gzz Comments on Rich's new article

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Submitted by gzz on October 18, 2021 - 1:17pm

Asking rents rose by 9% in our July-July period, which is a lot, but is dwarfed by the 20% rise in home prices. In San Diego, asking rents rose 12% against the 28% increase in home prices

Some reasons for this that don't imply prices are overshooting rents:

1. Rents are stickier than residential prices. Both are on the sticky side, with mortgage appraisels an example of a price-only factor.

But rents are literally 100% sticky for a lot of people because they are fixed by contract, as in 12 month leases. Some also have built in annual increases, which are certainly not going to be in the 28% YoY range.

2. Rent increases are legally limited. In San Diego the restriction isn't too intense, I believe 60 days notice for an increase of more than 10%. Nonetheless, the restriction exists.

3. The eviction moratorium shifted the legal landscape against landlords. Landlording involves a small risk that a tenant will become a costly disaster who stops paying rent, trashes the place, and fights eviction.

4. Low stakes. Raising rent can always be put off till next year at fairly low cost. $1200 less rent over a year on a property that appreciated by $300,000? Who cares! Taking lower than market rent can and often is a combo business decision, lifestyle decision, and small act of charity and goodwill in a way that selling for 10% under market in a hot market never will be.

Of course these factors primarily apply to current tenants, and can be worked around by looking at asking rents for vacant units. But they still matter: if rents are below their "economic value" set by supply, demand, and the alternative of buying, current tenants will sit tight and not enter the market for vacant units.

Shorter version of my thesis is that a large number of sticky price factors, not just the four above, mean that rents simply never make the dramatic moves price do. The corollary of this is that prices could go flat for 3 years, but rents would likely keep rising at a moderately fast clip until they more or less match the price increase.

The best evidence of my thesis that rents are temporally below market clearing prices is that there is a shortage of them. And it certainly seems that way, my co-worker who recent moved talked about tons of people showing up to rental open houses and offering more than list price. Published vacancy rates are very low too. A gigantic LA complex I am familiar with from work is exactly 1% vacant despite raising asking rents by about 60% over the past 8 years.

Submitted by Rich Toscano on October 18, 2021 - 1:46pm.

I agree that rents in the CPI (which measures what landlords are getting on average) is way understated, for all the reasons you cited. This is why I cited asking rents for newly available properties as the comparison. I believe that nullifies 1-3? Maybe not 4 though.

Submitted by sdrealtor on October 18, 2021 - 2:15pm.

Rich I beleive the asking rents you posted (you can correct me if Im wrong) are for large complexes which dont wait until next year. They are always on the bleeding edge of rising or falling rents so I think that takes care of #4 also.

Submitted by gzz on October 19, 2021 - 1:45pm.

The idea here isn't to argue that rents are currently not keeping up with prices. The data is what it is, and I don't have reason to doubt it is basically right.*

My point is that relatively slow asking rent growth "only" in the low double digits isn't a sign that prices are excessive and overshooting rents. The article's comparison of them suggested otherwise.

Rather, I think rents are temporally below their current equilibrium level.

*My periodic searches for rent data suggest the data quality is pretty low, with huge gaps from the various sources.

My guess is that Zillow will eventually have the best rent data, though the monthly rent estimates it sends for me on my condo have ranged from 2400 to 3500 in the last year, and swings wildly.

Submitted by gzz on October 19, 2021 - 2:26pm.

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we'll ever get back to pre-COVID levels on a lot of these issues.

I think these broad "fun outside the home" areas that ranges from trips to France to Applebees, will never recover.

Older people, even fully vaccinated, are frequently afraid to resume these activities. Others don't like the additional hassle, like covid tests before you can come home from a trip abroad.

And on top of just older people, you have a lot of younger people who consider themselves immuno-compromised, and young people who are in regular contact with elderly relatives.

Then there's the labor shortage issue. Restaurants in general have worse service and higher prices than before.

