Negative interest rates take investors into surreal territory

[TwoCitiesCapital]

 

Draghi & Volcker do not set market prices on real estate - buyers and sellers do.

 

 

Yes, but a central bank controls the growth path of the unit of account, which is the main measuring stick for those "buyers and sellers". 

 

The central bank can almost completely dictate the size of the nominal economy going forward.

 

The below table kinda shows that housing (as % of nominal GDP) has been relatively constant.

 

So at a high level, can't Draghi and Volcker largely determine the nominal price of housing over a decently long time frame?

 

https://www.nahb.org/-/media/Sites/NAHB/research/housing-economics/housings-economic-impact/housing-contribution-gdp-q1-2019-0426.ashx?la=en&hash=DB4820E7942613C16F65F3BF6739E0462AC168EE

 

 

(Would add that there's no iron law that housing must be a fixed % of GDP - Its just that with various zoning laws, it's (imo) likely to stay relatively constant.  Without those laws, there's a (good?) chance that housing would represent an ever decreasing % of GDP, much like food has done over the last century)

 

https://cdn.theatlantic.com/static/mt/assets/business/1900%201950%202003.png

 

Agreed. The more financial-ized housing becomes (i.e. the more house finance and package into a product to sell to retail investors), the more it's value depends on interest rates and money creation and the less on its fundamental value.

 

Back in the days of banks keeping mortgages on their books and buyers having to put 30% down, you wouldn't have near the housing prices we see today.

 

The prices are this high because with rates this low, you can finance 97% of the house and still end up with a reasonable mortgage payment - and banks don't care because they just package and sell it to retail investors who are just glad they can beat 2% on the 10-year treasury.

 

Upside is more mortgages and more affordable mortgages. Downside is housing inflation and increasing housing's dependence on low interest rates.

[RuleNumberOne]

https://www.ft.com/content/c060e162-98c1-11e9-8cfb-30c211dcd229

 

"In Frankfurt, Germany’s financial centre, prices have doubled since 2010...

 

...real house prices in Amsterdam rose 64 per cent in the five years to September 2018, but real disposable household income grew just 4.4 per cent in that time, despite ultra-low unemployment."

 

Klaas Knot, head of the Dutch central bank who also sits on the ECB governing council, said low interest rates “are a contributing factor”, with mortgage rates “down to levels where I don’t think we’ve seen them before in the Netherlands”.

 

Bloomberg claims the same Klaas Knot thinks inflation is too low

https://www.bloomberg.com/opinion/articles/2019-07-01/stock-market-can-t-be-fully-brain-dead-right

 

"Dutch Governor Klaas Knot, typically considered on the hawkish wing of the Governing Council, said it was “indisputable” that inflation is too low. "

[JimBowerman]

 

Denmark has negative mortgage rates and booming house prices. Governments and central bankers in Europe are far more crooked than the US. Throughout Europe you have rock-bottom interest rates and booming house prices. Debauchery of the currency is a mild description. How long can this go on?

 

https://www.globalpropertyguide.com/Europe/Denmark/Price-History

 

"Denmark´s negative interest rates continue to work their dangerous magic on both the housing and mortgage markets.

 

The price index of owner-occupied flats in Denmark rose by 7.88% (7.25% when adjusted for inflation) during the year to February 2018, an acceleration from last year´s growth of 6.87% (5.81% when adjusted for inflation), according to Statistics Denmark."

 

So for tiny Denmark, - in short - the answer to your question is actually : No. Draghi [et al.] does not decide or have jurisdiction/power over supplementary national regulation.

 

When looking on what's going on in EU with interest rates etc., you can't just look at it as whole. The economic situations & financial systems are only to various degrees similar among european countries.

 

Hi John,

 

Good meeting you as well and great discussion. There's a lot of moving parts imo regarding monetary policy as it relates to asset prices, so i'll try to list out at least my thoughts in bullet point order:

 

#1 I'd argue that monetary policy in the EU has been TOO TIGHT, not too loose.  Yes, the supply of money has gone up quite a bit in the EU, but the demand for money has gone up even further.  I think it's helpful to judge tightness or looseness of monetary policy based on nominal G.D.P. (which has been very low in the EU since 2008).  Current short term interest rates are not a good metric for judging monetary policy and instead, low short term interest rates are usually a sign that monetary policy has (counterintuitively) been too tight.  Theres a lot to this, and I explain it in much more detail across 50-100 pages in my 2017 and 2018 letters (link below in my signature)

 

#2 Because monetary policy has been too tight, this has led to lower Long term bond yields in the EU.  As Buffett says, LT bond yields act like gravity on asset prices.  Again, it's counterintuitive, but the implication is that because tight monetary policy led to lower bond yields, this results in higher house prices as mortgage rates tend to track the low bond yields in the EU.

