Where Does the Global Economy Go From Here?

[Gregmal]

13 minutes ago, changegonnacome said:

buyers were already at the edge of affordabilty with 2.75% mortgage rates....the move to 3% blew them out....and 4%....and 5% etc etc.

I’m sorry but this is an insane statement. Rates were 3-4% for almost a decade. Going to 2.75 from 3 didn’t change the game for anyone. Neither did going from 3-4. Going from 4-6(which in a lot of areas is actually 7-8%), in 2 months is what seemed to.

[Gregmal]

2 minutes ago, changegonnacome said:

 

If you want to sell your house, I dunno , this calendar year some time, you are going to have significantly reduce the price to get the deal done cause your prospective purchaser hasn't changed....its still the same socio-economic bracket person and their household cash flows haven't changed much but the mortgage rate they can secure sure has....and to get that purchaser to buy your house your going to have to significantly reduce the nominal house price level down such that they qualify under bank debt service capacity models underwritten against a 6% mortgage.

 

That memo.

 

Principal and interest payment on a $500k house mortgaged for 30-years:

@ 2.65% it'd be $2,015 (i.e. Jan. 2021)
@ 3.11% it'd be $2,138 (i.e. Dec. 2021)
@ 6.42% it'd be $3,134 (i.e. today)

 

The way you fix the math above to get you back to $2k monthly mortgage payment.....is the seller cuts the asking price, by alot.......there is no mortgage demand because people arent dumb, nobody signing up to a Q3 2022 mortgage against 2021 prices!!!!....buyers are on strike, sellers pretending its just a blip.....and as I've stated before a few times in regard to my housing theory......the socio-economic profile of people who live in various houses/neighborhoods rarely changes.....but interest rates & nominal house prices do......but all in all monthly mortgage payments should consume perhaps ~35% of monthly disposable household income..........if a neighborhood is traditionally populated X type of professionals....tell me the prevailing wage in that profession, income tax rates and mortgage rates....and I'll tell you the house price. Take the same equation and you can see why house prices have to give here if transaction levels are to be restored

I agree prices need to come down for volume. But this whole rate thing certainly isn’t solving or helping anyone. What’s being totally ignored is how that same seller doesn’t need to sell, and why would they drop their price to account for a problem that is not theirs and really only the buyers? You know how far rents have to fall in order for selling to be the most economically rational decision for existing owners? And is removing large swaths of would be buyers and forcing them to rent helping or hurting that? Again, the answer is to build more single and multifamily. MF is “kinda” capable of getting there bc it’s an institutional asset, but SFH builders had plenty of time to prepare for higher rates and have already started adjusting their rate of build. So the only one really getting fucked is that would be home buyer who’s losing 1/2/3 years of building equity by staying in the rental pool.

 

One of my tenants is in this exact boat. Signed a one year lease Feb 2020 cuz they were gonna buy a home. Chose not to be scumbags and skip out on rent despite both losing their jobs thanks to Phil Murphy. Paid it out of savings. Then home prices went up. Both were employed again last year and started saving. Housing kept going up. They were right there and in January this year asked for a month to month lease so they could buy in the spring. I said sure you guys are great, no biggie. They’re still renting. 

 

[LC]

What the Fed is doing will need more time to work. Prices do not equal affordability.
 

Rates are down but actual affordability isn’t:

 

I have a condo that I bought a year or so ago- 2.75% rate.

 

An identical condo across the building from me (and it’s a 6 unit luxury condo building so very comparable) sold this month at almost the exact same price (new owner paid 1% more), but with rates at 5.8%, the new owner is paying quite a bit more per month than I am. 
 

 

 

 

 

[changegonnacome]

28 minutes ago, Gregmal said:

I’m sorry but this is an insane statement. Rates were 3-4% for almost a decade. Going to 2.75 from 3 didn’t change the game for anyone. Neither did going from 3-4. Going from 4-6(which in a lot of areas is actually 7-8%), in 2 months is what seemed to.

 

Dont you get it........everything got turned up to 11.....in terms of nominal house prices in 2020/21......there was/is nowhere for them to go now but down.....house prices rose against a backdrop of 2.75% rates which reached a crescendo in terms of affordability......your waffling on about rates a decade ago & comparing them to now but you don't mention what the nominal house prices back then were against that 3-4% mortgage rate....I'll give you a hint.......they were way lower.

