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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How is the James Webb Space Telescope doing?

by philg

Who has been following the James Webb Space Telescope? It will take a while to travel nearly 1 million miles to get to its working position, but is everything still working as planned? $10 billion sounds like a lot of money, but considering that the federal government spent at least $10 trillion on less than 2 years of coronapanic, the James Webb money wouldn’t have funded coronapanic for even a single day.

It looks like the launch prep was similar to how my friends in Maskachusetts set up their living rooms prior to receiving grocery deliveries, March 2020 through present:

The original plan for unfolding (completed on January 8):

There is no visible light camera on the fancy machine, right? What do readers predict about the American public’s interest level in infrared-derived images? My prediction: it will be reasonably high for a year or so, as long as the pseudo-color images are of exoplanets.

I wonder if the name of the telescope tells us something about American culture. James Webb had no scientific training. From Wikipedia:

He completed his college education at the University of North Carolina at Chapel Hill, where he received an Bachelor of Arts in Education in 1928. He was a member of the Acacia fraternity. Webb became a second lieutenant in the United States Marine Corps, and he served as a Marine Corps pilot on active duty from 1930 to 1932. Webb then studied law at The George Washington University Law School, where he received a J.D. degree in 1936. In the same year, he was admitted to the Bar of the District of Columbia.

He was a high-level government official, however:

After World War II, Webb returned to Washington, DC and served as executive assistant to Gardner, now the Undersecretary of the Treasury, for a short while before he was named as the director of the Bureau of the Budget in the Office of the President of the United States, a position that he held until 1949. Webb was recommended for the appointment to Truman by Gardner and Treasury Secretary John Snyder. … Truman’s objective for the budget was to bring it to balance after the large expenditures of World War II …

President Harry S. Truman next nominated Webb to serve as an undersecretary of state in the U.S. Department of State, which he began in January 1949.

On February 14, 1961, Webb accepted President John F. Kennedy’s appointment as Administrator of NASA,

(Note shocking anachronistic content highlighted in bold!)

The previous big telescope, launched in 1990, was named after Edwin Hubble, a Ph.D. astronomer who figured out that there were other galaxies and that they were moving away from us.

So… when nobody said “I follow the science”, our expensive telescope was named after a scientist. Now that half the country says “I follow the science,” our expensive telescope is named after a politician/bureaucrat.

(We may see a loosely analogous progression in New York governors. Elliot Spitzer paid young women to have sex with him; Andrew Cuomo simply took the bodies of young women without paying.)

As someone who lives in completely flat state that Verizon is nonetheless unable to cover with a mobile data network, I’m curious to see if the design goal of 28 Mbps communication can be achieved.

I think it would be interesting if there were some cameras on the sunshield that could send back visible light images of the telescope itself (but maybe it will be far too dark for that? The telescope will be illuminated only by starlight if the shield works, right?). Or a camera with a sun filter on the back of the sunshield to give us a constant image of the Sun with the Earth and Moon in the foreground? I haven’t worked out the geometry to determine how big the Earth and Moon would be relative to the Sun from that perspective, but maybe it would be hopeless due to the small relative size of the Earth and Moon combined with the brightness of the Sun.

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At-home test kits are back in stock; triumph of central planning?

by philg

As of last night, CVS in the Palm Beach area has at-home test kits back in stock.

Do we call this a failure of central planning? The site to order “free” (i.e., paid for by us via taxes) kits went live only on January 19 delivery time was supposed to be “within seven to 12 days” (USA Today). In other words, the central planners’ fix for the shortage will not ramp up until after the shortage is over.

Or do we call this an example of the success of central planning? Secure in the knowledge that Joe Biden is sending them four kits per household, Americans have ceased their panic buying of test kits at retail.

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How’s transitory inflation in your area?

by philg

From the in-house economics Nobel-winner at the New York Times (December 2021):

Even once the inflation numbers shot up, many economists — myself included — argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected.

In other words, all inflation is transitory, but some transitory inflation is more transitory than others.

(Dr. Jill Biden’s colleague Professor Dr. Krugman, M.D., Ph.D. previously successfully predicted the stock market crash that lasted throughout the dark Donald Trump years.)

