Thursday, August 12, 2021

On the beach

We're staying at our favorite Maui beach for the next few weeks, so I don't expect to do much blogging.

For the time being, I haven't see anything that has changed my mind about what's going on in the economy and the markets.

The Fed is promising to be too easy for too long, and that means the current inflation surge is very unlikely to prove temporary. That, in turn, means that interest rates—which are currently expected to remain very low for a long time—are very likely to rise above expectations. 

Fiscal policy is dangerously "stimulative." No need for Congress to do anything except get out of the way of the private sector. A $3+ trillion dollar "stimulus" is not only unnecessary but harmful to the economy's prospects. More spending, an expansion of the welfare state, more regulations, more taxes, more subsidies, and more transfer payments will seriously weaken the economy's long-term prospects. Not in the near term (i.e., the remainder of the year at least) but in the long haul.

In this context, I would view the passage of Biden's spending goals to be very bearish. By that logic, if Congress grows a backbone and blocks trillion dollar deficit spending, the outlook would brighten considerably.

Unfortunately, there is little that investors can do. Cash remains trash, as its purchasing power is being seriously eroded by inflation. Ditto for most fixed-income securities. Better to own productive assets that can ride the tide of higher prices (equities, commodities, commercial property). Prudent levels of debt (at long-term fixed rates especially) should benefit from higher prices and a general loss of purchasing power.

Back to the beach, it's a perfectly beautiful day!


Benjamin Cole said...

Meanwhile, another all-time zenith on Wall Street. If the market is forward-looking...

K T Cat said...

Maui no ka oi!

If you like to snorkel, you've got to try Ulua Beach. Go early in the morning and it should be spectacular. Our other favorites are Kāʻanapali Beach - almost always good for sea turtles - and, if you're particularly adventurous, Cape Kinau. Kinau is very rocky with only a small spit of sand to enter the water, but because of the volcanic rock nature of the bottom, the water is quite clear.

Sorry if you knew all this already. Maui is one of our favorites. Hope you have a great time!

Christian S. Herzeca, Esq. said...

enjoy the beach!

fwiw, I have gotten 9% total return over past year on a portfolio that is 2/3rds in cash. very low risk, more than acceptable return. dont plan on doing anything differently...until the next correction, when I will risk up just a tad.

Carl said...

In 2006, i became convinced that US housing had entered bu**le territory and positioned accordingly. i've forgotten a lot of financial details but clearly remember that it felt really stupid to think that way, at least for a while.
Keeping in mind the importance of differentiating outcome from process, it turns that i may have been wrong about the US housing bu**le, at least according to these "gHHtx γ m [Vt/ (Pt + Wt)]γ = H˙ t + ι Z ΦR (M/Pt−) g (M, t−) dM" authors:
Their conclusion: Mr. Bernanke was right as, with "2020 hindsight", it's become clear that house prices have and will continue to be driven by "fundamental" factors and 2007-9 was just really a blip in the chart (this last part i agree with compared to the winter which is coming..).
But then again, now, from a non-consensus perspective, it's not only housing that's in a bu**le, it's also equities, junk bonds, risk-free bonds... it's an everything bu**le..
Of course, it's possible that maximum stupidity (odds perspective: maybe on my part though) hasn't been reached yet.

By far, i prefer Kauaʻi. It's less crowded and more 'natural'. To each their own. Apologies for the contrarian winds and today for me will be a 150 km ride in the heat/sun, contrarian winds included.

wkevinw said...

Carl- the US has interesting and complex RE markets. It is obvious that the value of RE is higher near city centers. The coastal cities show this, and I think there is a special economic scarcity in these cities- because of historical reasons (big cities with high density), and geography (on the big coasts, there is only one side of the city that can be lived on- the side without the ocean).

So, even though the US has plenty of open land, this special kind of scarcity is a huge part of each market.

If you look at the bigger/nationwide/macro picture, there is a "shortage" of residential real estate. The "shortage" is really kind of a gap: the first time buyer market has been weak for decades due to the true weakness in the real economy. Not enough houses or any durable goods, for that matter, have been made for 20-30 years- because of the vicious economic cycle. Younger, lower income people have lost a lot of wealth/income in the past 30 years vs. previous decades.

Thanks for the post.

Scott Grannis said...

Re real estate: I'm very reluctant to buy residential real estate, especially in a market like San Clemente where prices are soaring. Soaring prices are being driven largely by plunging interest rates on mortgages. Current prices are justified if interest rates remain low, but if they rise significantly, as I expect they will, then prices are at risk of a sharp decline.

Commercial real estate, on the other hand, is more driven by economic activity and even by inflation. And since it's productive (i.e., supports productive activity), it generates income even if interest rates rise. Home prices are behaving more like speculative investments these days. Caveat emptor.

