Where Does the Global Economy Go From Here?

[thowed]

19 hours ago, wabuffo said:

2023 is when things could REALLY get interesting. What if inflation is still high single digit. And labour markets are still super tight. And the economy is still doing OK. And the Fed KEEPS TIGHTENING. 

 

Very likely - that's why I bought a ton of TLT Jan 2024 LEAP put options (also Jan 2023 LEAP puts too).   We talked about this last summer in various Federal Reserve threads that long rates could rise a lot.

 

And I'm not really a macro investor.

 

Bill

 

Very interesting, thanks.  I am just about to look at PFIX (interest rate hedge ETF) which on first look appears to do a similar thing to this (for people like me who aren't confident enough to deal with options).

 

[wabuffo]

Also, when you say it (the treasury) first creates reserves I'm assuming this is the act of manifesting money, right? Is converting reserves to currency or treasury securities part of ensuring the Treasury's account doesn't have a negative balance?

 

The best way to visualize all of this is with an accounting ledger approach to all of these transactions.  The blue side is the consolidated Fed govt (Treasury + Federal Reserve).  The green side represents the private sector. 

 

The first payment flow is the US Treasury making a payment (i.e., issuing stimmie checks).  The US Tsy gives the Fed a payment order and the Fed moves reserves (settlement balances) from the Tsy's Fed acct to JPM's Fed acct.  This creates both a reserve asset and a deposit liability for JPM.  The non-bank private sector gets a new financial asset in its deposit account (with no offsetting liability).   That's why only US Treasury deficit spending creates new financial assets for the private sector.

 

In the second payment flow, the US Treasury issues a bond.  This removes the reserves and deposit from JPM and moves reserves at the Fed from JPM to the Treasury.   Notice that this transaction does not change the net asset position of the private sector.  It just substitutes one form of govt liability (reserve) for another (T-Bond).

 

The last payment flow is the Fed buying a Treasury security.  Of course it can also work the other way.  But the key point is that the Fed buying (or selling) Treasuries does not add (or subtract) net financial assets from the private sector.  It just changes the form of the asset.

 

 

Hope this helps.

 

Bill

 

Edited April 8, 2022 by wabuffo

[Thrifty3000]

5 hours ago, wabuffo said:

Also, when you say it (the treasury) first creates reserves I'm assuming this is the act of manifesting money, right? Is converting reserves to currency or treasury securities part of ensuring the Treasury's account doesn't have a negative balance?

 

The best way to visualize all of this is with an accounting ledger approach to all of these transactions.  The blue side is the consolidated Fed govt (Treasury + Federal Reserve).  The green side represents the private sector. 

 

The first payment flow is the US Treasury making a payment (i.e., issuing stimmie checks).  The US Tsy gives the Fed a payment order and the Fed moves reserves (settlement balances) from the Tsy's Fed acct to JPM's Fed acct.  This creates both a reserve asset and a deposit liability for JPM.  The non-bank private sector gets a new financial asset in its deposit account (with no offsetting liability).   That's why only US Treasury deficit spending creates new financial assets for the private sector.

 

In the second payment flow, the US Treasury issues a bond.  This removes the reserves and deposit from JPM and moves reserves at the Fed from JPM to the Treasury.   Notice that this transaction does not change the net asset position of the private sector.  It just substitutes one form of govt liability (reserve) for another (T-Bond).

 

The last payment flow is the Fed buying a Treasury security.  Of course it can also work the other way.  But the key point is that the Fed buying (or selling) Treasuries does not add (or subtract) net financial assets from the private sector.  It just changes the form of the asset.

 

 

Hope this helps.

 

Bill

 

This is very helpful. And, believe it or not, the way you've laid it out in the T tables is in line with the way I've understood that series of transactions to work. Though, admittedly, my mental model of the flow is a much dumbed down version.

 

Now, to continue with your example, after step 3 there is a brand spankin new $10 million treasury bond at the Federal Reserve and a brand spankin new $10 million private sector financial asset that didn't exist prior to step 1.

