Have We Hit The Top?

[thepupil]

On 10/10/2023 at 1:24 PM, thepupil said:

 

kind of my point. if the aggregates (real and nominal) have seen very good trailing 3-5 year growth and the top 20% of companies and people who drive the income, asset ownership and spending all have inflated NW's from ZIRP era can now invest their NW's (just a hair off peak values) at positive REAL interest rates, it feel to me that rising rates doesn't do much until it really really breaks something.

 

feels like stimmy as much as highly negative rates felt like stimmy, just with a different course of action..

 

and the to date damage is just kind of myeh little flesh wounds or niches blwoing up (like a bank with 10 venture firms as its entire deposit base, or some value add sunbelt multifamily floating rate folks or whatever). 

 

the bottom 50% were and are poor. no change. until the tax man or social upheaval man ruins the party, 

 

twitter

 

 

and front page bloomberg today

Quote

Americans’ Net Worth Surged by Most in Decades During Pandemic

• Households invested more, saw home values jump from 2019-2022
• Financial strength is thwarting Fed’s efforts to slow economy

By Alex Tanzi

(Bloomberg) -- 

Americans experienced a record surge in net worth propelled by unprecedented government stimulus during the pandemic, laying the groundwork for economic resilience in 2023.

Inflation-adjusted median net worth jumped 37% to $192,900 from 2019 to 2022, according to the Federal Reserve’s Survey of Consumer Finances out Wednesday. That marked the largest three-year increase in data back to 1989, and it was more than double the next-largest one on record, the Fed said.

 

 

Quote

Americans accumulated more wealth in the period as home values skyrocketed and more people invested in the stock market. Credit-card balances also dropped and measures of financial fragility such as bankruptcy declined.

Median net worth rose for all age groups with the largest growth among families younger than 35 years old, who saw their median net worth more than double. But they remained the least wealthy age group, while Americans aged 65 to 74 had the largest coffers. 

 

 

 

[thepupil]

On 10/9/2023 at 5:43 PM, TwoCitiesCapital said:

Aggregate statistics suggest that the average/median person's in this society are worse off financially than they were 3-years ago. 

 

I'm willing to bet the damage didn't stop @ the median and willing to extend the statement to 'most' people. 

 

I'm not saying the economy is going into a depression. There is no 'doom and gloom's prognostication above. It's simply recognizing what was/is true - most people are worse off today than 3-years ago.

 

 

@TwoCitiesCapital, how do you square this view with the Fed data showing the largest ever REAL increase in HH net worth from 2019 to 20222, the largest percentage gains  being from the young/levered. 

 

Do you think that's reversed in the 10 mo's since? 

Do you think it's "all housing"? 

Do you think something wrong w/ the data?

 

[Gregmal]

Yea the whole “average American is struggling” thing was total bullshit. Said it from the start. Think really the most plausible excuse for all this was that the Fed basically wanted to get the monetary and rates situation back to “normal” which is pretty much what they’ve done. They needed an excuse to get off 0, which while fun, was unhealthy. 

[Spekulatius]

3 hours ago, Gregmal said:

Yea the whole “average American is struggling” thing was total bullshit. Said it from the start. Think really the most plausible excuse for all this was that the Fed basically wanted to get the monetary and rates situation back to “normal” which is pretty much what they’ve done. They needed an excuse to get off 0, which while fun, was unhealthy. 

Why was getting of zero unhealthy? I would argue that ZIRP was unhealthy and an abnormality.

[adesigar]

32 minutes ago, Spekulatius said:

Why was getting of zero unhealthy? I would argue that ZIRP was unhealthy and an abnormality.

thats precisely what he is saying 

[Gregmal]

Yea 5% ain’t the new normal, it’s the old normal. We ain’t moving far off it til we need to. Welcome to the cycle. Really wasn’t and isn’t that big a deal if you paid attention. 

[Spekulatius]

11 hours ago, adesigar said:

thats precisely what he is saying 

I misinterpreted what @Gregmal was saying. I read " moving off ZIRP was unhealthy" rather "ZIRP" being unhealthy. 

[tede02]

The huge increase in networth (household equity) has got to be a driving factor in the economy's resiliency and the gradual slowdown of inflation. It's nuts when you think about housing alone which basically went up 40% since early 2020. 