 

I'm no expert on the specifics of the denmark housing market, and surely i'm missing some factors here (local building codes, zoning, etc), but at a high level i'm not surprised to see house prices rising. But its not because the ECB has been printing too much money...its the opposite...they haven't printed enough money.

 

I'd like to see the ECB drop its current targets and instead promise to do unlimited open market operations until NGDP is growing at 5% a year.  Assuming they do this i'd argue that

 

1) wages would go up across the EU

2) real asset prices would drop (real house prices drop and  (which also reduces income inequality)

3) populism and political tensions are reduced.

 

edit: as a final example showing how ECB largely controls asset prices at a high level.  Lets imagine 2 scenarios. The first scenario (akin to what we currently have) is that ECB keeps money growth low and inflation low over the next 100 years.  In this case, I'd expect nominal house prices to grow at a slow rate in line with money growth, but for there to be a one time boost in real house prices as the housing market adjusts to lower interest rates.  At the other extreme lets imagine the ECB prints a lot more money than they currently are to the point where inflation averges 10%/yr over the next 100 years.  in this case, nominal house prices would rise much more quickly than in scenario 1 (again, nominal house prices tend to track with inflation), however i'd expect real house prices to be a bit lower than in scenario 1, as the high interest rates act as a drag to real asset prices (scenario 2 would also likely result in stocks having lower P/E ratios (proxy for "real asset prices") but HIGHER nominal earnings growth/stock prices over those 100 years).  I'm probably not explaining this very well so welcome any feedback!

[RuleNumberOne]

The problem in Europe is the absence of a free market.

 

- Bad borrowers never punished

- Bad lenders never punished

- Bad regulators never punished

- Bad politicians never punished.

 

Monte Paschi bailed out:

- 17% non-performing loans

- accounting for same collateral with different values multiple times

- complex derivatives to hide losses.

 

 

What do we have now:

- Retroactive Rent freezes in Berlin (Wealth confiscation) to stop raging housing inflation in Germany

- Banks continue to make interest only loans, don't compensate for credit risk.

- ECB covers up insolvency, investors don't trust bank numbers.

 

 

It is like trying to generate inflation in Alabama with negative rates, regardless of how much capital gets misallocated. It would eventually work, but only after we have created a bubble that is as big as 1929 + 1999 + 2008. There is no escape from that box.

[CorpRaider]

Rule, you are a good noob.  I enjoy and value your contributions to this site.

[TwoCitiesCapital]

 

Denmark has negative mortgage rates and booming house prices. Governments and central bankers in Europe are far more crooked than the US. Throughout Europe you have rock-bottom interest rates and booming house prices. Debauchery of the currency is a mild description. How long can this go on?

 

https://www.globalpropertyguide.com/Europe/Denmark/Price-History

 

"Denmark´s negative interest rates continue to work their dangerous magic on both the housing and mortgage markets.

 

The price index of owner-occupied flats in Denmark rose by 7.88% (7.25% when adjusted for inflation) during the year to February 2018, an acceleration from last year´s growth of 6.87% (5.81% when adjusted for inflation), according to Statistics Denmark."

 

So for tiny Denmark, - in short - the answer to your question is actually : No. Draghi [et al.] does not decide or have jurisdiction/power over supplementary national regulation.

 

When looking on what's going on in EU with interest rates etc., you can't just look at it as whole. The economic situations & financial systems are only to various degrees similar among european countries.

 

Hi John,

 

Good meeting you as well and great discussion. There's a lot of moving parts imo regarding monetary policy as it relates to asset prices, so i'll try to list out at least my thoughts in bullet point order:

 

#1 I'd argue that monetary policy in the EU has been TOO TIGHT, not too loose.  Yes, the supply of money has gone up quite a bit in the EU, but the demand for money has gone up even further.  I think it's helpful to judge tightness or looseness of monetary policy based on nominal G.D.P. (which has been very low in the EU since 2008).  Current short term interest rates are not a good metric for judging monetary policy and instead, low short term interest rates are usually a sign that monetary policy has (counterintuitively) been too tight.  Theres a lot to this, and I explain it in much more detail across 50-100 pages in my 2017 and 2018 letters (link below in my signature)

 

#2 Because monetary policy has been too tight, this has led to lower Long term bond yields in the EU.  As Buffett says, LT bond yields act like gravity on asset prices.  Again, it's counterintuitive, but the implication is that because tight monetary policy led to lower bond yields, this results in higher house prices as mortgage rates tend to track the low bond yields in the EU.

