Category: Economics

The Guardian promotes open borders and decries 40 percent rent inflation

by philg

“Renters across US face sharp increases – averaging up to 40% in some cities” (The Guardian):

According to an analysis conducted by RedFin, rents in the US jumped 14% in December 2021 to $1,877 a month, the largest rise in more than two years.

Some of the most affected cities included Austin, Texas, with a 40% increase in rental prices compared with a year previous, New York City at a 35% increase, and several metro areas in Florida exceeding over 30% increases in rental prices.

Members of the 2SLGBTQQIA+ community are the worst-afflicted, according to The Guardian:

His $1,500-a-month rent was already a struggle for him to pay, and if late on rent payments he incurs a $100 fee. With the latest rental increase of nearly $450, he worries about his future in Sarasota, a community he’s lived in and helped build as a promoter and organizer for LGBTQ events over the years.

“Now, I can’t even afford to live in the community that I helped to create,” added Beadle. “This is not OK, There needs to be an answer for the young, single people who are trying to survive and thrive. We can’t just be happy with being able to pay rent one more month not knowing if we will have a place to live next month.”

One week before his wedding in January 2022, Joey Texeira and his partner received a lease renewal from their landlord in New York City, with a 30% increase to rent of $750 a month for a one-year lease renewal or a 41% rent increase of $1,050 a month for a two-year lease renewal for an apartment they have lived in since December 2020. The lease renewal would start on 1 May.

“We’re very stressed and don’t know exactly what we plan to do yet,” said Texeira.

His husband was also unexpectedly laid off recently and their neighbors downstairs were recently priced out of the apartment building with a rental increase of $250 to $500 added to their monthly rent.

How is it possible that the market-clearing price for housing is going up? Let’s look at the demand curve:

Why does the demand curve rise? Partly this is due to the no-fault (“unilateral”) divorce revolution, which creates more households per capita (the typical U.S. state’s family law takes people out of the workforce (successful plaintiffs face a huge disincentive to work because W-2 wages might result in a reduction of the family court gravy train), which reduces GDP available to build housing). But mostly the demand growth is due to immigration: “Modern Immigration Wave Brings 59 Million to U.S., Driving Population Growth and Change Through 2065” (Pew 2015).

A larger population might not result in a housing crisis if every new addition to the population had sufficient skills to earn enough to afford a new house, but even Americans at the median cannot afford to live in a new apartment (see City rebuilding costs from the Halifax explosion for some numbers).

Leading up to the shock and horror of the 40 percent rent increase story, The Guardian has been advocating for increased low-skill immigration to the U.S. Here’s an example explicitly calling for “open borders” … “Why Democrats should support open borders” (Reece Jones, February 2018):

… the Republican leadership has already settled on an extreme position that will substantially reduce all immigration to the United States. … In the face of this recalcitrance, the Democrats must rethink their current incoherent immigration policy and argue robustly for more open borders.

Open borders could have an enormous positive impact on GDP worldwide.

The concern that some citizens might lose jobs to immigrants is not supported by research. One study found migrant and native workers are employed in different sectors of the economy, another showed that migrants create 1.2 additional jobs beyond the job they do because they rent an apartment, buy a car, and frequent local businesses.

How many people would actually move if borders were open? A 2011 Gallop survey found that 14% of the world population would like to move to another country, with perhaps 100 million wanting to go to the US. These numbers may alarm some, but these movements would happen over years, or even decades.

… there is not a moral or ethical reason to justify restricting the movement of other human beings at borders.

I disagree with Professor Jones that there are only 100 million people who would want to come to the world’s 2nd most generous welfare state (measured by percentage of GDP devoted to welfare). The U.S. offers free unlimited health care via Medicaid and/or simply going into a hospital for “charity care.” Why wouldn’t anyone on Planet Earth who has a serious illness want to come to the U.S. for pull-out-all-the-stops treatment? The cruel National Health Service in the UK won’t spend money if the bureaucrats don’t think it is worth it (explanation). But if you’re 80 years old and think that you might benefit from some joint replacements, why not pop over from the UK to the US and get the $300,000 of surgery that the UK’s NHS is denying? Since the borders are open, it will always be possible to migrate back.