 

Its never just rates & its never just house prices.........its house prices, mortgage rates & incomes.....the variables change but what doesn't change is MOST people buy their house over 30 years on a monthly schedule using a mortgage & a bank will only allow ~35% of disposable monthly household income be consumed in the servicing of the mortgage.

Edited September 21, 2022 by changegonnacome

[Gregmal]

13 minutes ago, LC said:

What the Fed is doing will need more time to work. Prices do not equal affordability.
 

Rates are down but actual affordability isn’t:

 

I have a condo that I bought a year or so ago- 2.75% rate.

 

An identical condo across the building from me (and it’s a 6 unit luxury condo building so very comparable) sold this month at almost the exact same price (new owner paid 1% more), but with rates at 5.8%, the new owner is paying quite a bit more per month than I am. 
 

 

 

 

 

All that what’s been done has accomplished is really allowing wealthier folks and institutions to transact with less competition and with all the commodity inputs plummeting, fattening up the builders bottom line which de facto encourages them to wait out on price longer instead of building at lower prices.

 

[Gregmal]

24 minutes ago, changegonnacome said:

 

Its never just rates & its never just house prices.........its house prices, mortgage rates & incomes.....the variables change but what doesn't change is MOST people buy their house over 30 years on a monthly schedule using a mortgage & a bank will only allow ~35% of disposable monthly household income be consumed in the servicing of the mortgage.

This is nothing new. In 2013 people could afford houses. In 2021 they started not being able to afford them because of a decade of under building and a pandemic that made them reevaluate where and how they wanted to live. The Fed has stated their goal is among other things to make housing more affordable, so by your own acknowledgement, how is spiking all those who got left behinds mortgage or if not mortgage, subsequently their rents, doing anything to fix that?
 

Basically everyone who got into a primary home before June 22 is set and those homes are not coming to market for ages. Renters underwrite to rental figures. They’re set too. Only supply left is second/vacation homes…usually secured by rich people at low rates anyway…not much there. Only answer is encourage more building. Not 10% mortgage lol.

[changegonnacome]

17 minutes ago, Gregmal said:

Only answer is encourage more building. Not 10% mortgage lol.

 

Housing is collateral damage......last time I checked the Fed doesnt have a mandate to fix the housing market......its price stability & full employment......now they are trying to fix inflation...........I agree with your statement that labor force mobility is going to drop off a cliff as people wont budge out of their 3% mortgaged home and move elsewhere into the arms of 6% mortgages (which feels a bit long term inflationary to me, if you dont mind me saying  ).....a dynamic economy needs labor to move to where its required. Being short people, in the places you need em brings pricing pressure! Probably another one to add to the list of reasons why we aint going back to ZERO anytime soon even after we 'fix' this hopefully transitory inflation issue.

 

Anyway housing and stock market is collateral damage this time around with some intent from the Fed around negative wealth effects......its the mirror opposite of post-GFC.....where the stock market was collateral beneficiary of stimulating and cutting rates to bail the system out. 

 

Dont fight the Fed.

Edited September 21, 2022 by changegonnacome

[Gregmal]

The mistake in the above logic is that people are day trading homes. While certainly are some, it represents a very small and almost irrelevant piece of the market. I don’t think it’s going out on a limb saying those people are looking at some issues. Rates here or higher by and large creates a stalemate. If builders with new supply blink, then there’s some relief which I do concur is most likely a situation that occurs but builders trade volume for price all day. But what happens if they stop building? Further institutionalization of housing. 

[Dinar]

2 minutes ago, changegonnacome said:

 

Housing is collateral damage......last time I checked the Fed doesnt have a mandate to fix the housing market............its trying to fix inflation...........I agree with your statement that labor force mobility is going to drop off a cliff as people wont budge out of their 3% mortgaged home and move elsewhere into the arms of 6% mortgages (which feels a bit long term inflationary to me, if you dont mind me saying  ).....a dynamic economy needs labor to move to where its required. Being short people, in the places you need em brings pricing pressure! Probably another one to add to the list of reasons why we aint going back to ZERO anytime soon even after we 'fix' this hopefully transitory inflation issue.