Readers: What are you seeing for the stuff that you buy? If you’re in business, what are customers saying when you raise prices to them? Is it better to multiply by 1.4X once or 1.1X every few months until your revenue recovers its former purchasing power?

We took our Odyssey in for an oil change. The Honda dealer’s showroom contained only used cars, as did the lot. A new Accord or Odyssey was available for $3000 over sticker and a 1-2-month wait. “Some dealers are charging more,” the salesman said. This would be about $7,000 more than we paid for our in-stock Odyssey a year ago (i.e., roughly comparable to the 20% annual inflation in housing, though it would have been much higher for similar delivery time (buy out someone else’s order for $5,000 extra?)).

Honda plainly isn’t charging a market-clearing price for wiper blades. The dealer had just one of the two front blades in stock. Regarding the passenger-side blade, the advisor said “They’ve been on backorder.”

Our Cirrus SR20 needs its “reefing line cutters” replaced every 6 years. These are required every time that the pilot, or a nervous passenger, elects to land via parachute. Owners have mentioned long delays in getting parachute components for the Cirrus so I emailed our mechanic recently, three months before we actually need the part. Here was his response:

I will order you a set of line cutters as this has been on back order … be advised aircraft parts are increasing in price almost every day!

In 2021, Robinson Helicopter Company, founded in 1973, imposed its first-ever mid-year price increase. Order your aviation stuff now (13 percent price increase from Lycoming) describes a first-in-many-decades mid-year price increase from Lycoming.

Aviation costs, even for parts, seem to go up more like U.S. labor costs than like the costs of stuff that you can buy in Walmart. Aircraft parts, due to certification requirements, can’t be made by multiple competing Chinese and Mexican factories. The volume is low so it isn’t worth automating. Even if you’re just buying a bolt, which for a jet can cost $thousands, you’re essentially buying labor and health insurance.

Here is a line cutter in action. I think you’re seeing a $1,000 part (there are two for redundancy and both must be replaced every six years; then there is the $15,000 currently-unobtainable re-packed parachute every 10 years):

The used aircraft market is still booming, with airplanes worth 2X what they went for in 2019, but I wonder if a few years of transitory inflation will change that. Not everyone’s income goes up with inflation. Someone who bought a plane budgeting $X/year for hangar, maintenance, and insurance will now be paying $2X per year. At some point, won’t that person begin to ask “Why do I need this airplane? I can do most meetings via Zoom. I can move to Florida and have popular vacation destinations within a short drive. President Harris can’t keep up the mask requirements on commercial airlines forever.”

Related:

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Exclude white trash by excluding pit bulls?

by philg

In 2017, I wrote High minimum wage is a city’s way to keep out low-skill immigrants

Friends on Facebook are discussing “A ‘very credible’ new study on Seattle’s $15 minimum wage has bad news for liberals” (Washington Post). Of course, like most things in the U.S. media, this starts off with a lie (the minimum wage in Seattle is $13/hour, not $15/hour). But let’s look at the rest of the article…

Suppose that the goal of a liberal is to live in a city without too many unsightly low-skilled people (see Tyler Cowen explains why rich white Democrats freely express love for immigrants and people of color for how liberals already have segregated themselves away from dark-skinned Americans and immigrants).

Can the liberal make it illegal for anyone without a college degree to live in his or her city? Probably not. Can the liberal make it illegal for anyone without a college degree to work in his or her city? Sure! That’s the minimum wage.

(Imagine that in 2017 a $13/hour wage rising to $15/hour was considered princely. Where in the country right now one could hire a reliable worker for $15 per hour?)

I wonder if something analogous is happening in our neighborhood in Florida, the planned-but-not-gated community of Abacoa (within Jupiter; see our search process). There is no means-tested public housing in our neighborhood and therefore we are missing the social/economic class of those who have managed to obtain a lifetime of taxpayer-funded housing. But there is also a missing class of folks who likely could afford to pay market rent here (as low as $1500/month): white trash.

Palm Beach County is not exactly the white trash capital of Florida, but we do sometimes see tattooed folks walking their pit bulls not too far from here and in neighborhoods that aren’t much less expensive. Why don’t we have tattooed pit bull-owning neighbors within a 1-2-mile radius? The Homeowners’ Association (HOA) for each area within Abacoa specifically bans pit bulls and some other dog breeds with a reputation for aggression.