On the other hand, I agree with Professor Jones that, under the ethics and morality professed by a majority of Americans, there is no reason to deny people from the world’s poorest countries free housing, health care, food, and smartphone here in the U.S. If “housing is a human right” is our reason for providing taxpayer-funded housing to an American who chooses not to work, an undocumented migrant should be equally entitled to a free house since the migrant is equally human.

Maybe that “open borders” headline is an outlier? Let’s sample “opinion plus US immigration” in The Guardian. “The Biden administration has ended use of the phrase ‘illegal alien’. It’s about time” (Moustafa Bayoumi, April 2021):

Real immigration reform must follow. Paths to citizenship for the millions of undocumented people who are living in the shadows must be made into law. Unaccompanied minors must be afforded the same levels of safety and dignity we would want for our own children. And asylees must be admitted at far higher numbers than currently permitted.

Every asylum-seeker needs a place to live, presumably. And someone who claims to be an unaccompanied minor (there is no way to verify the age of an “undocumented” person since one cannot ask for his/her/zir/their passport) can’t have a safe and dignified lifestyle without a taxpayer-funded apartment.

“Calls to end inhumane border conditions aren’t enough. Ice must be abolished” (Natascha Elena Uhlmann, September 2019):

… where are we as a society if we cannot dream bigger? What does it mean that some of our most beloved writers – who have laboriously envisioned new and radical worlds – didn’t imagine a future that respects the right to human movement?

It is by refusing to concede to a rightwing vision of possibility that unimaginable prospects become reality.

With our imagination we can turn currently vacant land into 7 million houses/apartments for “extremely low-income renter households” (the “gap” as of March 2021).

“‘Australia’s loss is America’s gain’: the Nauru and Manus refugees starting anew in the US” (Anne Richard, January 2019):

Australia had stopped thousands of asylum seekers from reaching its shores and had arranged to detain them on islands in the South Pacific; the US had agreed to resettle some in America. … As the assistant secretary of state for population, refugees and migration in the US, I had signed the deal in September 2016. Had our team said no to the Australians, it might have kept the pressure on them to change their policy, but reports about the dire conditions on the islands worried us and my sense was the refugees would be better off restarting their lives elsewhere as soon as possible.

I met Sri Lankan parents of three children – including a baby born under difficult circumstances in the Pacific Island nation of Nauru – who are now living on the US west coast, happy that their children will receive an education, have a good future and experience freedom. The father, however, fears the earnings from his job at an Indian restaurant will not be sufficient to pay the rent for a two-bedroom apartment and other bills.

… three young men told me they had fled their village in Pakistan … One is working the graveyard shift at a convenience store and another, who had earlier studied medicine, is now a landscaper.

(Would the profiled 2SLGBTQQIA+ folks afflicted with 30-40 percent rent increases have preferred to pay their old rent and pulled a few weeds themselves and perhaps waited until 7 am for the convenience store to reopen?)

“Ice is a tool of illegality. It must be abolished” (Zephyr Teachout, June 2018):

On Sunday, Trump doubled down and took direct aim at our constitutional order when he tweeted: “When somebody comes in, we must immediately, with no Judges or Court Cases, bring them back from where they came. Our system is a mockery to good immigration policy and Law and Order.”

This is a direct affront to the most foundational principles of public morality and law. Our constitution insists that “no person shall be … deprived of life, liberty or property, without due process of law”. It should not need saying, but undocumented immigrants are persons.

“Why Trump thinks domestic violence victims don’t deserve asylum” (Jill Filipovic, June 2018):

What else, other than out-and-out hostility and a desire to hurt the most vulnerable, justifies Sessions’s decision to remove asylum protections from women suffering violence at the hands of their partners?

In other words, anyone willing to spin a tale of domestic suffering, which cannot possibly be verified from 1,000+ miles away, is entitled to live in the U.S. forever.