[thepupil]

I refuse to believe 5% / 2.5% real really can be the new normal. Doesn’t work with how indebted we are. Either need same nominal rates with higher inflation /lower  rates rates, or lower nominal  rates.
 

Otherwise Interest as % of GDP/budget will force dramatic and undesirable  societal change. 
 

basically my macro view is: lower rates or hell is coming. I’m an optimist so

i’m more positioned for lower rates than hell. Even if hell is coming (massive taxation increase 

 

people say “we used to have 15% rates”…well we also used to have 30% debt to GDP.

Can someone point me to errors in this “logic”/hope?

 

 

Edited October 19, 2023 by thepupil

[TwoCitiesCapital]

18 hours ago, thepupil said:

 

@TwoCitiesCapital, how do you square this view with the Fed data showing the largest ever REAL increase in HH net worth from 2019 to 20222, the largest percentage gains  being from the young/levered. 

 

Do you think that's reversed in the 10 mo's since? 

Do you think it's "all housing"? 

Do you think something wrong w/ the data?

 

 

I think real household net worth hasn't gone anywhere nominally from Q1 2022 from the same data. Which means for the last 2+ years the average household has LOST net worth in real terms. 

 

And that's before any real damage has been done to housing which is MOST households' largest asset and won't remain at these "most unaffordable" levels for much longer IMO. 

 

Lastly, most of us can't spend our networth. Say my house price goes up 50% and my 401k doubles. What does that matter if groceries, insurance, healthcare, children's education/day care, car repairs/replacement, utilities, gasoline, travel, etc is up 20-30% while my wages are up only 5-6%? Cuts have to be made. Quality of living is going down regardless of what my 401k says. 

 

Sell assets to fund the gap? Sure, but then I'm gonna take a penalty on early 401k withdrawals OR a hit against my equity paying selling/closing costs AND be able to afford something significant less nice. And spending those gains reduces the net worth a long with any penalties or fees paid. 

 

I don't care what aggregate net worth is on paper because it doesn't reflect anything real. Many people can't maintain their current quality of living without spending those net worth gains - and then spending them results in the reversal of those gains. If you have to spend the gains to run in place, were the gains ever really there?

 

I'm sure many people  saw their networths rose by investing in real estate in 2005. But was any of it real? 

Edited October 19, 2023 by TwoCitiesCapital

[TwoCitiesCapital]

57 minutes ago, thepupil said:

I refuse to believe 5% / 2.5% real really can be the new normal. Doesn’t work with how indebted we are. Either need same nominal rates with higher inflation /lower  rates rates, or lower nominal  rates.
 

Otherwise Interest as % of GDP/budget will force dramatic and undesirable  societal change. 
 

basically my macro view is: lower rates or hell is coming. I’m an optimist so

i’m more positioned for lower rates than hell. Even if hell is coming (massive taxation increase 

 

people say “we used to have 15% rates”…well we also used to have 30% debt to GDP.

Can someone point me to errors in this “logic”/hope?

 

 

 

I have two scenarios and I don't know which ones is more likely: 

 

1) We get a recession and rates go dramatically lower which buys us time before we have to face the next option or

 

2) we avoid recession, rates remain high, but there just isn't enough demand for the massively increased issuance of treasuries to fund an ever growing deficit/interest bill. The Fed implements yield curve control with a yield cap of 3 or 4% on the 10-year treasury. Either the Fed buys bonds directly or banking/insurance/pension regulations are adjusted to force them to buy more to implement the buying needed. Real assets and gold soar. Stocks will go up too, but probably by less. Bonds get an initial pop, but are then dead money for a decade -plus. 

 

The US is definitely heading towards and end-game of #2. Just a question of if we're there yet or if it'll be the next time or the time after. I'm still leaning on the recessionary scenario of #1 with an expected pop in bonds and drop in stocks. 

[mattee2264]

Yeah I think "wealth effects" are massively overrated. Asset price appreciation has been insane since the depths of the GFC but until the US government started running trillion dollar deficits we struggled to get GDP growth anywhere near 3%. Also the wealth effects during the 90s leading up to the dot com bubble top did little to prevent the house of cards from collapsing. 

 

Most people have however seen a reduction in their real wages and are finding it a lot more difficult to spend more than they earn now that credit is a lot more expensive and banks and other lenders are starting to tighten lending standards. Also the stuff that people actually spend money on such as rent, energy, food etc has gone up massively so the reduction in real wages is greater than the inflation figures suggest. 

