You claim that if rents are stable and housing prices go up, no one is mad. But you're apparently forgetting about a pretty significant group of people: those who currently rent but would like to own, which I imagine is a pretty large group of people, and probably over-represented in the urban millennial influential demographic.
Our system generally makes it cheaper to own than rent (partially from the risk premium for owning, partially from the mortgage interest tax deduction). So being locked out of the homeowner class due to rising prices on homes seems like real economic harm.
Well first time homebuyers can rent, and get the same product. That we have a norm that investing in housing is a good, but something like 30-40% of Americans rent and never own housing. Because we segregate ourselves by class we feel this isn’t true because 90% of our friends own eventually. But there are whole communities where no one owns.
It's not *quite* the same product. If you buy a home, you get a home with a lot of options for modification, and obligations for maintenance, and an option and an obligation for staying for a long time. If you rent a home, you get a home with few options or obligations.
but for CPI purposes all those options to upgrade/maintain the kitchen etc are actually "investments". If you make the kitchen really nice you can increase the value of the property. If a landlord spends money on maintenance/upgrade of a tenants property that is clearly an investment or cost of owning it the same way paying fees buying hedges is a cost associated with stocks.
Yeah, though I think that reflects more the incompleteness of the formal measures than the reality. Renting is like having an iPhone and owning is like having an Android - they're comparable enough that they can be thought of as competitors in the same market, but they're also different enough that someone might intentionally pay a premium for one or the other, not just because of price or availability.
Totally agree with this. You beat me to the main point, but I wanted to add a few more. First, the rent vs buying comparison is overly focused on year 1. The big savings from buying come in mortgage years 16-30, when more $ is going to principle and you are can see more gains on your household balance sheet. Monthly payment is also fixed, so if there has been rent inflation you are insulated from a micro prospective.
I also think it's important to remember the social value of home ownership in American society. This doesn't change the economic analysis that Matt did. Most renters want to own, and if home asset prices go up and rents stay the same, it's cold comfort that they are getting a "deal". Many want to climb the social ladder, not just have a roof over their heads.
Last, for most Americans buying a home is buying your kid's school district. And thanks to NIMBYs the distribution of own-able homes and rental units (especially apartment buildings) is not evenly distributed. So distribution of home/rental prices matters for lived experience, even if average is flat.
"The big savings from buying come in mortgage years 16-30, when more $ is going to principle and you are can see more gains on your household balance sheet."
But think of a NYC example where buying is $5000/month and renting is $2500/month. In 16 years if you rent and invest the difference you'll have $863,000. If you stop saving at that point (due to rising rents) then in 30 years you'll have $2.2 million.
People who are buying in NYC, SF, DC are hoping that their home values will rise. Past performance, etc. etc. but the track record over the last 30 years says if you buy a million dollar condo (I think that is close to a 5k/month mortgage at current rates?) you will have a fair amount of appreciation in the next 15 years.
Prices have risen as interest rates have fallen. At 2.8% $1 million is $4,109/month. If interest rates were to rise to the level of 2005 (6.5%) that would rise to $6,203. If they rose to the level of 1994 (9.25%) that would rise to $8,227. Unless you expect negative mortgage rates that process can't be repeated going forward. And if rates rise, prices will fall to compensate as there are just far fewer buyers who can afford $8,227 vs. $4,109.
So I just gave an example of how increasing inequality can raise prices. 1 rich person buys a 4 plex and turns it into a Mansion that is allowed even in cities with rent control. So it is possible for prices to keep rising even if interest rates go up. Their are too many factors affecting housing prices for you and me to keep track of. Also I love the name and picture.
Does that cause the price to rise more than 4x? For example if you have 4 luxury 1 bedrooms and someone buys them and converts them into one luxury 4 bedroom, is that worth more 4x what the original units were worth?
with respect you have no idea why people in NYC SF DC are buying homes. It could be because of increasing income inequality you have more crazy rich people buying 3, 1 million dollar condos and turning them in 1, 2.5 million dollar condo, so they have room for their grand piano. Such a structural change in ownership could very well drive up prices. I know that happens I don't know if it is enough to affect the overall market. But my point is, we don't know why prices appear crazy to us and we should have more humility than just assuming everything we don't understand is a bubble.
I don't think it's a bubble... I think paying an ownership premium is rational in light of the fact that SF and NYC have hot labor markets and severe supply constraints, so rents are likely to be higher in 10 years than they are now.
I'd be curious to see more evidence that the NYC/SF purchase vs rent for an identical unit difference is widespread and persistent - time will tell and my prior is that it won't be sustainable as much as it exists. But if it does that just goes to my wider point that renting and purchasing are not actually the same product, that they have different social implications and that those social implications are very important beyond strict semantic definitions (in your example, $2,500/mo different).
Even really nice school districts have property that can be rented. In most of those fancy school districts you can get more space for you money if you rent and you only care about the school district k-12 so renting is a bad choice if you are only doing it for the schools. I think the norm we have buying your own home is great it is the only way most "normal" people accumulate assets and that is a good thing.
Sure, rental property exists. But I can speak from experience growing up in a Boston suburb that had this problem that the housing stock is usually not equal in different districts, usually because of local land control policies that I'm sure you've read about if you're here. If you can afford to rent a large single-family detached home then you're allowed in. Many of these jurisdictions make multi-family units that typically have a lower price tag illegal or very difficult to build economically. It's the same social-exclusion dynamic that I was trying to describe and for which home-ownership is used as a proxy.
But this still doesn't make asset price inflation real. It just says that due to changing market conditions, the best financial investment you can make shifts from owning a home to owning some stocks, without changing your costs. And since these are marginal changes, it already takes into account the tax issues.
An issue is the difference in supply of rental vs owned homes in many places, but that's just a reason to adjust the imputed rent calculation potentially, not a problem with the model.
Finally, you might want to own a home as an investment and be sad that it's not a cheap investment, but that's not inflation any more than apple stock being expensive is.
But it's not harm from increases in asset prices. If we created the mortgage interest deduction today, that would be a windfall for people who already had mortgages but that's not what's going on. There's a harm to people that speculative financial investment in the price of land is required to live in many nice neighborhoods in the US, similar to if you had to buy GameStop options to live in those places. But the harm doesn't really change based on the price of the assets.
I think that if cows were spherical, you would be spot on.
The problem is that the asset prices for homes set the down payment for FHA-insured loans and also determine the cash flow you need to access a house. So the cow is not spherical, and the harm definitely goes up with prices, because fewer people are able to enjoy the shelter, access to services, and financial security afforded by ownership in these markets.
In essence, rising home prices causes the land speculation value of a house to crowd out all other imputed benefits of home ownership. This is harmful because the non-speculative imputed benefits of home ownership are good, whereas land price speculation is unproductive and bad for society. We are denying relatively-poorer people houses, so that some relatively-much-richer people can have a shot at slightly above-market returns on land in 30 years.
But, just to anticipate the reply, the solution is to allow the construction of abundant new housing, not to avoid stimulus that would otherwise be good due to its effect on aspiring homeowners.
Urban millennials might be influential culturally, but they (we) tend not to be politically influential... hence why housing policy (or any policy!) so rarely actually caters to them (us).
You're taking the term "asset price inflation" a little too literally here. This term came about to describe the fact that despite the Federal Reserve pumping trillions of dollars into the markets via QE for decades and repressing interest rates below r-star, and that while the money supply has grown substantially, you haven't seen that show up in any form of consumer price inflation. However, what you have seen is asset prices rise substantially. To your point, this normally may be seen as a good thing. However, it's really only a good thing when they rise for fundamental reasons, in this case we have seen a broad reduction in risk premiums as the result of Fed (and global CB) policy. This has been taken to a bit of an extreme with valuations on US stocks approaching record levels and spreads very tight for fixed income products. This may not be the worst thing in the world if "traditional" inflation stays low permanently and the Fed will permanently hold interest rates low (I'd argue it's bad if the Fed is engaging in financial repression though). However, if you think that rates may rise at any point in the near future, all that you have done is form a massive asset bubble that will ultimately wreak havoc on the rest of the economy, and all you have done is cause inequality to rise in the meantime without providing any gains to "Main Street". Hence, you've seen a greater emphasis by other CBs globally such as the RBNZ and PBOC to pay attention to any distortions they may be causing in the financial markets, which I think the Fed should pay more attention to.
It seems plausible that current loose monetary policy drives up equity prices, via any of several mechanisms. Don't think anyone would dispute this, and I guess "asset price inflation" is a reasonable informal term for this.
The weirder claim that you hear is that loose monetary policy is devaluing the currency, and we're on the brink of hyperinflation/the dollar will be worthless. When people point out "look, no inflation", the response is "well, there is inflation, it's just right now it's showing up in the asset prices" -- implying that soon it will show up everywhere else too, disastrously.
when every anyone says that I say the price of a hotdog and a coke at Costco was 1.50 in 1984 and now it is 1.50 you can get 2 tacos at Jack in the box in 1990 for $1 now it is 1.2 3 years latter.
"However, it's really only a good thing when they rise for fundamental reasons"
agreed
"all that you have done is form a massive asset bubble that will ultimately wreak havoc on the rest of the economy, and all you have done is cause inequality to rise in the meantime without providing any gains to "Main Street"
I’m not sure I care what anyone calls it, but a broadly-based bubble forming in the stock market which could/will burst, erasing 10-20% of asset values across the board, is not a good thing. So the question isn’t really about something called “asset price inflation” but about the likelihood of another extreme market “correction” on the medium-term horizon.
Yeah, this is the part I'm struggling with too. I accept that inflation is a bad term for it, but if very loose fiscal and monetary policy have downstream effects of encouraging more risky capital allocation at continuously untenable valuations and we get volatile markets and market corrections that seems like a problem both in terms of wealth effects and the effectiveness of the fiscal and monetary policy in terms of spurring economic activity. But I am open to the idea that I am missing something here.
Or you can just have opaque financial innovations (like CDOs) and flawed models (like gaussian copula) to encourage risky capital allocation.
In some ways, quantitative easing has proven you wrong, as investors seems hell-bent on engineering new ways of getting "risk free" returns, rather than actually making bets. Also, it is a problem when CEOs think that the best investment they can do is a stock buy back (well, at least for their bonuses). Maybe they should be forced/encouraged to take some actual risks?
The problem is people who look at stocks and say they are in a bubble are often wrong. Plenty of looked at Tesla at over 1000 and said this is a bubble it will crash. Then the stock did a 5-1 split and hit 1000 again. And Game stop yea it crashed back down to 40 just like all the smart people said. However ultimately the smart people were wrong as it went to 200.
Tesla and especially GameStop are the two worst examples you could have chosen. They are examples of a weird online dynamic in which retail investors buy stocks in order to make a statement. In GameStop's case, it's about anti-professional-finance sentiment. In Tesla's case, it's about Elon Musk's cult of personality (although the rational case for Tesla is a bit stronger.)
I picked "bad" examples to illustrate the point that we do know know what is going on. Look at stock valuations in 1999. look at Bitcoin 4 years ago when it jumped from 2k-20k and every one said that is crazy and now bitcoin is at 54k. If you were really dumb and bought bitcoin at 20k after it jumped from 2k-20k. You would have earned a solid 25% return on your investment over the last 4 years. We have no idea if these are bubbles or not. And you are not sure enough to mortgage your house and take out short positions because you don't know.
Yes there is, Increasing income inequality and shrinking overall populations in almost all countries, means you will have more capital looking for less and less productive labor. Result is capital gets a lower Return on investment. So PE ratios go up. Think of capital as an apartment complex but the shrinking population means fewer people live in each apartment not apartments go vacant. In boom times you have mon and dad working and an uncle working and sleeping on the couch all in one apartment that means you can charge higher rents. Well lets say the population is lower so the uncle does not exist so you have to charge lower rents. Ok now lets say fewer people get married and you are only renting to singles and thus have to charge lower rents. Ok now lets say you do not have enough people but you have one rich guy who will rent out an apartment at lower prices for his cats. The ratio capital to labor affecting the ROI is as old as economics. Next you can argue that the population decrease isn't that bad, or immigration from Africa will fix it. But, again I don't know and you don't know and I don't the Fed knows. and economists don't like talking about long term birth or marriage rates as a justification for 30x valuations. There are things that affect economics that economists are not experts in.
I agree in spirit but practically I think the vast majority of the few people who bought at 20k got out way earlier or just DCAed in and that was one of their bad buys.
Reuters Jan 2021: "Skyrocketing shares put market cap [of Tesla] at well over $700 bn, larger than any other auto manufacturer giant, and more than the combined value of Toyota, Volkswagen, Daimler, GM, BMW, Honda, Hyundai, Fiat Chrysler and Ford"
I would love for someone to provide me a rational explanation for Tesla's market cap beyond fandom.
The "rational explanation" for their market cap is that people believe the stock will go up in value. Stock prices aren't calculated by a specific formula -- they follow (mostly rich) people's thoughts. If lots of people think it'll go up, it does. There's no intrinsic reason why a stock price should be tied to any "fundamentals," so often, it isn't
Completely agree! And would echo the Keynes' line that "the market can be irrational longer than you can stay solvent" has been demonstrated with a number of Tesla bears. That being said, over the long run, opinions are either validated or disproven and the market updates its beliefs accordingly. So far, Tesla has not been able to validate its market worth. That may change, but I think most Tesla bulls don't appreciate how far it has to go.
In 1999 Amazon had a higher market capitalization than Borders books and Barns and Noble and everyone said this is silly fandom. Now I think both of of the chains are dead and and Amazon has taken over the world. The thing about Tesla that gives it crazy high growth potential is it doesn’t do dealerships. So it gets 1/3 of the auto market it will also get 1/3 of the dealerships market. And the dealership market is as big an industry as the manufacturing side.
It's impossible to under-estimate how chilling that news was for the equity research community for the OEMs. Look at the R&D budget for the new Ford Mach-E ... last I saw it was $12B over three years.
