
There are lots of great reasons to be optimistic about cryptocurrencies. I won't ever pretend to know which specific cryptocurrencies will perform well, but as a whole they're one of the most interesting things growing in finance right now. But one of the worst arguments I consistently see from Bitcoin Maximalists is this idea that hyperinflation is right around the corner. Crypto could very well serve as a great inflation hedge. In fact, I'd expect it to perform very well during a high inflation. But a lot of the current narratives about inflation seem to be based on very poor understandings of inflation dynamics. For instance, there was a data set (at right) going around Reddit that a bunch of crypto people were pumping:
Okay, so, bunch of issues here:
- These are mostly producer prices, not consumer prices. It's not uncommon to see large swings in PPI that doesn't materialize into CPI. In fact, this happened from 2001-2008 during the big run up in oil and commodity prices and the producer prices didn't get passed on in large part because aggregate demand was weak and the huge price surge contributed to a price crash. As the old economic saying goes, sometimes the solution to high prices is high prices. In any case, the BLS actually talked about this in some detail back in 2012. It's an interesting piece if you want to check it out.
- Further, there's some cherry picking going on here. The data picks the bottom of the price trough in many of these commodities to make it look like there's been huge changes. But if you look at any 5 year chart (below) in the same commodities you'll notice that prices are up only modestly. And this is important to understand because producers don't make all of their products all at once. It's a rolling process. So yes, some of the products were made in 2020 and some are being made as we speak. They're incurring relative price increases across a rolling period. Some of those periods were relative price declines. The main point is, even if lumber prices are up 126% year over year, it's clear that aggregate commodity prices aren't up nearly as much as you might think when looking at longer time horizons.
Now, I am not saying that there's no inflation. I've gone on a million podcasts in the last year saying inflation is here and coming. So yeah, could 2, 3, 4% inflation be coming? Of course. I'd be shocked if we didn't get at least 2.5% during the Summer. But we don't need to lose our minds and start talking about hyperinflation just because we really like Bitcoin.
That's all I got for now. I hope everyone is staying safe and getting vaxxed. It feels like we might have a normal Summer after a pretty hellish year so here's to hoping things don't all come crashing down on us.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
This article was written by
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Comments (21)
Household debt vs sovereign debt is irrelevant to the point. There is an enormous amount of sovereign debt worldwide; much of it with negative yield. Somehow this needs to get resolved. Default seems the least likely desired path; especially in the US. Powell has repeatedly said that they are going to let inflation run hot until the "average" is 2%. According to FRED (FPCPITOTLZGUSA), average inflation for 2012-2019 is 1.615%. Eyeballing the 5-Year Breakeven (T5Y1E) for 2020, it looks like something near 1.4%. That works out to about 1.6% average since the 2% inflation target was announced in 2012. The math says it will take several years to "average" 2% or inflation will have to run quite a bit higher than 2% for a shorter time (14% in one year should get it done). Based on the historical performance of the Fed acting in a timely manner on such matters, my money says that inflation will get out of control---until another Paul Volcker comes along. Jerome Powell has said repeatedly that they are going to wait until the data shows that we have reached the 2% goal before taking any countermeasures. FPCPITOTLZGUSA runs a little over a year behind. How far do you think they will overshoot?The housing bubble is more closely related to COVID-19 and has little, but some, relation to the sovereign debt problem. Housing prices rising at 2% every other week is still inflationary and this is going on globally. Sovereign debt is the elephant in the room that will force the hand of inflation.Central Bankers are trying to control an enormously complex mechanism of which they have little understanding. It is their job, I don't fault them for that. I actually have a great deal of respect for them. For the most part, I understand and agree with many of the actions they have taken in light of the alternatives. In the end, we are bouncing along a bumpy road hoping those trying to control the steering don't wreck the car.Perhaps Artificial Intelligence will take the wheel and smooth out the ride some day. However, that is far beyond the current state of AI. It will be many years before AI is capable of accomplishing this feat.
"Household debt vs sovereign debt is irrelevant to the point. "I have to say that I couldn't disagree more. It ALL comes down to the little-understood reality that the "debt" of a monetary sovereign--especially the US which creates the world's main reserve currency--is NOT debt. It is the stock of Treasuries, which the Treasury CHOOSES to provide, to those holding dollars, as a risk-free, interest-paying vehicle which helps maintain demand for the dollar, control reserves, and control interest rates. It is a vestigial left-over from the gold standard system.The stock of Treasuries (public "debt") has been rising for 80-years, and here we are, not having to pay for our grandparent's anything, and still able to buy all of our own production, PLUS some of the rest of the world's production (which they accept our dollars in return for). And yet, every year for 80-years we hear the same wrong story; the "debt" is going to blow us up if we don't pay it back somehow. The reason they are repeatedly wrong, is that they think the stock of Treasuries is actually debt, like household debt which has to be paid back. This misunderstanding is so deeply ingrained, that even Powell and Yellen think this way.80-years of being wrong, and still the myth persists. Fascinating, really.
The only potential for wrecking the world lies with the people residing on this globe we call earth.I'm taking family to Turks and Caicos first of May. To hell with the rest of the world, ha!
back in Nov 2018 @dave Kranzler said there was a
home builder train wreck coming :seekingalpha.com/...
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I concur on your inflation view-- we watched people cry louder and louder during Bernanke's quantitative easing "causing runaway inflation" over and over until they finally gave up. Here we go again?