 

It is difficult for the Fed to lower rates so long as the economy remains resilient and the US government continues to run trillion dollar deficits. And I think that a lot of the apparent economic strength does reflect that fiscal policy is so ridiculously expansive. 

[SharperDingaan]

On 10/19/2023 at 9:29 AM, thepupil said:

I refuse to believe 5% / 2.5% real really can be the new normal. Doesn’t work with how indebted we are. Either need same nominal rates with higher inflation /lower  rates rates, or lower nominal  rates.
 

Otherwise Interest as % of GDP/budget will force dramatic and undesirable  societal change. 
 

basically my macro view is: lower rates or hell is coming. I’m an optimist so

i’m more positioned for lower rates than hell. Even if hell is coming (massive taxation increase 

 

people say “we used to have 15% rates”…well we also used to have 30% debt to GDP.

Can someone point me to errors in this “logic”/hope?

 

 

 

The US hasn't had 'normal' since the 2007 GFC (16 years ago); relevant interest rate history is anything prior to 2007, and for much of it, 5% was a pretty good number. It seems 'unimaginable' simply because anyone who entered the industry within the last 16 years has had no experience with it; therefore it doesn't exist. Multigenerational mania.

 

US financial manias are common. In the run-up to the 2007 GFC, US finance was 'positive' that securitization (as it was done then) was the future; then along came Lehman Brothers along with the collapse of how many other major I-banks within how many weeks? Dramatic/undesirable social change is routine, and a great many would take great delight in the over privileged getting their comeuppances.

 

Toronto/Vancouver is full of people who borrowed as much as they could when rates were ultra-low, when the 'new normal' was endless QE and helicopter drops of free money (covid period). Greed and FOMO drove the gullible towards buying houses they couldn't afford, the purchase of multiple properties to airBnb, and made RE unaffordable for most local people to live in. Today, cities are banning airBnb in certain areas, forcing negative carry investment properties back onto the market, and using the supply overhang to lower prices/improve affordability. Everyone else's fault but theirs; moral hazard is a bastard, and bankruptcy sucks, but it's part of life. Make poor decisions, you wear the consequences.  

 

When 'hell' arrives (and it will), the population will need someone to blame, and it'll be the central bank. Even Canada's official opposition party wants to both fire the head of the BoC, and make the BoC subject to the whims of parliament; were there an election tomorrow, they would be in power. Diminish confidence in the central bank, and hard assets are a better choice than financial ones; infrastructure, hospitals, premier RE, pawned watches (tech bros), etc. All are quality luxury goods.

 

We just have great faith in the ability of disaster to concentrate the mind; pretty sure the end result is better, but how we get there remains a mystery!  

 

SD

 

 

 

   

Edited October 20, 2023 by SharperDingaan

[Gregmal]

Good to see both on and off this board the great minds all kinda see where this is going lol. 
 

Premier hard assets and trophies for the 1% will do what they’ve done for thousands of years…

[Spekulatius]

 

To sum it up:

We are screwed if interest rates are at zero.

We are screwed if interest rates stay where they are.

We are screwed even more if interest rates go higher.

 

[Gregmal]

It’s so clear Powell is just lying and/or an idiot when you listen to what he’s saying. Like I wish they didn’t have the corrupted crew of media and “reporters” handling the Q&A because all itd take to blow him up is one real comment/question. 
 

Jerry, you’re insistent on this 2% thing, and the only thing between you and it, is housing. Housing remains highly elevated, almost exclusively because of you and your rate hikes. How do you reconcile this? 

[changegonnacome]

6 hours ago, Gregmal said:

2% thing, and the only thing between you and it, is housing.

 

This just aint so - I wish it was.

 

We've got a domestic services inflation problem.....this excludes housing/OER....that domestic inflation problem assures we aren't getting back anywhere near to 2%.....the US is "stuck" at 3%+ inflation.....and its got nothing to do with housing.

 

It appears to me that we are AGAIN heading into year end wage comp discussions with almost ZERO weakness in the labor market.....which assures, most likely a re-acceleration or an underpinning of high core inflation in early 2024, as nominal wage increases turn into nominal spending increases that exceed the meager productivity growth of the US economy. This says nothing about the risks skewed to the upside to external supply shocks of energy etc. tumbling out of global macro (middle east etc.)