The consensus of the car industry is that Tesla has executed really well and certainly provides proof of concept of the electric car. However, build quality is middling and they are losing out in Norway, the only market where BEVs are dominating (83 % market share ) and where they have been a market leader (they contracted more than 53% last year). Audi E-tron outsold Model 3 in Norway, so I don't think VW is 5 years behind in any meaningful sense. Tesla is clearly the winners of hype, though. For my money, VW and the Koreans looks well positioned short term. Long term, never count Toyota out and God only knows what the Chinese are up to. I would be short Tesla, if markets truly were rational, but they ain't so there is that.
One possible explanation is that the vast majority of new cars made by 2035 will be electric. Tesla currently has the best electric car and has good battery technology.
Agree with both your points but for what it's worth, Goldman Sachs just published their updated EV sales forecast with 47% EV new car sales ratios by 2040. I think a lot of people underestimate the challenge of building a low cost EV. The raw material scrap value of a Model 3 is estimated at $5,000.
I might accept that if they were valued a bit higher than either Toyota or VV. But who thinks they are going to be making more cars or be more profitable than all the others combined in 2035?
Sure, there's a chance. Do I think its likely...no.
I don't think its that likely to happen even with no interference, but I especially doubt that the EU and/or Japan are going to let their car industry fail like Nokia and Blackberry did. I also suspect that China will be pushing hard on industrial policy to compete...something I think is likely to impact the phone market in the decade as well.
There is none. They don't have any significant patent advantages or advantages in manufacturing technology. In the latter category they are still trying to learn what everybody else already knows.
They have big advantage in the lack of dealership model. It is a big deal and potentially a game changer. On a 50k car the dealer will get 18k in profit on a 50k Tesla, Tesla will get 50K. Tesla's willingness to fight these dumb dealership laws on first amendment grounds and actually win is the best argument for the insane valuations because they can take over the dealership industry as well as car industry.
1) Have they successfully fought dealership laws anywhere?
2) I don't know where you're getting 18k profit on a 50k car, but from what I know that is way to high. Most dealerships make 10% or less the sale of a car. Their hope is to make it up in service. Which is the real reason why they are doomed - electric has significantly fewer parts resulting if far fewer repairs than gas cars.
(1) Goldman Sachs just published the most aggressive EV new car share ratio I've seen and still have 50 / 50 splits out past 2040 (text below, it's behind their equity research paywall).
(2) Calibration of the advanced driver assistance systems (ADAS) is so complex independent body shops can't even perform the work resulting in higher total loss rates from accidents and then the battery management systems (BMS) are black boxes. There's a long EV service tailwind for dealerships.
Raising our global EV sales volume estimates:
We raise our global sales estimates for electric vehicles (EVs) to factor in faster EV uptake in Europe and the US (see our jointly issued US and EU notes). We now forecast a global EV sales ratio of 11% in 2025 (previously 9%), 25% in 2030 (18%), 35% in 2035 (29%), and 47% in 2040 (43%). Stricter environmental regulations appear more feasible in Europe, and President Biden’s plans to promote EVs are taking shape in the US.
I am not a big Tesla booster I just don't think the valuations are all that crazy given how big the dealership market is and how hard it is to get out dealership agreements I remember that being an issue during the GM Bankruptcy.
2: I have a few close friends who are car sales men, and that is the profit margins on a popular cars at that price point. Dealerships are privately held so we don't have industry wide numbers.
Elsewhere, Yes, but not perfectly. For example in Texas on free speech ground Tesla has show rooms and people who provide information NOT sales men, who are not allowed to say the price because that would be commercial speech, and not as protected. If the customer wants to buy the Tesla the customer has to log on to the webpage and buy it.
The fact that bubbles can keep inflating WAY past when everyone thinks they will pop doesn't mean they aren't a bubble.
They always pop, but the longer they inflate they more damage it does.
See all the people in 2006 and 2007 (or 1998, 1999) saying there was no bubble, and that this time REALLY is different. And any damage will be contained.
But, you me and the general public have no idea. in 1998 Amazon was an crazy little online book seller that had a higher market capitalization than Border and Barns and Noble combined. Everyone, pointed to that as evidence that we were in a bubble. But the valuation of Amazon was justified because it was poised to sell few other things too. It is true that Pets dot come was was worth more than Pet co and that was really dumb, but it was not obviously dumb given that we have a few examples from 1999 that looked crazy, but were actually priced appropriately. We don't know what will happen Maybe Tesla will take over and be 2x as profitable because they do not have dealerships. On a 50k car the dealership makes 18k on a 50k Tesla, Tesla makes that 50k maybe that justifies its valuation and gives them such a competitive edge they will wipe everyone else out. Or maybe it is silly hype like the sock puppet from Pets dot com. In 2015 many people were saying we are in a bubble and IDK the number went up for another 6 years and are still going up we need to accept that we do not know.
I wish I could go back and buy more Nasdaq index at the height of the dotcom bubble. I mean, sure, it'd be even better to go back and buy a year later, but the height of the "bubble" to now still gives you a nearly 200% gain over 20 years. Not bad, certainly ahead of inflation, bonds, etc.
I feel like neither of those stories have fully played out yet, given where we continue to be in the market cycle. Schiller correctly identified the dot com bubble, but he was way early. I would argue it didn't mean he was wrong per se, although how one would use that information to conduct personal investment policy vs macroeconomic policy is generally different in important ways.
The problem with these bubbles is sometimes the valuation is appropriate. The valuation of Pets.com was dumb 1999 and the valuation of Amazon looked dumb. However, over 10-15 years that valuation of Amazon turned out to be appropriate. I don't think predicting bubbles is the kind of "obvious" thing the government can do with a a team of professionals who took 4 upper division classes in macroeconomics. We I thought we had good data for predicting recessions. We had the yield curve set of news stories in 2018, and I totally believed it. But the Yield curve normalized and it is not why we had a recession 2020.
Yeah, there's a lot of discussion about bubbles on here today and I think those who have high conviction that they are a real thing should dig into the topic a bit more. Not saying they don't exist, but it's certainly not a clear cut case. Here's a random (but good) example article: https://www.themoneyillusion.com/chestertons-fence-and-stock-prices/
Is a boom and then a correction on net bad, or is the correction only perceived as bad because the end result is less good for the asset owners than the middle period?
Also if stuff actually gets destroyed. Like in 2009 they bulldozed some of the houses that were built in 2007. Not like they built them and got really low rents with a 1% return on investment, but they built then bulldozed them.
I think people who think a price is not sustainable are not considering something and refuse to accept that they are not considering something. like overall demographics, or inequality or people trying to get money out of one country and into another or one large entity refusing to sell. etc etc there is always something that even smart people can miss.
Would you rather the the real economy be worse off, but asset prices didn't rise 10-20% and then suddenly fall 10-20%?
You are concerned that asset prices might fall back to where they would have been without the stimulus. But who cares if the end result is asset prices going to about where they would have been without the stimulus?
The purpose of the stimulus was never to affect asset prices, so if they correct back to where they should have been then that seems like a good thing.
So when I talk about this to my college buddies who are Econ Bros, it seems to me that the anxiety stems from an aesthetic preference for sound money. If your job is to evaluate investments, and the price of those investments seems untethered to their underlying fundamentals, that means we've gone wrong and are sinning
1. How will policy makers know when a bubble is forming? Does it have to be excess valuation across the entire stock market? How do you weigh the fact that AirBNB's valuation seems pretty rich (an app is 3x the valuation of Hilton??) with their enormous potential?
2. Related to the last example, even if you can identify that AirBNB is overvalued, is it really a legitimate policy objective to suppress its valuation to protect investors from a potential crash?
It's not *terribly bad*, though, if rents are staying flat (or decreasing). Like, yeah, those people would like to buy, and maybe are farther from it, but they aren't actually losing any money compared to status quo.
I think that most commentators of Slow Boring would generally like housing costs to decrease (both rents and real estate costs), and I'm no exception. But this is a pretty minor thing to get worked up about.
well from a CPI prospective they can rent. If housing prices go up 3x and rents don't all that happens is the return on capital gets worse. People still live people still work life is the same. I guess it sucks for people who live off rents. Like if you have 4 plex and you get 80k a year and the place is worth 1 million that is an 8% return if that 4 plex is now worth 10 million and your rents are sill at 80k a year that is a .08% return but does that really suck for the owner of the 4 plex. does it suck for the renters. the only person who it sucks for is someone who planned on investing in real-estate for retirement. Because now they have to retire on 10 million rather than 1 million.
I would claim that inflation is not bad per se, it is unpredictable and wild-swinging inflation that is bad. Low inflation is good for financial asset holders and banks. High inflation is good for borrowers since inflation will help you with the amortisation of your debt. Broadly speaking, low inflation is good for rich people, while high inflation helps the poor and indebted. As a middle-aged dude who has experienced inflation in the high single figures (with the odd year of double digit inflation) as well as very low inflation and borderline deflation, I much prefer the problems associated with the economy running hot (strikes, basically, and rich people having to protect their financial assets) over a low-inflation economy (persistent under-employment, and capital having a vise-grip over labor).
There is something odd over the present fixation over inflation. It is probably true that consumer preferences will shift when the pandemic is finally pushed back, but the most likely scenario is that consumers will shift their spending from home improvement to entertainment and eating out. The latter are simply not big spending items (and there might also be an overhang of people who has rediscovered the pleasures of home cooking). We didn't have a collapse in prices when the pandemic started. It is unlikely that we will have an explosion in prices when it ends. Most likely, savings will stay up.
If you're stupid enough to literally keep your dollars under a mattress, then yes, any inflation erodes the value of those dollars, but why would you do this?
"But to characterize the zaniness as inflation misses the point — inflation is bad, and booming investment (including zany investment) is good."
I'm not sure that follows. My diagnosis is that there is too much money chasing too few good investments. This creates a lot of distortions that are bad (like empty housing in city centers) to terrible (bitcoin destroying the environment, smart people working on speculative non-problems rather than e.g. fixing the healthcare system.
I think it’s ironic that you cite Bitcoin as an example of an asset that is useless/harmful in the comment section of an article arguing that there are no real downsides to arbitrarily increasing the money supply. That’s literally the point of Bitcoin, to provide an alternative currency which is immune to the inflationary dynamics Matt discusses (and dismisses) in this article.
Of course, you’re absolutely right that there would not be nearly as much attention on Bitcoin if the Fed were taking a different approach. But I think it’s important to note that Bitcoin’s massive rise in price isn’t a “distortion”. It’s a rational response by investors and asset managers to the Fed’s demonstrated willingness to continuously increase the supply of USD in service of policy goals.
Also we tried currencies you couldn't inflate with a printer, they were the gold and silver standards. Deflationary currency is an anti-stimulative incentive, as it means you should hoarde your cash not spend it on stuff.
It isn’t currently in widespread use as a currency, but that doesn’t imply that it is merely a vehicle for speculation. It’s a hedge against inflation - its value increases as people’s expectations of future inflation increase.
If Bitcoin were to completely replace fiat currency, then that would absolutely be anti-stimulative. But even (most) Bitcoin holders don’t expect that to happen. In a world where there is a small but non-negligible risk of substantial inflation as a result of central bank policy, there is a pretty good argument that a portfolio with a few percent allocated to Bitcoin is actually lower risk than a portfolio with no Bitcoin.
No, that's not the point of bitcoin. Bitcoin uses a medium sized country worth of electricity to enable illegal transactions (like ransomware attacks) and speculation. If you just wanted an inflation safe store of value, literally anything is better for society and the planet than Bitcoin, including burying gold in your backyard. That's also likely a more secure storage mechanism.
You’re free to invest (or not invest) in Bitcoin for whatever reasons you want. But I can just tell you that many people have invested in it for exactly the reasons that I outlined, so for those people that is the “point” of Bitcoin.
If you can come up with an alternative inflation hedge that has the same level of convenience and security without the massive energy costs, then that would be great, and I think many people would migrate to it from Bitcoin. Certainly there are other cryptoassets trying to do just that. But at the moment, no such alternative exists, and so the capital which is seeking such an asset has mostly flowed to Bitcoin.
If that is the point of Bitcoin, it does not seem to achieve it very well. If inflation rises to 5% instead of 2%, what will happen to the price of Bitcoin, with what probability will that occur, and why do you think it will happen like that? TIPS and other inflation-protection securities are actually immune to inflationary effects, because the asset seller agrees to pay the asset holder more if inflation rises by more than expected.
TIPS are immune to inflationary effects as measured by the CPI. However, the whole point of Matt’s article was that many people believe we are seeing inflationary effects in asset prices which are distinct from those measured by the CPI. If you’re one of the people who believes this, you’d have to look elsewhere for protection from that type of inflation.
Obviously one of the best ways to hedge against this type of inflation is by holding just those assets whose prices you believe are being inflated. So if you think “asset price inflation” is most prevalent in equities, you hold equities. If you think it is most prevalent in real estate, you hold real estate. However, the problem there is that you aren’t making an isolated bet on asset price inflation - you’re also making a bet on the idiosyncracies of the underlying assets. So you could be right about the inflationary component, but if a new covid strain leads to more lockdowns, your equity holdings might still underperform.
The long-term goal of Bitcoin (or at least one long-term goal) is to create an asset which is resistant to inflationary pressure by virtue of having fixed supply, but does not share the idiosyncrasies of other major asset classes which complicate their use as an inflation hedge. Gold already serves this purpose reasonably well. But Bitcoin is significantly more convenient to hold and to transact with, and so is perhaps even better suited to this use case.
"Asset price inflation" is clearly a nonsense phrase, so we can agree to stop using it. What is it about the 21 million limit of Bitcoin supply that will lead to its price increasing when inflation impacts the purchasing power of an American consumer? The two are completely disjoint facts. My car won't go faster because there are 102 floors in the Empire State Building.
Why would you need to hedge against asset prices going up? That's a good thing for asset holders, obviously. So yes, if you think real estate prices are going to rise, you should buy real estate. And yes, I agree that this kind of thinking leads very rapidly to concentration risk, so I and the rest of finance for the past century agree that people should broadly hold diversified indexes of different asset classes.
It seems that what you're saying is that there are some mystery risks that only a subset of people believe even exist or are harmful, and that Bitcoin and gold are the unique instruments which offer protection against them. That is an argument with which no one can do anything.