Going back to the happy days before the Trump dictatorship… “Bernie Sanders is wrong on open borders: they’d help boost the economy” (Cory Massimino, August 2015):

Bernie Sanders has come out against open borders, claiming they are a “right-wing proposal” that “would make everyone in America poorer.” He argues that, while we have a “moral responsibility” to “work with the rest of the industrialized world to address the problems of international poverty… you don’t do that by making people in this country even poorer.”

In other words, Bernie predicted, 6 years in advance, that non-immigrant Americans would become poor via rent increases! And some of the haters who comment here say that Comrade Bernie does not understand economics!

Related:

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Pinflation (pinball machine pricing compared to 2020)

by philg

We stopped into a Florida pinball machine dealer. He said that he went into the business as a labor of love, but has recently been making more money than he ever dreamed possible. “Prices for new machines are up 30 percent compared to 2020,” he said, “and the used machines have pretty much followed the new prices.”

New or old? “The new machines are much more engaging for home use,” he responded. “You could play one for an hour and not finish every mission. People get bored quickly with the older machines.”

How about the super wide super complex Jersey Jack machines? (Dialed-In is a prescient 2016 design about a city under attack.) “Remember the Fisker Karma? It looked great, but hardly any were made. Tesla, on the other hand, is still here.” (He wasn’t a believer in the maintainability of the Jersey Jack machines.) What company is the Tesla of pinball? “Stern.”

What if you’re not good enough to complete these complex games with 3 balls? “You can set them to up to 10 balls per game,” the expert responded, and explained that it was also possible to customize the amount of time within which the machine would provide a replacement ball for one that drained.

The Dialed-In game, above, made me think that a Coronapanic machine could be a lot of fun. The player would have to spell out R0, PCR, mRNA, Fauci, Wuhan, and WHO. The history section of the game would feature Robert Malone inventing the idea of an mRNA medication, being interviewed by Joe Rogan, and then being memory-holed by the New York Times. A wheel-o-masks would spin to bandana, cloth, surgical, and N95 locations. The virus would start spreading and the player would have to hit targets and ramps to #StopTheSpread. The successful player would shut down commercial airline flights, quarantine cities, order the general public to wear masks (slowing down the spread imperceptibly), order schools shut, etc. Hit the 14 Days to Flatten the Curve spinner once and then it inexplicably would continue to spin until the machine was powered down.

The Canadian Freedom Convoy would get its own subsection. The player would take on the role of Justin Trudeau. Don Blackface would be the first level. No matter how many times the player hit the trucks that converted in the center of the playing field, they wouldn’t break up. It would then be time to Invoke Emergency Powers and freeze the bank accounts of anyone who donated $20 to the truckers.

Separately, I wondered why pinball machines aren’t made in China. Everything else electronic is. You wouldn’t buy a smartphone assembled by clumsy Americans, right? It turns out that Homepin set up a factor in Shenzhen (factory tour video; the machine gets terrible reviews, but mostly because of its rules and layout, not because of the way it is built).

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Inflation chronicles: European windows

by philg

A friend imports European windows for Americans who are too rich to look at America through American windows. Price increases for components are happening every few weeks. Prices for the finished product are now 30 percent higher than two years ago. “We’re doing much better than our competitors with lead times,” he said. “Where we used to be at 12 weeks, for example, we’re now at 16.”

He surprised me by saying that the Europeans make windows with laminated and tempered impact glass, which is conventional for installation in new Florida construction. Why would they do that when there aren’t any hurricanes in Europe? “They like that nobody can break in,” he responded.

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The PPP program generated asset price inflation?

by philg

“Where, Exactly, Did $800 Billion in PPP Money Go?” (Bloomberg):

Billions of dollars of federal funds may have been misappropriated as part of the government’s well-intentioned but loosely monitored effort to support entrepreneurs and their employees during the Covid-19 pandemic. Meanwhile, the Small Business Administration, which has supervised the massive rescue since last year, decided recently to speed up its completion by making it easier for borrowers to have their loans forgiven.