 

Given the rate insensitivity of the consumer to monetary policy.........it appears to me that the bond market, acting rationally, and spotting this insensitivity is beginning to incorporate higher inflation expectations plus higher for longer Fed rates........in doing so....so called bond 'vigilantes' are going to do what Powell has failed to do to the lowly consumer.......they are going to force the fiscal authorities hands to shrink their nominal spending......debt servicing costs are going to start overwhelm federal and state budgets.....forcing spending cuts and/or tax increases on political leadership....this is going to be the transmission mechanism this time that effects the consumer in way that is meaningful enough.

 

We saw post-GFC and the fight against deflation.....the weakness inherent in monetary policy to affect nominal spend in the real economy.......interest rates and even QE are weaker sauce than we realized....they effect very well financial instruments/asset prices.....but Wall St. is not the economy....what we discovered during COVID is the inherent power of fiscal stimulus over the monetary kind.....this is money that actually circulates in the real economy and flows into real goods and services...not the financial economy.

 

Seems to me that this current 'landing' question gets resolved one of two ways.......the first is an outbreak of enforced or voluntary federal/state fiscal tightening in the face of rising debt servicing costs......or number two.......a fiscal financial crisis is engineered whereby the Fed is forced to buy treasury issuance directly.....i.e. fiscal debt get's monetized directly by the Fed..........it would be a crossing of the rubicon to a certain extent..........and the final FU to those holding US gov paper especially overseas given what this would do to the dollar......effectively the US authorities will play its trump card as the reserve currency....and it will rug pull the global monetary system. Interesting times.

 

The game, so to speak continues into 2024 I think, the voluntary fiscal restraint is only going to occur post-Nov 2024......the car crash fiscal restraint is of course government shutdowns etc.

[UK]

12 hours ago, TwoCitiesCapital said:

 

I think real household net worth hasn't gone anywhere nominally from Q1 2022 from the same data. Which means for the last 2+ years the average household has LOST net worth in real terms. 

 

And that's before any real damage has been done to housing which is MOST households' largest asset and won't remain at these "most unaffordable" levels for much longer IMO. 

 

Well, you may be right on last two years, but they came after "Inflation-adjusted median net worth jumped 37% to $192,900 from 2019 to 2022"

 

As for housing: https://edition.cnn.com/2023/10/19/homes/existing-home-sales-september/index.html. Are you expecting home prices to fall substiantially going forward?

[UK]

11 hours ago, Spekulatius said:

 

To sum it up:

We are screwed if interest rates are at zero.

We are screwed if interest rates stay where they are.

We are screwed even more if interest rates go higher.

 

 

 

I think the problem is not any particular scenario, but that we just can not know for sure which of them will persist. At least for me this means diworsification between longer duration (or lower rates again beneficiares) vs shorter duration (or higher rates for longer beneficiaries). I am at ~50/50 on this:). 

[changegonnacome]

20 hours ago, thepupil said:

Otherwise Interest as % of GDP/budget will force dramatic and undesirable  societal change. 
 

basically my macro view is: lower rates or hell is coming. I’m an optimist so

i’m more positioned for lower rates than hell. Even if hell is coming (massive taxation increase 

 

people say “we used to have 15% rates”…well we also used to have 30% debt to GDP.

Can someone point me to errors in this “logic”/hope?

 

Yeah I think your right - the range of outcomes for upward movement in headline long term rates specifically are capped.....the fiscal debt situation & daily growing entitlement spending makes it so that rates moving much much higher from here is a math problem no politician can solve and no electorate will vote for.

 

You wanna kill inflation & the economy - just do reverse helicopter money.....cut gov spending and raise taxes. Never gonna happen. The upward move on the long end of the curve recently is just that......it's effectively the bond market cutting government spending in real time. The budgetary math is starting to break.

 

Nearly 5% across the curve bingo today:

 

 

The treasury did a horrible job on duration during 2020/2021......while the rest of America was re-financing their mortgages into 30yr paper at 3%......the treasury did close to diddly squat......we should have got the guy who came up with the Austrian 100yr bond...thats my type of treasury secretary....selling that paper into the 2021 bond bull market. Genuis.

 

Anyway seems to be that absent a recession that kills inflation and allows the Fed to ease........some version of yield curve control is the way out here......fiscal authorities get to extend and pretend.......the curve gets re-inverted....and continue to hope that that inversion drives nominal spending contraction in the household sector via the credit channel.