I think this is correct but misses the point a bit. With our current set of incentives, you're going to get empty housing in city centers either way, that's not really related to inflation or fears of inflation. If there was less money to chase incentives - if the economy were worse - it's not like the zany investments would be replaced by good investments, there would just be less investment overall. The problem of nudging investment away from weird stuff like Bitcoin (if it's weird - there are some potentially good uses for the blockchain beyond the ridiculous hype) into more clearly productive enterprises is one that's different from "is this a good economy or is it just some kind of sector-specific inflation?"
What's the promising use case for blockchain thats not a lot of yadda yadda yadda underpants gnome stuff? The resilience advantage a network gains from geographic distribution makes it proportionally more challenging to process optimize, and I don't totally see the "sure a blockchain currency is stupid, but blockchain itself is quite promising" magic.
The blockchain evangelists remind me of libertarians - sure in theory, if everyone always acted exactly as the theory requires, it could work. But when has that ever happened?
Maybe I'm a total smoothbrain, but I've never been able to see an application that the technology is substantively good for beyond building a log within an organization that no one can fuck with (like for example evidence custody in criminal investigations). That's at least a use, but it's not world changing or anything. In finance it's too volatile to be a store of wealth or unit of account, and too clunky to be a medium of exchange. It also is a lot of technical lift to get back to a currency you can't print.
You just listed a use case for bitcoin yourself, so that's some innovation right there. I agree that Bitcoin is almost certainly overrated, which is why it's risky! But I don't think that "almost certainly" is a good enough standard to... what, regulate it out of existence or something? What's the proposed policy response to Bitcoin if you think it's dumb? Isn't it enough for the investors in it to eventually lose all their money when it doesn't pan out? If energy use and contribution to climate change is the issue, why is Bitcoin unique compared to other uses of energy and fossil fuels? Why would carbon taxes, offsets, etc. be insufficient to deal with Bitcoin?
Lotta stuff here so this response is going to ramble. I did list a use case, but how much investment does that case merit? Is that investment economy of Norway scale? We see truly eye-popping amounts of time, capital, thought, and energy spent on cryptocurrencies. But people spend resources on lots of things. Bitcoin is different because bitcoin doesn't do anything. If you read some cyrpto-Bull apologia like what ARK investors puts out they'll scale bitcoin's energy consumption to only a fraction of the global banking industry, but the global banking industry performs the worlds banking. Existing currencies function as currencies, bitcoin basically doesn't.
You could solve a lot of problems by accurately internalizing the social cost of carbon, but carbon taxes are really unpopular and challenging to enforce and a bunch of other implementation problems that make them non-starters, especially as the silver bullet that they were understood as 15 years ago (https://www.volts.wtf/p/why-carbon-pricing-will-never-be). We go to war with the army we have. That's to say nothing of the international enforcement and transfers problem. If we had a world government where everyone could agree on a historically weighted carbon consumption tax which finances transfers to developing countries, well that would probably go a long way to fixing things. I just don't think that's going to happen any time soon so we have to fix the problem using the tools we have.
Cryptos are especially tricky in this regard as their structure kind of makes them unregulatable. If you somehow price crypto-mining to be cost prohibitive in the US or China, the mining moves to Russia or Bahrain or someplace else with dirty cheap power and no scruples. I have no idea how they should be regulated.
What I do see is a ton of energy and enthusiasm and hype from technically literate types for this technology, and I think it's misplaced. I also personally find it annoying
Investment in and of itself isn't good though! As a thought experiment, imagine that I somehow got access to the Fed's money printer and decided I wanted to fund an investment that painted every rock within the borders of the United States white to help with climate change. We'd spin up new paint manufacturers, there'd be a revolution in spray nozzles, a huge boom in tankers and pipelines for pushing paint into rural areas. Tons and tons of investment, all of which is incredibly stupid (like bitcoin)!
The key part in Matt's original post is, "no matter what you do, there is going to be some zone of risky speculative investments. And what you want is a world in which the risky speculative investment zone is also genuinely weird and potentially innovative. If doing something sensible like opening a dry cleaning shop in a strip mall counts as a high-risk/high-reward investment, then your policy has failed."
The argument is *not* that stupid investment is better than no investment, it's that it's better to be in a situation where risky/seemingly stupid investments lead to innovation in the rare cases where they pay off, rather than "oh my crazy bet on opening a corner store paid off, now we have a new corner store". It's not that bitcoin is better than a corner store in that example, it's that a strong economy correctly slots "bitcoin" into the risky investment pool and "new corner store" into the safe investment pool.
Right now, stupid investments are crowding out good ones because the excess money is pulling human capital to suboptimal places. If I had infinite money to make sure every rock in the US was painted white, there would be less dry cleaning shops because the paint manufacturing business would raise wages and the cost of equipment enough that it would drive out marginal dry cleaners, even if those dry cleaners were part of the societally optimal amount.
How does less money make the situation better? Why are you assuming that people with poor investment ideas are getting more money than people with good ones? This also continues to assume that you, specifically, know which investments will and will not pay off in the long run.
All I ask here, indeed I beg, is that no one try to convince me that the stock valuations of Elon Musk's various enterprises are in any way related to market fundamentals. I might die laughing.
Tesla Motors finally succeeded in making a profit last year. Not by making and selling cars mind you. That came from selling tax credits to other auto manufacturers. Who will soon be building EVs and won't need to buy credits from Tesla or anyone else. And every one of them is better at manufacturing cars than Tesla.
Big thing that Tesla has that could maybe, (long shot) justify the valuations is the lack of dealerships. The dealership industry is actually a few times the size of the manufacturing industry. If Tesla can get 1/3 of the auto market including the dealership side that might justify the valuations.
"But the “asset price inflation” hypothesis is that the value of owner-occupied housing goes up but the rent doesn’t.
So who’s mad about that? Nobody! It’s just good."
As an aspiring homeowner currently working in the CA tech industry, I do not see this as good!! I see it as a massive obstacle to the type of life I want.
It was rising but covid offered some reprieve. Invest and wait is the only option. In the meantime, my family grows older without making memories in our home the way I did as a child.
Their is stuff in the Bay area you can afford you just don't want to live there. I can show you Condo's in East Palo Alto or Masons in Tracy. It is true that you cannot afford to buy a large hose in the most exclusive neighborhoods that you and your friend group where 90% have a degree consider normal, but you can buy in actual normal neighborhoods.
This is a gross mischaracterization of the housing crisis in the Bay Area. It is really, very bad for people of all incomes, and it's not caused by people being afraid of minorities or entitled attitudes from Millenial tech workers.
Having people of any income commuting from Tracy to the job centers is an immense daily waste of human and economic potential, while also being climate arson. There are some condos for sale in EPA, but the number of units is tiny.
Lastly, you missed the most important part: on the scale of the Bay Area, nearly all
the land suitable for housing and in commutable distance to a job center, could be described as "most exclusive neighborhoods...where 90% have a degree." It makes the Bay Area a place where the only millionaires can have stable finances, high-quality schooling for their children, reasonable commutes for parents, and a retirement. This fact is an affront American egalitarian/liberal values.
There are no normal neighborhoods. Especially in the South Bay and the Peninsula, this fact has been consciously engineered by a generation of homeowners and city officials, who have staked their retirements, lifestyles, and careers on turning California cities into state-sanctioned country clubs competing for the richest residents, rather than healthy communities full of people with a range of incomes, races, values, occupations, and backgrounds.
I live here too. And the attitude of people in the South Bay or peninsula toward the East Bay kind of offends me. It is true that East Palo Alto is small only like 15 square miles but the fact that is still sort of affordable makes think there is some snobbery going on. Also even in CA only about 34% have a 4 year degree or higher. Your Uber driver doesn’t have a 4 year degree. The staff at Chipotle doesn’t have a 4 year degree. Like ask people where they live. Also, you can commute from Tracy to Palo Alto in an electric car I used a hybrid. 50 mpg Prius C. I ultimately bought in the East bay my condo is worth like 480. if your working in the South Bay I would suggest the Tri Valley. Dublin and Livermore have lots of new construction. My commute to Palo Alto was 45 minutes if I left by 7. Tracy adds another 30 minutes. So it is really only an option if you must have a house.
I'd bet dollars to donuts that your Chipotle associate, Uber driver, etc. are either (a) living in very crowded living conditions (more than one tenant per bedroom), (b) living with family well past when they want to, or (c) are commuting from somewhere very far, like Vallejo, the Central Valley, etc. These are all hallmarks of a severe housing crisis.
I think it's pretty simple: If your city does not have enough housing to accomodate all of its daytime workers, including options affordable-enough for those daytime workers making relatively less (e.g. Uber, service workers, etc.), then it is exporting a housing crisis to its neighbors. Cities like that in CA are benefitting from the economic activity of large numbers of jobs, without paying the costs in the form of schools, infrastructure, emergency services, public transit improvements, etc.
I am a 10-year resident of the East Bay (Berkeley/Oakland), and I am also offended by the attitude of Peninsula and South Bay people about the East Bay, especially Oakland (many of whom are my coworkers). The Bay Area is very woke, except your your garden variety white-flight fear of living near brown people, pearl-clutching over the quality of the schools, "quality of life" as a euphemism for fewer brown people near me, etc. It's all alive and well here in sunny Santa Clara/San Mateo county. People who say things like "but if our company opened an office in Oakland, wouldn't the real estate savings quickly be overtaken by extra security costs" are breathtakingly ignorant and they should feel bad about that.
Maybe it's the pandemic, or maybe we need to agree to disagree on our facts, but pre-COVID there's no way the commute from the outer East Bay or down the 101 towards Gilroy is going to be less than 1 hour per way to tech companies in the South Bay. 90 minutes seems more likely.
In any case, 2-3 hour per day car commutes becoming considered what's normal to be able to afford a condo is what housing policy failure looks like. The snobbery exists: it's in Cuptertino, Palo Alto, Mountain View, every city in San Mateo County, etc. not providing housing for the workers their cities benefit from.
I really don't think $700k for 1bd/1ba condos in EPA is "sort of affordable" by anyone's definition, except for perhaps people in the Bay Area whose perspectives have been warped by the crisis. Those are Hong Kong/Shanghai/Tokyo-level condo prices, except instead of living in the a dynamic amenity-rich world city, you are down the street from Back-A-Yard, have a good commute to one employer and a livable commute to many others. And I love Back-A-Yard--the oxtails are amazing -- but it doesn't justify $700k condos in EPA.
Damm those one bedrooms on university are $700 now. As for commute from Tri valley to Palo Alto if you left at 7 you could be at work by 745 if you leave at 730 you get in at 9 am because apparently you can be 15 minutes early or an hour late no in between.
Richmond is super affordable I saw a condo there for 200k. But it is only a reasonable commute to SF and Oakland. Richmond to Mtn View etc is same time as Tracy maybe more. People really exaggerate how bad the altamont pass is.
Housing is not expensive in the Bay Area, but people are psychologically obsessed by housing prices to the exclusion of all else for many interest reasons I will not go into
Quality schools for my children is the number one concern. Number two is a house with a yard where we can hunt Easter eggs or have a 4th of July BBQ. Building these cherished childhood memories shouldn't be out of reach for all but those who inherit homes.
There are many, many quality schools in the Bay Area. The problem is not a lack of quality schools, but a multi-decade campaign by cities in the Bay Area to keep kids out of their quality schools. They don't want people who can afford less than $1.5m for a house in their schools. That's the real snobbery.
Does it need to be detached from all of the other houses? Townhouses, duplexes, four-plexes, etc. are illegal in most of the Bay Area, and are exactly how humans have built affordable housing for centuries in places where land prices are high.
Well Pleasention is in the top 5 for school districts in the Bay Area the houses in Pleasention are crazy expensive but the Condos are like 400-700 for a 2 bedroom my community the condos are 400-500 and I have seen neighbors use the common area for Easter egg hunts. Better housing policy will actually result in fewer houses and more condos. The Tri Valley is one of the only the places that is pro building housing.
Better housing policy would result in fewer houses and more multi-unit housing of all kinds, but as I am sure you are aware, multi-unit housing is illegal in 82% of residential land in the Bay Area.
I am really curious to see how many people in a single family home get an ADU. Now that they are legal. A lot of houses have really small yards. My guess is maybe 10% will get an ADU it will help. But you need like 1/2 of all single family homes getting ADU because the numbers are that bad. I would like to see laws making it easier to be a landlord of an ADU so it truly easy money. It only takes one news story of the nightmare eviction to make a busy professional say it isn’t worth it.
It's extremely easy to be the landlord of an ADU. Indeed, in California there are companies that will put up an ADU in your back yard, rent out the property, and manage it, for a share of the income.
In San Jose, you can get approval for an ADU over the counter. That is, you hand them your permit application, and you get the permit that same day.
If the guy who makes your coffee and cleans your office every day in Mountain View lives in Tracy it is part of the commute pattern of the Bay Area. I know people who say Dublin is part of the bay even though it has 2 Bart stations. There are a lot of people who think the Bay Area is Marin to San Jose. I hear people say I would rather move to Texas than the East bay.
What do you mean "it's a part of the commute pattern of the Bay Area"? It's a BAD part of the commute pattern of the Bay Area, climate arson, and we should stop it. Also, the guy who cleans your office in Mountain View lives not in Tracy, but in Redwood City or East San Jose, in a two bedroom apartment with 11 other people. He got COVID from his work, and it spread to his grandmother, who died. Overcrowding is bad, and we should stop it.
First I agree build more condos in the Bay Area. However I don’t think the commute is necessarily bad for the environment in a Prius it is like one extra gallon of gas a day and electric cars can do the trip. Prior to Covid I liked the idea of multi generational housing being closer physically and emotionally to grandparents etc. I am hopping the ADU rules will make multi generational housing more live able.
Asset bubbles don’t matter? Believe it or not, I’m actually old enough to remember the financial crisis and the dot com crash.
The problem with asset bubbles is that people are actually wasting their money in crappy investments, but the investments go up on paper for a while and when the bubble bursts you have a recession because the wealth evaporates. People are suddenly a lot less rich - or even broke in the case of housing which is highly leveraged- and they need to act accordingly.
Worse if it hits a sector that is prone to financial contagion- such as mortgages- we get another enormous crisis.