 

Anyway housing and stock market is collateral damage this time around with some intent from the Fed around negative wealth effects......its the mirror opposite of post-GFC.....where the stock market was collateral beneficiary of stimulating and cutting rates to bail the system out. 

 

Dont fight the Fed.

Sure, but at what point are things priced in?  S&P is down 20% (excluding dividends) in nominal terms and probably 30% in real terms.  At what point would you say things are priced in?  I am not trying to be argumentative, I am trying to understand how you think.  Thank you.

[Gregmal]

For example, my first primary home I bought in 2013 with 10 year rates at 2.95 and a 4.25 mortgage. Which I cash out refi d in April 2020 at 3.25. Whereas an investment property I bought in January 2020 for 1/3 of the value of my primary and cashed out in December at 3.875 currently has market value rent 15% greater than the mortgage on my primary and 55% higher than the carry cost. Rates don’t mean jack if you’re in. If you’re not in you’re kinda just walking by the store browsing and hoping/praying. 

[Gregmal]

And on the rental front with 95-98% occupancy rates you’d need a COVID type event to get landlords anywhere near the point of considering dropping price to any meaningful degree. It’s a Chinese finger trap where the more you twist and turn the harder it is to get out. 

[changegonnacome]

 

11 minutes ago, Dinar said:

Sure, but at what point are things priced in?  S&P is down 20% (excluding dividends) in nominal terms and probably 30% in real terms.  At what point would you say things are priced in?  I am not trying to be argumentative, I am trying to understand how you think.  Thank you.

 

I think like this:

 

> inflation is real, persistent and occurring at a domestic level which can be seen in the BLS data, labor shortages, unemployment rate etc.

> if you dont have price stability in an economy.....pretty soon you might not have a society....look to S.A. for infinite case studies

> solving inflation requires bringing aggregate demand down and for a period bringing it actually under aggregate supply i.e. slack....you and I might call it excess labor/capacity = unemployment

> to do so you need to engineer a slow down in demand.....this is achieved in the following way and in sequence by the monetary authorities.......you hit first the (1) Money Supply then (2) Credit Markets....which eventually seeps into (3) Spending/Income

> we have only really achieved a complete 'mark' for  (1).....on (2) the Fed was so far behind the curve that credit markets in the US TODAY have crazy quirks where the prime rate for borrowers is BELOW the inflation rate such that REAL rates are NEGATIVE.....see you hit credit markets, as credit shows up in spending and income and fuels/ stymies aggregate demand. This is what needs to get hit & we aren't really there yet fully cause well it just makes sense to borrow right now to supplement spending/income so it keeps the aggregate demand buoyant.....but we want it subdued. Call me when the REAL rates to borrow money have a PLUS sign in front of them...such that I know the spending/income lever is finally getting pulled.

> so to summarize....credit markets still aren't tight.....and unsurprisingly incomes/spending/employment havent felt pretty much ANY effects yet....I mean whats priced in that this will all be over soon and we get back to 0% Fed funds? 

 

Priced in...think I said somewhere else....I think we might be at the end of the beginning......markets seem to think we are getting close to the end, they are wrong....there is a ways to go here my friends.....like at a basic level I dont see SPY earnings cuts getting priced in....SPY earnings HAVE to get hit......whatever P/E your using, the E is WRONG.......SPY earnings estimates are wrong.......think about it the Fed is TRYING to hit aggregate demand........is that good for SPY earnings, Wall street still hasnt chopped 2023 earnings yet from what I can see?....and the DXY strength doesn't help $ earnings either.....and when America sneezes the world catches a cold....engineering a slow down in the US...creates problems for China/Europe/Emerging market but more importantly this isnt good for SPY earnings a good 40- 50% of which are non-US.

 

Monkeys pick bottoms.......i just dont want to fight the Fed......and they've demonstrably got more work to do and I'm not going to be collateral damage in that process......