 

I'm no expert on the specifics of the denmark housing market, and surely i'm missing some factors here (local building codes, zoning, etc), but at a high level i'm not surprised to see house prices rising. But its not because the ECB has been printing too much money...its the opposite...they haven't printed enough money.

 

I'd like to see the ECB drop its current targets and instead promise to do unlimited open market operations until NGDP is growing at 5% a year.  Assuming they do this i'd argue that

 

1) wages would go up across the EU

2) real asset prices would drop (real house prices drop and  (which also reduces income inequality)

3) populism and political tensions are reduced.

 

edit: as a final example showing how ECB largely controls asset prices at a high level.  Lets imagine 2 scenarios. The first scenario (akin to what we currently have) is that ECB keeps money growth low and inflation low over the next 100 years.  In this case, I'd expect nominal house prices to grow at a slow rate in line with money growth, but for there to be a one time boost in real house prices as the housing market adjusts to lower interest rates.  At the other extreme lets imagine the ECB prints a lot more money than they currently are to the point where inflation averges 10%/yr over the next 100 years.  in this case, nominal house prices would rise much more quickly than in scenario 1 (again, nominal house prices tend to track with inflation), however i'd expect real house prices to be a bit lower than in scenario 1, as the high interest rates act as a drag to real asset prices (scenario 2 would also likely result in stocks having lower P/E ratios (proxy for "real asset prices") but HIGHER nominal earnings growth/stock prices over those 100 years).  I'm probably not explaining this very well so welcome any feedback!

 

Why is it the low rates have allowed for massive real estate inflation, but not equity markets?

 

Europe is dirt cheap on a relative basis to the U.S. If low rates act as a guaranteed inflator of asset prices, I would think European equities would've trounced U.S. equities over the past 5-years - but instead they've underperformed massively while the U.S. was raising rates?

[no_free_lunch]

TwoCities, my opinion is that interest rates are more tightly coupled to real estate than equities.  It's standard practice to borrow to buy a house, quite rare in fact not to use debt.  With equities it's much less common to use debt and really it's a dangerous thing to do.  Maybe it's just that simple?  I agree that if markets are efficient there shouldn't be such a divergence but perhaps markets aren't that efficient.

 

[JimBowerman]

 

Why is it the low rates have allowed for massive real estate inflation, but not equity markets?

 

Europe is dirt cheap on a relative basis to the U.S. If low rates act as a guaranteed inflator of asset prices, I would think European equities would've trounced U.S. equities over the past 5-years - but instead they've underperformed massively while the U.S. was raising rates?

 

Yeah its definitely not a guarantee and theory would certainly be more accurate in a completely closed economy. My guess is many are avoiding EU equities because earning growth is lower there than in the US.  That said, i think CAPE for EU equities has been around 20 back in 2018 so not super low either.

 

That said i don't think market has adjusted to lower rates in either US or Europe and would expect higher multiples going forward (of course this assume Fed and ECB keep their low inflation targets).

 

Just a guess, but with mortgages it seems more clear cut and would expect the housing market to adjust more quickly as there's less need to forecast future interest rates (assuming fixed mortgage).  If there are low rates when I buy a house thats all i kinda need to know.  I can calculate my monthly payments and determine affordability.  With stocks you necessarily have to guess at what rates will be in 5 years, 10 years, etc

 

edit: Would add that i'm talking about multiples here not total returns. In fact, while i think PE ratios will be higher going forward, I think total equity returns will be LOWER as earnings growth will be lower and tend to track the lower inflation/lower ngdp numbers going forward.  Somewhat over simplistic, but if we expect ECB to have slower growth than the US going forward then wouldn't surprise me to see US outperform on a total return basis, but for the EU to have higher PE ratios during that same time period.  Just a guess, and as others like TwoCities etc have pointed out, it may not always work exactly like this over even a 10 year time frame...other options for investing in equities outside one's own country, etc also complicates it a bit as  we've seen

[TwoCitiesCapital]

TwoCities, my opinion is that interest rates are more tightly coupled to real estate than equities.  It's standard practice to borrow to buy a house, quite rare in fact not to use debt.  With equities it's much less common to use debt and really it's a dangerous thing to do.  Maybe it's just that simple?  I agree that if markets are efficient there shouldn't be such a divergence but perhaps markets aren't that efficient.

