QE3 Away!: (EDIT: Now on the special unlimited nights and weekend spending plan)…

[CA renter]

[quote=paramount]Does anyone know if Operation Twist is still operating?[/quote]

http://www.bloomberg.com/news/2012-06-20/fed-expands-operation-twist-by-267-billion-through-year-end.html

[Coronita]

Read this…

http://finance.yahoo.com/blogs/breakout/qe3-hurt-low-end-consumers-sozzi-133452501.html

Can you say asset inflation?

Still planning to hold on to cash?

I think this is just another blatant indication of the Fed’s intention to inflate asset prices….Worse yet, what is alarming…There is no indication on what the criteria will be for them to stop…

Cash holders/fixed income folks will once again be the screwed ones….

Morale of the story…(1)Buy something tangible. At this point, it most likely will be better than holding on to USD in the majority. (2) If you’re still mid-career in your 30-40ies and were planning an early retirement…Think twice. Might want to leverage your earning power years a little bit longer…Never no what’s gonna happen 5,10,15,20 years if we continue down this path….You might be asked to retire eventually sooner than expected anyway…(3) Defer paying off your mortgage debt as long as possible….

[all]

Just an observation – mortgage rates are where they were a month+ ago when yields on 10y treasuries were ~1.5% vs. today’s 1.8%.

[an]

[quote=flu](2) If you’re still mid-career in your 30-40ies and were planning an early retirement…Think twice.[/quote]
I’m one of those 30-40s who are planning an early retirement. If anything, this move by the fed to inflate asset prices will help me get to my goals easier. It would have been much harder if we’re in a long deflation period. If we see another bout of inflation like the 70s and 80s, my mortgage will look like peanuts, just like those who bought in the 70s or 80s. It will almost be like getting my house almost for free. Not to mention, if you have rentals with fixed rate, your PITI will stay fixed and when rent rises to match inflation, your ROI will be much more sweeter.

[livinincali]

[quote=AN][quote=flu](2) If you’re still mid-career in your 30-40ies and were planning an early retirement…Think twice.[/quote]
I’m one of those 30-40s who are planning an early retirement. If anything, this move by the fed to inflate asset prices will help me get to my goals easier. It would have been much harder if we’re in a long deflation period. If we see another bout of inflation like the 70s and 80s, my mortgage will look like peanuts, just like those who bought in the 70s or 80s. It will almost be like getting my house almost for free. Not to mention, if you have rentals with fixed rate, your PITI will stay fixed and when rent rises to match inflation, your ROI will be much more sweeter.[/quote]

How does inflating asset prices translate to inflating wages especially in our high unemployment globalized world. It’s certainly possible that the inflation shows up mostly in the commodities that we consume, leaving less for shelter. That’s always been the problem with the fed’s method. They can increase the money/credit supply but they can’t dictate where that inflation will show up. In the late 1990’s it showed up in the stock market in the mid 2000’s it showed up in housing. In order to win the fed’s money printing game you need to be invested in the next bubble and get out before it pops.

[an]

[quote=livinincali]How does inflating asset prices translate to inflating wages especially in our high unemployment globalized world. It’s certainly possible that the inflation shows up mostly in the commodities that we consume, leaving less for shelter. That’s always been the problem with the fed’s method. They can increase the money/credit supply but they can’t dictate where that inflation will show up. In the late 1990’s it showed up in the stock market in the mid 2000’s it showed up in housing. In order to win the fed’s money printing game you need to be invested in the next bubble and get out before it pops.[/quote]
I didn’t say anything about inflating wages in my post. But, since you brought it up, my wage have been inflating well above inflation number for the last 10+ years. So, even if I stop seeing wages increasing at faster than inflation and start seeing it increasing slower than inflation, it wouldn’t change my statement. If you noticed, I said I have a fixed rate mortgage. If my wage increase at 1/2 of the inflation rate and inflation is high, I still would be better off, since my shelter cost would decrease as a percentage of my total income every year that we see high inflation. However, I don’t see wages in my profession going down in the near term. I’m being bombarded by head hunters all the time and it’s has been increasing in frequency lately. It’s no longer small start up in the bay, but the big boys are ramping up too.

Also, you pointed out that in order to win the fed’s money printing game, I’d need to invest in the next bubble. I totally agree. Housing is one of those assets that will take full advantage of inflation. Even after this crash, many places are still higher than where they were in the mid 90s, much less 80s.

[CA renter]

I think livinincali made the correct observation. The only way a person’s mortgage payment can become “peanuts” is when there is wage inflation that meets or beats cost inflation in other basic needs like food, energy, healthcare, etc.