 

I fully expect we will have a 'minsky moment' some time between now and when inflation is 'fixed'/under control.....a moment when folks will get that the Fed isnt coming in to save the mark to market levels in their portfolio this time like March 2009 or March 2020....a time of real "get me out at any price" stuff......this time folks are on their own and there is a hell of alot of market participants out there who know ONLY the Fed 'put' era when it was an asymmetric trade for the Fed to cut rates & grow the B/S.....this time it isnt such an easy choice for the Fed

[Gregmal]

6 minutes ago, changegonnacome said:

 

 

I think like this:

 

> inflation is real, persistent and occurring at a domestic level which can be seen in the BLS data, labor shortages, unemployment rate etc.

> if you dont have price stability in an economy.....pretty soon you might not have a society....look to S.A. for infinite case studies

> solving inflation requires bringing aggregate demand down and for a period bringing it actually under aggregate supply i.e. slack....you and I might call it excess labor/capacity = unemployment

> to do so you need to engineer a slow down in demand.....this is achieved in the following way and in sequence by the monetary authorities.......you hit first the (1) Money Supply then (2) Credit Markets....which eventually seeps into (3) Spending/Income

> we have only really achieved a complete 'mark' for  (1).....on (2) the Fed was so far behind the curve that credit markets in the US TODAY have crazy quirks where the prime rate for borrowers is BELOW the inflation rate such that REAL rates are NEGATIVE.....see you hit credit markets, as credit shows up in spending and income and fuels/ stymies aggregate demand. This is what needs to get hit & we aren't really there yet fully cause well it just makes sense to borrow right now to supplement spending/income so it keeps the aggregate demand buoyant.....but we want it subdued. Call me when the REAL rates to borrow money have a PLUS sign in front of them...such that I know the spending/income lever is finally getting pulled.

> so to summarize....credit markets still aren't tight.....and unsurprisingly incomes/spending/employment havent felt pretty much ANY effects yet....I mean whats priced in that this will all be over soon and we get back to 0% Fed funds? 

 

Priced in...think I said somewhere else....I think we might be at the end of the beginning......markets seem to think we are getting close to the end, they are wrong....there is a ways to go here my friends.....like at a basic level I dont see SPY earnings cuts getting priced in....SPY earnings HAVE to get hit......whatever P/E your using, the E is WRONG.......SPY earnings estimates are wrong.......think about it the Fed is TRYING to hit aggregate demand........is that good for SPY earnings, Wall street still hasnt chopped 2023 earnings yet from what I can see?....and the DXY strength doesn't help $ earnings either.....and when America sneezes the world catches a cold....engineering a slow down in the US...creates problems for China/Europe/Emerging market but more importantly this isnt good for SPY earnings a good 40- 50% of which are non-US.

 

Monkeys pick bottoms.......i just dont want to fight the Fed......and they've demonstrably got more work to do and I'm not going to be collateral damage in that process......

 

I fully expect we will have a 'minsky moment' some time between now and when inflation is 'fixed'/under control.....a moment when folks will get that the Fed isnt coming in to save the mark to market levels in their portfolio this time like March 2009 or March 2020....a time of real "get me out at any price" stuff......this time folks are on their own and there is a hell of alot of market participants out there who know ONLY the Fed 'put' era when it was an asymmetric trade for the Fed to cut rates & grow the B/S.....this time it isnt such an easy choice for the Fed

Ok so let’s go with that. Tell me what pro inflation trades are or have been working? Rates sure. But that’s like level one. Everything else, energy, commodities etc, has been printing deflation? Why? Or if you disagree then what? Utilities or WM for instance. Why?

[SharperDingaan]

Different POV ....

 

The current real return on a 2yr treasury is roughly -4.30% (3.96-8.26), and -4.69% on a 5 yr treasury (3.57-8.26). If a 100bp increase in interest rates instantly reduced inflation by 100bp; the Fed would need to hike by 215bp (4.30%/2) - just to get to a zero real rate of return. Then add to it, whatever historic real of return is deemed appropriate 

 

Of course, a rate hike does not produce an immediate 1:1 impact; as inflation lags, the same period impact is not 1:1. In the early stages the impact is a lot less than 1:1 as the economy still has positive inertia, whereas in the later stages it is a lot more than 1:1 as negative inertia in the economy compounds upon itself. There is a reason for the typical under and over shoots that occur.  