At the end of the day, loose monetary policy is a lubricant for good investments that are hypothetically possible but lacking in capital under tighter policy. Loose policy does not create more hypothetical investments. So once all the good investments are fully funded, all the capital will flow to bad investments and bubbles become far more likely.
>> Now a situation that can arise is that rents rise by 7%, and therefore the price of owner-occupied housing also rises by 7%. This is going to be a tricky political situation, because it’s ruinous inflation for renters but homeowners will likely perceive it as a good thing.
Is is really that nice if you're a homeowner? I think its really only valuable if you intend to sell and move to a lower price area. Otherwise, its just all bad.
If you're house was worth $250k, and went to 500k. In theory, you had a 250k increase in home value. But in practice, if you didn't sell your house, all that happened was that you are now paying more in property taxes (assuming they're not frozen). Plus, if you do sell, then you might just be going to go buy a another house that went from 250k to 500k. Net you don't have any actual gain.
Yeah, we saw a 50% increase in the value of our house over 4 years (and then sold), and it was pretty much just all bad. Maybe in 10 or 20 years if and when we downsize houses or move out of the area, it will retrospectively be a good thing, but honestly right now I'd rather that houses were flat in price and I had the hundreds of thousands back in something more liquid.
The benefits of increased house prices for homeowners are largely theoretical.
I guess you could say the same thing about all asset prices? While I think your points are valid, we could add some other points to them. The thing about selling then buying is a point that highlights the fact that a home is a little different than other assets, which you can just sell and cash out more easily. In fact, some say a home is not an asset at all. If that's true, I suppose everyone should rent. But please note that this is an option in your scenario. If you want to cash out that $250 without putting it back into another house, you can cash out and become a renter. At any time. One of the reasons I bought a house instead of renting is that I view my property as part of my long-term retirement savings plan. The value is real.
"If you want to cash out that $250 without putting it back into another house, you can cash out and become a renter." This balances out.
If you bought this house 10 years ago at a 5% interest rate, you've been paying about $1,350 in principle and interest on a 30 year mortgage. If you decide to cash out with 500k, then for you to "rent" at the same level, you will now need to pay $2,700 a month because the landowner can charge that as all houses in the area cost that much. You have cash in hand (~300k), but your monthly expenses are significantly higher! Its really only beneficial if you can find a way to decrease your rent by downsizing or moving to an area where costs are lower.
False if the price to rent ratio has changed. At the moment the price to rent ratio is back to where it was before the last crash. In that case rents are lower than the PITI on an equivalent unit.
True. It depends. I don't know what the ratio is, typically, which why I said it sounds about right. The claim was that it balanced. I am guessing this is close to true in most cases.
That sounds about right. And again it speaks to the point about housing being a unique asset as most people have to spend money on rent or mortgage one way or another, so when you are a seller on one side you are a buyer on the other. I would just add that to this point another point, which is that this circumstantial fact does not change the other fact that you do have a valuable asset that you can sell. You do have the option to downsize. You do have the option to move to a lower cost of living area. These are real options that put real money in your pocket because the value of your house going up is a real thing. It is real value.
I live and work in the city. When I retire I plan to downsize a bit and live in the country. I probably won't have to go to Mozambique. I think I will have other options. No one knows the future, but I think I will have a decent chance that I will be able to cash out and take advantage of my investment.
yea but you can buy less space buy a 2 bedroom condo rather than a house for your family and make the 2 kids share a room. You can consume less real-estate to keep more of that pay bump.
So the argument here is... that speculative bubbles are always good, except maybe in the special case of housing?
That seems to be your thesis, and it also seems obviously false in the abstract. (Although it may be true that the *current* behavior of markets is more good than bad.)
Can we get a post about the dangers of speculative bubbles, and why you're not worried about those dangers right now?
Before the housing crash, everyone assumed that if someone bought a house for $500k and it later fell to $250k, if they could still afford to pay the mortgage they would. It came as a shock when it turned out that if prices fell people who could still pay their mortgages didn't. In terms of the current bubble I haven't heard that risk being mentioned at all.
No it’s not. At 3% inflation you lose almost half the value of your money in 20 years. That’s horrible.
As for asset inflation. You might think it’s good for the value of your home to be going up fast. But what if you don’t already own a home. Say you are just starting out trying to build a family, and all the home prices are crazy high. How do you feel then?
Not to mention most people are horrible at math. They take advice from realtors and lenders telling them of course they can afford the home they really can’t. What happens then (see 2008)
As for stocks, a stock valuation should be seen as ownership in a future dividend stream. When stock prices rise (and not driven by earnings increases) what that really means is you are paying more and more money for that future dividend stream. IE, you are getting less of a return (and maybe a negative one). Given current PE ratio’s, if you are buying right now, you should expect a negative return over the next 7 years)
“But if Powell could give me $20,000 and you $20,000 and everyone else $20,000 without prices rising, that would be amazing. You could end poverty!”
No, no, no. Money is a claim on assets. If you just create a bunch more money, what you have done is devalued that money in relation to the same asset base. Printing money doesn’t create wealth, just more money.
"At 3% inflation you lose almost half the value of your money in 20 years. That’s horrible."
He did acknowledge that inflation erodes savings. I am not sure I would call it "horrible" that money under my mattress is half as valuable in 20 years. This fact makes me less inclined to put my money under a mattress to begin with. Maybe that's a good thing. At least, probably better than the reverse. If the value of my money doubled in 20 years, then I would have incentive to hoard it. That may well be much more horrible for the economy, in fact.
I think it's pretty clearly a good thing that sticking your money in a mattress isn't incentivized. What's money for in the abstract? To reduce the friction of commerce. Barter economies are a real pain in the ass, so we invented gigantic stone rings as a medium of exchange, store of wealth, and unit of account. If currency is deflating we're introducing this gigantic new friction of "just holding the money will be worth more than buying something" so then nobody buys anything and commerce halts. Money is for efficient commerce, deflation is antithetical to that
He also said inflation is "undesirable." His exact words were:
"Inflation is bad"
"The key thing about inflation is that it’s undesirable."
In context, he is distinguishing here between inflation (bad) and asset inflation (not bad).
In that context, he is further saying that inflation (bad) of 3% is "fine" - which he defines as meaning "not a disaster."
So, full context: asset inflation, not the same as inflation. Inflation is "bad" but 3% is not a "disaster."
Further, he acknowledges that "people worry about inflation because it erodes the value of accumulated savings."
So it seems to me that he fully acknowledges the view that inflation is "bad" but argues that at 3%, it is not "so bad" and more to the point, asset inflation is a different category that is not bad in the way that inflation is bad - i.e bad in the sense of eroding savings:
"asset prices going up doesn't erode savings; in fact, it usually does the opposite."
"At 3% inflation you lose almost half the value of your money in 20 years."
Only if you hold cash and why would you hold cash? If inflation is 3% and CDs are paying 5% then you don't have anything to complain about, do you? If inflation is 3% and CDs are paying 1% then that's a problem. But 3% inflation by itself isn't a problem.
True, but if you have fixed-rate debt you benefit from inflation. I think this is the way people typically conceptualize inflation--that it is "progressive" because it benefits debtors and causes creditors to get paid back with future dollars that are not worth as much. Clearly credit markets defy this sort of simple explanation but it does represent sort of a "hedge" for some people against inflation.
Most brokerage accounts are now commission free and many also have no minimum required to open an account. There is nothing stopping someone from buying stock if they wish.
Sure you need an emergency fund but that should only be a small percentage of your savings by the time you hit your 50s. The majority of your wealth shouldn't be in cash.
People saving up for retirement get hammered by low inflation. At least retirees can hedge against inflation. If you're in your 20s with 5% student loans or your 30s with a mortgage, your only option is to make more money. Except the low growth that's tied to low inflation makes that difficult.
I couldn't agree more if you said that water is wet. But the median person's net worth is ~100k, and for many people that is the mostly wrapped up in the mortgage. Over 40% of American's would have to borrow or sell something to cover a $400 emergency, and 25% of households making 100k-150k couldn't raise $2,000 in a month without borrow or selling.
Biggest concern is if their wages don't keep up with price inflation. So long as they are increasing at similar rates, unlikely to impact people at the bottom.
This is a very silly argument that has become dogma among Bitcoiners and their compatriots. There is no reason to own a large volume of cash. If you are dumb enough to do so, you probably deserve to have your wealth inflated away. Every financial investment (savings accounts, corporate bonds, Treasuries, inflation-protected securities, equities) has as part of its expected return an expectation of what inflation will be in the period you hold the investment. Every non-financial investment has to clear an IRR that includes an expectation of what inflation will be. You may not have realized, but people have thought about this before you did.
As other people have hinted at, we would generally expect 3% inflation to be something that investments would just compensate for. There's some friction in that, so if inflation is super high or super inconsistent, it stops being possible for everything to just more-or-less cancel out inflation, but in a world where we have pretty consistent approximately 3% inflation, we expect nominal returns to increase such that we have roughly the same real returns as in a lower-inflation world.
I think a key part of this claim is that the asset base remains the same. I think this is more true with services, but much less true with scalable goods (TVs, phones, etc.) and not at all true of digital goods.
If everyone was given $1,000 and only spent it on Slow Boring subscriptions (or other lesser digital goods), then would money be devalued?
I understand that housing prices going up while rent stays the same is a win and not-loss for home owners and renters, respectively. But isn’t it a loss for renters who are in the market to buy a house? Isn’t this one of the reasons fewer and fewer youngish people are making the leap from renting to owning?
I’m just saying it isn’t a free lunch. There are still winners and losers in this example.
The Fed's balance sheet doubled in 2009, then doubled again in 2014, and then doubled again in 2020. Ray Dalio said it best ... "Cash is trash." You need to decouple the "asset inflation" from the dollar devaluation. It's not that assets are more expensive today then say 10 years ago, it's that the dollar is worth so much less. P/E ratios could go to 50x in this environment - not because the fundamentals of the business are strong but because the shares are priced in dollars. It's weird to say this "is not a thing". This is *THE* macro move of our generation.
What on earth are you trying to say here? How much does it cost you to buy a barrel of oil from Saudi Arabia? Is that proof that the dollar is worth much less than 10 years ago? It is the case that assets are more expensive 10 years ago, which was the point of Fed interventions after the financial crisis. They wanted scared investors to go out and buy equities. And it worked.
it is possible if the ratio of labor to capital changes Capital gets a lower return on investment. That is basic principal of economics but people tend to ignore it because over the short term labor to capital ratios appear fixed.
They can be (i.e., it depends on the global distribution of revenue streams) but I'm not sure I follow the question. Are you reacting to using a P/E ratio as the relative metric to compare company valuations to other asset classes?
You claim that if rents are stable and housing prices go up, no one is mad. But you're apparently forgetting about a pretty significant group of people: those who currently rent but would like to own, which I imagine is a pretty large group of people, and probably over-represented in the urban millennial influential demographic.
Our system generally makes it cheaper to own than rent (partially from the risk premium for owning, partially from the mortgage interest tax deduction). So being locked out of the homeowner class due to rising prices on homes seems like real economic harm.
First-time homebuyers are overlooked in a *lot* of policy discussions.
Well first time homebuyers can rent, and get the same product. That we have a norm that investing in housing is a good, but something like 30-40% of Americans rent and never own housing. Because we segregate ourselves by class we feel this isn’t true because 90% of our friends own eventually. But there are whole communities where no one owns.
It's not *quite* the same product. If you buy a home, you get a home with a lot of options for modification, and obligations for maintenance, and an option and an obligation for staying for a long time. If you rent a home, you get a home with few options or obligations.
but for CPI purposes all those options to upgrade/maintain the kitchen etc are actually "investments". If you make the kitchen really nice you can increase the value of the property. If a landlord spends money on maintenance/upgrade of a tenants property that is clearly an investment or cost of owning it the same way paying fees buying hedges is a cost associated with stocks.
Yeah, though I think that reflects more the incompleteness of the formal measures than the reality. Renting is like having an iPhone and owning is like having an Android - they're comparable enough that they can be thought of as competitors in the same market, but they're also different enough that someone might intentionally pay a premium for one or the other, not just because of price or availability.
Totally agree with this. You beat me to the main point, but I wanted to add a few more. First, the rent vs buying comparison is overly focused on year 1. The big savings from buying come in mortgage years 16-30, when more $ is going to principle and you are can see more gains on your household balance sheet. Monthly payment is also fixed, so if there has been rent inflation you are insulated from a micro prospective.
I also think it's important to remember the social value of home ownership in American society. This doesn't change the economic analysis that Matt did. Most renters want to own, and if home asset prices go up and rents stay the same, it's cold comfort that they are getting a "deal". Many want to climb the social ladder, not just have a roof over their heads.
Last, for most Americans buying a home is buying your kid's school district. And thanks to NIMBYs the distribution of own-able homes and rental units (especially apartment buildings) is not evenly distributed. So distribution of home/rental prices matters for lived experience, even if average is flat.
"The big savings from buying come in mortgage years 16-30, when more $ is going to principle and you are can see more gains on your household balance sheet."
But think of a NYC example where buying is $5000/month and renting is $2500/month. In 16 years if you rent and invest the difference you'll have $863,000. If you stop saving at that point (due to rising rents) then in 30 years you'll have $2.2 million.
People who are buying in NYC, SF, DC are hoping that their home values will rise. Past performance, etc. etc. but the track record over the last 30 years says if you buy a million dollar condo (I think that is close to a 5k/month mortgage at current rates?) you will have a fair amount of appreciation in the next 15 years.
Prices have risen as interest rates have fallen. At 2.8% $1 million is $4,109/month. If interest rates were to rise to the level of 2005 (6.5%) that would rise to $6,203. If they rose to the level of 1994 (9.25%) that would rise to $8,227. Unless you expect negative mortgage rates that process can't be repeated going forward. And if rates rise, prices will fall to compensate as there are just far fewer buyers who can afford $8,227 vs. $4,109.
So I just gave an example of how increasing inequality can raise prices. 1 rich person buys a 4 plex and turns it into a Mansion that is allowed even in cities with rent control. So it is possible for prices to keep rising even if interest rates go up. Their are too many factors affecting housing prices for you and me to keep track of. Also I love the name and picture.