I wonder if the dog breed rules are partly designed to keep out undesirable breeds of humans…

Related:

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Politician characterizes immigrant-rich California as “like a third world country”

by philg

At 27 percent, California leads the U.S. in percentage of population who are foreign-born (Wikipedia). Many of these folks migrated from low-income countries where the typical resident is “low-skill” from the perspective of a U.S. employer.

What if a politician referred to California as “like a third world country”? We would cancel him/her/zir/them as a Trump-poisoned hater of low-skill migrants, right?

“Newsom grapples with his ‘third-world country’” (Politico):

Gov. Gavin Newsom’s frustration was palpable on Thursday, as he cleaned up trash-strewn railroad tracks in Los Angeles that have become the site of innumerable package thefts. You may have seen images of the property crimes in question. They’ve permeated California’s media markets and been beamed beyond our borders, where the coverage has often advanced a familiar narrative of California spiraling into dystopia. None of that is lost on Newsom.

“I’m asking myself, what the hell is going on? We look like a third-world country,” Newsom said

Separately, “Newsom has big plans to get rid of California’s massive homeless camps. Will they work?”:

After pouring an unprecedented $12 billion into homeless housing and services last year, Gov. Gavin Newsom now is turning to the massive tent camps, shantytowns and makeshift RV parks that have taken over California’s streets, parks and open spaces during the COVID-19 pandemic.

In a never-before-seen effort, the governor is doling out $50 million this winter to help cities and counties clear out camps and house people living outside. San Jose, Richmond and Santa Cruz are among those that might benefit. Newsom hopes to increase that investment 10-fold in the coming year’s budget and add $1.5 billion to house people with behavioral health conditions. In charge of it all will be Newsom’s new state homelessness council, co-chaired by none other than the face of California’s COVID response — Dr. Mark Ghaly.

“This is probably one-of-a-kind, once-in-a-lifetime type funding that we’re seeing from the state,” said Michelle Milam, crime prevention manager for the Richmond Police Department and a member of the city’s homelessness task force. “We’ve never seen this kind of investment from the state for encampments.”

If he/she/ze/they is canceled as a result of this hate speech, maybe Mx. Newsom will retire to state-income-tax-free 3-percent-foreign-born Wyoming?

Based on my own travels, I think that Mx. Newsom is incorrect regarding California looking like a third-world country. The major cities in the poorest countries that I have visited do not feature people encamped in tents on sidewalks, people consuming drugs out in the open, etc. See my photos from Haiti, for example (not the tourist Haiti, but the authentic Haiti). A sample:

And, from the Provincetown Public Library, taken shortly after the above photo, some migration-related titles in the Young Adult Non-Fiction section:

Related:

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Skiing in a country where nobody wants to work and where nobody can afford to live

by philg

A friend lives in a $3 million starter home in the Vail valley. He reports having to carefully pick ski days this season due to crowding on the mountain and long lift lines. “They sold a ton of Epic passes in the spring at a discount,” he explained, “and now lifts and trails are closed because nobody wants to work. They can’t find people to drive the snowcats for grooming, so you find that a lot of trails are roped off and blocked by a big pile of snow.”

How did the labor supply change? “The cost of living, especially housing, is much higher than two years ago and the wages haven’t gone up as much,” he replied. “They’re offering a $2 per hour bonus for people who stay through March, but that’s not enough to enable someone to live where the rich people live.”

(I wonder if restrictions imposed with a COVID-19 justification are partly to blame. The last time I was at Beaver Creek I noticed that a high percentage of workers were foreigners, e.g., from Central and South America, on temporary visas. It seems that not too many Americans wanted to spend the winter in a glorious ski resort, at least not at the wages offered. Until November 2021, was it possible for foreigners to get to the U.S., except as asylum-seekers walking across the Rio Grande?)

From a February 2017 trip to Beaver Creek:

Related:

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Soviet management tips for the American executive

by philg

To celebrate having gotten through one month of winter, let’s turn our attention to things Russian (since they are the true masters of the cold).

