Where Does the Global Economy Go From Here?

[Dinar]

Sure, wealth effect plays a huge role, particularly for retirees.   However, how about a Medicaid effect?  I saw figures that claimed 88MM Americans are on Medicaid, sure some of them are elderly and children, but why aren't the parents of those children as well as able bodied adults working? Why is nobody talking about this?  Surely a much larger impact than baby boomers.

[changegonnacome]

27 minutes ago, Dinar said:

Medicaid, sure some of them are elderly and children, but why aren't the parents of those children as well as able bodied adults working? Why is nobody talking about this?  Surely a much larger impact than baby boomers.

Because nobody believes for a second that anything of what you described is really changeable politically in the current environment - if it’s not even on the table, it doesn’t get discussed.

From the Democrats politically there is clearly no chance they ask the question whether some social welfare programs create a disincentive to work never mind changing said programs…. and if you haven’t noticed recently the Republican Party (post-Trump) has a new voter constituency (poor white working class) that has in it a much larger percentage of recipients of social welfare than used to be the case for the GOP.

 

The margins are so narrow, especially for the presidency, that touching Medicare, Medicaid or social security is political suicide & the party MOST likely to do something about amending/reducing these programs just gained a few million new ‘fans of the Donald’ that are in receipt of these payments. 

[Gregmal]

Now even rate rise advocate and fear mongering Bill Ackman is ceding 3.5-4% a year out. So now the ominous stealth tax that must be reigned is in costing those with jobs 50-100 bps of purchasing power per year. Sounds like a reason to wipe out 2 million jobs. 

[Gregmal]

Another kind of interesting philosophical quandary…who is the almighty that decides 2% inflation is perfectly cool and kosher but 0 or 4% isn’t? Or that 3% is bad but 2.5% no big deal? Especially when anyone with a pulse gets 3% raises annually and thankfully today, those with some ambition can get way more? 

[Viking]

Big move in US treasury yields today. 10 years is up to 3.34%, up 15 basis points. Close to its 10 year high reached in June of 3.5% since hitting 2.65% the end of July the 10 year has increased 70 basis points in the last 5 weeks. That is a massive move. I think where the 10 year goes from here will be a key data point to monitor moving forward. Higher long bond yields = lower stock market multiple (generally speaking).

 

3 year, 5 year and 7 year are all also up 15 basis points. Yield on 3 year is up to almost to 3.6%, a decade high. If bond yields get close to 4% my guess is a fair bit of money will start to move in to bonds. 
 

If US bond yields continue higher, especially further out on the curve, get out your pop corn. This month we also are just beginning Phase 2 of QE (with the amount of treasuries the Fed is letting run off doubling in size to $95 billion per month).
 

Joseph Wang (the Fed Guy) is of the opinion that the higher supply of treasuries (from QT and increased issuance from the large federal deficit) in the coming months could push treasury yields higher…

Edited September 6, 2022 by Viking

[changegonnacome]

1 hour ago, Viking said:

Yield on 3 year is up to almost to 3.6%, a decade high. If bond yields get close to 4% my guess is a fair bit of money will start to move in to bonds. 

 

They sure will - companies with a FCF yield of 3% would be a good place to start pulling your cash from to put into this stuff........for the next 36 months do you wanna hold Apple at 3.x% FCF yield (& hope they launch the car & grow revenues & dont get caught on anti-trust) or you wanna hold Uncle Sam paper.....its not even a contest in my mind.....and in hindsight folks going over the cliff holding FANGMA at these FCF yields will ask themselves what the hell was I thinking?? 

 

Apple/Amazon 'feel' safe, but they're literally rat poison right now.

[Gregmal]

FANG stocks, minus META are 100% an exercise in the psychology of crowds. You don’t even need to pay attention to fundamentals at this point. They’re poor risk/reward all around. 

[ERICOPOLY]

3 hours ago, Viking said:

If bond yields get close to 4% my guess is a fair bit of money will start to move in to bonds. 

 

Yeah, but the inflow will be matched with outflow dollar for dollar.

[scorpioncapital]

11 hours ago, ERICOPOLY said:

 

Yeah, but the inflow will be matched with outflow dollar for dollar.

 

Aren't stocks, but bonds especially, merely paper that can be created out of thin air to increase supply to sell?

[Cigarbutt]

5 hours ago, scorpioncapital said:

 

Aren't stocks, but bonds especially, merely paper that can be created out of thin air to increase supply to sell?