Here's one way the new "nesting in a bigger home" is permanent for me. I spent a ton of money setting up a full home gym. This has both saved me money on gym membership and transportation costs to get there, but permanently increased my demand for residential housing.

What percentage of the population will never go out to the movies again because they upgraded their home theater system with high end speaker and an 60-inch TV or even a projector setup?

Submitted by gzz on October 19, 2021 - 3:06pm.

The main point of contention is whether the recent rise in inflation will be temporary or more protracted.

You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.

That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.

The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don't work that way.

Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent "creditworthy borrower's" market. We are getting rarer, and savers are getting more common.

You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.

The idea that savers can say "Due to higher inflation, I won't lend out my money unless I get a commensurable higher rate" just doesn't fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn't get his desired rate.

Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.

Submitted by sdrealtor on October 19, 2021 - 3:24pm.

gzz wrote:

*My periodic searches for rent data suggest the data quality is pretty low, with huge gaps from the various sources.

My guess is that Zillow will eventually have the best rent data, though the monthly rent estimates it sends for me on my condo have ranged from 2400 to 3500 in the last year, and swings wildly.

Yes just like the sales data which may be even lower quality. But for rents they use big complexes that are homogenous units and about the best one can do. They dont sepak for the entire market but they are a good proxy and consistent over time which is much more than I say for sales data of heterogenous homes with complex terms more often than not inaccurately reported

Zillow will never have the best data. unlike sales there is no public recorded data on rents unlike sales. The big complex data is and always will be the best we can do.

BTW its ok to say I was mistaken from time to time you should try it some time

Submitted by sdrealtor on October 19, 2021 - 3:21pm.

gzz wrote:

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we'll ever get back to pre-COVID levels on a lot of these issues.

I think these broad "fun outside the home" areas that ranges from trips to France to Applebees, will never recover.

Older people, even fully vaccinated, are frequently afraid to resume these activities. Others don't like the additional hassle, like covid tests before you can come home from a trip abroad.

And on top of just older people, you have a lot of younger people who consider themselves immuno-compromised, and young people who are in regular contact with elderly relatives.

Then there's the labor shortage issue. Restaurants in general have worse service and higher prices than before.

Here's one way the new "nesting in a bigger home" is permanent for me. I spent a ton of money setting up a full home gym. This has both saved me money on gym membership and transportation costs to get there, but permanently increased my demand for residential housing.

What percentage of the population will never go out to the movies again because they upgraded their home theater system with high end speaker and an 60-inch TV or even a projector setup?

I cant begin to tell you how big the resale market is for unused home gym equipment. Much of it is given away or tossed within a year or two

Submitted by gzz on October 19, 2021 - 3:22pm.

None of these are predictions. (We think anyone who has a confident multi-year interest rate forecast is deluding themselves).

But you are making a very bold prediction. You outline four scenarios and their impact on affordability, one where they stay the same and three more where they go up by varying amounts.

You all but rule out what I believe is quite likely, which is rates go down.

I also, for the reasons above, think you may be implicitly dismissing the chance of higher inflation with declining or flat rates.

While I think the low inflation and low rates is most likely, high inflation low rates is an easy enough scenario to imagine: BIB and BBB both pass, the boom continues, incomes rise and partly bleed into higher prices, but partly are saved. Dem gains in 2022 are unlikely but possible, and I think would lead to an even bigger round of BidenBux that again is split between consumption and debt reduction.

This chart is illuminating.

https://fred.stlouisfed.org/series/HDTGP...

The cost of debt keeps going down, but it doesn't matter, the quantity of debt demanded goes down even more.

Submitted by gzz on October 19, 2021 - 3:53pm.

I cant begin to tell you how big the resale market is for unused home gym equipment.

Not for the high end of the market.

I think a lot of the "big market" for used home fitness is low quality stuff advertised on TV or sold at WalMart. People don't end up using it because it is uncomfortable, wobbly, and hard on the joints.