Whether it’s you, the next buyer, or your renter, most people depend on wages for purchasing power. Without wage inflation, cost inflation takes away from most people’s purchasing power. The one kind of inflation that the Fed hates is wage inflation…that seems to be the only thing they’ll fight. In the absence of wage inflation, I would not count on higher rents unless you run a flop house where people can bunk up in each of the rooms.

Back in the 70s, there was significant wage inflation. Much of that was due to the relative strength of unions and the lack of cheap overseas competitors, etc. Those conditions don’t exist today.

[an]

[quote=CA renter]I think livinincali made the correct observation. The only way a person’s mortgage payment can become “peanuts” is when there is wage inflation that meets or beats cost inflation in other basic needs like food, energy, healthcare, etc.

Whether it’s you, the next buyer, or your renter, most people depend on wages for purchasing power. Without wage inflation, cost inflation takes away from most people’s purchasing power. The one kind of inflation that the Fed hates is wage inflation…that seems to be the only thing they’ll fight. In the absence of wage inflation, I would not count on higher rents unless you run a flop house where people can bunk up in each of the rooms.

Back in the 70s, there was significant wage inflation. Much of that was due to the relative strength of unions and the lack of cheap overseas competitors, etc. Those conditions don’t exist today.[/quote]
That makes no sense. Lets say your P&I = 10% of GI right now. Lets say we see 100% inflation over 10 years. Even if your income increase at 1/2 of the inflation rate, that still mean your income increased by 50% over 10 years. Your P&I is fixed, so your P&I will become only 2% of your GI. How is that not becoming “peanuts”. Unless you’re assuming there’s 0% wage increase when inflation runs at 100% over 10 years. I don’t see that happening.

BTW, if you assume there’s no wage inflation and high asset inflation, then everyone will be dirt poor. At that point, we all can just stop working and go on Welfare. If that happen, then essentially, I’ll be in early retirement anyways. Since there will be no reason for me to work. There’s also much bigger problem to worry about in the scenario.

Did wage inflation in the 70s keep pace with inflation or did it outpace inflation? I’m in an industry that have no unionization and there are plenty of cheap overseas competitors. Yet, my wage has been far outpacing inflation for the last decade. So, your statement about needing union and no cheap overseas competitors to have wage inflation is completely wrong.

BTW, you don’t see the government increasing the section 8 assistance to match inflation? Or at lease somewhat keeping pace with inflation? If they do, then why can’t I count on higher rents?

[CA renter]

Okay, let’s say we have 100% inflation over 10 years, and your income goes up only 50%. What if your healthcare costs go up 150% (they’ve been outpacing inflation for quite a while), food costs go up 90%, and energy costs go up 100%.

Let’s take a hypothetical wage earner who earns $6,000/month (make it net, just to keep it simple).

1. P&I is $2,000/month on a 30 yr FRM.

2. Healthcare costs are $1,000 for a family of four.

3. Gasoline, natural gas, electricity run around $600/month.

4. Groceries and household items cost around $1,000/month.

We’ll leave out the other costs just to keep it simple, as well; most of those will go up, too.

These costs add up to $4,600/month while your earnings are $6,000. These costs consume 76% of your earnings.

….

At the end of 10 years, the wage earner makes $9,000/month (unlikely, will go into this later).

1. P&I are $2,000/month.

2. Healthcare costs are $2,500/mo.

3. Energy costs are $1,200/mo.

4. Groceries and HH items are $1,900/mo.

These four items now cost $7,600.00 while your wages are $9,000/month. They consume 84% of your earnings.

Now, while you have certainly benefitted from the fixed mortgage payments, how about the person you intend to sell to? Do you think they will be able to contribute more than 84% of their income toward these expenses in order to pay you a higher price for your house? Don’t forget, interest rates will likely rise from the zero bound; they can’t really fall, which means that equal (or lower) monthly payments will dramatically reduce the amount they are able to pay you.

What about renters? In many occupations where renters tend to come from, wages are lower, **nominally** than they were in the 1980s and 1990s. The only way to increase rents is for these people to move more and more people into their homes, and even that would be pushing it since so many of them were already living with lots of roommates back in the 80s and 90s. How are they going to pay higher rents if costs are going up and wages are stagnant of lower?

Also, while you’ve seen your wages go up in the past 10 years, I think you’re younger than most of us here. IIRC, you graduated from college around the time of the stock/internet bubble, which means you’re in the early stages of your career trajectory. Most of your gains in earnings will happen in the first 10-20 years of your career. While you may well see rising wages over time, most people tend to top out at a certain point, usually in their 40s or 50s.

————

Regarding Section 8 and CPI: Most would agree that CPI drastically understates real inflation. Also, with all the drubbing the govt is getting regarding spending, expect “welfare” programs to get hit as well. Section 8 might be getting cut back as we move forward.