Last year, I was invited to a family dinner in which the husband’s father is retired from managing a large Soviet enterprise (many bonuses and incentives for performance, so not actually all that different from running a bureaucratic U.S. company). The wife had recently been promoted to manage five divisions of a substantial U.S. company instead of just one. She described her frustration with workers who didn’t want to come back to the office. “Can you make it in every Wednesday?” was an unreasonable ask. Productivity was unimpressive and a lot of people had gotten comfortable with the previous manager, whose standards were low-to-mediocre.

We kicked around some ideas for motivating the workers and gradually acclimating them to the new higher standards. After 10 minutes of mostly unproductive suggestions, the father-in-law offered some advice…. “Old Russian saying: When whorehouse is losing money, you don’t change the beds. You change the whores.”

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We voted for Pedro; did all of our wildest dreams come true?

by philg

Joe Biden’s campaign promises were similar to those of Pedro’s (“if you vote for me, all of your wildest dreams will come true”) in Napoleon Dynamite.

It has been a year. How did Biden deliver on the promised dreams?

First, let’s check the promises on archive.org, 10/29/2020. It was a “Battle for the Soul of the Nation.” Do we have a better soul today?

Biden promised “leadership during the COVID-19 Pandemic”:

Biden knows how to mount an effective crisis response and elevate the voices of scientists, public health experts, and first responders because he has done it before.

We need a decisive public health response to curb the spread of this disease and provide treatment to those in need — as well as a decisive economic response that delivers real relief to American workers, families, and small businesses, and protects the economy as a whole.

More Americans have died with a COVID-19 tag during the Biden administration than during the Trump administration. Did the dead people die happier under Biden because they heard the voices of scientists before they died?

Then there was “Joe and Kamala’s Plan to Beat COVID-19”:

Fix Trump’s testing-and-tracing fiasco to ensure all Americans have access to regular, reliable, and free testing.

Double the number of drive-through testing sites.

Invest in next-generation testing, including at home tests and instant tests, so we can scale up our testing capacity by orders of magnitude.

Stand up a Pandemic Testing Board like Roosevelt’s War Production Board. It’s how we produced tanks, planes, uniforms, and supplies in record time, and it’s how we can produce and distribute tens of millions of tests.

Create the Nationwide Pandemic Dashboard that Americans can check in real-time to help them gauge whether local transmission is actively occurring in their zip codes. This information is critical to helping all individuals, but especially older Americans and others at high risk, understand what level of precaution to take.

Immediately restore our relationship with the World Health Organization, which — while not perfect — is essential to coordinating a global response during a pandemic.

By how many orders of magnitude was our testing capacity scaled up? Just two orders of magnitude (100X) or did Biden/Harris get us 10,000X the testing capacity that prevailed in the Dark Days of Donald?

And where did President Biden hide the promised “Nationwide Pandemic Dashboard”?

How about the economy? Did Biden promise the highest inflation since Jimmy Carter? Not according to Google. joebiden.com barely uses the word “inflation”. One thing that raging inflation will facilitate: Biden’s promise to raise the minimum wage to $15 per hour, which will also be the price of a stick of chewing gum.

Foreign policy?

Biden will end the forever wars in Afghanistan and the Middle East, which have cost us untold blood and treasure. As he has long argued, Biden will bring the vast majority of our troops home from Afghanistan and narrowly focus our mission on Al-Qaeda and ISIS. And he will end our support for the Saudi-led war in Yemen. Staying entrenched in unwinnable conflicts only drains our capacity to lead on other issues that require our attention, and it prevents us from rebuilding the other instruments of American power.

I’d say that President Biden delivered on this dream!

A taco shop at the Delray Beach Market:

Biden promised to discriminate in hiring on the basis of membership in the 2SLGBTQQIA+ community:

Biden will nominate and appoint federal officials and judges who represent the diversity of the American people, including LGBTQ+ people.

How many people who wouldn’t otherwise have qualified for high positions did Joe Biden appoint? And did they have to wear these socks in order to get hired? (also from Delray Beach)

On education:

The challenge facing our schools is unprecedented. President Trump has made it much worse. We had a window to get this right. And, Trump blew it. His administration failed to heed the experts and take the steps required to reduce infections in our communities. As a result, cases have exploded.