I am tightwad, so I looked used before buying my $9200 elliptical (now $10,200). I really wish I could have gone with a cheaper model too, but I was used to a particular model that I used for years at 24 Hour Fitness and EOS, and everything else felt flimsy, shaky, and unable to let me go all out when doing interval training. This one here:

https://www.precorhomefitness.com/produc...

A lot of equipment hit the market at that time because of gym bankruptcies. It got snapped up in days, I know because I called the listings for multiple gym bankruptcy sales.

Submitted by sdrealtor on October 19, 2021 - 4:50pm.

You won't see it for resale in areas where people don't buy it as often like in OB. You should check up here. I see high end stuff all the time

Submitted by Escoguy on October 19, 2021 - 8:04pm.

gzz wrote:

The main point of contention is whether the recent rise in inflation will be temporary or more protracted.

You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.

That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.

The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don't work that way.

Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent "creditworthy borrower's" market. We are getting rarer, and savers are getting more common.

You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.

The idea that savers can say "Due to higher inflation, I won't lend out my money unless I get a commensurable higher rate" just doesn't fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn't get his desired rate.

Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.

Going out on a limb here but I think 24-36 months out we could be setup for a meaningful soft patch with odd side effects:

Not sure there is any specific action a person can take other than to have some reasonable liquidity/reserves/open lines of credit: much of the stimulus funds are unspent but think by 2024 that is gone.

1. the supply chain issues will have worked themselves out, even PC demand is set to slump about 5% in coming 12 months heard on CNBC today
2. shipping costs will come back to historical trends
3. energy prices will soften (perhaps at somewhat elevated levels)
4. housing will enter a period of 3-5 years of under performance (mean reversion) 2023-2026 it may still be 1-2% nominal increases but likely below inflation (over 3 years could drop 5% adjusted for inflation).
5. unemployment will rise and stay below 2019 levels in tourism/restaurants
6. will hit some limits of government stimulus
7. USD will stay relatively flat with low interest rates (safe haven effect) but continued political infighting will prevent signifiant boost to growth via public investment
8. US growth may actually outpace China for a couple of years as China starts to show age from demographic shifts (10-15 years out it gets worse for them)
9. stocks are the hardest to predict as there has been so much obsession with the US market so momentum likely to continue, many international markets are more fairly valued but the momentum catalyst is often missing
10. Don't want to make political predictions but if we don't get better choices in 2024 (could be catalyst for meaningful volatility), revulsion at whoever is perceived as extreme could cause more damage
11. certain commodities (think coffee) may be the best investments (something like 1/3 of the Brazilian crop was wiped out in August and may take years to recover

In a nutshell, I'm not going to go hard on raising rents. I can be fine with lagging the market but having higher quality tenants. The more secure cash flow is more important than getting every last dollar. Content to play catch up as the occasional one opens up.

I put this out there as the rental income would potentially become the money I live on if I work less or retire. The predictability is more important.

Submitted by zk on October 20, 2021 - 8:19am.

gzz wrote:

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we'll ever get back to pre-COVID levels on a lot of these issues.

I think there's an awful lot of pent up demand for such things. I and a lot of people I know are busting out of this confinement we've been enduring with renewed appreciation for getting out there and doing...anything but sitting around at home. I'm definitely spending on those things at a higher rate now than pre-covid.

gzz wrote:

I am tightwad, so I looked used before buying my $9200 elliptical (now $10,200)...

https://www.precorhomefitness.com/produc...

Gym-quality ellipticals are built tough, and that should last you forever. I bought mine:

https://www.worthpoint.com/worthopedia/l...

in 2006. I bought it used and I've been using it (very vigorously) 3-4 times a week for 15 years with not so much as a hiccup. Before I bought that one, I bought an elliptical at Walmart for $250. The frame snapped at a weld (during an interval peak) on the last day of the (30-day?) warranty. I don't think those cheap ones are even really meant to be used seriously.