 

 

Edited October 20, 2023 by changegonnacome

[mattee2264]

We haven't had the hard landing yet. And based on the resilience of the economy unless something major breaks then Powell's envisaged scenario of a period of below trend growth will probably be how things play out. Especially if some fiscal discipline is imposed by bond markets. 

 

But as a minimum you'd expect some repricing of financial assets as the long bond rate goes higher to establish a proper term premium and optimism about a pivot in 2024 starts to fade as people realise that so long as employment remains strong and nothing major breaks Powell will stay the course. 

And even if people don't believe in higher for longer then if anything that increases enthusiasm for bonds because it means there is a limited time opportunity to lock in a long term return of 5% + as well as enjoy some capital appreciation if rates do fall. Or for the more speculatively minded with the TLT down 50% there are bottom fishing opportunities. Either way equity allocations are bloated so it wouldn't take much of a rotation into bonds to result in quite a bit of downside to equity markets. 

 

The economy is probably as good as it gets at the moment. So the idea things will get better and there is a broad based rally encompassing non-tech stocks seems unlikely. And even if the economy only gets a little worse it will continue to depress the prices of non-tech stocks and if sentiment sours and tech results disappoint then a lot of the YTD gains could be given up and when Magnificent 7 are 30% of the index and have gone up 70-80% on average YTD then that again adds to the downside risks. 

[changegonnacome]

53 minutes ago, mattee2264 said:

The economy is probably as good as it gets at the moment. So the idea things will get better and there is a broad based rally encompassing non-tech stocks seems unlikely.

 

Yep we're headed for stagflation in the current standoff......Joe Sixpack cant expand his purchasing power YoY right now....the median russell 2000 stock hasnt a chance to rally with that backdrop....and the Fed cant cut cause labor markets & by extension inflation haven't slackened sufficiently....Buffett the old dog can smell stagflation coming and is buying oil in the ground.

[TwoCitiesCapital]

8 hours ago, UK said:

 

Well, you may be right on last two years, but they came after "Inflation-adjusted median net worth jumped 37% to $192,900 from 2019 to 2022"

 

As for housing: https://edition.cnn.com/2023/10/19/homes/existing-home-sales-september/index.html. Are you expecting home prices to fall substiantially going forward?

 

My general view is they will either fall or stagnate. 

 

Either way, if they underperform reported inflation over the next few years, then any gains after inflation weren't ultimately real and it just took a few years for that to be evident - just like it took a few years for people buying houses in 2004/2005 to realize that the gains weren't ultimately real. 

 

It doesn't shock me that people's net worths went up when the government literally mailed everyone and their mother checks for thousands upon thousands of dollars. It's what's been happening afterwards that I don't think is as rosy as everyone makes it. 

Edited October 20, 2023 by TwoCitiesCapital

[dealraker]

It has been my view, right or wrong, that low interest rates made home building costs meaningless given the minor addion to long term mortgages.  Heck, homebuilders...why not toss in one or two Disney trips for the family if you're paying with 3% over decades...only would add $10 per month to the mortgage?!

 

After exiting the insurance business I was a building contractor (my entire family is in building), I got my contractors license in 1982.  I built 52 homes, double digit fast food restaurants, two large apartment complexes (for family), and even did concrete highway projects during the early 80's high rate era.  Mr. Hyperactive, that's me, sometime to my benefit, sometimes not.  But back then we used to say, "When the homebuilders/contractors are buying new trucks it is time to sell."  Hell, the homebuilders/contractors have been buying new trucks, now $70,000 ones, for ten years plus.  Our builders supply is R-O-C-K-I-N-G!  But seems to have peaked too...here in NC.

 

Still not enough housing though.  Interesting to say the least.

 

Recently the family had a meeting about our stocks (held in the builders supply) and I voiced my view (I'm not the one who makes the final decisions) not to add to Lowe's.  The stock was selling for about $210 and some were wanting to buy more.  It is a good business, very good, but to me the path is troubled now, people's obsession with houses will wane when the "it will be worth twice as much in five years" obsession in the south here has gone.  So do it yourself type middle and high end gets replaced by housing for the masses?

 

Hell, I don't know.  Rambling.  Greg knows better than me!

 

 

 

 

[Ulti]

https://podcasts.apple.com/us/podcast/this-is-what-an-8-mortgage-means-for-the-housing-market/id1056200096?i=1000631762612

 

good discussion on odd lots about whats going on in housing.