 

215bp to get to zero real return, plus 35%? (75bp) timing difference to overcome the lag, plus 150bp? required for historic rate of return. Total fed hike required of around 440 bp (215+75+150) - or elimination of the current negative yield, entirely via a series of rate hikes.

 

Most would think that the rate hikes are just getting started.

There is strong incentive to go hard, go early, collapse demand so as to better match supply, and reduce inflation as quickly as possible.

 

SD

Edited September 21, 2022 by SharperDingaan

[Investor20]

8 hours ago, Cor said:

Perhaps this drives more of the pay increases across the board than employees proactively asking for raises out of need.

 

Emphasis in bold added

From August 2021 to August 2022, .... resulted in a 3.2-percent decrease in real average weekly earnings over this period. https://www.bls.gov/news.release/realer.htm

There is no Pay Increase.  The workers are only asking for raises to keep up with inflation for their ends to meet.

Emphasis in bold added

[Spekulatius]

5 hours ago, Investor20 said:

From August 2021 to August 2022, .... resulted in a 3.2-percent decrease in real average weekly earnings over this period. https://www.bls.gov/news.release/realer.htm

There is no Pay Increase.  The workers are only asking for raises to keep up with inflation for their ends to meet.

Emphasis in bold added

The vast majority of the people will be better of with shallow recession and 2% inflation. If the current situation of negative real wages (in real terms) persists for a few years, the middle class will get absolutely destroyed.

 

Now, I understand why people like Sternlicht think differently - just look at their business and how they benefit from negative real interest rates. How would his business do, if real interest rates (after inflation) were at 3% like they were in the 80‘s ? Probably not so great.

[changegonnacome]

25 minutes ago, Spekulatius said:

The vast majority of the people will be better of with shallow recession and 2% inflation. If the current situation of negative real wages (in real terms) persists for a few years, the middle class will get absolutely destroyed.

 

Now, I understand why people like Sternlicht think differently - just look at their business and how they benefit from negative real interest rates. How would his business do, if real interest rates (after inflation) were at 3% like they were in the 80‘s ? Probably not so great.

 

Yeah exactly...my view exactly - shallow recession, unemployment ticks up to 5%...put in federal supports to cushion, as best you can, those who are the collateral damage to solve the problem. Get inflation back to 2% and then re-tackle the full employment manadate in an environment of price stability.

 

I mean the alternative to NOT raising rates aggressively & killing inflation is not good either. People realize that right? Raising rates aggressively, creating a recession and ticking employment up to 5%.....is the LEAST worst option

 

If the FED theoretically did NOTHING as some here seem to be advocating (which is an option for coward civil servants) - well let me tell you STAGFLATION itself begins to engineer a slow down in aggregate demand as peoples real incomes get hit, companies unsure of the future path of prices pull back from investment etc etc etc.....problem with this solution....is its chaotic, unpredictable, broad based and scattered across the population......ever hear of the working poor? Ever hear of political instability? Last time I checked we had a little incident on Jan 6th? Want AOC as the next president? Run the do nothing STAGLFATION experiment.

 

Its a terrible problem, sometimes in life your presented with only bad options. This is one of them. Its very hard to direct assistance into the 'working poor' space its hugely complex & the scale potentially immense....you dont want to create dis-incentives to employment, you dont want to distort labor markets.......whereas employment status is binary & easier bureaucratically....you are either in work or out of work. As I've said before an economy printing 6% inflation is one where ALMOST everybody is losing their job just slowly via diminished purchasing power.

Edited September 21, 2022 by changegonnacome

[ERICOPOLY]

1 hour ago, changegonnacome said:

As I've said before an economy printing 6% inflation is one where ALMOST everybody is losing their job just slowly via diminished purchasing power.

 

However, people who previously had excess income to save can now cut that rate of savings to free up purchasing power.  

 

On the surface this may seem like it will hurt them down the road, but if they have sizable mortgage debt being devalued they may in fact be coming out ahead.

Edited September 21, 2022 by ERICOPOLY

[changegonnacome]

1 hour ago, ERICOPOLY said:

but if they have sizable mortgage debt being devalued they may in fact be coming out ahead.