Does that cause the price to rise more than 4x? For example if you have 4 luxury 1 bedrooms and someone buys them and converts them into one luxury 4 bedroom, is that worth more 4x what the original units were worth?
Home price appreciation is more than that in San Francisco and NY though.
with respect you have no idea why people in NYC SF DC are buying homes. It could be because of increasing income inequality you have more crazy rich people buying 3, 1 million dollar condos and turning them in 1, 2.5 million dollar condo, so they have room for their grand piano. Such a structural change in ownership could very well drive up prices. I know that happens I don't know if it is enough to affect the overall market. But my point is, we don't know why prices appear crazy to us and we should have more humility than just assuming everything we don't understand is a bubble.
I don't think it's a bubble... I think paying an ownership premium is rational in light of the fact that SF and NYC have hot labor markets and severe supply constraints, so rents are likely to be higher in 10 years than they are now.
With the rise of working from home due to the pandemic and overall tech improvements you think demand is still going to be higher in 10 years?
I'd be curious to see more evidence that the NYC/SF purchase vs rent for an identical unit difference is widespread and persistent - time will tell and my prior is that it won't be sustainable as much as it exists. But if it does that just goes to my wider point that renting and purchasing are not actually the same product, that they have different social implications and that those social implications are very important beyond strict semantic definitions (in your example, $2,500/mo different).
Even really nice school districts have property that can be rented. In most of those fancy school districts you can get more space for you money if you rent and you only care about the school district k-12 so renting is a bad choice if you are only doing it for the schools. I think the norm we have buying your own home is great it is the only way most "normal" people accumulate assets and that is a good thing.
Sure, rental property exists. But I can speak from experience growing up in a Boston suburb that had this problem that the housing stock is usually not equal in different districts, usually because of local land control policies that I'm sure you've read about if you're here. If you can afford to rent a large single-family detached home then you're allowed in. Many of these jurisdictions make multi-family units that typically have a lower price tag illegal or very difficult to build economically. It's the same social-exclusion dynamic that I was trying to describe and for which home-ownership is used as a proxy.
But this still doesn't make asset price inflation real. It just says that due to changing market conditions, the best financial investment you can make shifts from owning a home to owning some stocks, without changing your costs. And since these are marginal changes, it already takes into account the tax issues.
An issue is the difference in supply of rental vs owned homes in many places, but that's just a reason to adjust the imputed rent calculation potentially, not a problem with the model.
Finally, you might want to own a home as an investment and be sad that it's not a cheap investment, but that's not inflation any more than apple stock being expensive is.
Right, I wasn't disagreeing with the main thesis. I was just refuting one specific point, that rising house prices don't cause any harm.
But it's not harm from increases in asset prices. If we created the mortgage interest deduction today, that would be a windfall for people who already had mortgages but that's not what's going on. There's a harm to people that speculative financial investment in the price of land is required to live in many nice neighborhoods in the US, similar to if you had to buy GameStop options to live in those places. But the harm doesn't really change based on the price of the assets.
I think that if cows were spherical, you would be spot on.
The problem is that the asset prices for homes set the down payment for FHA-insured loans and also determine the cash flow you need to access a house. So the cow is not spherical, and the harm definitely goes up with prices, because fewer people are able to enjoy the shelter, access to services, and financial security afforded by ownership in these markets.
In essence, rising home prices causes the land speculation value of a house to crowd out all other imputed benefits of home ownership. This is harmful because the non-speculative imputed benefits of home ownership are good, whereas land price speculation is unproductive and bad for society. We are denying relatively-poorer people houses, so that some relatively-much-richer people can have a shot at slightly above-market returns on land in 30 years.
It's not inflation, but how is that not harm?
But, just to anticipate the reply, the solution is to allow the construction of abundant new housing, not to avoid stimulus that would otherwise be good due to its effect on aspiring homeowners.
Of course. But with construction prices through the roof right now, that complicates factors.
Urban millennials might be influential culturally, but they (we) tend not to be politically influential... hence why housing policy (or any policy!) so rarely actually caters to them (us).
"Our system generally makes it cheaper to own than rent"
That's certainly not the case today. The price to rent ratio is such that renting can be half the price of buying depending on the location.
Are you measuring in terms of monthly payment, or in terms of the net present value of future expenditures compared to gain of equity?
You're taking the term "asset price inflation" a little too literally here. This term came about to describe the fact that despite the Federal Reserve pumping trillions of dollars into the markets via QE for decades and repressing interest rates below r-star, and that while the money supply has grown substantially, you haven't seen that show up in any form of consumer price inflation. However, what you have seen is asset prices rise substantially. To your point, this normally may be seen as a good thing. However, it's really only a good thing when they rise for fundamental reasons, in this case we have seen a broad reduction in risk premiums as the result of Fed (and global CB) policy. This has been taken to a bit of an extreme with valuations on US stocks approaching record levels and spreads very tight for fixed income products. This may not be the worst thing in the world if "traditional" inflation stays low permanently and the Fed will permanently hold interest rates low (I'd argue it's bad if the Fed is engaging in financial repression though). However, if you think that rates may rise at any point in the near future, all that you have done is form a massive asset bubble that will ultimately wreak havoc on the rest of the economy, and all you have done is cause inequality to rise in the meantime without providing any gains to "Main Street". Hence, you've seen a greater emphasis by other CBs globally such as the RBNZ and PBOC to pay attention to any distortions they may be causing in the financial markets, which I think the Fed should pay more attention to.
It seems plausible that current loose monetary policy drives up equity prices, via any of several mechanisms. Don't think anyone would dispute this, and I guess "asset price inflation" is a reasonable informal term for this.
The weirder claim that you hear is that loose monetary policy is devaluing the currency, and we're on the brink of hyperinflation/the dollar will be worthless. When people point out "look, no inflation", the response is "well, there is inflation, it's just right now it's showing up in the asset prices" -- implying that soon it will show up everywhere else too, disastrously.
I would argue that there is inflation in consumer goods too. But the government has spent decades "adjusting" their formula to downplay it.
when every anyone says that I say the price of a hotdog and a coke at Costco was 1.50 in 1984 and now it is 1.50 you can get 2 tacos at Jack in the box in 1990 for $1 now it is 1.2 3 years latter.
Costco is bad example -- they deliberately froze the hotdog combo price, I think they might actually lose money on them.
other fast food, sure.
Yeah, that's the bonkers Zero Hedge or Shadowstats kinda nonsense that makes the rest of us look bad! Hahaha
"However, it's really only a good thing when they rise for fundamental reasons"
agreed
"all that you have done is form a massive asset bubble that will ultimately wreak havoc on the rest of the economy, and all you have done is cause inequality to rise in the meantime without providing any gains to "Main Street"
agreed, and agreed
I’m not sure I care what anyone calls it, but a broadly-based bubble forming in the stock market which could/will burst, erasing 10-20% of asset values across the board, is not a good thing. So the question isn’t really about something called “asset price inflation” but about the likelihood of another extreme market “correction” on the medium-term horizon.
Yeah, this is the part I'm struggling with too. I accept that inflation is a bad term for it, but if very loose fiscal and monetary policy have downstream effects of encouraging more risky capital allocation at continuously untenable valuations and we get volatile markets and market corrections that seems like a problem both in terms of wealth effects and the effectiveness of the fiscal and monetary policy in terms of spurring economic activity. But I am open to the idea that I am missing something here.
This is exactly what my point was (at least what I was trying to say).
Or you can just have opaque financial innovations (like CDOs) and flawed models (like gaussian copula) to encourage risky capital allocation.
In some ways, quantitative easing has proven you wrong, as investors seems hell-bent on engineering new ways of getting "risk free" returns, rather than actually making bets. Also, it is a problem when CEOs think that the best investment they can do is a stock buy back (well, at least for their bonuses). Maybe they should be forced/encouraged to take some actual risks?
The problem is people who look at stocks and say they are in a bubble are often wrong. Plenty of looked at Tesla at over 1000 and said this is a bubble it will crash. Then the stock did a 5-1 split and hit 1000 again. And Game stop yea it crashed back down to 40 just like all the smart people said. However ultimately the smart people were wrong as it went to 200.
Tesla and especially GameStop are the two worst examples you could have chosen. They are examples of a weird online dynamic in which retail investors buy stocks in order to make a statement. In GameStop's case, it's about anti-professional-finance sentiment. In Tesla's case, it's about Elon Musk's cult of personality (although the rational case for Tesla is a bit stronger.)
I picked "bad" examples to illustrate the point that we do know know what is going on. Look at stock valuations in 1999. look at Bitcoin 4 years ago when it jumped from 2k-20k and every one said that is crazy and now bitcoin is at 54k. If you were really dumb and bought bitcoin at 20k after it jumped from 2k-20k. You would have earned a solid 25% return on your investment over the last 4 years. We have no idea if these are bubbles or not. And you are not sure enough to mortgage your house and take out short positions because you don't know.
Yes, there are individuals stocks that defy the odds.
But that won't happen for broad based stock Index's like the S&P. There's just no way to justify 30x PE ratio's
Yes there is, Increasing income inequality and shrinking overall populations in almost all countries, means you will have more capital looking for less and less productive labor. Result is capital gets a lower Return on investment. So PE ratios go up. Think of capital as an apartment complex but the shrinking population means fewer people live in each apartment not apartments go vacant. In boom times you have mon and dad working and an uncle working and sleeping on the couch all in one apartment that means you can charge higher rents. Well lets say the population is lower so the uncle does not exist so you have to charge lower rents. Ok now lets say fewer people get married and you are only renting to singles and thus have to charge lower rents. Ok now lets say you do not have enough people but you have one rich guy who will rent out an apartment at lower prices for his cats. The ratio capital to labor affecting the ROI is as old as economics. Next you can argue that the population decrease isn't that bad, or immigration from Africa will fix it. But, again I don't know and you don't know and I don't the Fed knows. and economists don't like talking about long term birth or marriage rates as a justification for 30x valuations. There are things that affect economics that economists are not experts in.
"Result is capital gets a lower Return on investment."
So your contention is this time it's REALLY different. Than high prices are here to stay.
Maybe, but I feel it's much more likely that its' not different. That as with EVERY time before, this bubble will pop and end in tears
If you were dumb enough to buy BTC at $20k, you were probably dumb enough to panic-sell it at $4k, too.
I agree in spirit but practically I think the vast majority of the few people who bought at 20k got out way earlier or just DCAed in and that was one of their bad buys.
As Ross Douthat has written, $TSLA is as much a meme as it is a real investment. https://douthat.substack.com/p/memes-against-decadence
Reuters Jan 2021: "Skyrocketing shares put market cap [of Tesla] at well over $700 bn, larger than any other auto manufacturer giant, and more than the combined value of Toyota, Volkswagen, Daimler, GM, BMW, Honda, Hyundai, Fiat Chrysler and Ford"
I would love for someone to provide me a rational explanation for Tesla's market cap beyond fandom.
The "rational explanation" for their market cap is that people believe the stock will go up in value. Stock prices aren't calculated by a specific formula -- they follow (mostly rich) people's thoughts. If lots of people think it'll go up, it does. There's no intrinsic reason why a stock price should be tied to any "fundamentals," so often, it isn't
Completely agree! And would echo the Keynes' line that "the market can be irrational longer than you can stay solvent" has been demonstrated with a number of Tesla bears. That being said, over the long run, opinions are either validated or disproven and the market updates its beliefs accordingly. So far, Tesla has not been able to validate its market worth. That may change, but I think most Tesla bulls don't appreciate how far it has to go.
In 1999 Amazon had a higher market capitalization than Borders books and Barns and Noble and everyone said this is silly fandom. Now I think both of of the chains are dead and and Amazon has taken over the world. The thing about Tesla that gives it crazy high growth potential is it doesn’t do dealerships. So it gets 1/3 of the auto market it will also get 1/3 of the dealerships market. And the dealership market is as big an industry as the manufacturing side.
VW spent $50 billion trying to beat Tesla with the ID.3 and ID.4 and the general consensus is they are still 5 years behind.
It's impossible to under-estimate how chilling that news was for the equity research community for the OEMs. Look at the R&D budget for the new Ford Mach-E ... last I saw it was $12B over three years.
The consensus of people who own Tesla stock.
No the consensus of the automobile industry.
The consensus of the car industry is that Tesla has executed really well and certainly provides proof of concept of the electric car. However, build quality is middling and they are losing out in Norway, the only market where BEVs are dominating (83 % market share ) and where they have been a market leader (they contracted more than 53% last year). Audi E-tron outsold Model 3 in Norway, so I don't think VW is 5 years behind in any meaningful sense. Tesla is clearly the winners of hype, though. For my money, VW and the Koreans looks well positioned short term. Long term, never count Toyota out and God only knows what the Chinese are up to. I would be short Tesla, if markets truly were rational, but they ain't so there is that.
One possible explanation is that the vast majority of new cars made by 2035 will be electric. Tesla currently has the best electric car and has good battery technology.
Agree with both your points but for what it's worth, Goldman Sachs just published their updated EV sales forecast with 47% EV new car sales ratios by 2040. I think a lot of people underestimate the challenge of building a low cost EV. The raw material scrap value of a Model 3 is estimated at $5,000.
Tesla has no dealerships so that could be it
I might accept that if they were valued a bit higher than either Toyota or VV. But who thinks they are going to be making more cars or be more profitable than all the others combined in 2035?
So you think there is zero chance of Toyota and VW failing in the face of Tesla like Nokia and Blackberry failed in the face of Apple?
Sure, there's a chance. Do I think its likely...no.
I don't think its that likely to happen even with no interference, but I especially doubt that the EU and/or Japan are going to let their car industry fail like Nokia and Blackberry did. I also suspect that China will be pushing hard on industrial policy to compete...something I think is likely to impact the phone market in the decade as well.
There is none. They don't have any significant patent advantages or advantages in manufacturing technology. In the latter category they are still trying to learn what everybody else already knows.
They have big advantage in the lack of dealership model. It is a big deal and potentially a game changer. On a 50k car the dealer will get 18k in profit on a 50k Tesla, Tesla will get 50K. Tesla's willingness to fight these dumb dealership laws on first amendment grounds and actually win is the best argument for the insane valuations because they can take over the dealership industry as well as car industry.