 

So, it seems to me the next big question is what happens to inflation if the treasury bond is paid off at maturity:

 

a) using taxpayer dollars (specifically, using reserves offset by taxpayer dollars)

 

b) using debt purchased by the private sector (specifically, using reserves offset by treasury bonds purchased and held by the private sector)

 

c) using debt purchased by the Federal Reserve (specifically, using reserves offset by treasury bonds purchased from the private sector at artificially high prices to reduce interest rates, but ultimately held by the Federal Reserve)? Further, let's assume the market expects the Treasury to perpetually roll maturing Treasuries over into new Treasuries that will be purchased/held by the Federal Reserve.

 

It seems to me scenarios a and b pose low risks of longer term inflation.

 

However, it seems scenario c is equally as inflationary as raining cash from helicopters IF the Treasuries are rolled over to an over-paying Federal Reserve in perpetuity.

 

It sounds to me like our WSJ article author was suggesting that the extent to which the market realizes/believes we're facing scenario c will drive Mr. Market's inflationary expectations and consequent behavior.

 

Maybe the Treasury ultimately rolls half the Treasuries held by the Fed. Maybe it rolls all of them and much more.

 

I think Buffett is betting we're in a world where the government won't have the willpower to reduce spending or raise taxes enough to pay off its existing debt with taxpayer dollars, and that we should expect the debt to be rolled to the central bank in perpetuity.

 

Even worse, it's probably not a stretch to expect continued deficit spending in excess of 2%, or at the very least, the continued reliance on bazooka-sized stimulus during future economic downturns - at least until inflation becomes overly destructive and intolerable. It's the only playbook developed economies seem to have.

 

I guess we'll know more after the Fed starts winding down its balance sheet. If the market chokes and the Fed reverses course like it did in 2018 then we're probably in for more of the same.

Edited April 8, 2022 by Thrifty3000

[wabuffo]

 

So, it seems to me the next big question is what happens to inflation if the treasury bond is paid off at maturity:

a) using taxpayer dollars (specifically, using reserves offset by taxpayer dollars)

 

Focusing on a treasury bond being paid off in isolation is the wrong frame, I think.  Since the US Treasury needs to run a perpetual deficit, then all its doing is rolling over its bonds and increasing the net issuance.   If it tries to run a sustained surplus (ie, paying down its US Treasury security balances outstanding, it unleashes monetary deflation (as it did in 1998-2001).

 

b) using debt purchased by the private sector (specifically, using reserves offset by treasury bonds purchased and held by the private sector)

 

Not sure what you mean here - but this sounds like a) above.

 

c) using debt purchased by the Federal Reserve (specifically, using reserves offset by treasury bonds purchased from the private sector at artificially high prices to reduce interest rates, but ultimately held by the Federal Reserve)? Further, let's assume the market expects the Treasury to perpetually roll maturing Treasuries over into new Treasuries that will be purchased/held by the Federal Reserve.

 

If the Fed keeps buying all of the US Treasuries issued, then interest rates will go negative, banks assets will be nearly 100% reserve assets and the economy becomes moribund.   Not because of inflation (though that's possible if the US Treasury deficits are sustained over 10% for multiple years).  More likely under normal deficits = 2-4% of GDP, this creates a moribund economy because consumption falls and banks stop lending.  

 

Bottom line - you (and that article) are focusing on the wrong thing - Treasury securities.   IMHO, inflation appears if the US Treasury runs multi-year deficits of >10% of GDP.   Its the spending, not the Treasury issuance that comes after the spending.

 

Bill

 

Edited April 11, 2022 by wabuffo

[MikeL]

Everybody is saying: with interest rate goes up, asset price goes down

People also said: cash is trash with high inflation

 

I got confused, because if you know interest rate goes up, and asset price will go down, why wouldn't you hold cash now so you can buy stocks or RE when their prices go down. 

If you don't want to hold cash, then what would you buy now to hedge inflation? commodity?

[Spekulatius]

18 minutes ago, MikeL said:

Everybody is saying: with interest rate goes up, asset price goes down

People also said: cash is trash with high inflation

 

I got confused, because if you know interest rate goes up, and asset price will go down, why wouldn't you hold cash now so you can buy stocks or RE when their prices go down. 

If you don't want to hold cash, then what would you buy now to hedge inflation? commodity?

Gold.

