What’s Driving the Stock, Bond and Housing Markets?(awealthofcommonsense.com)
awealthofcommonsense.com
What’s Driving the Stock, Bond and Housing Markets?
https://awealthofcommonsense.com/2021/07/whats-driving-the-stock-bond-housing-markets-right-now/
31 comments
They talked about possibly raising rates in 2023. In my opinion, they're bluffing. They can't do what Paul Volcker did in the 80s and raise rates to stave off inflation without crashing the stock and real estate markets deeply. They can't raise rates without triggering a deep, deep recession and taking everyone's retirement fund out with it.
Your assumption is they can keep rates low while inflation goes wild.
That’s not an option either.
That’s not an option either.
I think they've run out of options and are between a rock and a hard place.
Wild? No. 3-5% a year? I think that would be very doable.
> without crashing the stock and real estate markets deeply
And, perhaps more immediately, without paying abhorrent interests on public debt?
And, perhaps more immediately, without paying abhorrent interests on public debt?
We are talking about inflation causing an increase in interest rates. Public debt is not a problem in this scenario because the real interest rate doesn't change that much. However, inflation will kill the bank accounts of rich corporations and encourage them to invest their money.
That's why you should have inflation every year instead of concentrating 20 years of inflation into one. (what you get when you do the deflation thing)
In practice rates will be raised but but carefully enough that we still end up with 0% real interest.
In practice rates will be raised but but carefully enough that we still end up with 0% real interest.
Aren’t real rates like -2% right now?
> FAANG and tech stocks that don’t require capital to grow
Facebook lobbied intensely for TikTok to be banned, which went nowhere, and its discounted threat price was $55b, which went nowhere, and also, Facebook could not afford to buy them at their real price. Attention is zero sum, and the big tech cos will eventually need capital, maybe even next year, to make the acquisitions they have been putting off.
Facebook lobbied intensely for TikTok to be banned, which went nowhere, and its discounted threat price was $55b, which went nowhere, and also, Facebook could not afford to buy them at their real price. Attention is zero sum, and the big tech cos will eventually need capital, maybe even next year, to make the acquisitions they have been putting off.
> People have a lot of money right now and they want to buy financial assets with that money.
The article is very good at explaining the basic fact. Prices depend on demand. It does not matter how bad the product is, or how useless it is. If demand increases, price increases accordingly.
The stock market is a "market" and behaves as such. Something that should be obvious, but we miss some times in our arguments.
The article is very good at explaining the basic fact. Prices depend on demand. It does not matter how bad the product is, or how useless it is. If demand increases, price increases accordingly.
The stock market is a "market" and behaves as such. Something that should be obvious, but we miss some times in our arguments.
> Of course, this can’t last forever. Markets are always and forever cyclical. Nothing ever goes up and to the right forever. It would be delusional to assume otherwise.
> But if you’ve been yelling at people for years and years about fundamentals you’ve missed the fact that a tidal wave of money and demand for assets has trumped every historical metric in the book.
Of course, this makes sense and I already knew this. But what I'm looking for are articles or blog posts or reports on where we're headed in the next few years. I know that nobody can predict the future, and I know that there will be a time of reckoning for the excesses of the present. But some hints on what exactly to watch out for as triggers to some sort of snowballing crash would be useful...even if the unwinding takes a long time. I'd be grateful for any reading recommendations.
> But if you’ve been yelling at people for years and years about fundamentals you’ve missed the fact that a tidal wave of money and demand for assets has trumped every historical metric in the book.
Of course, this makes sense and I already knew this. But what I'm looking for are articles or blog posts or reports on where we're headed in the next few years. I know that nobody can predict the future, and I know that there will be a time of reckoning for the excesses of the present. But some hints on what exactly to watch out for as triggers to some sort of snowballing crash would be useful...even if the unwinding takes a long time. I'd be grateful for any reading recommendations.
Debt to GDP is the normal ration to watch
https://tradingeconomics.com/united-states/households-debt-t...
But I wonder if it is still a good measure as much of that new GDP is flowing to the 1%.
https://tradingeconomics.com/united-states/households-debt-t...
But I wonder if it is still a good measure as much of that new GDP is flowing to the 1%.
The problem with debt to GDP is that it doesn't tell you anything about how "dangerous" the debt is, just how big it is compared to GDP. It would be more interesting to see interest payments vs tax revenue because at least those tell you something (better than nothing) about the risk of default.