Analysts remain split on how best to assess the success of the PPP and the related Economic Injury Disaster Loan program. The Government Accountability Office puts the spending at $910 billion, of which $800 billion is PPP money. Any assessment, however, will rely on the release of more sweeping data about the push from the government and borrowers. It’s also becoming clearer that fraud may have been much more rampant than originally understood, although the likelihood of massive misappropriation because of lax supervision was obvious from the start. Any funds that wound up in the wrong pocket or were steered toward insiders also blunted the program’s effectiveness.

The question for today is not whether any of the $800 billion was obtained fraudulently (or whether forgiveness was obtained fraudulently), but what businesses actually did with the money. For example, my friends who own small-to-medium-sized companies enjoyed reasonably strong revenue in 2020 (a dip in the spring and then roaring back in the summer and fall), so the PPP money ended up being a an untaxed bonus of $millions that went straight into personal checking accounts. From there, what did or could they do with, e.g., $2-5 million? Mustafa Qadiri bought himself “a Ferrari, Bentley and Lamborghini” and got in trouble because he faked the number of employees that he had. But my friends were in a similar position, showered in cash that they had no use for in their respective businesses (which were continuing to show a profit).

Let’s assume that half the companies that got PPP didn’t need it. That’s $400 billion in cash that business owners needed to invest in stocks or real estate. This is only about 1 percent of the total value of the U.S. stock market, but it could still be significant if we believe the Wall Street Journal. “What Determines Stock-Market Prices? Here’s a New Theory” (11/6/2021):

A new study shows how much the flows of money into and out of the stock market affect stock prices—perhaps more than many investors realize.

Specifically, a dollar of cash from outside the stock market that is invested in equities will cause the combined market cap of all stocks to rise by about $5, while a dollar withdrawn from the market will have the opposite “multiplier effect,” the study says.

The reigning academic theory of the market up until now, in contrast, has insisted that investors are extremely sensitive to price, very willing to sell when prices go up. As a result, flows into the market that have no relevance to a company’s fundamentals should play no role. That is why academic orthodoxy up until now has been that the flow-based multiplier must be zero.

The new study that finds to the contrary, titled “In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis,” was written by Xavier Gabaix, a professor of economics and finance at Harvard University, and Ralph Koijen, a finance professor at the University of Chicago’s Booth School of Business.

Another reason is investor psychology: We become more bullish as prices rise—not less. An illustration is how much stock market timers’ recommended equity-exposure levels have risen since the March 2020 bottom. According to my tracking of nearly 100 such timers, they on average were completely out of the market at that bottom, when the Dow Jones Industrial Average was below 19000. Today, with the DJIA nearly double where it stood then, the average exposure level is 63%. If these timers were more price-sensitive, you would expect their equity-exposure levels today to be a lot less.

It could the same phenomenon in real estate. In a country where it is ever-more-challenging to build anything (but we’ll bring in 59 million more migrants and hope to find somewhere for them to live!), extra money in bank accounts will generate insane bidding wars among those who were blessed by the Great Covidcratic Wealth Reallocation of 2020-2022.

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Inflation rages because the apparatchiks never worked in a factory?

by philg

A friend owns a company that makes equipment for factories. His theory is that the central planners who’ve been printing money overestimated the elasticity of supply and therefore created much more inflation than they expected. In his experience, the number of Americans willing, interested, and capable of building anything in a factory is essentially fixed. Once existing factories and teams maxed out, increased government spending just created inflation rather than more production.

For the apparatchiks who set up the money-printing presses, factories are abstract concepts, never experienced in person. They come up with theories about why certain complex items aren’t available, e.g., automobiles or GPUs, but don’t grapple with the reality than even the simplest-to-build items are back-ordered by months or years. I just checked at ikea.com, for example, and none of the things that we wanted to buy in August 2021, e.g., dining chairs, are back in stock:

(I check every month or so and the situation has never improved. We’ve learned to live with what we have!)

Could the inelastic nature of worldwide manufacturing have been expected? I think so! Look at the Great Toiler Paper Famine of spring 2020. A tiny increase in demand led to empty supermarket shelves, not increased production.

Readers: What do you think of this theory? The Modern Monetary Theory that is the de facto mainstream economic philosophy in the U.S. assumes that inflation occurs as soon as supply runs out, but doesn’t predict when the supply wall is hit.

