Take a different tack, what is the Fed looking for? In 1978 my parents bought their principal residence, an apartment in the centre of the city, they paid $50,000…I know! They still own that apartment, sure the condo fees have gone up, from maybe 400 per month to nearly 2,000 per month (its a very nice place). but their overall cost of housing has not increased appreciably. Now if they bought the same apartment today it would cost, conservatively, $2 million. If they had to carry a mortgage on that it would be expensive, but they don’t. The reality is that for the vast majority of the US population, the cost of buying a house today is irrelevant. Its a bit like the tail wagging the dog.
It has been know for many decades, it was when I studied economics in the late 1980s) that the CPI was a poor indicator of inflation, which I agree is a lot higher today than that measure would seem to indicate. Nevertheless, the big question is what is the FEDs game, what are they trying to do, and more importantly are the levers they control allow them to do anything about inflation?
The tools for managing inflation have changed over the years, and don’t even start about how we measure the expansion of the money supply…its an unholly mess and I suspect that the Feds have no idea what to do. Afterall the US economy is doing rather well, there “seems to be some inflation out there” but the Feds keep rates low. Its like the story below about selling commercial real estate (3rd tier) with negative cap rate, what are the buyers expecting?
Powderhound
2 years ago
Mish, great stab at a more realistic inflation measure, certainly the Fed dfn does not work in today’s world. I’m in the real estate investment business and have been for decades. Never have I witnessed real “ cap rates” this low. We just sold a large apartment project in a tertiary market for the equivalent, depending on your inflation measure, of between -2% and -7%, “cap rate”. Buyers must be expecting serious rent inflation or significant appreciation (which is a symptom of rental rate growth) or both. God bless the buyers. We’re definitely at the party and just hope no one shows up with a pin to poop the balloons.
Casual_Observer2020
2 years ago
I have a different theory as to why the Fed doesn’t care about these asset bubbles — they are good for pension funds and 401ks at a time when a fair chunk of the population is entering retirement. The Fed doesn’t need more problems with pension funds and 401ks so I predict they will continue to keep asset values on the high side over the next 10-15 years. You heard that right. But don’t expect that to keep up with inflation. It will simply be treading water for that period and this will convince more people who have the money and are eligible for retirement to take the plunge. The labor market will improve for younger college graduates because of this.
Casual_Observer2020
2 years ago
Looks like ending UI really isn’t doing much. Only about 13 % of those unemployed because jobless benefits pay more. Overall the US is a crappy place to work for multiple reasons and this is why people quitting with no job lined up is increasing.
The Republican labor-shortage fix looks like a bust
There are probably some people who are sitting out the job market because they make more in jobless aid than they would from working. But research has consistently found this to be a much smaller slice of the unemployed than Republicans typically acknowledge. A link to morningconsult.com found that only 13% of unemployed Americans are jobless because benefits pay more. Other big reasons people aren’t working: child-care obligations, ongoing fears about Covid in the workplace, health limitations and lousy work options.
Funny how very astute people here actually think the CDC eviction moratorium will actually be allowed to expire on 31 July. It has already been extended several times. Despite no fewer than 5 federal courts striking it down as Unconstitutional, those judges either refused to act or issued a stay on the decision. So the Biden administration ordered the CDC to extend another month in June. The Supreme Court even went with a 5-4 decision not to act on the moratorium (likely because they thought as well that it would be ending soon) but a statement issued by Justice Roberts suggested that if the matter were to come to the Court via an Appealate decision, it is likely to be found to be overreach of the CDC’s authority and struck down. But we know how long these formal legal challenges can take, and so many people are benefitting from not paying their obligations and getting stimulus, especially people with kids who have become a modern day gold mine for the stimulus policies.
So–guess what? The moratorium will be extended yet again. I’d bet my entire 401(k) on it. This is no time for rules & laws…we need to keep pumping the stock and housing markets. Do it for the kids! And with COVID cases on the rise yet again, there’s the perfect excuse for the CDC to continue its streak of egregious federal law violations.