 

I'm not so certain.

 

Sure most people don't use debt to buy equities, but the equities themselves have every opportunity to to lever up, refinance at lower rates, acquire competitors, fund capital projects, etc to grow revenues and earnings.

 

I agree the effects might become more apparent more quickly in mortgages, but to have the evidence in one area of the market and not another that should be similarly impacted calls into question the assumptions that it's interest rates driving that. Particularly where the only place globally upholding the "low interest rates = high equity multiples" mantra seems to be the U.S.

[CorpRaider]

Bear shitting here, but maybe the transmission mechanism to EAFE stonks is messed up because of sickly banks and regulations and whatever has prevented their corporate sector from dis-intermediating their banks as much as has been done in U.S.  Or maybe its because their governments/unions are ckblocking it like with the Renault deal.

 

Japan just needs Gordon Gecko/1980's guy to bash some corporate heads, imop.

 

RAFI has EAFE CAPE @ 16.4 (29th percentile of observed historical values) and EM @ 12.8X (17th percentile); US is at 54.6....so there's a little distance there, even assuming the foregone conclusion that Beyond Meat makes Nestle a zero.  haha

[Jurgis]

CAPEs worldwide: https://www.starcapital.de/en/research/stock-market-valuation/

[RuleNumberOne]

I think the reason is the Central Providers at the European Collectivism Bank (ECB) will buy homes at 120% of market value in a recession.

 

Banks lend to homeowners at negative interest rates without bothering about credit risk. In normal banking, they would have to charge a sufficiently high interest rate to compensate for default rates.

 

But the European Collectivism Bank provides everything - lavish pensions to whoever needs it by buying Greece 10-year at 2.1%, Italian 2-year at 0%.

 

At the current time, the Central Providers have bought corporate bonds, but it would be a stretch for the Central Providers to enrich stock market "speculators".

 

If you interview for a job at a European bank, make sure you say you don't know the meaning of the term "credit risk"

 

TwoCities, my opinion is that interest rates are more tightly coupled to real estate than equities.  It's standard practice to borrow to buy a house, quite rare in fact not to use debt.  With equities it's much less common to use debt and really it's a dangerous thing to do.  Maybe it's just that simple?  I agree that if markets are efficient there shouldn't be such a divergence but perhaps markets aren't that efficient.

 

I'm not so certain.

 

Sure most people don't use debt to buy equities, but the equities themselves have every opportunity to to lever up, refinance at lower rates, acquire competitors, fund capital projects, etc to grow revenues and earnings.

 

I agree the effects might become more apparent more quickly in mortgages, but to have the evidence in one area of the market and not another that should be similarly impacted calls into question the assumptions that it's interest rates driving that. Particularly where the only place globally upholding the "low interest rates = high equity multiples" mantra seems to be the U.S.

[John Hjorth]

RuleNumberOne,

 

Please stop spamming this topic with what I consider rubbish [at least in your last post here in this topic - naturally links to articles about what's discussed are OK]. This topic is actually started by what I consider one of the most successful & competent investors here on CoBF with regard to banks, who wants to discuss.

 

Pushback is always good. But please keep it fact based.

 

That said, your pushback has actually been massage to my own home bias, as a Danish citizen. I appreciate your energy to post links to relevant stuff. Time for me to lookup some IMF country reports and start reading again. Thank you.

[John Hjorth]

European Banking Authority : EBA Basel assessment sees impact driven by large banks [July 2^nd 2019].

 

The European Banking Authority (EBA) presented today, during a public hearing, the results of its Basel III implementation assessment, which

includes a quantitative impact study (QIS) based on data from 189 EU banks, and a comprehensive set of policy recommendations in the area of credit and operational risk, output floor and securities financing transactions. This work, which responds to a Commission's call for advice, shows that the full implementation of Basel III in the EU, under the most conservative assumptions, increases the weighted average minimum capital requirement (MRC) by 24.4%, leading to an aggregate capital shortfall of EUR 135.1 bn. Importantly, the capital impact is almost entirely driven by large globally active banks. The impact on medium-sized banks is limited to 11.3% in terms of MRC, leading to a shortfall of EUR 0.9 bn, and on small banks to 5.5% MRC with a EUR 0.1 bn shortfall. The EBA will publish the full report by the end of July. ...