Submitted by carlsbadworker on October 20, 2021 - 10:48am.

gzz wrote:

The main point of contention is whether the recent rise in inflation will be temporary or more protracted.

You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.

That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.

The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don't work that way.

Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent "creditworthy borrower's" market. We are getting rarer, and savers are getting more common.

You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.

The idea that savers can say "Due to higher inflation, I won't lend out my money unless I get a commensurable higher rate" just doesn't fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn't get his desired rate.

Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.

Very good points. I like it!

Submitted by gzz on October 21, 2021 - 12:57pm.

ZK your pic took me back, that looks like my favorite model from my college days in 1998-99.

I am happy to hear you have got so many years of good use, that's my justification for spending $9200 on one. It was the last item I really needed for the home gym that will save me about $300 a year in membership fees, and which I will actually use more and not have to drive to. I also like having my own music with a Bose sound system, not the increasingly bad music at the gym mixed in with loud advertisements and repetitive instructions to always wipe down and download the gym's app.

Nothing like being able to get a 3 hour workout and not have my knees and feed hurt the next day. Though after hitting my weight loss goal I have been focusing on upping intensity not time, so average 1.5hrs 3x a week now, and only go 3 hours about once a month.

Submitted by gzz on October 21, 2021 - 1:07pm.

I agree with these ones:

Escoguy wrote:

1. the supply chain issues will have worked themselves out, even PC demand is set to slump about 5% in coming 12 months heard on CNBC today
2. shipping costs will come back to historical trends
3. energy prices will soften (perhaps at somewhat elevated levels)
6. will hit some limits of government stimulus
7. USD will stay relatively flat with low interest rates (safe haven effect) but continued political infighting will prevent signifiant boost to growth via public investment
8. US growth may actually outpace China for a couple of years as China starts to show age from demographic shifts (10-15 years out it gets worse for them)
9. stocks are the hardest to predict as there has been so much obsession with the US market so momentum likely to continue, many international markets are more fairly valued but the momentum catalyst is often missing
10. Don't want to make political predictions but if we don't get better choices in 2024 (could be catalyst for meaningful volatility), revulsion at whoever is perceived as extreme could cause more damage
11. certain commodities (think coffee) may be the best investments (something like 1/3 of the Brazilian crop was wiped out in August and may take years to recover

I don't agree here:

4. housing will enter a period of 3-5 years of under performance (mean reversion) 2023-2026 it may still be 1-2% nominal increases but likely below inflation (over 3 years could drop 5% adjusted for inflation).

How is this going to happen when there are far more buyers than sellers, and construction costs are high in all the hot markets? The switch to Biden will also up residential demand via immigration and Chinese buyers feeling more welcome.

Also, don't forget the sticky price issue, while stronger for rents, still applies for RE pricing because (1) appraisals need to catch up (2) the confirming loan limits right now are way below what they should be because they only get updated in January. In fact, right now is probably an all-time record low for the ratio between median price and conforming loan limits, which will be followed by a record large increase.

I think China will start feeling its demographic changes pretty soon, but still has at least five years of torrid 5% real GDP growth left in it before that happens. They have a highly educated and skilled workforce and increasingly first world infrastructure. Their stock market is full of scams and there's no investor protection from fraud or government seizures, so I wouldn't invest there however.

Submitted by gzz on October 21, 2021 - 1:10pm.

If mortgage rates remain at the post-pandemic average of 3.0%, it will neither help nor hurt affordability from this point.

To offset a rate rise to 4.1% (the pre-pandemic average in the above chart), home prices would have to decline by 13%.

To offset a rate rise to 4.9% (the high point in the graph reached in 2018), prices would have to drop by 21%.

If the inflation-worriers turned out to be right, and rates broke above their pre-pandemic range, perhaps mortgage rates might rise to 6%. This is not an outlandish number… it’s about 1% above the level reached in 2018, and is somewhat below the average rate for the decade of the 2000s. To offset the affordability hit from a 6% mortgage rate, home prices would have to drop by 30%.