1) Have they successfully fought dealership laws anywhere?
2) I don't know where you're getting 18k profit on a 50k car, but from what I know that is way to high. Most dealerships make 10% or less the sale of a car. Their hope is to make it up in service. Which is the real reason why they are doomed - electric has significantly fewer parts resulting if far fewer repairs than gas cars.
Dealership are far from doomed:
(1) Goldman Sachs just published the most aggressive EV new car share ratio I've seen and still have 50 / 50 splits out past 2040 (text below, it's behind their equity research paywall).
(2) Calibration of the advanced driver assistance systems (ADAS) is so complex independent body shops can't even perform the work resulting in higher total loss rates from accidents and then the battery management systems (BMS) are black boxes. There's a long EV service tailwind for dealerships.
Raising our global EV sales volume estimates:
We raise our global sales estimates for electric vehicles (EVs) to factor in faster EV uptake in Europe and the US (see our jointly issued US and EU notes). We now forecast a global EV sales ratio of 11% in 2025 (previously 9%), 25% in 2030 (18%), 35% in 2035 (29%), and 47% in 2040 (43%). Stricter environmental regulations appear more feasible in Europe, and President Biden’s plans to promote EVs are taking shape in the US.
If you are interested in it there is a whole Wiki on it that has better information than a random commenter. https://en.wikipedia.org/wiki/Tesla_US_dealership_disputes
I am not a big Tesla booster I just don't think the valuations are all that crazy given how big the dealership market is and how hard it is to get out dealership agreements I remember that being an issue during the GM Bankruptcy.
2: I have a few close friends who are car sales men, and that is the profit margins on a popular cars at that price point. Dealerships are privately held so we don't have industry wide numbers.
1: As for successfully fighting the dealership rules. In Massachusetts they basically won. https://www.reuters.com/article/us-tesla-motors-massachusetts-lawsuit/tesla-prevails-in-top-massachusetts-court-over-direct-sales-idUSKBN0HA29620140915
Elsewhere, Yes, but not perfectly. For example in Texas on free speech ground Tesla has show rooms and people who provide information NOT sales men, who are not allowed to say the price because that would be commercial speech, and not as protected. If the customer wants to buy the Tesla the customer has to log on to the webpage and buy it.
They have a substantial advantage in terms of battery manufacturing.
The fact that bubbles can keep inflating WAY past when everyone thinks they will pop doesn't mean they aren't a bubble.
They always pop, but the longer they inflate they more damage it does.
See all the people in 2006 and 2007 (or 1998, 1999) saying there was no bubble, and that this time REALLY is different. And any damage will be contained.
But, you me and the general public have no idea. in 1998 Amazon was an crazy little online book seller that had a higher market capitalization than Border and Barns and Noble combined. Everyone, pointed to that as evidence that we were in a bubble. But the valuation of Amazon was justified because it was poised to sell few other things too. It is true that Pets dot come was was worth more than Pet co and that was really dumb, but it was not obviously dumb given that we have a few examples from 1999 that looked crazy, but were actually priced appropriately. We don't know what will happen Maybe Tesla will take over and be 2x as profitable because they do not have dealerships. On a 50k car the dealership makes 18k on a 50k Tesla, Tesla makes that 50k maybe that justifies its valuation and gives them such a competitive edge they will wipe everyone else out. Or maybe it is silly hype like the sock puppet from Pets dot com. In 2015 many people were saying we are in a bubble and IDK the number went up for another 6 years and are still going up we need to accept that we do not know.
I wish I could go back and buy more Nasdaq index at the height of the dotcom bubble. I mean, sure, it'd be even better to go back and buy a year later, but the height of the "bubble" to now still gives you a nearly 200% gain over 20 years. Not bad, certainly ahead of inflation, bonds, etc.
I feel like neither of those stories have fully played out yet, given where we continue to be in the market cycle. Schiller correctly identified the dot com bubble, but he was way early. I would argue it didn't mean he was wrong per se, although how one would use that information to conduct personal investment policy vs macroeconomic policy is generally different in important ways.
The problem with these bubbles is sometimes the valuation is appropriate. The valuation of Pets.com was dumb 1999 and the valuation of Amazon looked dumb. However, over 10-15 years that valuation of Amazon turned out to be appropriate. I don't think predicting bubbles is the kind of "obvious" thing the government can do with a a team of professionals who took 4 upper division classes in macroeconomics. We I thought we had good data for predicting recessions. We had the yield curve set of news stories in 2018, and I totally believed it. But the Yield curve normalized and it is not why we had a recession 2020.
Yeah, there's a lot of discussion about bubbles on here today and I think those who have high conviction that they are a real thing should dig into the topic a bit more. Not saying they don't exist, but it's certainly not a clear cut case. Here's a random (but good) example article: https://www.themoneyillusion.com/chestertons-fence-and-stock-prices/
“‘In the end’? Nothing ends, Adrian. Nothing EVER ends.”
Is a boom and then a correction on net bad, or is the correction only perceived as bad because the end result is less good for the asset owners than the middle period?
It depends, is it just a brief stock market correction, or is it something broader like in 2008
Also if stuff actually gets destroyed. Like in 2009 they bulldozed some of the houses that were built in 2007. Not like they built them and got really low rents with a 1% return on investment, but they built then bulldozed them.
I agree - when ppl talk about “asset price inflation”, I think they’re really saying the prices are too high to be sustainable.
I think people who think a price is not sustainable are not considering something and refuse to accept that they are not considering something. like overall demographics, or inequality or people trying to get money out of one country and into another or one large entity refusing to sell. etc etc there is always something that even smart people can miss.
This doesn't make sense.
Would you rather the the real economy be worse off, but asset prices didn't rise 10-20% and then suddenly fall 10-20%?
You are concerned that asset prices might fall back to where they would have been without the stimulus. But who cares if the end result is asset prices going to about where they would have been without the stimulus?
The purpose of the stimulus was never to affect asset prices, so if they correct back to where they should have been then that seems like a good thing.
So when I talk about this to my college buddies who are Econ Bros, it seems to me that the anxiety stems from an aesthetic preference for sound money. If your job is to evaluate investments, and the price of those investments seems untethered to their underlying fundamentals, that means we've gone wrong and are sinning
2 questions:
1. How will policy makers know when a bubble is forming? Does it have to be excess valuation across the entire stock market? How do you weigh the fact that AirBNB's valuation seems pretty rich (an app is 3x the valuation of Hilton??) with their enormous potential?
2. Related to the last example, even if you can identify that AirBNB is overvalued, is it really a legitimate policy objective to suppress its valuation to protect investors from a potential crash?
Yes game stock went from $2 to 300 down to 40 and back up 200 is that a bubble popping down 30% or volatile stock
This is tangential to your main point, but it's not "just good" if home prices go up for those who would like to own a home but don't yet.
It's not *terribly bad*, though, if rents are staying flat (or decreasing). Like, yeah, those people would like to buy, and maybe are farther from it, but they aren't actually losing any money compared to status quo.
I think that most commentators of Slow Boring would generally like housing costs to decrease (both rents and real estate costs), and I'm no exception. But this is a pretty minor thing to get worked up about.
But what happens if they buy the homes they can't afford anyway (hint 2008)
well from a CPI prospective they can rent. If housing prices go up 3x and rents don't all that happens is the return on capital gets worse. People still live people still work life is the same. I guess it sucks for people who live off rents. Like if you have 4 plex and you get 80k a year and the place is worth 1 million that is an 8% return if that 4 plex is now worth 10 million and your rents are sill at 80k a year that is a .08% return but does that really suck for the owner of the 4 plex. does it suck for the renters. the only person who it sucks for is someone who planned on investing in real-estate for retirement. Because now they have to retire on 10 million rather than 1 million.
Why would rents stay the same if housing prices go up? Rents might lag, but would expect them to follow housing prices.
Possibly housing prices are increasing due to lower interest rates across the board, so the future cash flow from rent is discounted less.
I would claim that inflation is not bad per se, it is unpredictable and wild-swinging inflation that is bad. Low inflation is good for financial asset holders and banks. High inflation is good for borrowers since inflation will help you with the amortisation of your debt. Broadly speaking, low inflation is good for rich people, while high inflation helps the poor and indebted. As a middle-aged dude who has experienced inflation in the high single figures (with the odd year of double digit inflation) as well as very low inflation and borderline deflation, I much prefer the problems associated with the economy running hot (strikes, basically, and rich people having to protect their financial assets) over a low-inflation economy (persistent under-employment, and capital having a vise-grip over labor).
There is something odd over the present fixation over inflation. It is probably true that consumer preferences will shift when the pandemic is finally pushed back, but the most likely scenario is that consumers will shift their spending from home improvement to entertainment and eating out. The latter are simply not big spending items (and there might also be an overhang of people who has rediscovered the pleasures of home cooking). We didn't have a collapse in prices when the pandemic started. It is unlikely that we will have an explosion in prices when it ends. Most likely, savings will stay up.
"I would claim that inflation is not bad per se"
" At 3% inflation you lose almost half the value of your money in 20 years. That’s horrible. "
If you're stupid enough to literally keep your dollars under a mattress, then yes, any inflation erodes the value of those dollars, but why would you do this?
Inflation erodes your dollars in most investments. Certainly in bank accounts, CD's, bonds etc
Sure. And you have these little babies https://www.investopedia.com/terms/t/tips.asp to protect you from that. Among other things.
"But to characterize the zaniness as inflation misses the point — inflation is bad, and booming investment (including zany investment) is good."
I'm not sure that follows. My diagnosis is that there is too much money chasing too few good investments. This creates a lot of distortions that are bad (like empty housing in city centers) to terrible (bitcoin destroying the environment, smart people working on speculative non-problems rather than e.g. fixing the healthcare system.
I think it’s ironic that you cite Bitcoin as an example of an asset that is useless/harmful in the comment section of an article arguing that there are no real downsides to arbitrarily increasing the money supply. That’s literally the point of Bitcoin, to provide an alternative currency which is immune to the inflationary dynamics Matt discusses (and dismisses) in this article.
Of course, you’re absolutely right that there would not be nearly as much attention on Bitcoin if the Fed were taking a different approach. But I think it’s important to note that Bitcoin’s massive rise in price isn’t a “distortion”. It’s a rational response by investors and asset managers to the Fed’s demonstrated willingness to continuously increase the supply of USD in service of policy goals.
Except it's not used as a currency, its a speculation vehicle. It's a store of value, but not a unit of account or medium of exchange (https://link.springer.com/article/10.1007/s00181-020-01990-5#:~:text=Bitcoin%20is%20a%20cryptocurrency%20but,days%2C%20weeks%2C%20or%20months.)
Also we tried currencies you couldn't inflate with a printer, they were the gold and silver standards. Deflationary currency is an anti-stimulative incentive, as it means you should hoarde your cash not spend it on stuff.
It isn’t currently in widespread use as a currency, but that doesn’t imply that it is merely a vehicle for speculation. It’s a hedge against inflation - its value increases as people’s expectations of future inflation increase.
If Bitcoin were to completely replace fiat currency, then that would absolutely be anti-stimulative. But even (most) Bitcoin holders don’t expect that to happen. In a world where there is a small but non-negligible risk of substantial inflation as a result of central bank policy, there is a pretty good argument that a portfolio with a few percent allocated to Bitcoin is actually lower risk than a portfolio with no Bitcoin.
No, that's not the point of bitcoin. Bitcoin uses a medium sized country worth of electricity to enable illegal transactions (like ransomware attacks) and speculation. If you just wanted an inflation safe store of value, literally anything is better for society and the planet than Bitcoin, including burying gold in your backyard. That's also likely a more secure storage mechanism.
You’re free to invest (or not invest) in Bitcoin for whatever reasons you want. But I can just tell you that many people have invested in it for exactly the reasons that I outlined, so for those people that is the “point” of Bitcoin.
If you can come up with an alternative inflation hedge that has the same level of convenience and security without the massive energy costs, then that would be great, and I think many people would migrate to it from Bitcoin. Certainly there are other cryptoassets trying to do just that. But at the moment, no such alternative exists, and so the capital which is seeking such an asset has mostly flowed to Bitcoin.
If that is the point of Bitcoin, it does not seem to achieve it very well. If inflation rises to 5% instead of 2%, what will happen to the price of Bitcoin, with what probability will that occur, and why do you think it will happen like that? TIPS and other inflation-protection securities are actually immune to inflationary effects, because the asset seller agrees to pay the asset holder more if inflation rises by more than expected.
TIPS are immune to inflationary effects as measured by the CPI. However, the whole point of Matt’s article was that many people believe we are seeing inflationary effects in asset prices which are distinct from those measured by the CPI. If you’re one of the people who believes this, you’d have to look elsewhere for protection from that type of inflation.
Obviously one of the best ways to hedge against this type of inflation is by holding just those assets whose prices you believe are being inflated. So if you think “asset price inflation” is most prevalent in equities, you hold equities. If you think it is most prevalent in real estate, you hold real estate. However, the problem there is that you aren’t making an isolated bet on asset price inflation - you’re also making a bet on the idiosyncracies of the underlying assets. So you could be right about the inflationary component, but if a new covid strain leads to more lockdowns, your equity holdings might still underperform.
The long-term goal of Bitcoin (or at least one long-term goal) is to create an asset which is resistant to inflationary pressure by virtue of having fixed supply, but does not share the idiosyncrasies of other major asset classes which complicate their use as an inflation hedge. Gold already serves this purpose reasonably well. But Bitcoin is significantly more convenient to hold and to transact with, and so is perhaps even better suited to this use case.
"Asset price inflation" is clearly a nonsense phrase, so we can agree to stop using it. What is it about the 21 million limit of Bitcoin supply that will lead to its price increasing when inflation impacts the purchasing power of an American consumer? The two are completely disjoint facts. My car won't go faster because there are 102 floors in the Empire State Building.
Why would you need to hedge against asset prices going up? That's a good thing for asset holders, obviously. So yes, if you think real estate prices are going to rise, you should buy real estate. And yes, I agree that this kind of thinking leads very rapidly to concentration risk, so I and the rest of finance for the past century agree that people should broadly hold diversified indexes of different asset classes.