Net worth is what is left after all financial assets and liabilities net out (to zero). So, net worth equals the value* of real and non-financial assets.

The impression of thin air creation may be related to what Minsky described when he referred to the world built on a global set of interlocking balance sheets (which have also expanded much faster than underlying fundamentals).

In my news feed this AM, there is a small note explaining how this rising net worth trend is the foundation for economic renewal. i agree

*If you take "market" value, for the last twenty years or so, net worth growth has outpaced underlying growth in 

fundamentals but this growth has been the result mostly of valuation changes, mainly in real estate.

[ERICOPOLY]

6 hours ago, scorpioncapital said:

 

Aren't stocks, but bonds especially, merely paper that can be created out of thin air to increase supply to sell?

 

I didn't understand his point to be one of higher interest rates enticing issuers to issue more paper.  But of course they would if they needed more funds to make the higher interest payments on newly issued bonds.  

Edited September 7, 2022 by ERICOPOLY

[changegonnacome]

3 hours ago, Cigarbutt said:

net worth growth has outpaced underlying growth in 

fundamentals but this growth has been the result mostly of valuation changes, mainly in real estate.

 

Correct - and this is why millennials and kids feel so pessimistic about their future......financial & hard assets (houses, stocks,) have been bid up (1) beyond their ability to even acquire them in the case of houses (2) so high in case of financial assets that all the return has been brought forward to the current holder of those assets through multiple expansion, that if prices remain here the next holder of those stocks i.e. younger investors looking to build an investment portfolio have absolutely no chance of repeating the average 8-9% CAGR return enjoyed by previous holders of say SPY.

 

They feel pessimistic about their financial future......and why wouldn't they........the simple math embedded in assets doesn't paint a rosy picture.

Edited September 7, 2022 by changegonnacome

[TwoCitiesCapital]

1 hour ago, changegonnacome said:

 

Correct - and this is why millennials and kids feel so pessimistic about their future......financial & hard assets (houses, stocks,) have been bid up (1) beyond their ability to even acquire them in the case of houses (2) so high in case of financial assets that all the return has been brought forward to the current holder of those assets through multiple expansion, that if prices remain here the next holder of those stocks i.e. younger investors looking to build an investment portfolio have absolutely no chance of repeating the average 8-9% CAGR return enjoyed by previous holders of say SPY.

 

They feel pessimistic about their financial future......and why wouldn't they........the simple math embedded in assets doesn't paint a rosy picture.

 

While I don't disagree with your outcome, I can absolutely guarantee the average millennial isn't doing this math so it can't be what's driving their discontent. I think it's less asset prices directly and more simply the quality of life they can afford. 

 

After rent, student loans, car payments, and food there isn't much left over for most living in large cities nowadays. Sure, some of this is their own fault.  They had cheaper schools to attend, cheaper cars to buy, cheaper neighborhoods to live in, etc. 

 

But on the flip side, if every decision in your life is involving sacrifice and you're driving a shitty car in a shitty neighborhood in a shitty town with a shitty degree so you can go to a job that pays shit wages, what quality of life is that? They're not going to feel any wealthier/better by cutting those expenses. 

 

Either way they feel poor or are living poorly because those are the options available to most outside of the upper 5-10% of millennial earners. 

 

And they're smart enough to see it's happened in an environment of corporate prosperity/tax cuts/bailouts where little of the benefit has trickled down to those who labored to make it possible. 

 

That's what's driving most millennials/Gen Zs discontent IMO. 

 

 

[Gregmal]

I think this generation has become one who’s much poorer but still lives a higher quality life than the predecessor. It seems impossible to have that equation but somehow it’s been rather consistent. Previous generations placed emphasis on ownership, saving, and stability. On average there was probably a lower but more secure lifestyle. Today they live a rent/lease type lifestyle which I don’t understand, but it seems to work for them. 

[changegonnacome]

19 minutes ago, TwoCitiesCapital said:

I can absolutely guarantee the average millennial isn't doing this math so it can't be what's driving their discontent. I think it's less asset prices directly and more simply the quality of life they can afford. 

 

Yeah agree but math isn't even required sometimes....when the price of things seem so improbably high relative to your capability to buy them or they require implausible projections of the future required to get you an adequate rate of return relative to the risk

 

I dont need to do the math on the purchase of Ferrari........I just know that I cant afford it......that doing even the math would be a waste of my time.