[scorpioncapital]

Why do you need to hedge inflation? I think people misunderstand something about inflation. Loss is guaranteed under inflation. The goal is to lose less at the other end of the tunnel. If you can maintain 80% of your purchasing power instead of 50% you should be quite happy. Now maybe the top investors can keep 100% or even have some gain but from what I read it is very hard when inflation is high to not lose, if by corruption on the ground alone. I've often been fascinated by human society. For example, there are many places where if you wave big money and ask for a taxi or a lodging they will say NO! Pride sometimes is worth more than money. And even if they're starving they'll take your money and still do something to show you who is boss.

 

[Ulti]

https://podcasts.apple.com/us/podcast/jeff-currie-on-the-volatility-trap-keeping-commodity/id1056200096?i=1000557582351

[Castanza]

1 hour ago, Ulti said:

https://podcasts.apple.com/us/podcast/jeff-currie-on-the-volatility-trap-keeping-commodity/id1056200096?i=1000557582351

Just listened to that, pretty interesting take on the setup….makes me wish I went longer dated on my CLF calls though

[Ulti]

Yep, interesting that he's been thinking about the bank angle "for 2 or 3 months ".

 

More importantly, He seems to feel that copper is going to , and I'm paraphrasing, break out 2023 ish. How does one invest, bhp\rio or the etf route \ cper ? Seems like Mr Currie believes that we are

" in the 2nd inning". There are also smaller companies like cmmc\ero\trq. Or do you do what he suggests and find a BCOM?  Personally, I've done the BCOM route with metals, ag, ind etc. and individual equities for O&G.

[Viking]

Will higher interest rates actually achieve the Fed’s objectives? Maybe not…

—————

Scant housing supply cripples rate hike impact on real estate market, economists warn
- https://www.theglobeandmail.com/business/article-scant-housing-supply-cripples-rate-hike-impact-on-real-estate-market/

 

A record mismatch between housing demand and supply is forcing economists to reconsider the role interest rates will play in cooling runaway house prices.

 

Typically, rising rates cool a hot housing market by making mortgages more expensive. During the current rate hike cycle, however, the supply of homes is so low relative to pent-up demand – in both Canada and the U.S. – that traditional economic models may not apply.

 

This dynamic caught the attention of some U.S. economists this week, who started cautioning that rate hikes probably won’t wield the power they normally do over the housing market.

 

In the U.S., mortgage rates have already jumped to 5 per cent, which is an 11-year high. “Standard economic models suggest that an increase of that magnitude should weigh substantially on housing, the most interest-rate-sensitive segment of the economy and the textbook channel of monetary policy transmission,” Ronnie Walker, a U.S. economist at Goldman Sachs, wrote in a note to clients.

 

“However, the extreme supply-demand imbalance in today’s housing market will likely dampen the hit to activity from higher rates,” he wrote. “Using state-level data, we show that existing home sales are only one-third as sensitive to changes in rates in a supply-constrained environment.”

Mr. Walker and his team also found that housing starts have historically been unresponsive to changes in mortgage rates when supply can’t keep up with demand. The likely reason: “Homebuilders are able to continue building with little fear that homes will sit vacant after completion.”

 

This dynamic is supported by fresh data on U.S. housing starts released Tuesday. Despite a major jump in mortgage costs since the start of the year, housing starts in March beat expectations, rising 0.3 per cent month-over-month instead of the estimated decline. “The market may have some room to run yet before the Fed’s tightening cycle becomes a binding constraint,” Shernette McLeod at TD Economics wrote in a note to clients.

 

It is still too early in the rate hike cycle to make any definitive claims. However, if housing demand remains robust, it “may suggest the Fed will have to hike rates more than expected,” Bill McBride, who pens the CalculatedRisk newsletter that specializes in housing, wrote this week.

 

In other words, if the effectiveness of each increase is diminished by the powerful demand-supply mismatch, an unusually high number of hikes may be needed to restore some order in the housing market.

[Ross812]

@Viking, I agree with the premise that increasing rates is not going to stop the rise in home prices due to constrained supply, but I don't think cooling home prices is what the Fed is after. New purchases at higher prices mean borrowers have less money to spend elsewhere because they are servicing mortgage debt which is deflationary. The same can be said for refinancing, which is really just selling your home to the bank. I would expect refinancing to slow down in the near term and the same mechanism to suck money out of the economy in the medium to long term. If the goal is to make homes more affordable, then road blocks for investors and second home owners are needed to reduce competition. Lending guidelines and interest rates on second homes and investment properties needs to be tightened and raised and a sales tax on all cash or mostly cash offers could be levied.