It seems that what you're saying is that there are some mystery risks that only a subset of people believe even exist or are harmful, and that Bitcoin and gold are the unique instruments which offer protection against them. That is an argument with which no one can do anything.
I think this is correct but misses the point a bit. With our current set of incentives, you're going to get empty housing in city centers either way, that's not really related to inflation or fears of inflation. If there was less money to chase incentives - if the economy were worse - it's not like the zany investments would be replaced by good investments, there would just be less investment overall. The problem of nudging investment away from weird stuff like Bitcoin (if it's weird - there are some potentially good uses for the blockchain beyond the ridiculous hype) into more clearly productive enterprises is one that's different from "is this a good economy or is it just some kind of sector-specific inflation?"
What's the promising use case for blockchain thats not a lot of yadda yadda yadda underpants gnome stuff? The resilience advantage a network gains from geographic distribution makes it proportionally more challenging to process optimize, and I don't totally see the "sure a blockchain currency is stupid, but blockchain itself is quite promising" magic.
The blockchain evangelists remind me of libertarians - sure in theory, if everyone always acted exactly as the theory requires, it could work. But when has that ever happened?
Maybe I'm a total smoothbrain, but I've never been able to see an application that the technology is substantively good for beyond building a log within an organization that no one can fuck with (like for example evidence custody in criminal investigations). That's at least a use, but it's not world changing or anything. In finance it's too volatile to be a store of wealth or unit of account, and too clunky to be a medium of exchange. It also is a lot of technical lift to get back to a currency you can't print.
You just listed a use case for bitcoin yourself, so that's some innovation right there. I agree that Bitcoin is almost certainly overrated, which is why it's risky! But I don't think that "almost certainly" is a good enough standard to... what, regulate it out of existence or something? What's the proposed policy response to Bitcoin if you think it's dumb? Isn't it enough for the investors in it to eventually lose all their money when it doesn't pan out? If energy use and contribution to climate change is the issue, why is Bitcoin unique compared to other uses of energy and fossil fuels? Why would carbon taxes, offsets, etc. be insufficient to deal with Bitcoin?
Lotta stuff here so this response is going to ramble. I did list a use case, but how much investment does that case merit? Is that investment economy of Norway scale? We see truly eye-popping amounts of time, capital, thought, and energy spent on cryptocurrencies. But people spend resources on lots of things. Bitcoin is different because bitcoin doesn't do anything. If you read some cyrpto-Bull apologia like what ARK investors puts out they'll scale bitcoin's energy consumption to only a fraction of the global banking industry, but the global banking industry performs the worlds banking. Existing currencies function as currencies, bitcoin basically doesn't.
You could solve a lot of problems by accurately internalizing the social cost of carbon, but carbon taxes are really unpopular and challenging to enforce and a bunch of other implementation problems that make them non-starters, especially as the silver bullet that they were understood as 15 years ago (https://www.volts.wtf/p/why-carbon-pricing-will-never-be). We go to war with the army we have. That's to say nothing of the international enforcement and transfers problem. If we had a world government where everyone could agree on a historically weighted carbon consumption tax which finances transfers to developing countries, well that would probably go a long way to fixing things. I just don't think that's going to happen any time soon so we have to fix the problem using the tools we have.
Cryptos are especially tricky in this regard as their structure kind of makes them unregulatable. If you somehow price crypto-mining to be cost prohibitive in the US or China, the mining moves to Russia or Bahrain or someplace else with dirty cheap power and no scruples. I have no idea how they should be regulated.
What I do see is a ton of energy and enthusiasm and hype from technically literate types for this technology, and I think it's misplaced. I also personally find it annoying
Investment in and of itself isn't good though! As a thought experiment, imagine that I somehow got access to the Fed's money printer and decided I wanted to fund an investment that painted every rock within the borders of the United States white to help with climate change. We'd spin up new paint manufacturers, there'd be a revolution in spray nozzles, a huge boom in tankers and pipelines for pushing paint into rural areas. Tons and tons of investment, all of which is incredibly stupid (like bitcoin)!
The key part in Matt's original post is, "no matter what you do, there is going to be some zone of risky speculative investments. And what you want is a world in which the risky speculative investment zone is also genuinely weird and potentially innovative. If doing something sensible like opening a dry cleaning shop in a strip mall counts as a high-risk/high-reward investment, then your policy has failed."
The argument is *not* that stupid investment is better than no investment, it's that it's better to be in a situation where risky/seemingly stupid investments lead to innovation in the rare cases where they pay off, rather than "oh my crazy bet on opening a corner store paid off, now we have a new corner store". It's not that bitcoin is better than a corner store in that example, it's that a strong economy correctly slots "bitcoin" into the risky investment pool and "new corner store" into the safe investment pool.
Right now, stupid investments are crowding out good ones because the excess money is pulling human capital to suboptimal places. If I had infinite money to make sure every rock in the US was painted white, there would be less dry cleaning shops because the paint manufacturing business would raise wages and the cost of equipment enough that it would drive out marginal dry cleaners, even if those dry cleaners were part of the societally optimal amount.
How does less money make the situation better? Why are you assuming that people with poor investment ideas are getting more money than people with good ones? This also continues to assume that you, specifically, know which investments will and will not pay off in the long run.
Because there are only so many useful ideas where money is the limiting factor but there are a near infinite number of bad ideas.
All I ask here, indeed I beg, is that no one try to convince me that the stock valuations of Elon Musk's various enterprises are in any way related to market fundamentals. I might die laughing.
The man knows how to market himself
https://www.wsj.com/articles/how-volkswagens-50-billion-plan-to-beat-tesla-short-circuited-11611073974
Tesla Motors finally succeeded in making a profit last year. Not by making and selling cars mind you. That came from selling tax credits to other auto manufacturers. Who will soon be building EVs and won't need to buy credits from Tesla or anyone else. And every one of them is better at manufacturing cars than Tesla.
And I'm sure you said the same about Nokia and Blackberry.
Big thing that Tesla has that could maybe, (long shot) justify the valuations is the lack of dealerships. The dealership industry is actually a few times the size of the manufacturing industry. If Tesla can get 1/3 of the auto market including the dealership side that might justify the valuations.
"But the “asset price inflation” hypothesis is that the value of owner-occupied housing goes up but the rent doesn’t.
So who’s mad about that? Nobody! It’s just good."
As an aspiring homeowner currently working in the CA tech industry, I do not see this as good!! I see it as a massive obstacle to the type of life I want.
As an aspiring homeowner in the Bay Area not in tech, I agree! And unfortunately (for me) probably with a lower ultimate salary potential.
And what is your rent doing? If it's rising with house prices, that's inflation. If it's not, invest your savings in a risk-tolerant way and wait
Rent and housing prices are not perfectly matched. Rent goes up 20% but housing goes up 300%
It was rising but covid offered some reprieve. Invest and wait is the only option. In the meantime, my family grows older without making memories in our home the way I did as a child.
Their is stuff in the Bay area you can afford you just don't want to live there. I can show you Condo's in East Palo Alto or Masons in Tracy. It is true that you cannot afford to buy a large hose in the most exclusive neighborhoods that you and your friend group where 90% have a degree consider normal, but you can buy in actual normal neighborhoods.
This is a gross mischaracterization of the housing crisis in the Bay Area. It is really, very bad for people of all incomes, and it's not caused by people being afraid of minorities or entitled attitudes from Millenial tech workers.
Having people of any income commuting from Tracy to the job centers is an immense daily waste of human and economic potential, while also being climate arson. There are some condos for sale in EPA, but the number of units is tiny.
Lastly, you missed the most important part: on the scale of the Bay Area, nearly all
the land suitable for housing and in commutable distance to a job center, could be described as "most exclusive neighborhoods...where 90% have a degree." It makes the Bay Area a place where the only millionaires can have stable finances, high-quality schooling for their children, reasonable commutes for parents, and a retirement. This fact is an affront American egalitarian/liberal values.
There are no normal neighborhoods. Especially in the South Bay and the Peninsula, this fact has been consciously engineered by a generation of homeowners and city officials, who have staked their retirements, lifestyles, and careers on turning California cities into state-sanctioned country clubs competing for the richest residents, rather than healthy communities full of people with a range of incomes, races, values, occupations, and backgrounds.
I live here too. And the attitude of people in the South Bay or peninsula toward the East Bay kind of offends me. It is true that East Palo Alto is small only like 15 square miles but the fact that is still sort of affordable makes think there is some snobbery going on. Also even in CA only about 34% have a 4 year degree or higher. Your Uber driver doesn’t have a 4 year degree. The staff at Chipotle doesn’t have a 4 year degree. Like ask people where they live. Also, you can commute from Tracy to Palo Alto in an electric car I used a hybrid. 50 mpg Prius C. I ultimately bought in the East bay my condo is worth like 480. if your working in the South Bay I would suggest the Tri Valley. Dublin and Livermore have lots of new construction. My commute to Palo Alto was 45 minutes if I left by 7. Tracy adds another 30 minutes. So it is really only an option if you must have a house.
I'd bet dollars to donuts that your Chipotle associate, Uber driver, etc. are either (a) living in very crowded living conditions (more than one tenant per bedroom), (b) living with family well past when they want to, or (c) are commuting from somewhere very far, like Vallejo, the Central Valley, etc. These are all hallmarks of a severe housing crisis.
I think it's pretty simple: If your city does not have enough housing to accomodate all of its daytime workers, including options affordable-enough for those daytime workers making relatively less (e.g. Uber, service workers, etc.), then it is exporting a housing crisis to its neighbors. Cities like that in CA are benefitting from the economic activity of large numbers of jobs, without paying the costs in the form of schools, infrastructure, emergency services, public transit improvements, etc.
I am a 10-year resident of the East Bay (Berkeley/Oakland), and I am also offended by the attitude of Peninsula and South Bay people about the East Bay, especially Oakland (many of whom are my coworkers). The Bay Area is very woke, except your your garden variety white-flight fear of living near brown people, pearl-clutching over the quality of the schools, "quality of life" as a euphemism for fewer brown people near me, etc. It's all alive and well here in sunny Santa Clara/San Mateo county. People who say things like "but if our company opened an office in Oakland, wouldn't the real estate savings quickly be overtaken by extra security costs" are breathtakingly ignorant and they should feel bad about that.
Maybe it's the pandemic, or maybe we need to agree to disagree on our facts, but pre-COVID there's no way the commute from the outer East Bay or down the 101 towards Gilroy is going to be less than 1 hour per way to tech companies in the South Bay. 90 minutes seems more likely.
In any case, 2-3 hour per day car commutes becoming considered what's normal to be able to afford a condo is what housing policy failure looks like. The snobbery exists: it's in Cuptertino, Palo Alto, Mountain View, every city in San Mateo County, etc. not providing housing for the workers their cities benefit from.
I really don't think $700k for 1bd/1ba condos in EPA is "sort of affordable" by anyone's definition, except for perhaps people in the Bay Area whose perspectives have been warped by the crisis. Those are Hong Kong/Shanghai/Tokyo-level condo prices, except instead of living in the a dynamic amenity-rich world city, you are down the street from Back-A-Yard, have a good commute to one employer and a livable commute to many others. And I love Back-A-Yard--the oxtails are amazing -- but it doesn't justify $700k condos in EPA.
Damm those one bedrooms on university are $700 now. As for commute from Tri valley to Palo Alto if you left at 7 you could be at work by 745 if you leave at 730 you get in at 9 am because apparently you can be 15 minutes early or an hour late no in between.
Richmond is super affordable I saw a condo there for 200k. But it is only a reasonable commute to SF and Oakland. Richmond to Mtn View etc is same time as Tracy maybe more. People really exaggerate how bad the altamont pass is.
Housing is not expensive in the Bay Area, but people are psychologically obsessed by housing prices to the exclusion of all else for many interest reasons I will not go into
Excuse me, we were talking about the San Francisco Bay Area here. What area were you talking about?
The Bay Area is the richest place in the world, it’s not even in the top 50 in terms of real estate prices
"Housing is not expensive in the Bay Area" where are you getting your facts on that one?
Quality schools for my children is the number one concern. Number two is a house with a yard where we can hunt Easter eggs or have a 4th of July BBQ. Building these cherished childhood memories shouldn't be out of reach for all but those who inherit homes.
There are many, many quality schools in the Bay Area. The problem is not a lack of quality schools, but a multi-decade campaign by cities in the Bay Area to keep kids out of their quality schools. They don't want people who can afford less than $1.5m for a house in their schools. That's the real snobbery.
Does it need to be detached from all of the other houses? Townhouses, duplexes, four-plexes, etc. are illegal in most of the Bay Area, and are exactly how humans have built affordable housing for centuries in places where land prices are high.
Well Pleasention is in the top 5 for school districts in the Bay Area the houses in Pleasention are crazy expensive but the Condos are like 400-700 for a 2 bedroom my community the condos are 400-500 and I have seen neighbors use the common area for Easter egg hunts. Better housing policy will actually result in fewer houses and more condos. The Tri Valley is one of the only the places that is pro building housing.
Better housing policy would result in fewer houses and more multi-unit housing of all kinds, but as I am sure you are aware, multi-unit housing is illegal in 82% of residential land in the Bay Area.
I am really curious to see how many people in a single family home get an ADU. Now that they are legal. A lot of houses have really small yards. My guess is maybe 10% will get an ADU it will help. But you need like 1/2 of all single family homes getting ADU because the numbers are that bad. I would like to see laws making it easier to be a landlord of an ADU so it truly easy money. It only takes one news story of the nightmare eviction to make a busy professional say it isn’t worth it.
It's extremely easy to be the landlord of an ADU. Indeed, in California there are companies that will put up an ADU in your back yard, rent out the property, and manage it, for a share of the income.
In San Jose, you can get approval for an ADU over the counter. That is, you hand them your permit application, and you get the permit that same day.
Tracy is not the Bay Area.
If the guy who makes your coffee and cleans your office every day in Mountain View lives in Tracy it is part of the commute pattern of the Bay Area. I know people who say Dublin is part of the bay even though it has 2 Bart stations. There are a lot of people who think the Bay Area is Marin to San Jose. I hear people say I would rather move to Texas than the East bay.