[CA renter]

BTW, the above is exactly what’s been happening to most working families over the past ~30 years, and it’s been accelerating over the past 10 years.

The only way to increase purchasing power (and asset prices for the rich) was to expand credit. People have been “living beyond their means” for a long time because cost inflation has been rising so far and fast, even though many of these working people are just buying basic necessities.

This is why we have a credit bubble. There is no lack of credit. The problem is the inability to pay off the debt already accumulated — on all levels.

[paramount]

[quote=CA renter]

This is why we have a credit bubble. There is no lack of credit. The problem is the inability to pay off the debt already accumulated — on all levels.[/quote]

Great posts on this thread…

At any rate, the statement above is why we may not see a sharply higher across the board inflation.

As Martin Armstrong points out, a lot of de-leveraging is occurring at all levels as well.

[livinincali]

[quote=AN]
Also, you pointed out that in order to win the fed’s money printing game, I’d need to invest in the next bubble. I totally agree. Housing is one of those assets that will take full advantage of inflation. Even after this crash, many places are still higher than where they were in the mid 90s, much less 80s.[/quote]

I tend to disagree with this statement. Look at the stock market bubble in 2000. If you invested in stocks back in 1980’s or 1990’s you were still way up after the crash but new investors to the market in 2000 going forward would be extremely lucky to be beating CPI over the years even now when we’re approaching the 2008 highs. I think housing will follow that same pattern (it did play out in Japan that way where housing prices and stock prices have drifted lower over the past 20-30 years after those bubbles popped). The next bubble will likely not show up in the previous bubble.

I personally think we’re already seeing the next bubble in Treasury bonds/total debt, but I don’t know when it will end and I don’t know how it will end. I see hyperinflation or a deflationary depression as the end game but depending on how it plays out there might be a way to take advantage. Of course it’s certainly possible that even if you win the government will confiscate the winnings in the name of fairness.

[an]

[quote=livinincali]I tend to disagree with this statement. Look at the stock market bubble in 2000. If you invested in stocks back in 1980’s or 1990’s you were still way up after the crash but new investors to the market in 2000 going forward would be extremely lucky to be beating CPI over the years even now when we’re approaching the 2008 highs. I think housing will follow that same pattern (it did play out in Japan that way where housing prices and stock prices have drifted lower over the past 20-30 years after those bubbles popped). The next bubble will likely not show up in the previous bubble.

I personally think we’re already seeing the next bubble in Treasury bonds/total debt, but I don’t know when it will end and I don’t know how it will end. I see hyperinflation or a deflationary depression as the end game but depending on how it plays out there might be a way to take advantage. Of course it’s certainly possible that even if you win the government will confiscate the winnings in the name of fairness.[/quote]
Of course if you buy at peak, you’re screwed. Just like if you bought a house in 2005, on average, you’re still screwed today. However, like you said, if you bought stocks in the 80s and 90s, even after the .com crash, you’re still ahead. If you bought a house before 2001, you’re still ahead. Today is not 2005. So, if you bought today, you’re more likely to come out ahead than if you bought in 2005. You point out that if you bought in 2000, it’s unlikely for you to beat CPI over the last 12 years. But I say, if you bought in 2001, it’s very likely you’re coming out ahead of CPI over the last 11 years. Point is, it matters when you buy and at what price you bought it at.

Stocks didn’t drift lower over after the .com crash. It crashed, then “drift” higher, until 2008. Today, the NASDAQ is at a 12 years high. If you bought in January 2000, yes, you’re still under, but if you bought in 2001-2002, you’re probably up over 100% over 10-11 years. That’s not too shabby and I wouldn’t call that as drifting lower.

I see our housing behave similar to our stock market instead of like the Japanese housing market. Japan have problems we don’t have. Such as an aging population and low birth rate that can’t even keep up w/ the death rate. There are others, but because your demographics are different, it’s hard to draw a link.

What make you say the next bubble won’t show up in the previous bubble? There are only so many asset classes. If bubble doesn’t reoccur in past bubble assets, then wouldn’t we run out of asset classes to inflate and bubble would no longer exist?

Bring this back to my original response to flu’s:
[quote=flu](2) If you’re still mid-career in your 30-40ies and were planning an early retirement…Think twice.[/quote]
I’m stating this for myself, but inflation would make it easier for me to be ahead of the curve and retire early than if we see deflation.

[an]

[quote=CA renter]Okay, let’s say we have 100% inflation over 10 years, and your income goes up only 50%. What if your healthcare costs go up 150% (they’ve been outpacing inflation for quite a while), food costs go up 90%, and energy costs go up 100%.