 

 

[Viking]

Have we learned anything over the past 4 months? Yes. What the Fed does matters to financial markets. And much, much more than anything else. Kind of obvious. We are also just starting to learn (once again) that there are times when preservation of capital is more important than return on capital; but we are likely still in the early innings of this teaching moment - it will take more time (and more pain) before investors more fully appreciate this lesson.
 

Most importantly, the Fed is JUST GETTING STARTED. They have actually raised Fed funds by a whopping 25 basis points. Balance sheet run off hasn’t even started yet. Now all the Fed talking IS STARTING to tighten financial conditions. Mortgage rates have popped higher. Bond yields have popped higher. Credit markets have tightened a little. S&P has had a small correction. Are we there yet? We have just got started. And this will not be a short journey (that is not how inflation works once it gets embedded into the economy).
 

The problem for investors is we are entering unchartered territory:
- Continuously falling interest rates? No, the opposite (interest rates rising faster and to levels thought impossible).

- Disinflation (or possible deflation)? No, the opposite (roaring inflation).

- Economy running year after year at sub par growth? No, the opposite (red hot economy).

- Stagnating wage growth? No, the opposite (strongest labour market ever and rising wages).

- Globalization? No, the opposite (de-globalization).

- Ever falling input costs? No, the opposite (commodity super cycle). 

- Russia (fall of iron curtain) and China (joining WTO) unleashing era of global prosperity? No. Major war in Europe. Russian economy in shambles. Russia and China deciding it is time to create authoritarian block to challenge US/West.
————-

The first victim has been the bond market. Bond returns have been the worst ever? Over last 40 years? Bottom line, owners of bonds have had their heads handed to them. Increasingly it is looking like we had a bond bubble. It has popped. And the air is still coming out. And as bond yields continue to rise that creates another headwind for stocks.
 

Meanwhile, the stock market reminds me of Rocky Balboa getting beat up by Apollo Creed in the first movie - round after round of abuse. Except, i am not convinced the stock market will keep getting up off the mat every time it gets knocked down (like it has so far in 2022). My read is the Fed has ‘ripped up the script’. And when we get to the end of the movie, investors are going to be shocked because it is NOT GOING TO HAVE THE FEEL GOOD ENDING that everyone is used to and expecting. Because the Fed has decided to rip up the script.

—————

The Fed blew up asset bubbles during the pandemic (bonds, stocks and real estate). In the dark days of the pandemic they calculated they NEEDED the wealth effect to save the economy. And now they have calculated they NEED TO significantly tighten financial conditions (this is code for - a fall in asset prices - bonds, stocks and real estate). Rocky Balboa (asset owners) better get ready to be beaten up by Apollo Creed (the Fed) for at least a few more rounds. And hope they are able to get back up off the mat once the beating stops…

Edited April 22, 2022 by Viking

[mattee2264]

This feels a bit too obvious....reminds me of Howard Marks distinction between first level and second level thinking. 

 

I still kinda feel the bubbles are too big to burst and while the Fed is OK with letting a bit of air out especially in the more speculative areas of the market if a mild tantrum shows any signs of turning into a market crash they will quickly reverse course and rescue markets once again. So the Fed put is probably still relatively intact and while there will be continued volatility and perhaps a further downside of 10-20% the Fed will step in long before it gets any worse than that. The aim is still a soft landing rather than doing whatever it takes to break inflation recession and market crashes be damned. 

 

 

 

 

[wabuffo]

Have we learned anything over the past 4 months? Yes. What the Fed does matters to financial markets.

 

FWIW - I don't think the Fed was/is responsible for the carnage this week in equities (and to a lesser extent in commodities).   While there were a lot of Fed speakers sounding bearish, the Fed rate hike odds didn't change this week (they've been predicting 3 straight 50bp rate hikes in each of the May/June/July Fed meetings coming up for the last month or so). So there was no change in expectations as to the Fed from what I can see by markets.