 

Depends on the housing equity/debt math too.....did they buy in late 2021 in say Phoenix.......a $2m mortgage being inflated away against an equity base thats declined by 30%....still puts you in negative equity.

[changegonnacome]

13 hours ago, Gregmal said:

Tell me what pro inflation trades are or have been working?

 

Short the indexes and short companies with no cash flow, poor balance sheets, requiring on-going access to capital (debt/equity)....also companies that became 30yr bond subs in the 2010's........financial instruments yielding below 4% FCF....this last one hasnt quite happened yet but it will......thats when the indexes really cave in

Edited September 21, 2022 by changegonnacome

[Gregmal]

9 minutes ago, changegonnacome said:

 

Short the indexes and short companies with no cash flow, poor balance sheets, requiring on-going access to capital (debt/equity)....also companies that became 30yr bond subs in the 2010's........financial instruments yielding below 4% FCF....this last one hasnt quite happened yet but it will......thats when the indexes really cave in

Shorting the index also works with deflation or a recession. Agree on the bond subs. But that’s where I think since May and June we ve been getting a signal that the inflation trade is over. I believe markets are highly inefficient but also believe in aggregate they signal to you what’s going on. First, unrelated, Tesla is just bonkers unbreakable. But the quality high multiple stuff hasn’t really gotten hit. The recession and deflation plays are if anything where there’s some leadership. What you’re going for is a pure valuation short with inflation the catalyst. Good risk reward because I think upside is pretty mute. But if everything is that clear and down in the weeds it’s obvious, I would just imagine there’s significantly lower hanging fruit where you can make money with inflation playing out. But I’ve seen nothing resembling that for months now.

[changegonnacome]

13 minutes ago, Gregmal said:

But that’s where I think since May and June we ve been getting a signal that the inflation trade is over. I believe markets are highly inefficient but also believe in aggregate they signal to you what’s going on.

 

I think that too many market participants haven't seen an inflationary/rate hiking cycle and really cant see what happens next......or just institutional bias to keep dancing while going over the cliff........better to fail conventionally than succeed unconventionally.....insituational money managers will go over the cliff holding 3% FCF yielding instruments even when the 30yr is printing 6%.....in retrospect it look dumb....but inside the machine it aint dumb at all, its the exactly right thing to do if your a money managing agent collecting a fees.....nobody gets sacked in the market meltdown post-mortem holding a basket of FANGMA even if they drop 30-50%...... as a money manager you get to live another day.....and re-build your AUM's

Edited September 21, 2022 by changegonnacome

[changegonnacome]

11 minutes ago, Gregmal said:

Tesla is just bonkers unbreakable.

 

This aint over - the market mania/meme stock stuff that began in 2020 - until Tesla breaks........as I said before we are the beginning of the end......but no where close to the end of this........the degenerate gamblers haven't been cleaned out yet and Tesla is living breathing proof

[Dinar]

I think that most people are positioned very conservatively/defensively.  Here are two datapoints for you:

 

a) I spoke with guy in high net worth at a large bank (minimum account - $10MM in investable assets.)  He said that in general they are guiding clients to be very conservative.  Also, the biggest client inflows/purchases are going into B-REIT (Blackstone's REIT.)  I asked why, he said there is effectively no mark to market on it, so clients are not worried.  This is NOT the bank steering them supposedly, this is clients choosing from a menu of options.  

b) I spoke with a former coworker today.  He is in the high yield/distressed/special situations group at a large family office. (Family office is over $30bn in assets, his group manages several billion.)  He said that 1) they are only buying first lien paper, which he thinks is pretty safe at 10-11% yields.  2) pretty much everyone he talks to is very defensively positioned.  He has been in this seat for twenty two years.

[changegonnacome]

10 minutes ago, Dinar said:

He said that in general they are guiding clients to be very conservative.

 

As I said above........this is guiding clients or investing clients assets in Costco/Apple/Microsoft etc at 3-4% FCF yields, while the 30yr treasury is potentially going to 6%......conservative sometimes is another word for institutional ass covering, while keeping the client FULLY invested and with you and making sure you dont get sacked in the post-mortem

Edited September 21, 2022 by changegonnacome