gzz Comments on Rich’s new article

[gzz]

I agree with these ones:

[quote=Escoguy]

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
[/quote]

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.

[gzz]

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?”

[Rich Toscano]

[quote=gzz]

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?”[/quote]

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?

[carlsbadworker]

[quote=Rich Toscano]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?[/quote]

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.

[gzz]

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:

There is no drug shortage crisis

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

[an]

[quote=gzz]I’ll worry about inflation when I start seeing articles about the positive effects of inflation. Fat chance![/quote]
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.

[XBoxBoy]

[quote=gzz]The big underlying cause of declining rates is demographic. [/quote]

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.

[carlsbadworker]

[quote=XBoxBoy][quote=gzz]The big underlying cause of declining rates is demographic. [/quote]
I think your certainty that the lack of inflation and the inevitability of low rates is something you should rethink.[/quote]

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.

[XBoxBoy]

[quote=carlsbadworker][quote=XBoxBoy][quote=gzz]The big underlying cause of declining rates is demographic. [/quote]
I think your certainty that the lack of inflation and the inevitability of low rates is something you should rethink.[/quote]

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.[/quote]

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.GNS.ICTR.ZS
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.

[DaCounselor]

[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.

[sdrealtor]

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

[gzz]

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.

[sdrealtor]

Restaurants are more expensive? You mean like inflation?

[flyer]

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.

[scaredyclassic]

“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.

[Author]

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