 

To find a possible reason for the upset, one must look to the US Treasury as we always have to for monetary goings-on.  Fed tax receipts have been booming this year, but April (as the 2021 tax filing deadline) has been one for the record books.  Here's a couple of charts: the first, tax receipts for the last few months, and the next one April US Treasury receipts vs expenditures for the last 25 years.

 

The effect of this huge Federal tax receipt week (and large surplus) was to reduce US domestic bank sector reserves by $466b!  This was a 12.3% reduction in bank reserves in one week!!   You can see this in the comparison of the Fed's balance sheet between April 13 and April 20.  Basically the Fed moved reserves from the banking sector to the US Treasury's general account.

 

 

This was a huge reserve drain from the banking sector.  To put it in perspective, the Fed has said that it wants to shrink its balance sheet by $100b a month (which also has the effect of removing bank reserves).  So the US Treasury did in one week, what it will take the Federal Reserve to do (starting in May) in more than four and a half months.   Another way to think about it is that in mid-Sept 2019, a relatively small corporate income tax draw (when bank reserves were at $1.5t) caused a much smaller reserve drain that sent short-term interest rates spiking and forced the Federal Reserve to come in with repo mop-up operations the next day.

 

The private sector really felt this big withdrawal of liquidity - especially in the latter part of the week as the effects started to ripple into a strengthening of the US dollar (gold sank on Wed-Fri by over $60/oz because gold is inversely correlated to dollar strength and is very sensitive to changes in the supply of/demand for US dollars).

 

So what does this possibly mean for the macro economy?  I think in the short-term we'll feel it for another week or so but the tax haul is a one-timer and the budget should filp back into deficit mode.   Longer-term, I'm still bullish on the US economy for this year and next, but I do think the US budget deficit is falling fast.  That's healthy, but if it continues to fall over the next few years and gets as low as 2% of GDP - that might be too low for the US domestic & global economy and could create a very strong USD that could put deflationary pressures on the US and the world.   Of course, just because the US economy is fine, equities will feel headwinds from rising rates.  The economy and markets can go in different directions and often do.

 

Bill

 

Edited April 23, 2022 by wabuffo

[SharperDingaan]

On the Canadian side, there is now a 2/3 expectation that the BOC will now raise by 75bp on June 01, and not the previously expected 50bp. Inclined to agree as after the raise, the BOC will simply be back to what it was at the start of Covid. Thereafter it would make a lot of sense to do a 2nd 75bp raise, a lot sooner vs later, and use the 150bp raise to get ahead of inflation.

 

Big raises north of the border, aren't going to influence the US. However, they do indicate that material raises are on the table, and sooner versus later. Obviously, not what the market wants to hear.

 

SD

Edited April 23, 2022 by SharperDingaan

[Gregmal]

The markets go up a few percent, like early in the month, no big deal. Markets go down a few percent, and everyone panics and thinks something happened. Its really just volatility. Love it or leave it. 

 

I honestly dont see the fuss really in anything. The stuff people got greedy with or made fortunes on, bonds, growth stocks, is giving a lot of that back. Even after Netflix putting in an absolutely dismal 12 months of fundamental performance, is stock is basically back to what? 2019 levels? Nothing lasts forever. By and large it seems stocks are finally reacting to fundamentals for the most part, investors are starting to value real earnings again, and in general, good stock selection is being rewarded. Whats the problem? 

Edited April 23, 2022 by Gregmal

[Viking]

3 hours ago, wabuffo said:

Have we learned anything over the past 4 months? Yes. What the Fed does matters to financial markets.

 

FWIW - I don't think the Fed was/is responsible for the carnage this week in equities (and to a lesser extent in commodities).   While there were a lot of Fed speakers sounding bearish, the Fed rate hike odds didn't change this week (they've been predicting 3 straight 50bp rate hikes in each of the May/June/July Fed meetings coming up for the last month or so). So there was no change in expectations as to the Fed from what I can see by markets.

 

To find a possible reason for the upset, one must look to the US Treasury as we always have to for monetary goings-on.  Fed tax receipts have been booming this year, but April (as the 2021 tax filing deadline) has been one for the record books.  Here's a couple of charts: the first, tax receipts for the last few months, and the next one April US Treasury receipts vs expenditures for the last 25 years.