[Spekulatius]

It s easy to bash the European bankers and the ECB, but what will happen to US banks and US insurance companies  when interest rates go the way they did Europe? US bank8ng has structurally less competition so it might be a bit better, but overall, I would expect NIM to compress to near European levels, which probably means ROE<10% and compressing P/tangible book <1.

 

The US still has a profitable credit card busInes and other niches that don’t exist in Europe, but banks have non-bank competitors in those.

Insurers like BHF or LNC with long tail business or even FFH and BRK will be affected as well. Then we have issues with pension fund’s (Hello IBM, GE and many others).

 

The winners are probably utilities (unless their guaranteed returns gets revised down, as happened in Switzerland ), real estate, infrastructure  and probably solid growth business with or without capital needs that will command higher multiples.

[scorpioncapital]

I think the reason is the Central Providers at the European Collectivism Bank (ECB) will buy homes at 120% of market value in a recession.

 

Banks lend to homeowners at negative interest rates without bothering about credit risk. In normal banking, they would have to charge a sufficiently high interest rate to compensate for default rates.

 

But the European Collectivism Bank provides everything - lavish pensions to whoever needs it by buying Greece 10-year at 2.1%, Italian 2-year at 0%.

 

At the current time, the Central Providers have bought corporate bonds, but it would be a stretch for the Central Providers to enrich stock market "speculators".

 

If you interview for a job at a European bank, make sure you say you don't know the meaning of the term "credit risk"

 

TwoCities, my opinion is that interest rates are more tightly coupled to real estate than equities.  It's standard practice to borrow to buy a house, quite rare in fact not to use debt.  With equities it's much less common to use debt and really it's a dangerous thing to do.  Maybe it's just that simple?  I agree that if markets are efficient there shouldn't be such a divergence but perhaps markets aren't that efficient.

 

I'm not so certain.

 

Sure most people don't use debt to buy equities, but the equities themselves have every opportunity to to lever up, refinance at lower rates, acquire competitors, fund capital projects, etc to grow revenues and earnings.

 

I agree the effects might become more apparent more quickly in mortgages, but to have the evidence in one area of the market and not another that should be similarly impacted calls into question the assumptions that it's interest rates driving that. Particularly where the only place globally upholding the "low interest rates = high equity multiples" mantra seems to be the U.S.

 

What's the end game to free money?

[John Hjorth]

What's the end game to free money?

 

Scorpioncapital,

 

I [naturally] can't quantify it, but I suppose it'll be unpleasant for somebody - perhaps very. If I knew how to play it, I would certainly do. But I don't.

[RuleNumberOne]

The problem is not the interest rates or yield curve. Banks can lend at zero rates in Europe because they assume the ECB will cover defaults.

 

Banks in the US know the Fed is not going to cover defaults. So they have to charge a high enough NIM to generate income to account for defaults. WaMu, Wachovia, Lehma, Bear, and many other bank shareholders/bondholders lost money in 2008. There is market discipline here. US banks have to generate enough income to be able to handle defaults, there is a free market in the US.

 

In Europe, Draghi is a hero. "Whatever it takes" for the "European Project." Rent freezes in Germany to curtail 10% housing inflation?

 

"Whatever it takes" means it is OK for the ECB to buy up all defaulting homes in a recession. Why would a borrower who can make payments pay in such a scenario? Everyone would default.

 

(A 1% NIM is fine if default rates are 0, or if the recovery rate is 100% - e.g. high downpayments. OTOH if default rate is 10%, a 5% NIM is not going to save you. US banks set 20% downpayment with high NIM, European banks have interest-only loans and don't care.)

 

It s easy to bash the European bankers and the ECB, but what will happen to US banks and US insurance companies  when interest rates go the way they did Europe? US bank8ng has structurally less competition so it might be a bit better, but overall, I would expect NIM to compress to near European levels, which probably means ROE<10% and compressing P/tangible book <1.

 

The US still has a profitable credit card busInes and other niches that don’t exist in Europe, but banks have non-bank competitors in those.

Insurers like BHF or LNC with long tail business or even FFH and BRK will be affected as well. Then we have issues with pension fund’s (Hello IBM, GE and many others).