None of these are predictions. (We think anyone who has a confident multi-year interest rate forecast is deluding themselves).

Rich's four interest rate scenarios are kind of like Stephen Colbert's frequent interview question: "George W Bush, great president, or greatest?"

Submitted by Rich Toscano on October 21, 2021 - 4:02pm.

gzz wrote:

If mortgage rates remain at the post-pandemic average of 3.0%, it will neither help nor hurt affordability from this point.

To offset a rate rise to 4.1% (the pre-pandemic average in the above chart), home prices would have to decline by 13%.

To offset a rate rise to 4.9% (the high point in the graph reached in 2018), prices would have to drop by 21%.

If the inflation-worriers turned out to be right, and rates broke above their pre-pandemic range, perhaps mortgage rates might rise to 6%. This is not an outlandish number… it’s about 1% above the level reached in 2018, and is somewhat below the average rate for the decade of the 2000s. To offset the affordability hit from a 6% mortgage rate, home prices would have to drop by 30%.

None of these are predictions. (We think anyone who has a confident multi-year interest rate forecast is deluding themselves).

Rich's four interest rate scenarios are kind of like Stephen Colbert's frequent interview question: "George W Bush, great president, or greatest?"

Whatever man. It says right there - in the part you quote! - that these aren't predictions. They are illustrations of potential affordability impact IF rates were to go up. (I also included a neutral scenario to indicate that current rates neither help nor hurt, because they are already priced in to the affordability measurement).

Your statement in another comment above that I am making a "bold prediction" is similarly bullshit.

As to the rest. You know, it's funny, I actually agree with a lot of the things you've written about interest rates, particularly your thoughts on how wealth inequality impacts inflation and real rates.

My main disagreement is with how useful this info is. For one thing, it's backwards looking - who's to say that those underlying causes won't start to shift in the other direction at some point? And for another, it's reductionist. This is a very complex puzzle; you are overly focused on one piece of it and seemingly don't know or don't care that the rest of the puzzle exists. I will note here that while you have a lot of good insights, you've also occasionally shown some pretty basic gaps in your knowledge of this general topic.

So all in all, while I find many of your arguments compelling, your declarative predictions about the future of interest rates strike me as ludicrously overconfident. As I've said before.

I don't know why you're trolling me here with your bad-faith reading of what I wrote. Are you trying to get me to argue with you about interest rates? Sorry, I don't want to. You have all the answers already, so what's the point?

Submitted by carlsbadworker on October 22, 2021 - 11:18am.

Rich Toscano wrote:
Are you trying to get me to argue with you about interest rates? Sorry, I don't want to. You have all the answers already, so what's the point?

Well. It would at least help the rest of us to think about interest rate expectation.

I believe the market is currently expecting that in one year from now, FED will raise interest rate by 25 basis points. Canadian FED will raise the rate by 75 basis points. UK rate will trend around 1%.

I completely agree with gzz's point that the long run interest rate will be suppressed and FED is right to delay raising the rates, but in the middle term, inflation will force many governments to act, especially more "socialists" governments.

Submitted by gzz on October 25, 2021 - 3:23pm.

Not trolling, that would mean I am being insincere about something to provoke a reaction.

I understand you don't see yourself as making predictions. But what I see in your article are implicit assumptions that amount to predictions about the future.

The two big ones are

(1) rates have probably hit their lows and the realistic future scenarios are higher rates or flat rates

(2) a move in inflation above 4% for a few years will lead to higher nominal rates. I.e., you seem to discount (no pun intended) the possibility of extended and highly negative real rates.

who's to say that those underlying causes won't start to shift in the other direction at some point

The big underlying cause of declining rates is demographic. And the big demographic shift certainly is not going to go in the other direction. Hungary and Russia are the latest nations that have spent a ton of money subsidizing births. And they did get some return, in the sense of getting birthrates to go from 1.4 to 1.7 children per woman for Hungary and Russia from 1.2 to 1.5 (if I remember the exact numbers right).