Related:

  • Netflix: American Factory (in which a Chinese auto glass manufacturer tries to get workers in Dayton, Ohio to make high quality glass while Senator Sherrod Brown and other politicians try to get the workers to unionize)
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Inflation as experienced by a police officer

by philg

At a COVID-safe Super Bowl party, one of the guests was a police officer who lives in our building. She was chatting with a guy who works for a small video production company. He talked about the challenge of paying rent that had gone up more than 10 percent, health insurance that was going up almost as fast, and similar inflation woes. She expressed amazement that an employer wouldn’t provide health insurance. “The company keeps the headcount below 50 so that the Obamacare rules don’t apply,” said the pinched private sector worker.

The police officer described receiving automatic pay raises in lockstep with official government inflation numbers, which she acknowledged did not keep up with the rising cost of housing here in South Florida. Although only in her 20s, she was already looking forward to retirement. “It’s based on your highest three years of earnings,” she said. “So if you work a lot of overtime near the end of your career you can get a pension that is higher than your full-time salary.”

We asked what the real world speed limit was. “I don’t pull anyone over for speeding,” she replied. “If they’re speeding, that’s a risk that they’re taking for themselves. The State Troopers, however, will even give me tickets.”

Was it worth getting a license plate celebrating law enforcement or applying stickers evidencing a donation to a police-oriented cause? “Those are the people I worry about the most,” she said, “because I know they’ll have a gun in the car.”

What about our minivan, with its “Support Education” specialty tag? (example below)

She said “Any officer who pulls over a minivan needs to reevaluate his or her priorities in life. I won’t pull over a minivan.”

Our Jupiter, Florida police department sends in the SWAT team any time there is a search warrant to be executed. “Jupiter doesn’t have a lot going on,” she responded. “I can do that too if I want. If I pull someone over and there is a warrant outstanding, I can turn it over to SWAT.”

What about enforcement of coronapanic orders? (she worked for a police department down towards Miami, where muscular governmental intervention in the life of a respiratory virus is popular) “I won’t ticket people for not wearing a mask,” she said.

We learned that one shouldn’t be too upset when the police come to investigate a neighbor’s noise complaint. “It won’t hold up in court if there isn’t a calibrated noise measurement and we don’t have any meters,” she said.

(Why was the party “COVID-safe”? Everyone in the room was following the same mask protocols that the spectators in the stadium that we saw on TV were following and we know that California Follows the Science.)

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CVS marked down COVID-19 tests before Joe Biden’s arrived in the mail

by philg

The 6-year-old and I found COVID-19 tests on sale today at CVS in Jupiter, Florida:

I placed my order for taxpayer-funded tests (“free”) on January 19, the advertised first day in “The Biden Administration to Begin Distributing At-Home, Rapid COVID-⁠19 Tests to Americans for Free“ (whitehouse.gov) and haven’t gotten anything yet except an email from USPS promising an update “once your package ships.”

In other words, relief from the central planners will arrive some weeks after CVS was forced to mark COVID-19 tests down due to oversupply.

I remarked on the low price and ample quantity available, saying “Those would have been very valuable a month ago.” The 6-year-old immediately responded, “let’s buy some now and keep them at home and then sell them for $20.99 during the next wave.”

I’m not going to leave him alone with any Dr. Seuss books (re-sold for up to $1,700 on Amazon before being banned there)!

Readers: Did your tests from the central planners arrive? If so, when? It was supposed to be “seven to 12 days” from January 19.

Speaking of COVID-19, let me take this opportunity to give a shout-out to selfless front-line workers, such as the physician (see the license plate) who parked this Ferrari on the street near the above-mentioned CVS:

Who knows Ferraris well enough to say what model this is and estimate the value? My guess is a Portofino retractable hard top (worth about 250,000 in 2022 mini-dollars).

Related:

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Inflation Chronicles: meatballs and spec houses

by philg

“Annual American inflation hit 7.5%: A near 40-year high” (CNN, today):

A key measure of inflation climbed to a near-40-year high last month. Economists are hopeful that America will reach the peak of the pandemic-era price increases in the early months of 2021. Here’s to hoping.