Let’s take a hypothetical wage earner who earns $6,000/month (make it net, just to keep it simple).

1. P&I is $2,000/month on a 30 yr FRM.

2. Healthcare costs are $1,000 for a family of four.

3. Gasoline, natural gas, electricity run around $600/month.

4. Groceries and household items cost around $1,000/month.

We’ll leave out the other costs just to keep it simple, as well; most of those will go up, too.

These costs add up to $4,600/month while your earnings are $6,000. These costs consume 76% of your earnings.

….

At the end of 10 years, the wage earner makes $9,000/month (unlikely, will go into this later).

1. P&I are $2,000/month.

2. Healthcare costs are $2,500/mo.

3. Energy costs are $1,200/mo.

4. Groceries and HH items are $1,900/mo.

These four items now cost $7,600.00 while your wages are $9,000/month. They consume 84% of your earnings.[/quote]
OK, lets use this example and your numbers. Today, this couple’s expense would take up 76% of your income and by your numbers, lets say with 150% health care inflation while wage is rising at 50%, which is absurdly off balance and I don’t think is sustainable, their % of income going to expense only went up by 8%. That show you how much of a boon it is to have a fixed rate mortgage. Imagine what those numbers would be if income rises at 2/3 of the rate of assets inflation, or even 3/4? We’re not even talking about income rising at the rate of CPI. I see a few things this couple can do to drastically change their financial numbers.
1) Energy cost. I say, if it goes up 100% over 10 years, it would make perfect sense to go solar and live close to work and get a bike. They would probably cut down the energy usage drastically from the $600/month they’re spending. BTW, $600 is kinda high. My cars are definitely not the fuel efficient type and I leave my AC on at 73 all day long. Yet, my total energy usage is around $500 during peak summer months and around $350 during the cooler months. Even with my usage numbers, it already make sense to go solar.

2) Food, again, this is kinda high. Maybe because I don’t eat out nearly as much as most people. But my food only takes up <$500/month for a family of 4. We buy organics when we can, so this is not skimping on quality at all. If your estimating $1k/month because you go out to eat a lot. Then maybe starting to cook fresh meals will not only reduce your food cost but make you more healthy as well. 3) The main key point, do you seriously think we'll have health care and other cost rising at 100-150% while income rising only at 50%? I call that a bubble. We all know what happens to bubble. I don't see those kind of inflation out pacing income as sustainable. Here are some data to back up point about assets inflation vs CPI. Food inflation: http://www.forecast-chart.com/inflation-food-price.html (2.7% over the last 20 years)
Energy: http://www.forecast-chart.com/inflation-usa-energy.html (5.1% over the last 20 years)
Medical care: http://www.forecast-chart.com/inflation-medical-care-cost.html (4.1% over the last 20 years)
So, food price basically track CPI numbers. Medical care is rising faster than inflation, but only by about 30-50%, not 300%. How much of this is attributed to true inflation and how much of this is attributed to better medicine/tests/etc. that keep people alive a lot longer. Also, how much of it is attributed to people just getting fatter everyday and needing more healthcare.
I concede that Energy have been rising almost 2x the cost of CPI. However, I don't see that happening much longer. If it continue in this trajectory, it would be a no brainer to go w/ solar and electric cars. Your average renter won't be able to take advantage of alternative energy, but as a home owner, you can totally do that.

[an]

[quote=CA renter]Also, while you’ve seen your wages go up in the past 10 years, I think you’re younger than most of us here. IIRC, you graduated from college around the time of the stock/internet bubble, which means you’re in the early stages of your career trajectory. Most of your gains in earnings will happen in the first 10-20 years of your career. While you may well see rising wages over time, most people tend to top out at a certain point, usually in their 40s or 50s.[/quote]You’re right, I’m younger than most on here. I would say my trajectory was higher in the first 5-7 years of my career. After that, it has definitely has been on a slower trajectory. However, even with the lower trajectory, my company have been giving raises that have been above the CPI number. The raises applies to company wide, so people who have 20-30 years experience still get similar raises (assuming they’re performing well). So, I don’t see my wage topping out, unless I’m stuck w/ a crappy company that doesn’t give raises. The moment I see that, there won’t be any problem with jumping ship. I’m getting bombarded by head hunters today. I don’t see that letting up in the near future. As long as my skill sets are up to date and I keep myself ahead of the curve, I don’t see myself having problem finding jobs in the next 10-20 years. Also, keep in mind that this debated started out with flu saying those of us in our 30s-40s who plan to retire early should watch out. I do intend to retire early, hopefully by the time I’m 50 give a take a few years, so even if you’re right that wages for those over 50 flat line, that wouldn’t matter much, since I would be retired by then (assuming things fall into place).

[Author]

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