What do you mean "it's a part of the commute pattern of the Bay Area"? It's a BAD part of the commute pattern of the Bay Area, climate arson, and we should stop it. Also, the guy who cleans your office in Mountain View lives not in Tracy, but in Redwood City or East San Jose, in a two bedroom apartment with 11 other people. He got COVID from his work, and it spread to his grandmother, who died. Overcrowding is bad, and we should stop it.
First I agree build more condos in the Bay Area. However I don’t think the commute is necessarily bad for the environment in a Prius it is like one extra gallon of gas a day and electric cars can do the trip. Prior to Covid I liked the idea of multi generational housing being closer physically and emotionally to grandparents etc. I am hopping the ADU rules will make multi generational housing more live able.
Multi-generational housing is fine. Twelve people living in a two bedroom apartment is overcrowding, which is not fine. (I like ADUs too.)
Asset bubbles don’t matter? Believe it or not, I’m actually old enough to remember the financial crisis and the dot com crash.
The problem with asset bubbles is that people are actually wasting their money in crappy investments, but the investments go up on paper for a while and when the bubble bursts you have a recession because the wealth evaporates. People are suddenly a lot less rich - or even broke in the case of housing which is highly leveraged- and they need to act accordingly.
Worse if it hits a sector that is prone to financial contagion- such as mortgages- we get another enormous crisis.
At the end of the day, loose monetary policy is a lubricant for good investments that are hypothetically possible but lacking in capital under tighter policy. Loose policy does not create more hypothetical investments. So once all the good investments are fully funded, all the capital will flow to bad investments and bubbles become far more likely.
>> Now a situation that can arise is that rents rise by 7%, and therefore the price of owner-occupied housing also rises by 7%. This is going to be a tricky political situation, because it’s ruinous inflation for renters but homeowners will likely perceive it as a good thing.
See also: NIMBY
If my pay goes up by 2% but the price of housing goes up by 7%...
This is nice if I am a homeowner. I like it. But if I am trying to enter the home owner market, I don't like it so much.
Is is really that nice if you're a homeowner? I think its really only valuable if you intend to sell and move to a lower price area. Otherwise, its just all bad.
If you're house was worth $250k, and went to 500k. In theory, you had a 250k increase in home value. But in practice, if you didn't sell your house, all that happened was that you are now paying more in property taxes (assuming they're not frozen). Plus, if you do sell, then you might just be going to go buy a another house that went from 250k to 500k. Net you don't have any actual gain.
Prop 13 makes this situation extra pernicious in CA, because of the frozen property taxes.
Yeah, we saw a 50% increase in the value of our house over 4 years (and then sold), and it was pretty much just all bad. Maybe in 10 or 20 years if and when we downsize houses or move out of the area, it will retrospectively be a good thing, but honestly right now I'd rather that houses were flat in price and I had the hundreds of thousands back in something more liquid.
The benefits of increased house prices for homeowners are largely theoretical.
I guess you could say the same thing about all asset prices? While I think your points are valid, we could add some other points to them. The thing about selling then buying is a point that highlights the fact that a home is a little different than other assets, which you can just sell and cash out more easily. In fact, some say a home is not an asset at all. If that's true, I suppose everyone should rent. But please note that this is an option in your scenario. If you want to cash out that $250 without putting it back into another house, you can cash out and become a renter. At any time. One of the reasons I bought a house instead of renting is that I view my property as part of my long-term retirement savings plan. The value is real.
"If you want to cash out that $250 without putting it back into another house, you can cash out and become a renter." This balances out.
If you bought this house 10 years ago at a 5% interest rate, you've been paying about $1,350 in principle and interest on a 30 year mortgage. If you decide to cash out with 500k, then for you to "rent" at the same level, you will now need to pay $2,700 a month because the landowner can charge that as all houses in the area cost that much. You have cash in hand (~300k), but your monthly expenses are significantly higher! Its really only beneficial if you can find a way to decrease your rent by downsizing or moving to an area where costs are lower.
False if the price to rent ratio has changed. At the moment the price to rent ratio is back to where it was before the last crash. In that case rents are lower than the PITI on an equivalent unit.
True. It depends. I don't know what the ratio is, typically, which why I said it sounds about right. The claim was that it balanced. I am guessing this is close to true in most cases.
The ration may be off in the short term, but I would think they would be tied together pretty well over the long term. Do you have evidence otherwise?
"but I would think they would be tied together pretty well over the long term."
If interest rates were flat, yes. They have been falling for 30 years.
ratio, not ration
That sounds about right. And again it speaks to the point about housing being a unique asset as most people have to spend money on rent or mortgage one way or another, so when you are a seller on one side you are a buyer on the other. I would just add that to this point another point, which is that this circumstantial fact does not change the other fact that you do have a valuable asset that you can sell. You do have the option to downsize. You do have the option to move to a lower cost of living area. These are real options that put real money in your pocket because the value of your house going up is a real thing. It is real value.
I agree that people could. People could move to Mozambique and live like kings! But they don't. And they don't want to. Silly people.
I live and work in the city. When I retire I plan to downsize a bit and live in the country. I probably won't have to go to Mozambique. I think I will have other options. No one knows the future, but I think I will have a decent chance that I will be able to cash out and take advantage of my investment.
Is it your opinion that buying a house is a mistake and that people would be better off to rent?
yea but you can buy less space buy a 2 bedroom condo rather than a house for your family and make the 2 kids share a room. You can consume less real-estate to keep more of that pay bump.
So the argument here is... that speculative bubbles are always good, except maybe in the special case of housing?
That seems to be your thesis, and it also seems obviously false in the abstract. (Although it may be true that the *current* behavior of markets is more good than bad.)
Can we get a post about the dangers of speculative bubbles, and why you're not worried about those dangers right now?
Before the housing crash, everyone assumed that if someone bought a house for $500k and it later fell to $250k, if they could still afford to pay the mortgage they would. It came as a shock when it turned out that if prices fell people who could still pay their mortgages didn't. In terms of the current bubble I haven't heard that risk being mentioned at all.
“Three percent inflation is fine”
No it’s not. At 3% inflation you lose almost half the value of your money in 20 years. That’s horrible.
As for asset inflation. You might think it’s good for the value of your home to be going up fast. But what if you don’t already own a home. Say you are just starting out trying to build a family, and all the home prices are crazy high. How do you feel then?
Not to mention most people are horrible at math. They take advice from realtors and lenders telling them of course they can afford the home they really can’t. What happens then (see 2008)
As for stocks, a stock valuation should be seen as ownership in a future dividend stream. When stock prices rise (and not driven by earnings increases) what that really means is you are paying more and more money for that future dividend stream. IE, you are getting less of a return (and maybe a negative one). Given current PE ratio’s, if you are buying right now, you should expect a negative return over the next 7 years)
See GMO’s excellent asset return forecast
https://www.advisorperspectives.com/commentaries/2021/01/21/gmo-7-year-asset-class-forecast-4q-2020
“But if Powell could give me $20,000 and you $20,000 and everyone else $20,000 without prices rising, that would be amazing. You could end poverty!”
No, no, no. Money is a claim on assets. If you just create a bunch more money, what you have done is devalued that money in relation to the same asset base. Printing money doesn’t create wealth, just more money.
"At 3% inflation you lose almost half the value of your money in 20 years. That’s horrible."
He did acknowledge that inflation erodes savings. I am not sure I would call it "horrible" that money under my mattress is half as valuable in 20 years. This fact makes me less inclined to put my money under a mattress to begin with. Maybe that's a good thing. At least, probably better than the reverse. If the value of my money doubled in 20 years, then I would have incentive to hoard it. That may well be much more horrible for the economy, in fact.
Deflation is, yes, bad for the economy. Much worse for the economy than symmetrically high inflation.
I think it's pretty clearly a good thing that sticking your money in a mattress isn't incentivized. What's money for in the abstract? To reduce the friction of commerce. Barter economies are a real pain in the ass, so we invented gigantic stone rings as a medium of exchange, store of wealth, and unit of account. If currency is deflating we're introducing this gigantic new friction of "just holding the money will be worth more than buying something" so then nobody buys anything and commerce halts. Money is for efficient commerce, deflation is antithetical to that
The case in the bank (or most other places) worth less as well.
It's a real problem if you've been saving money to say retire on
Yes, it is a real thing. Matt acknowledged this. I am not convinced it is "horrible" which is the word that is being disputed here.
He said it's fine. It's not fine, it's bad
He also said inflation is "undesirable." His exact words were:
"Inflation is bad"
"The key thing about inflation is that it’s undesirable."
In context, he is distinguishing here between inflation (bad) and asset inflation (not bad).
In that context, he is further saying that inflation (bad) of 3% is "fine" - which he defines as meaning "not a disaster."
So, full context: asset inflation, not the same as inflation. Inflation is "bad" but 3% is not a "disaster."
Further, he acknowledges that "people worry about inflation because it erodes the value of accumulated savings."
So it seems to me that he fully acknowledges the view that inflation is "bad" but argues that at 3%, it is not "so bad" and more to the point, asset inflation is a different category that is not bad in the way that inflation is bad - i.e bad in the sense of eroding savings:
"asset prices going up doesn't erode savings; in fact, it usually does the opposite."
"At 3% inflation you lose almost half the value of your money in 20 years."
Only if you hold cash and why would you hold cash? If inflation is 3% and CDs are paying 5% then you don't have anything to complain about, do you? If inflation is 3% and CDs are paying 1% then that's a problem. But 3% inflation by itself isn't a problem.
Do most people have access to non-cash options? Home ownership rate is 65% https://www.census.gov/housing/hvs/files/currenthvspress.pdf, stock ownership rate seems to be 55% https://news.gallup.com/poll/266807/percentage-americans-owns-stock.aspx. I wouldn't think those are independent. It sounds quite plausible that a quarter or a third of the country doesn't have a good ability to hedge against inflation.
True, but if you have fixed-rate debt you benefit from inflation. I think this is the way people typically conceptualize inflation--that it is "progressive" because it benefits debtors and causes creditors to get paid back with future dollars that are not worth as much. Clearly credit markets defy this sort of simple explanation but it does represent sort of a "hedge" for some people against inflation.
Most brokerage accounts are now commission free and many also have no minimum required to open an account. There is nothing stopping someone from buying stock if they wish.
What do you think happens if interest rates go up to 5%?
Take a look at the federal debt, and calculate the interest at 5% (or even 3%)
Moreover, it's quite likely that inflation will be 3%, and interest rates will be at 2%, or even 1%.
You hold cash because you want your resources to be liquid.
Sure you need an emergency fund but that should only be a small percentage of your savings by the time you hit your 50s. The majority of your wealth shouldn't be in cash.
When you retire, most of your savings should be in cash like vehicles. CD's, Bonds etc. Those get hammered with inflation
People saving up for retirement get hammered by low inflation. At least retirees can hedge against inflation. If you're in your 20s with 5% student loans or your 30s with a mortgage, your only option is to make more money. Except the low growth that's tied to low inflation makes that difficult.
I couldn't agree more if you said that water is wet. But the median person's net worth is ~100k, and for many people that is the mostly wrapped up in the mortgage. Over 40% of American's would have to borrow or sell something to cover a $400 emergency, and 25% of households making 100k-150k couldn't raise $2,000 in a month without borrow or selling.
This article was mind boggling when I read it: https://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/
But if they have no money then they are at no risk of having it inflated away.
Biggest concern is if their wages don't keep up with price inflation. So long as they are increasing at similar rates, unlikely to impact people at the bottom.
That was a sad article. The core of his problem is that he's too generous.
This is a very silly argument that has become dogma among Bitcoiners and their compatriots. There is no reason to own a large volume of cash. If you are dumb enough to do so, you probably deserve to have your wealth inflated away. Every financial investment (savings accounts, corporate bonds, Treasuries, inflation-protected securities, equities) has as part of its expected return an expectation of what inflation will be in the period you hold the investment. Every non-financial investment has to clear an IRR that includes an expectation of what inflation will be. You may not have realized, but people have thought about this before you did.
As other people have hinted at, we would generally expect 3% inflation to be something that investments would just compensate for. There's some friction in that, so if inflation is super high or super inconsistent, it stops being possible for everything to just more-or-less cancel out inflation, but in a world where we have pretty consistent approximately 3% inflation, we expect nominal returns to increase such that we have roughly the same real returns as in a lower-inflation world.
I think a key part of this claim is that the asset base remains the same. I think this is more true with services, but much less true with scalable goods (TVs, phones, etc.) and not at all true of digital goods.
If everyone was given $1,000 and only spent it on Slow Boring subscriptions (or other lesser digital goods), then would money be devalued?
I understand that housing prices going up while rent stays the same is a win and not-loss for home owners and renters, respectively. But isn’t it a loss for renters who are in the market to buy a house? Isn’t this one of the reasons fewer and fewer youngish people are making the leap from renting to owning?
I’m just saying it isn’t a free lunch. There are still winners and losers in this example.
The Fed's balance sheet doubled in 2009, then doubled again in 2014, and then doubled again in 2020. Ray Dalio said it best ... "Cash is trash." You need to decouple the "asset inflation" from the dollar devaluation. It's not that assets are more expensive today then say 10 years ago, it's that the dollar is worth so much less. P/E ratios could go to 50x in this environment - not because the fundamentals of the business are strong but because the shares are priced in dollars. It's weird to say this "is not a thing". This is *THE* macro move of our generation.
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
What on earth are you trying to say here? How much does it cost you to buy a barrel of oil from Saudi Arabia? Is that proof that the dollar is worth much less than 10 years ago? It is the case that assets are more expensive 10 years ago, which was the point of Fed interventions after the financial crisis. They wanted scared investors to go out and buy equities. And it worked.
I find my statement clear. What confuses you? Do you believe the dollar hasn't been devalued by the Fed's actions?
it is possible if the ratio of labor to capital changes Capital gets a lower return on investment. That is basic principal of economics but people tend to ignore it because over the short term labor to capital ratios appear fixed.
Aren't the earnings priced in dollars too?
They can be (i.e., it depends on the global distribution of revenue streams) but I'm not sure I follow the question. Are you reacting to using a P/E ratio as the relative metric to compare company valuations to other asset classes?