 

The winners are probably utilities (unless their guaranteed returns gets revised down, as happened in Switzerland ), real estate, infrastructure  and probably solid growth business with or without capital needs that will command higher multiples.

[RuleNumberOne]

I think the reason is the Central Providers at the European Collectivism Bank (ECB) will buy homes at 120% of market value in a recession.

 

Banks lend to homeowners at negative interest rates without bothering about credit risk. In normal banking, they would have to charge a sufficiently high interest rate to compensate for default rates.

 

But the European Collectivism Bank provides everything - lavish pensions to whoever needs it by buying Greece 10-year at 2.1%, Italian 2-year at 0%.

 

At the current time, the Central Providers have bought corporate bonds, but it would be a stretch for the Central Providers to enrich stock market "speculators".

 

If you interview for a job at a European bank, make sure you say you don't know the meaning of the term "credit risk"

 

TwoCities, my opinion is that interest rates are more tightly coupled to real estate than equities.  It's standard practice to borrow to buy a house, quite rare in fact not to use debt.  With equities it's much less common to use debt and really it's a dangerous thing to do.  Maybe it's just that simple?  I agree that if markets are efficient there shouldn't be such a divergence but perhaps markets aren't that efficient.

 

I'm not so certain.

 

Sure most people don't use debt to buy equities, but the equities themselves have every opportunity to to lever up, refinance at lower rates, acquire competitors, fund capital projects, etc to grow revenues and earnings.

 

I agree the effects might become more apparent more quickly in mortgages, but to have the evidence in one area of the market and not another that should be similarly impacted calls into question the assumptions that it's interest rates driving that. Particularly where the only place globally upholding the "low interest rates = high equity multiples" mantra seems to be the U.S.

 

What's the end game to free money?

 

I think the end game is some hedge fund hotshots like Michael Burry or Paulson getting rich via CDS or other derivatives.

 

If we really have a "global recession" like the news media claims, will the Greece 10-year yield remain at 2%?

 

Maybe the Euro falls hard or the CDS goes up? How do I find such a hedge fund to invest in?

 

[mcliu]

What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

 

Central banks seem to be trapped into a position where they need to

consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

 

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

 

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?

or are they a reflection of the declining value (debasement) of the currency?

Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

 

No idea. Just thinking out loud.

[RuleNumberOne]

mcliu, This is a European bubble being exported to the US by European investors buying US bonds.

USD/EUR = 0.89.

US government debt is a far far far greater value than any European government debt.

 

Regarding asset inflation: that is why inflation calculators use "imputed rents", because they can "impute" whatever they please. Housing bubbles don't show up in the CPI.

 

But the ever-honest Bundesbank revealed that rent inflation in Berlin has been running at 7-10% and some politicians responded with a 5-year rent freeze in Berlin. That is why no Bundesbanker will ever be the head of the ECB. Instead the job of ECB chief is reserved for former or aspiring politicians.

 

Probably, rent freezes will be put in place in other German cities? Frankfurt rents have also gone up a lot.

 

 

What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

 

Central banks seem to be trapped into a position where they need to

consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

 

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

 

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?

or are they a reflection of the declining value (debasement) of the currency?

Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

 

No idea. Just thinking out loud.

[SharperDingaan]

Just to add some things here ...

 

It is assumed that lower NIM can be offset with higher fee income. Not really practical.

The advent of CBDC (eKrone), and social media platform currencies (Libra), means fee income has significant low-cost competion. Less fee income.

The mass displacement of large numbers of people in banking is also a social problem. More regulatory management.

....... unusual times, and for quite some time.

 

It is much harder to change fundamental business practices in Europe/Japan, than it is in the US/Canada. Ability to change.

And if future earnings rely on product innovation in changing times? Lower P/E multiples in Europe/Japan vs US/Canada.

....... 'controlled' bubbles in Europe/Japan as the norm, NOT the exception.

 

And then there's the UK ....

 

A Brexit will force widespread and broad change in business practices throughout the UK; unfortunately as a gale clearing out the cobwebs, versus anything 'controlled'. Change that Europe can't do, producing a competitive advantage as innovation is allowed to proceed. Great for the young, not so much for the old.

 

Average UK P/E multiples should improve over time, but not evenly. High for the new tech firms selling into the UK/Europe, low for the old tech firms stuck with legacy platforms. Betting on old tech firms having innovation failures (the norm) adds additional layers of opportunity. Great for employment, as 7 in 10 'future' jobs  don't exist today.