>But I wonder if it is still a good measure as much of that new GDP is flowing to the 1%.
You'll have to factor in interest rates for that comparison. 60% of household debt at 5% interest is much worse than 80% of household debt at 2% interest.
You'll have to factor in interest rates for that comparison. 60% of household debt at 5% interest is much worse than 80% of household debt at 2% interest.
2008. Just wow.
> People have a lot of money right now and they want to buy financial assets with that money.
I am very far away from any kind of expert in this matter, but it seems to me people would be better off long term by investing their money into their own business. The lure of not doing anything and watching your pile in stocks grow is strong, but it can't really work long term for everyone. Eventually people need to produce something of value.
I am very far away from any kind of expert in this matter, but it seems to me people would be better off long term by investing their money into their own business. The lure of not doing anything and watching your pile in stocks grow is strong, but it can't really work long term for everyone. Eventually people need to produce something of value.
I produce something for the company I am employed by. Others own shares in the company.
What business in the US makes more money then real estate? There's stuff like Apple where you almost literally own half the countries computers but outside of stuff that is or should be illegal there's very little.
Nothing is like land. You can just let it sit and make money borrowing against it. You can work on it yourself to improve (this has an extremely high $/hr rate.) Everyone has to go somewhere and zoning means "somewhere" is usually not clumped together which means demand for land.
Long term we definitely need to figure something out. Maybe better zoning, maybe LVT. Short term you want real estate if you can afford it.
Nothing is like land. You can just let it sit and make money borrowing against it. You can work on it yourself to improve (this has an extremely high $/hr rate.) Everyone has to go somewhere and zoning means "somewhere" is usually not clumped together which means demand for land.
Long term we definitely need to figure something out. Maybe better zoning, maybe LVT. Short term you want real estate if you can afford it.
There are very large portions of land in the US that produce very little return compared to simply buying VTI. Large tracts of upper Midwest and Northeast and states (and cities) with outlier debt per taxpayer burdens come to mind (CT/NJ/IL).
Land, specifically individual land ownership on a non REIT scale, is a notable asset class for a variety of reasons, but diversifying investments is still a good idea in my opinion. It is not impossible or even very unlikely that the specific piece of land one owns to stagnate or even decline in price for a long period of time.
Land, specifically individual land ownership on a non REIT scale, is a notable asset class for a variety of reasons, but diversifying investments is still a good idea in my opinion. It is not impossible or even very unlikely that the specific piece of land one owns to stagnate or even decline in price for a long period of time.
Yes great you explained the now… but that’s not exactly interesting or insightful. What folks want to know is if this is temporary or a long term trend
It's a a long term trend - because the natural rate of interest is zero.
Money is a unit of account and therefore costless to produce, which means it has no intrinsic value. The value comes when you attach it to something. So in a competitive market the cost of a mortgage is the amortised cost of evaluating the quality of the borrower and their income stream, and is the price of preparing the mortgage, which is a financial derivative asset of a house giving the right to stop the owner selling it without permission.
Every interest rate cycle ends with the interest rate peak lower than the previous one, because it rapidly sends the economy into recession when you try to raise interest rates. This is because the belief about how interest rates work doesn't match the reality of how interest rates work.
People aren't spending all they earn, which means all asset classes rise in price relative to the indifference level of holding money vs paying off loans and paying taxes.
Japan is the canary in the mine and everybody seems to want to believe Japan is somehow 'special'. It isn't.
It's a natural result of the reality of banking. Loans create deposits. The cheaper the loan, the more loans are created, the more people downstream from the borrower earn and the more they can save. But those people that earn and save aren't the ones with the loans. And since those who are saving are not spending, the ones with the loans can't earn more to pay off their loans.
The result is a long slow credit expansion that interest rate changes cannot halt. And up goes the indifference price of incoming paying assets.
Money is a unit of account and therefore costless to produce, which means it has no intrinsic value. The value comes when you attach it to something. So in a competitive market the cost of a mortgage is the amortised cost of evaluating the quality of the borrower and their income stream, and is the price of preparing the mortgage, which is a financial derivative asset of a house giving the right to stop the owner selling it without permission.
Every interest rate cycle ends with the interest rate peak lower than the previous one, because it rapidly sends the economy into recession when you try to raise interest rates. This is because the belief about how interest rates work doesn't match the reality of how interest rates work.