Joe Biden has a simple five-step roadmap to support local decision-making on reopening schools safely

Get the Virus Under Control:… Implement nationwide testing-and-tracing, including doubling the number of drive-through testing sites;

Where are these extra sites and how does one sign up for nationwide test and trace?

Readers, especially those who voted for Biden: did your dreams of what President Biden would do come true?

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It will be tougher to get a parking space in Palm Beach

by philg

“Rolls-Royce, Bentley, BMW Sales Surge as Cheaper Brands Lag Behind” (WSJ):

The most luxurious brands such as Rolls-Royce, Bentley, Porsche and BMW have reported record sales.

Bentley sold 14,659 cars last year, an increase of 31% from the year before and a record for the company. Porsche, also owned by VW, sold 301,915 cars, an increase of 11% world-wide. Both brands posted growth in the U.S., Europe, and China.

Rolls-Royce, owned by Bayerische Motoren Werke AG, whose tailor-made superluxury cars have starting prices of more than $300,000, sold a record 5,586 cars last year, up 49% from the year before.

Martin Fritsches, president of Rolls-Royce Motor Cars Americas, told the Journal that buyers of superluxury cars like Rolls-Royce are younger today. The average age of a customer is about 43 years old, which means many of their clientele are in their 30s.

In part, Mr. Fritsches said, Rolls-Royce’s wealthy customers have been sheltered from the hardships felt by many during the pandemic. They benefited more from the economic recovery, the cryptocurrency boom and soaring stock prices. And many of the buyers are first-time Rolls owners, he said, including young entrepreneurs who got rich on the stock market and cryptocurrencies.

Meanwhile, when we took our Honda Odyssey in for an oil change recently, the dealer had exactly 0 new Hondas in stock. If we’d wanted to replace our Odyssey it would have required paying 20% more than we paid a year ago and waiting 1-2 months.

“Global chip shortage: Everything you need to know” (TechRepublic, November 2021):

A shortage in the supply of semiconductors first hit the automotive industry during the COVID-19 pandemic and has had a cascading effect, causing global disruption. The shortage can be traced back to the first half of 2020, when overall consumer demand for cars declined during the lockdown. This forced chip manufacturers to shift their focus to other areas, such as computer equipment and mobile devices, which spiked in demand with more people working remotely.

Part of the problem is that the return on investment isn’t compelling enough to build new foundries—which cost billions of dollars and take years to construct—to satisfy the demand by automakers, according to IDC. Automakers operate in a just-in-time environment without business continuity planning, according to Mario Morales, program vice president of the semiconductor group at IDC.

After they canceled orders early on in the pandemic, disgruntled suppliers turned to other markets that were still doing well, such as consumer electronics, and automakers found themselves lower on the priority list.

I still don’t get it. A replacement for our Odyssey is at least $7,000 more than we paid for the identical vehicle in January 2021. Let’s say that Bidenflation has driven up Honda’s costs by $3,000. Assuming that Honda made a profit on our Odyssey, Honda could still pay up to $4,000 for some chips and sell Odysseys at a profit (they’d have to raise the price to dealers so that Honda recovered the $3,000 premium over sticker that the dealer is currently charging). Apple can’t pay $4,000 for the chips that go inside a $1,400 iPhone. Microsoft can’t pay $4,000 for the chips that go inside a $500 Xbox Series X. Econ 101 suggests that the car companies can outbid anyone other than the U.S. military for the chips that they want. How is it possible that integrated circuit supplies are limiting car production?

Consistent with the WSJ article, I did find a Cadillac available for immediate delivery near the Venice (FL) airport:

“Microlino EV, Adorable Two-Seater, Going into Production in Europe” (Car and Driver):

“Our goal was to deliver the first vehicles to customers within the end of the year [2021], but the worldwide supply-chain chaos is affecting us like many other carmakers,” the company indicated. “Despite our preparations to order crucial parts way in advance, the situation has gotten much worse and is now affecting more and more parts. Now, even commodity parts like simple connectors for the wiring harness have become scarce and have lead times of up to 50 weeks!”

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