But there's zero examples of nations headed toward aging and declining working age populations actually reversing trend. And while there are few exceptions, aging and declining fertility are trends that are accelerating, and spreading from the developing world increasingly to poorer and middle income nations.

And even if we could somehow go back to 2.2+ TFR, demographic momentum means this would have to last for 15+ years to have a serious dent in long term economic trends.

So I plead guilty to dismissing the possibility of this trend "shift[ing] in the other direction."

The trend of growing inequality I also don't see changing, even though it could happen much more easily.

The developed world has a mix of parties that support inequality policies openly like the GOP and those that pretend to care, or are ineffectual and corrupted, like the Democrats. Bernie can't even win a Democratic primary. And in a hypothetical where he or someone similar becomes President, he needs 60 votes in the Senate to pass major legislation which is never going to happen because rural midwestern and western areas that used to vote for Democrats have stopped.

In the EU meanwhile, the ECB smashes down any party that seeks to address inequality.

All of this political analysis applies equally to inflation, which is an egalitarian policy that elites around the world have demonized and crushed. The MSM is just packed the past year with awful scare stories about inflation, but never covers deflation. Here's Irvine progressive journalist Kevin Drum debunking a related MSM scare story:

https://jabberwocking.com/there-is-no-dr...

I'll worry about inflation when I start seeing articles about the positive effects of inflation. Fat chance!

Submitted by an on October 25, 2021 - 3:55pm.

gzz wrote:
I'll worry about inflation when I start seeing articles about the positive effects of inflation. Fat chance!

Did we have articles about the positive effects of inflation in the mid to late 70s?

As for worrying, I would only worry if I'm not prepared.

Submitted by XBoxBoy on October 25, 2021 - 4:24pm.

gzz wrote:
The big underlying cause of declining rates is demographic.

I'm not sure I buy this statement at all. I've felt for a long time the main cause of declining rates is that the federal reserve (and other central banks) have followed a loose money policy because they can. And why can they? Two main reasons:

1) Globalization has destroyed workers ability to demand higher wages. In the 1950's and 1960's American workers were able to demand pay at a certain level. But with globalization, we brought a couple billion more workers into the workforce, generating an oversupply of workers. (Particularly factory workers) This has held wages down and greatly reduced costs of labor, which otherwise would have been passed on into higher prices.

2) Automation. Increased automation has also greatly reduced the cost of labor, and allowed for the cheaper production of goods. Just like globalization, this is a very deflationary force.

I would put demographics a distant third to these two issues.

Which begs the question, could these trends change? I have no crystal ball, so I won't make a prediction about what they will do, but only what they could do.

Globalization could be reaching the end of it's deflationary run. At this point lots of agrarian poor have moved to the cities and are now trying to make their way into the consumer class. As they buy more stuff, (with their wages) that could turn the tide. (Maybe)

Automation: A lot harder to know. I would have thought by now we would have already seen a lot of deflation due to automation. But hasn't happened on the scale I expected 10 years ago. We still don't have driver less cars, delivery vans, or taxis. Maybe someday. There's always been a debate in economics about whether automation would displace enough workers so that we didn't have jobs for people. I used to think that was going to happen. Now, I'm not so sure. Maybe the side that says, "don't worry, people will just find different, even better jobs" is correct. (Or maybe not, who's to say)

Regardless of my uncertainty about the two above trends, I think your certainty that the lack of inflation and the inevitability of low rates is something you should rethink.

Submitted by carlsbadworker on October 25, 2021 - 10:35pm.

XBoxBoy wrote:
gzz wrote:
The big underlying cause of declining rates is demographic.

I think your certainty that the lack of inflation and the inevitability of low rates is something you should rethink.

I don’t think gzz said anything about lack of inflation. His prediction is about rate, which is about oversupply for saving v.s. market demand for those saving.

If I understand him correctly. He is saying that demographic change creates more savings and the rich also has excessive saving, that they will accept however low returns due to these excessive savings that there’re not enough market demand for it (e.g. lower corporate investment demand).