 

There are lots of assets out there right now.....where I dont need to do the math anymore.....they are improbably high relative to FCF....that they dont provide an adequate return in and of themselves.....and certainly relative to alternatives like T-bills & inflation adjusted.

 

 

[Castanza]

34 minutes ago, TwoCitiesCapital said:

 

While I don't disagree with your outcome, I can absolutely guarantee the average millennial isn't doing this math so it can't be what's driving their discontent. I think it's less asset prices directly and more simply the quality of life they can afford. 

 

After rent, student loans, car payments, and food there isn't much left over for most living in large cities nowadays. Sure, some of this is their own fault.  They had cheaper schools to attend, cheaper cars to buy, cheaper neighborhoods to live in, etc. 

 

But on the flip side, if every decision in your life is involving sacrifice and you're driving a shitty car in a shitty neighborhood in a shitty town with a shitty degree so you can go to a job that pays shit wages, what quality of life is that? They're not going to feel any wealthier/better by cutting those expenses. 

 

Either way they feel poor or are living poorly because those are the options available to most outside of the upper 5-10% of millennial earners. 

 

And they're smart enough to see it's happened in an environment of corporate prosperity/tax cuts/bailouts where little of the benefit has trickled down to those who labored to make it possible. 

 

That's what's driving most millennials/Gen Zs discontent IMO. 

 

 

 

You can't talk about everything you mentioned without discussing expectations of millennials. Personally I think their expectations are way off. You can go back and look at polls taken around the 2016 election when UBI was a hot topic. Discussions around amounts and what "normal living expenses" covers. I remember reading a few different ones but one that stuck out was how they thought it should cover going out to eat 1-2 times a week, or going to the movies 2 times a month etc. Just going from memory but I believe there was a monthly clothing budget etc. 

 

Personally, I view all of those as extras which you choose to engage in as a lifestyle choice. But it cemented imo the underpinning philosophy that Millennials largely view the world in terms of conveniences and inconveniences. How does this hinder me from doing this. Why do I have to deal with XYZ? 

 

Look at the student loan forgiveness thresholds. 125k individual and 250k couple? Jfc, I was making 45-80k (yr 1-4), wife was making (55k-70k) , paying for my school, paying off some past student loans, paying off my wifes student loans, bought two new cars, funded two Roths every year, and still saved money. Went out to eat probably once a week and a few vacations here or there. Never felt like the budget was "tight."  What the F&*% do people spend their money on? 

 

To me it shows priorities and expectations of people are way tf off. Personal accountability and responsibility are at all time lows. 

 

@TwoCitiesCapital Also not saying you're wrong with the end thinking millennials probably share. Everyone is a product of their environment. 

 

 

24 minutes ago, Gregmal said:

I think this generation has become one who’s much poorer but still lives a higher quality life than the predecessor. It seems impossible to have that equation but somehow it’s been rather consistent. Previous generations placed emphasis on ownership, saving, and stability. On average there was probably a lower but more secure lifestyle. Today they live a rent/lease type lifestyle which I don’t understand, but it seems to work for them. 

 

Yup this hits the nail on the head. It showcases the priorities and expectations of most millennials. It's a gotta have it all, gotta have it now generation. Not being able to own a house is more of an inconvenience because it means they will pay more in rent which prevents them from doing other things. Where with prior generations it was seen as a point of pride. Now it's I need this subsidized so it doesn't cut into XYZ activity or lifestyle choice. 

Edited September 7, 2022 by Castanza

[Gregmal]

The thing is they whine about rent but don’t mind it at all. My little sister embodies this. I recall staying with her when I was in town for an investment meeting in Orlando in like 2015. She was renting with 3 friends a 4/4 in an Orlando suburb. They had to move because the landlord was selling. I looked it up and they wanted $180k and I asked her why not just buy it? I offered her the money too but she said they preferred the convenience of being able to move as they wished and the flexibility to change scenery often. People like us view it as an inconvenience but they view it as a luxury. I don’t get it. That home today is worth $550k.

[Spekulatius]

38 minutes ago, Gregmal said:

I think this generation has become one who’s much poorer but still lives a higher quality life than the predecessor. It seems impossible to have that equation but somehow it’s been rather consistent. Previous generations placed emphasis on ownership, saving, and stability. On average there was probably a lower but more secure lifestyle. Today they live a rent/lease type lifestyle which I don’t understand, but it seems to work for them. 

The next generation will eventually own what the current has, so they can't be poorer in aggregate. it may be more difficult to accumulate wealth from scratch though, if you aren't born in a family with some money.