The consumer price index rose 7.5% in the 12 months ending January, not adjusted for seasonal swings, the Bureau of Labor Statistics said Thursday. It was the steepest annual price increase since February 1982 and worse than economists had forecast.

(Note that these are “pandemic-era” increases, not “Biden-era”.)

Which economists are “hopeful”? The article itself cites only an economist who suggests that the price increases will be persistent.

“There will be plenty of persistence from soaring house prices pushing shelter costs this year,” said Sal Guatieri, senior economist at BMO, in a note to clients.

How does it feel on the ground? (“on the swamp”?) Across from our beloved Abacoa neighborhood is Alton, a newer development. The Italian restaurant inside Alton is Lynora’s and, through 2021, they were famous for $2 meatballs on Mondays (example). For 2022, the meatballs are $3 each (an annual inflation rate of 50%).

What about the new houses in Alton? You used to buy one pre-construction or at least pre-completion, thus enabling the selection of colors, styles, finishes, and options. The result would be paying a June 2021 price and moving into a December 2021 house. Inflation is now so high that this approach to business has become untenable. Starting in 2022, the developer will no longer sell any house until it is complete and therefore it is no longer possible for a buyer to customize anything.

What does a house with in Alton look like? Here’s one for $3 million (5,000 square feet, helpful alligator ramp from the “lake”):

Or you could live in a townhouse for $950,000 (2,252 sq. ft.):

Despite the stratospheric-by-2020-standards prices, this neighborhood is actually inferior to Abacoa in many ways. People don’t like the public schools as much (though both neighborhoods are served by the same Palm Beach County system). There is much less green space in Alton. There are fewer trees and they’re scrawny so there is precious little shade. There is so little space between houses that your single family home’s living room probably ends in the neighbor’s bathroom. Why are people willing to pay so much? There is a significant premium for new construction in Florida, where people believe sic transit gloria mundi when it comes to developer-built housing exposed to sun and humidity. (As Dan Quayle is famous for pointing out, Latin is more commonly spoken here due to the proximity to Latin America.)

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More bad news for Americans in the slavery zone ($100,000 per year)

by philg

The U.S. is a great place to be on welfare. Except for France, we spend the largest percentage of our GDP on government handouts such as free housing, health care, food, and smartphone (Washington Post). Marijuana is legal in a lot of states (and “essential” so it will be available through any COVID-19 shutdowns), booze is cheap, and Medicaid will buy you a suitcase full of opioids.

The U.S. is also a great place to be rich. There is no limit to corporate executive pay. After the shareholders have been thoroughly mined, there are plenty of swank neighborhoods in which to hang out with other rich people. At least until 2020, there was a huge supply of low-wage service workers to meet the needs and wants of those in the rich enclaves. Unlike Europe, we have no massive value-added tax to discourage consumption. (Depending on the state, rich people are much more exposed to family court predators than in Europe; see Real World Divorce.)

There is a slavery zone in the middle, though, where an American earns too much to get subsidized housing, health care, food, etc., but not enough to have a spending power or material standard of living substantially higher than what someone on welfare enjoys (quantified by state). He/she/ze/they will pay a crushing array of taxes as well in order to support the comparable material lifestyles of those who don’t work at all.

American slaves seem to be prevented by economics from reproducing. From $50,000 per year to nearly $200,000 per year, fertility is lower than for those on welfare and for the elites. A chart from 2019:

The Wall Street Journal (2/7/2022) says the trend is toward additional oppression of these slaves. “In Covid-19 Housing Market, the Middle Class Is Getting Priced Out”:

At the end of last year, there were about 411,000 fewer homes on the market that were considered affordable for households earning between $75,000 and $100,000 than before the pandemic, the study found. At the end of 2019, there was one available listing that was affordable for every 24 households in this income bracket. By December 2021, the figure was one listing for every 65 households.

For households earning between $75,000 and $100,000, five of the top six metro areas with the fewest affordable homes for sale per household were in California, NAR found, led by the San Jose metro area. The state’s shortage of affordable housing helps explain why many people left California’s coastal cities during the pandemic and moved inland.