The logic is sound to me.

Submitted by XBoxBoy on October 26, 2021 - 7:44am.

carlsbadworker wrote:
XBoxBoy wrote:
gzz wrote:
The big underlying cause of declining rates is demographic.

I think your certainty that the lack of inflation and the inevitability of low rates is something you should rethink.

I don’t think gzz said anything about lack of inflation. His prediction is about rate, which is about oversupply for saving v.s. market demand for those saving.

If I understand him correctly. He is saying that demographic change creates more savings and the rich also has excessive saving, that they will accept however low returns due to these excessive savings that there’re not enough market demand for it (e.g. lower corporate investment demand).

The logic is sound to me.

Okay, fair enough. Allow me to revise my last sentence to say, "I think your certainty that the inevitability of low rates is something you should rethink".

While I don't think gzz's premise about increased demand is wrong I think it will get overwhelmed by the policies of central banks. Sure, the amount of savings might be growing, and that extra demand for bonds would cause lower rates. But when central banks buy trillions of dollars of bonds that's a much bigger impact. And central banks can only do that because inflation is so low.

My premise is that without the deflationary forces of globalization and automation, central banks would not have been able to drive interest rates so low. While I fully agree that an increased rate of saving (whether from demographics or other forces) would cause lower interest rates, I do not see that as the principle driver of low rates.

Worth considering, if gzz's premise is correct then we should be able to find data to back up the claim that between demographics and income inequality the rate of savings has been going up. (And that's what is causing low rates) I don't have that data, but a quick google gets me this:
https://data.worldbank.org/indicator/NY....
The data displayed there shows an increase in savings rate relative to GDP but not a substantial increase. And the last decade is mostly flat. Perhaps there is better data out there, but without solid data, I'm going to continue to question gzz's premise that the big underlying cause of declining rates is demographic. To me both globalization and automation are likely to be causing a bigger impact.

Submitted by DaCounselor on October 26, 2021 - 11:26am.

[quote=gzz]

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we'll ever get back to pre-COVID levels on a lot of these issues.

I think these broad "fun outside the home" areas that ranges from trips to France to Applebees, will never recover.

______________

Never recover? My math might be bad, but I think Never sounds like a very long time. Never?

In my own experience, and that of my family and social circles, there has been and is an enormous pent-up demand for travel and any variety of outside the home activities. People want to get back to a pre-pandemic lifestyle. A lifestyle comprised of work from home all day, school from home, cook at home every meal, work out at home, movies at home, Zoom calls from home to relatives instead of travel, etc etc etc is not what people desire. At least not the people I know.

So I would disagree, I think we will see a recovery over the coming years.

Submitted by sdrealtor on October 26, 2021 - 12:34pm.

Agree, Napa was great last weekend and Vegas was great this weekend even though we lost the game. Did not run into metrosexual slumlord either

Submitted by gzz on October 26, 2021 - 3:52pm.

I don’t think gzz said anything about lack of inflation. His prediction is about rate, which is about oversupply for saving v.s. market demand for those saving.

If I understand him correctly. He is saying that demographic change creates more savings and the rich also has excessive saving, that they will accept however low returns due to these excessive savings that there’re not enough market demand for it (e.g. lower corporate investment demand).

Correct. And whether inflation is 1.5% or 5% has very little to do with this.

Did we have articles about the positive effects of inflation in the mid to late 70s?

No, but the political system was not so biased in favor of hard money elites, meaning inflation was possible, and officeholders feared high unemployment and low wage growth more than inflation.

Now officeholders are either or both hard money true believes and want to work for elites at elite salaries after they leave office. "Inflation isn't coming, but it would be a good thing if it did" is a disqualifying statement for most elite jobs.

The politically correct thing is to mouth the right combination of worries about hyperinflation, "money printing" and "bitcoin solves this."