 

FWIW, the same arguments were made 20 years ago. I think every generation will have opportunities to create wealth but it may not be as easy in some time periods than in others and you may have to pounce on them.

 

For example, if you invested in housing in 2009/2010 in the lost decade, you could have made out like a bandit (I didn't). No stock market knowledge necessary. Generally speaking, a lost decade will occurs when we have a few crisis during this time period and you are starting from a high base. That was the case in the 70's (two oil shocks) and 2000-2010 (dot.com bust and GFC). Every crisis is a huge opportunity to make a lot of money, if you are set up correctly and act accordingly.

 

The current generation also has a strongest labor market since the 1960's going for it. It wasn't as pretty when I started working. Having no risk to stay unemployed is a nice implicit fallback that can be utilized to take more risk, for example.

 

Just a few thoughts and that's how I explain "creating wealth" to my son.

 

 

[fareastwarriors]

I blame the parents...

 

I'm an older millennials, 30s. I see my friends' parents setting low expectations and providing nearly everything for them.  It is like the parents were deprived so now they are making up for it through their kids.  

 

True for Gen Z too. 

[crs223]

No working person under ~35 can buy a first home within 30 miles of my neighborhood (93101).

 

Even if we assume the younger generation is useless… this imbalance will not last.

 

1. Home prices will fall

2. Incomes will rise

3. Resources will be redistributed

4. No more first time homebuyers ever

 

My bet: (4) will not happen.  Each election cycle without (1) or (2) will bring more (3).

 

Student loan forgiveness is just the beginning.

[LC]

I think it's a likelihood that areas that you describe simply die out. Home prices remain elevated, families mature, the kids leave because they can't afford to stay, and nobody else can afford to move in. So you get a dying neighborhood of middle aged folks. 

[Dinar]

16 minutes ago, crs223 said:

No working person under ~35 can buy a first home within 30 miles of my neighborhood (93101).

 

Even if we assume the younger generation is useless… this imbalance will not last.

 

1. Home prices will fall

2. Incomes will rise

3. Resources will be redistributed

4. No more first time homebuyers ever

 

My bet: (4) will not happen.  Each election cycle without (1) or (2) will bring more (3).

 

Student loan forgiveness is just the beginning.

Seriously?  Based on what do you make this assertion?  Why can't a Google couple making $750K per annum each can't?  Why can't a couple of lawyers buy it?  

[Castanza]

39 minutes ago, crs223 said:

No working person under ~35 can buy a first home within 30 miles of my neighborhood (93101).

 

 

This is only a problem in the most expensive areas. All of the below cities are very reasonable places to live. Plenty to do, plenty of education options, plenty of entertainment and food options. I know people who live in the majority of the cities listed below and most of them have a combined income around 100k + or - 20k. All of them have homes that are probably much nicer than what you would get for 600k+ in pricey areas. 

 

Average home price in...

 

Columbus = 240k

Cincinnati = 230k

Savanah = 278k

Buffalo = 216k

Pittsburgh = 235k

San Antonio = 300k

St. Louis = 177k

Lexington = 285k

Indianapolis = 228k

 

The list goes on. Then you have plenty of cities like Nashville that are mid 3-400k. 

 

There was an OddLots podcast maybe two-three months ago where they discussed housing affordability and how generally it's a myth that housing is "unaffordable" in the majority of areas including tier 2 cities. Usually the divergence from the norm is a couple percent on total price. 

Edited September 7, 2022 by Castanza

[crs223]

24 minutes ago, Dinar said:

Seriously?  Based on what do you make this assertion?  Why can't a Google couple making $750K per annum each can't?  Why can't a couple of lawyers buy it?  

 

I stand corrected.  Yes someone making $750k/year can still afford a first home.

 

Your example leaves me even more convinced that the present imbalance will not last.

 

 

[Spekulatius]

32 minutes ago, LC said:

I think it's a likelihood that areas that you describe simply die out. Home prices remain elevated, families mature, the kids leave because they can't afford to stay, and nobody else can afford to move in. So you get a dying neighborhood of middle aged folks. 

The area Santa Barbara simply won't have many first time home buyers. That does not mean that the area dies out. It just means that likely other buyers will move to this very desirable area - think retired people, rich emigrants, tech employees etc.

 

The problem existed forever in CA - there are more people moving out (especially in Uhaul trucks!) than moving in the state, yet CA did not die out. The balance is made up with with emigrants.