 

The effect of this huge Federal tax receipt week (and large surplus) was to reduce US domestic bank sector reserves by $466b!  This was a 12.3% reduction in bank reserves in one week!!   You can see this in the comparison of the Fed's balance sheet between April 13 and April 20.  Basically the Fed moved reserves from the banking sector to the US Treasury's general account.

 

 

This was a huge reserve drain from the banking sector.  To put it in perspective, the Fed has said that it wants to shrink its balance sheet by $100b a month (which also has the effect of removing bank reserves).  So the US Treasury did in one week, what it will take the Federal Reserve to do (starting in May) in more than four and a half months.   Another way to think about it is that in mid-Sept 2019, a relatively small corporate income tax draw (when bank reserves were at $1.5t) caused a much smaller reserve drain that sent short-term interest rates spiking and forced the Federal Reserve to come in with repo mop-up operations the next day.

 

The private sector really felt this big withdrawal of liquidity - especially in the latter part of the week as the effects started to ripple into a strengthening of the US dollar (gold sank on Wed-Fri by over $60/oz because gold is inversely correlated to dollar strength and is very sensitive to changes in the supply of/demand for US dollars).

 

So what does this possibly mean for the macro economy?  I think in the short-term we'll feel it for another week or so but the tax haul is a one-timer and the budget should filp back into deficit mode.   Longer-term, I'm still bullish on the US economy for this year and next, but I do think the US budget deficit is falling fast.  That's healthy, but if it continues to fall over the next few years and gets as low as 2% of GDP - that might be too low for the US domestic & global economy and could create a very strong USD that could put deflationary pressures on the US and the world.   Of course, just because the US economy is fine, equities will feel headwinds from rising rates.  The economy and markets can go in different directions and often do.

 

Bill

Bill, i am a currency idiot. What i do find very interesting right now is the very divergent paths the worlds largest economies appear to be on. Which will likely have important ramifications for their currencies over the next year. Bottom line, US looks exceptionally well positioned. Japan looks like it is in a tough spot right now (its currency anyways). 

 

- Europe: energy crisis and major war likely leading to mild recession. Inflation high.

- China: in process of deflating housing bubble; zero covid; beginnings of deglobalization? Economic growth is slowing. I really have no idea what Xi has been doing the past 2 years.

- US: lead by consumer, very strong economy. Record low unemployment. Record high job openings. Commodities boom. Housing shortage. Big beneficiary of de-globalization. Inflation running at 8%.

- Japan: Bank of Japan has clearly stated bond yields WILL NOT be allowed to go higher (0.25 on 10 year i think?). With rates rising in Europe and especially in US the Japanese currency is falling like a stone. 
- Canada/Australia: commodity boom is a definite tailwind. Very strong economies. Canada will have very high immigration (400,000). As interest rates go higher what happens to housing bubbles? Does air come out slowly or not?

[SharperDingaan]

Canada/Australia: commodity boom is a definite tailwind. Very strong economies. Canada will have very high immigration (400,000). As interest rates go higher what happens to housing bubbles? Does air come out slowly or not?

 

We have already seen the answer. In a Toronto - there are are now only 2 bids above offer, versus 20

Today's Toronto Star has the example of a 800K house (Toronto average), with a 10% DP, and a floating rate mortgage. On a mortgage of 720K, a 50bp increase in interest rates, raises the monthly debt cost by $300. Should the BOC raise by the expected additional 125bp over the next 3 months, the monthly debt cost rises a further $750. If you had stretched to buy 2 months ago, and got the house; during your first 6 months of ownership your monthly debt cost will haven risen by $1.050/month - along with the rise in your gas, food, and utilities costs, etc. Hence the screaming over inflation.

 

House prices may fall 5-10%. but that's it. You don't have to buy in a Toronto, you simply buy in the GTA and commute - as does everyone else.

 

SD

[Viking]

1 hour ago, SharperDingaan said:

Canada/Australia: commodity boom is a definite tailwind. Very strong economies. Canada will have very high immigration (400,000). As interest rates go higher what happens to housing bubbles? Does air come out slowly or not?