People aren't spending all they earn, which means all asset classes rise in price relative to the indifference level of holding money vs paying off loans and paying taxes.
Japan is the canary in the mine and everybody seems to want to believe Japan is somehow 'special'. It isn't.
It's a natural result of the reality of banking. Loans create deposits. The cheaper the loan, the more loans are created, the more people downstream from the borrower earn and the more they can save. But those people that earn and save aren't the ones with the loans. And since those who are saving are not spending, the ones with the loans can't earn more to pay off their loans.
The result is a long slow credit expansion that interest rate changes cannot halt. And up goes the indifference price of incoming paying assets.
> People aren't spending all they earn
this is good, because this means productivity is growing, and is outpacing the person's consumption. This allows investments in future productivity to be made - aka, progress.
Asset prices reflect this progress.
this is good, because this means productivity is growing, and is outpacing the person's consumption. This allows investments in future productivity to be made - aka, progress.
Asset prices reflect this progress.
If every single actor is following this strategy then no actor is earning money. Rather than a race to the bottom it is a race into nothing.
Emphasis on allows. If nobody is consuming the output of your investments then those investments won't happen. We expect people to provide their time to society through work. Consumerism is just the realization that for every person that provides their time, there must be someone who wants that time. The answer is to create meaningful ways for humans to spend/provide time for money.
Emphasis on allows. If nobody is consuming the output of your investments then those investments won't happen. We expect people to provide their time to society through work. Consumerism is just the realization that for every person that provides their time, there must be someone who wants that time. The answer is to create meaningful ways for humans to spend/provide time for money.
> every single actor is following this strategy then no actor is earning money
surely people will still need to consume. But all future improvements require that one doesn't consume all production today.
Investment can drive the economy, creating more efficient production, or more production (of different things), and therefore, grow the pie size.
surely people will still need to consume. But all future improvements require that one doesn't consume all production today.
Investment can drive the economy, creating more efficient production, or more production (of different things), and therefore, grow the pie size.
"this is good"
It means others cannot earn an income, therefore they cannot demand output, therefore it is not produced therefore there is no job for them.
Aggregate demand = Aggregate Supply, and there is no such thing as a 'market for loanable funds' because saving is just the accounting record of investment. A historic record, nothing more.
Once you start at loans as the starting point and follow the geometric progression of spending and earning you find that saving reduces transaction numbers.
It means others cannot earn an income, therefore they cannot demand output, therefore it is not produced therefore there is no job for them.
Aggregate demand = Aggregate Supply, and there is no such thing as a 'market for loanable funds' because saving is just the accounting record of investment. A historic record, nothing more.
Once you start at loans as the starting point and follow the geometric progression of spending and earning you find that saving reduces transaction numbers.
Most of that is going to depend on fiscal/monetary policy that has not been created yet.
You might as well use a magic 8 ball.
You might as well use a magic 8 ball.
>So they keep buying bonds. (*3)
There is a lot to disagree with in this article, but is the above factual? My understanding is that although equities, real estate, real assets, etc are up, bonds have fallen significantly out of favor due to low rates and rate risk (bond prices will fall if interest rates go up, as new issues will be more attractive to buyers).
There is a lot to disagree with in this article, but is the above factual? My understanding is that although equities, real estate, real assets, etc are up, bonds have fallen significantly out of favor due to low rates and rate risk (bond prices will fall if interest rates go up, as new issues will be more attractive to buyers).
> "People don’t care that housing prices just saw their largest one-year gain ever. They just want a home to live in.
> So they keep buying houses."
What, until they find the right one or something? Picky! I'll just take one please.
> So they keep buying houses."
What, until they find the right one or something? Picky! I'll just take one please.
Low and negative interest rates make stocks and real estate more attractive than bonds and housing loans cheaper increasing demand for homes.
This new phenomenon with FAANG and tech stocks that don’t require capital to grow, so their high (albeit reasonable) valuations weigh on the market and market sentiment.
Now add in pandemic stimulus. Remember moral hazard from the Great Recession? Now firms are doubly confident of bailouts when things go south.
It’s wishful thinking to think it’s permanent or even long term. Jerome Powell is already talking about raising rates. We’ve had low rates for the past decade. I’m a bull, but who knows when rates will rise. the market is dynamic and to think anything is permanent or predictable is wrong-headed.
It’s always good to have some cash if and when there’s a major correction.