McKibbinUSA said...

When Scott Grannis hints pessimism, investors should take note. I am long crypto and commodities. @mckibbinusa

Carl said...

"The "shortage" is really kind of a gap: the first time buyer market has been weak for decades due to the true weakness in the real economy."
"It is obvious that the value of RE is higher near city centers."

If you take a look at the recent US census (2010-2020), there are relevant aspects. US population growth is slowing, most counties are losing population (negative growth) and cities remain relatively attractive which should continue to drive a housing value differential between rural/semi-rural and urbanizing areas. The "shortage" and potential pent-up demand argument make a lot of sense but for this concept to apply one needs to include relatively optimistic assumptions about the general economy. There is no doubt that divisiveness is building not only between different geographies but also along age groups. i hope the restructuring goes relatively smoothly.
See especially 2020 census housing units.

alpacino said...
This comment has been removed by the author.
alpacino said...

Hi Scott, are you still bullish on the market overall? If interest rates rise significantly, the markets will surely tumble. Thanks

Scott Grannis said...

alpacino: Still bullish on the overall market, but still nervous. It's not hard to see the inflation problem, and the potential for higher rates and for those higher rates to derail markets, especially the housing market. The problem of course is the timing. The Fed seems determined to ignore inflation and to keep interest rates low. With real rates of return on cash strongly negative for the foreseeable future (e.g., through at least year end), investors have a strong incentive to stay invested (cash is trash in this environment).

Everybody is nervous, though, and that makes it tough to be bearish. The existence of super-low interest rates is strong proof of the market's bearishness: low rates mean very strong demand for the safety of bills, notes and bonds, and that is what you'd expect from a very nervous market.

Meanwhile, it's also hard for anyone to get excited about the prospects for further fiscal stimulus. More government spending, subsidies and regulations almost ensure the economy will be weak once the pent-up demand from last year is satisfied, and that will probably take another several months.

The one thing I can hang my hat on is the continued existence of a huge increase in the M2 money supply, which is totally unprecedented. The market needs to remain extremely nervous for investors to continue to hold onto so much money that is losing value almost daily.

It's tough to be confident of anything these days, and that's another reason to remain cautiously optimistic. (I'm a contrarian by nature, as you might have guessed)

Things I do worry a great deal about are 1) the Biden administration, which is being led by an old politician suffering from the early stages of dementia, 2) Kamala Harris, who may be uniquely unqualified to fill Biden's empty shoes, and 3) the geopolitical environment, which abhors a political vacuum such as is being created by Biden's incompetence. I'm not the only one who worries about this, however, and that's yet another reason why real interest rates are so low: everyone seems willing to pay a very high price for the safety of cash.

Things I'm very optimistic about: the prospects of Larry Elder becoming governor of California. This would send a seismic political shock wave all over the US and lay the groundwork for a return to sensible fiscal policy.

Carl said...

"With real rates of return on cash strongly negative for the foreseeable future (e.g., through at least year end), investors have a strong incentive to stay invested (cash is trash in this environment)."
Thinking out loud here..
In 2010, i was wrong on many many things but expected money velocity (inverse of 'money demand') to slow despite unconventional and unprecedented monetary measures. This was not exactly consensus thinking.
Despite more unconventional and more unprecedented measures (latest measures in relation to a fairly benign virus from a macro perspective, with a 30%-to-GDP-debt government 'transfusion'), money velocity's trend down seems still in place. Why?
Money velocity and 'money demand' are weird concepts and elastic uses of the concepts can end up with distorted conclusions, especially with the consolidated Fed-Treasury printing money in exchange for various 'risk-free' debt instruments.
When money ends up in a private account 9or money market fund etc) and if that someone wants to exchange that money for something else (a consumer product or a financial product), the money ends up in someone else's account. While 'circulating', the money can affect the prices of products and, for the financial product side, can result in a different relative asset composition in relation to higher or lower 'market' prices but, in the main, the ordinary Joes does not decide how much money ends up in the money supply pool unless, for example, the average Joe uses the cash, combines it with a new commercial loan and opens up a new restaurant. Buying a meme stock or equivalent does NOT change money supply.
The concept of precautionary savings, in the aggregate makes little sense outside of the lower aggregated financial asset prices it implies, which, clearly, doesn't correspond to today's predicament. 'People' have 'excess savings these days because the Fed has put it there, similar to how some geese are forced fed in order to deliver foie gras (check out some youtube videos if you want to stop ordering foie gras poêlé next time you go to your favorite gourmet joint).
Today's monetary and fiscal policies (IMO) show a typical debt addiction problem and, obviously, the first step is to accept that there is a problem. It's not 'easy'.
Apologies for the following revelation (from a economic macro perspective): The US is turning Japanese in an eerily predictable way, at least so far.