 

And the rest of Europe ? ....

 

Betting against 'moral hazard' is a pretty safe bet, just about everywhere.

There will be well-publicized regular temporary failures accross Europe, but the institution will not be allowed to fail - as too many people depend on its continuation. Over 10yrs+ of wide-spread continual CB interference, Europe has become an addict. Take away the drug, and there are withdrawal reactions. Trading opportunities.

 

SD

 

[Spekulatius]

mcliu, This is a European bubble being exported to the US by European investors buying US bonds.

USD/EUR = 0.89.

US government debt is a far far far greater value than any European government debt.

 

Regarding asset inflation: that is why inflation calculators use "imputed rents", because they can "impute" whatever they please. Housing bubbles don't show up in the CPI.

 

But the ever-honest Bundesbank revealed that rent inflation in Berlin has been running at 7-10% and some politicians responded with a 5-year rent freeze in Berlin. That is why no Bundesbanker will ever be the head of the ECB. Instead the job of ECB chief is reserved for former or aspiring politicians.

 

Probably, rent freezes will be put in place in other German cities? Frankfurt rents have also gone up a lot.

 

 

What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

 

Central banks seem to be trapped into a position where they need to

consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

 

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

 

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?

or are they a reflection of the declining value (debasement) of the currency?

Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

 

No idea. Just thinking out loud.

 

The rising rents in Germany were at least partly caused by immigration. All of a sudden, Germany has 1 Million more people they need housing adding in a short period of time. With full employment and starting with a shortage in larger cities to begin with, and little new construction, it’s easy to see why demand outruns supply. The stop gap measure of rent control certainly will not solve the problem, but make it worse. Adding to the supply is what is needed.

[RuleNumberOne]

Frankfurt home prices grew 15%/year in both 2018 and 2017. So that would be a 32% rise in 2 years.

 

https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000460528/The_German_housing_market_in_2018.PDF

https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000488315/German_property_and_metropolis_market_outlook_2019.pdf

 

I thought Germany was scared of inflation, but maybe they enjoy housing booms just like anyone else. The author of those DB reports (Mobert) predicted rates rising in 2019 to 0.4% from -0.1%, but instead they have fallen so far in 2019 to -0.4%.

 

 

mcliu, This is a European bubble being exported to the US by European investors buying US bonds.

USD/EUR = 0.89.

US government debt is a far far far greater value than any European government debt.

 

Regarding asset inflation: that is why inflation calculators use "imputed rents", because they can "impute" whatever they please. Housing bubbles don't show up in the CPI.

 

But the ever-honest Bundesbank revealed that rent inflation in Berlin has been running at 7-10% and some politicians responded with a 5-year rent freeze in Berlin. That is why no Bundesbanker will ever be the head of the ECB. Instead the job of ECB chief is reserved for former or aspiring politicians.

 

Probably, rent freezes will be put in place in other German cities? Frankfurt rents have also gone up a lot.

 

 

What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

 

Central banks seem to be trapped into a position where they need to

consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

 

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

 

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?

or are they a reflection of the declining value (debasement) of the currency?

Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

 

No idea. Just thinking out loud.

 

The rising rents in Germany were at least partly caused by immigration. All of a sudden, Germany has 1 Million more people they need housing adding in a short period of time. With full employment and starting with a shortage in larger cities to begin with, and little new construction, it’s easy to see why demand outruns supply. The stop gap measure of rent control certainly will not solve the problem, but make it worse. Adding to the supply is what is needed.

[mcliu]

This feels like a missed opportunity for massive infrastructure investment like what China did since 2008 by building a national high speed railway system.

 

Isn't it interesting that governments aren't using fiscal policy but instead focused on monetary stimulus? Clearly, at this point, monetary policy has had limited effect on driving inflation and wages higher, but may be creating risks in asset price inflation.

 

It just seems like a big investment in infrastructure (high speed rail, internet/fibre/5g, airports) is quite obvious ad it will tighten labour markets, drive wages, increase inflation and interest rates and drive long-term productivity. And the market is basically saying, it'll finance it for next to nothing..

 

0 high speed rail in the US vs 428km of high-speed rail in China in 2007 to 29,000km in 2017

5 of the 6 top airports in the world are in Asia..

Fastest internet: Taiwan, Singapore, Denmark, Sweden, Japan..