Is it safe to say that the future of the American middle-class slave is apartment living and a one-child max? The population keeps growing while land and roads are more or less fixed. Construction costs go up much faster than wages. A median earner in China can’t afford a single family home. As the U.S. approaches Chinese levels of population, why would we expect someone near the median here to own a single family home?

Related:

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How an asset bubble that inflates and deflates makes a lot of people worse off

by philg

One might think that an asset bubble that inflates and deflates doesn’t hurt that many people. After all, if you just stay in your house, what difference does it make if the value goes up to 3X and then comes back down to 1.2X?

Jeremy Grantham, the G in the asset management firm GMO, points out that people caught up in bubble fever adjust their consumption (i.e., spend like drug dealers). From his January 20 newsletter (a friend who has managed $billions sent it to me):

All 2-sigma equity bubbles in developed countries have broken back to trend. But before they did, a handful went on to become superbubbles of 3-sigma or greater: in the U.S. in 1929 and 2000 and in Japan in 1989. There were also superbubbles in housing in the U.S. in 2006 and Japan in 1989. All five of these superbubbles corrected all the way back to trend with much greater and longer pain than average.

Today in the U.S. we are in the fourth superbubble of the last hundred years.

One of the main reasons I deplore superbubbles – and resent the Fed and other financial authorities for allowing and facilitating them – is the underrecognized damage that bubbles cause as they deflate and mark down our wealth. As bubbles form, they give us a ludicrously overstated view of our real wealth, which encourages us to spend accordingly. Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down. To allow bubbles, let alone help them along, is simply bad economic policy.

What nobody seems to discuss is that higher-priced assets are simply worse than lower-priced ones. When farms or commercial forests, for example, double in price so that yields fall from 6% to 3% (as they actually have) you feel richer. But your wealth compounds much more slowly at bubble pricing, and your income also falls behind. Some deal! And if you’re young, waiting to buy your first house or your first portfolio, it is too expensive to get even started. You can only envy your parents and feel badly treated, which you have been.

If your house goes from being worth $800,000 to $1.6 million, as the houses in our Florida neighborhood have done within the past two years, Grantham predicts that you’ll sign up for that lavish vacation, buy the fancy new car, splurge on clothing and jewelry (see “Cartier’s Dazzling Festive Season Bodes Well for Luxury Stocks” (WSJ): “Overall, U.S. jewelry sales increased 32% year-over-year from Nov. 1 to Dec. 24”), pay $1.2 million for a piston-powered unpressurized airplane, etc. We see this with governments as well. States that are raking it in from temporarily turbocharged capital gains taxes build new spending programs that will need to be funded every year, even if capital gains tax revenues collapse due to asset values stagnating (but maybe inflation can help, since capital gains tax calculations don’t adjust for inflation and, therefore, even assets that actually lost value will result in taxes being owed on a nominal profit).

Where does Grantham, an elder statements of the equity markets, think we’ll end up?

The key here is that two things are true: 1) the higher you go, the lower the expected future return; you can gorge on your cake now or enjoy it piece by piece into the distant future, but you can’t do both; and 2) the higher you go, the longer and greater the pain you will have to endure to get back to trend – in the current case to a trend value of about 2500 on the S&P 500, adjusted for the passage of time, from whatever high point the market might reach (currently at nearly 4700).

In other words, the S&P crashes to 2,500 or, assuming sufficiently clever manipulation of all the control wheels by wizards in Washington, D.C., stays more or less where it currently is, adjusted for inflation, for a decade or so.

(Maybe “spend like drug dealers” above isn’t the best expression for today? How about “spend like crypto early-adopters”?)

Related:

  • Grantham warned us of a bubble in January 2021 (and if you’d followed his advice by going short or moving to inflation-savaged cash you’d be pretty miffed right now!): “We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. It seemed prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! But we also stayed completely out for three years after the top and ultimately made good money on the round trip. Similarly, in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses.” The Jan 2021 piece includes the figure below.
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