The data displayed there shows an increase in savings rate relative to GDP but not a substantial increase.

I think your link supports my point that there's a secular trend toward higher desired savings due to population aging and the rich getting richer and lacking consumption opportunities to spend money on.

Savings increased slightly as a share of GDP even though interest rates went down relentlessly.

Never recover? My math might be bad, but I think Never sounds like a very long time. Never?

In my own experience, and that of my family and social circles, there has been and is an enormous pent-up demand for travel and any variety of outside the home activities.

Never recover to their prior share of the economy is what I should say. Maybe their nominal size will eventually hit 2019's.

Also, even if you're right about pent-up demand, supply is also impacted. I'd like to go on fun business trips to LA/SF and fancy restaurants at the same rate I did at 2017-2019. But the experience of both are degraded AND more expensive. Just one example of how the demand is there, but that's not enough.

Submitted by sdrealtor on October 26, 2021 - 4:45pm.

Restaurants are more expensive? You mean like inflation?

Submitted by flyer on October 26, 2021 - 8:35pm.

Agree, we, and most people we know are doing more and more of the things we love--family activities, travel, visiting friends, entertainment (Broadway is back!) dining out, etc., etc.--hopefully that will continue, but you never
know--so enjoy the moment.

Submitted by scaredyclassic on October 27, 2021 - 7:32am.

"Going to another country doesn’t make any difference. I’ve tried all that. You can’t get away from yourself by moving from one place to another. There’s nothing to that."
Ernest Hemingway, The Sun Also Rises

Picked this book up a few days ago and buzzed through half. I don't get it.

Submitted by phaster on October 27, 2021 - 9:05am.

gzz wrote:

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we'll ever get back to pre-COVID levels on a lot of these issues.

phaster wrote:
Rich Toscano wrote:
Totally, if we took out the bubble, current valuations would dwarf prior peaks.

But I'm not sure that chart alone can prove it's a bubble. For one thing, I could see there being a long term uptrend in the "fair" or sustainable valuation (due to supply constraints, globalization of the housing markets, or what have you).

But a much bigger thing is the interest rate factor. Given that people finance their purchases with fixed rate mortgages, and that rates are super low, it could be rational in some cases to buy at these prices. (See the monthly payment graph). And if it's rational to buy, at least sometimes, can it truly be a bubble?

My take is: it's expensive, and if rates go up, it will likely prove to have been unsustainably expensive. But that's not the same as a speculative bubble, which in my view requires a certain level of behavioral craziness we aren't seeing, and also (in my view) implies an inevitable price crash.

Thoughts?

Just for giggles here is your requested graph. It doesn't change the median; it would change the historical average but I don't chart that. However, it changes the historical standard deviation quite a bit, so taking away the prior bubble would put us comfortably above Grantham's "2 sigma" rule of thumb for bubble-spotting. For what that's worth...

what we are seeing w/ local RE prices "rising" makes sense IMHO because I am thinking about the dollar being the global reserve currency

IOW since the dollar is the global reserve currency, this means the world needs dollars to settle accounts,... so the amount of "credit" dollars out there is ever growing,... when there are more "credit" dollars out there chasing a limited supply of RE (as in the case here in San Diego) the price of RE goes up

BUT we have to consider the idea that all good things come to an end (i.e. some day the dollar will no longer be the global reserve currency)

https://www.bis.org/publ/work684.pdf

I've also been I've been wondering about is RE prices during the 1930's Great Depression,... where we see RE prices as expected during the roaring 1920's went up and during the depression, prices of RE went down

https://www.hbs.edu/ris/Publication%20Fi...

the reason I bring the idea up of RE prices during the 1930's Great Recession is because I'm pretty sure if the dollar was not the global reserve currency,... prices of local San Diego RE (as well as RE in other parts of the USA) would not be as high as they are now

wondering what other piggs think the new normal for the next decade or so will be for: interest rates, RE prices, what will be trends/fads for those on the "low" and "high" end of the income scale, etc.

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