 

We have already seen the answer. In a Toronto - there are are now only 2 bids above offer, versus 20

Today's Toronto Star has the example of a 800K house (Toronto average), with a 10% DP, and a floating rate mortgage. On a mortgage of 720K, a 50bp increase in interest rates, raises the monthly debt cost by $300. Should the BOC raise by the expected additional 125bp over the next 3 months, the monthly debt cost rises a further $750. If you had stretched to buy 2 months ago, and got the house; during your first 6 months of ownership your monthly debt cost will haven risen by $1.050/month - along with the rise in your gas, food, and utilities costs, etc. Hence the screaming over inflation.

 

House prices may fall 5-10%. but that's it. You don't have to buy in a Toronto, you simply buy in the GTA and commute - as does everyone else.

 

SD

The real kick in the nuts is if you bought at the peak in Feb and prices correct 10-15% over the next 12-18 months. Your monthly cost to own went up $1,000 (your example). And the value of your shiny new asset just dropped n value by $100,000 (from $800,000 to $700,000). Leverage is a beautiful thing but only as long as home prices to up.

[Spekulatius]

43 minutes ago, Viking said:

The real kick in the nuts is if you bought at the peak in Feb and prices correct 10-15% over the next 12-18 months. Your monthly cost to own went up $1,000 (your example). And the value of your shiny new asset just dropped n value by $100,000 (from $800,000 to $700,000). Leverage is a beautiful thing but only as long as home prices to up.

Canada RE has a structural problem that housing has become too expensive due to lack of supply. Supply constraint markets have been the most prone to boom and bust cycles in the past and I think the rising interest rates will trigger a decline if not an crash in RE prices that could be far larger than 10-15%. A 10-15% decline does not really solve the affordability problem, since with rising mortgage rates , the affordability would likely be even poorer than at the peak, due to higher mortgage costs.

 

I could be wrong, a Canadian RE crash has been predicted for a long time, but as Taleb says, the markets that don’t have smaller corrections, tend to have a huge one, once the time comes.

[Blugolds]

I’m in the process of getting one of my lake properties ready to sell, I had a friend that stopped by to see how it was going and take a look, he and his wife said they might be interested…during our conversation they had mentioned that they were also considering building, speaking with several builders they were quoted at $375-$400/sq ft to build…and that is for a pretty basic package, no fancy trim packages or upgrades. 

 

I was shocked, obviously this is geographically dependent..but previously I would have thought that you could get a basic home built for around $175-200 depending on finishes, layout etc…so I assumed that with the increase in building materials maybe $250-300…

 

Then when I thought about it further…a 250’ roll of 12/2 wire at Menards used to be $54….now $160…4x8 sheet of 7/16 OSB used to be $12 now $45…PVC, Rebar, Concrete, shingles, siding…nearly every single thing at Menards has doubled or tripled…so I guess it makes sense that the cost of a package would reflect that…

 

Keep in mind, this lake place is in a rural community, so we aren’t talking about a metro area here, historically things had always been cheaper out there. 

 

All of a sudden this property that I bought for $100k back in 2011 when they were giving them away, at a $400k ask (2k sq ft) seems like a steal to them vs building new on a price per sq ft basis…plus they get to live on a recreational lake. 

[crs223]

On 4/22/2022 at 5:38 PM, Viking said:

the Fed is JUST GETTING STARTED.

if I understand correctly the Fed raised the federal funds rate from 0.00 percent to 0.25 percent and has reduced its balance sheet by $0.

[crs223]

1 hour ago, Viking said:

The real kick in the nuts is if you bought at the peak in Feb and prices correct 10-15% over the next 12-18 months. Your monthly cost to own went up $1,000 (your example). And the value of your shiny new asset just dropped n value by $100,000 (from $800,000 to $700,000). Leverage is a beautiful thing but only as long as home prices to up.

what percentage of residential mkt cap is on an adjustable rate mortgage?  I doubt it’s that much.

 

Also: to be fair, need to also include how much is saved by not paying rent.

Edited April 24, 2022 by crs223

[Gregmal]

Do some math. What are the total number of available homes on the market right now? What’s 10-20% of that at average home price? Now how much residential RE is JUST BX taking down PER MONTH? Most in cash. It’s pure supply and demand.