In California is already extended to the end of September.
By that time the delta variant will be severe enough to generate enough panic for another full year extension.
You are not entirely wrong.
Blurtman
2 years ago
Now hold on, Mish. Biden says his economic plan is working.
“Planning a cookout this year? Ketchup on the news,” the White House tweeted. “According to the Farm Bureau, the cost of a 4th of July BBQ is down from last year. It’s a fact you must-hear(d). Hot dog, the Biden economic plan is working. And that’s something we can all relish.”
Almost as embarrassing as a trump tweet. Is this really the best we can do?
Jojo
2 years ago
“The entire notion we need 2% inflation while ignoring asset bubbles that allegedly do not represent inflation is downright idiotic.”
———
But what forces will force a change to anything more reasonable? The government computes inflation the way it does because it is beneficial for them to do it this way. Why would they ever change?
So…longer term, rents have to go up to follow housing price increases, or nobody will rent houses anymore.. I accept that it could take years to catch up. In fact, my experience is that it does usually take years, but since this time a lot of landlord costs are starting to get really out of hand, I expect rents to rise faster, although I don’t expect them to go as high (proportionally) as home sales have this last year.
I don’t intend to raise rents 20%. I think that’s more than the market will bear here.
I will discuss monetary inflation next week, so stay tuned.
I know the rise in reverse repos is not money creation per se, but I have heard it argued that they’re a symptom of stress, and that the NEXT step might be a LOT of money creation, all of a sudden, when credit locks up. The chart looks scary. I know you’ve looked at it.
Reverse repos are soaking up liquidity that is sloshing in the banking system, the opposite of money creation.
The clowns are still doing QE to the tune of 120B/month, but the money cannot be lent out productively by the institutions. The puny interest on reverse repos provide some returns, but has to be repeated daily as these transactions unwind.
Reverse repos are still Fed borrowing. It’s a liability on the Fed’s balance sheet, and they get cash for that from the member banks.
What if, instead of the prevailing wisdom that the Fed is “soaking up excess money” the real story is that the Fed is using that cash to continue to float the ongoing financing of the national debt, i.e. using it to buy more Treasuries.
It looks to me like an institutional version of using a new credit card to make minimum payments on the old credit card.
In the past few months, the Fed has put up more than a trillion dollars of its most valuable assets as collateral. If they can’t pay, then what happens?
That’s when printing money actually starts for real on a grand scale.
“What if, instead of the prevailing wisdom that the Fed is “soaking up excess money” the real story is that the Fed is using that cash to continue to float the ongoing financing of the national debt, i.e. using it to buy more Treasuries.”
Yes. The FED is digitally printing money and buying treasuries and MBS, that’s the ongoing QE. The FED doesn’t need cash, it can print as much as it decides, unfortunately.
I am not sure what you mean by most valuable assets? Those assets are mostly treasuries.
Previously, during the financial panic, it bought a lot of garbage from banks, but then it re-inflated all assets, and could offload the garbage.
By removing debt ceilings, the treasuries have ironically become safer, until some black swan event. Let’s imagine, when the inflation cannot be hidden anymore…
In one of my buildings, I have a one-bedroom unit and a three-bed unit. I was literally mobbed when I listed the smaller unit last month. Over 200 requests for showing in a week! The three-bed demand is almost non-existent. These two units are literally in the same building.
My theory is that singles and young population is out in force to move out of parent’s home and become independent. Families are still in wait and watch mode so demand is not present yet for larger units.
It is true that once moratorium on evictions is lifted, there will be a lot of demand but there will be a lot of supply too. I guess there will be a market for renting to evicted folks at higher rents although I am not sure if I want to play in that market.
I am watching this closely to see where this all settles in the next six months.
BTW, evictions will take six months or so as courts are completely backed up and will handle these cases very slowly. They will force both parties to go through mediation. Tenants will stay of course until it is all resolved so tenants will have a lot of leverage in these situations.
anoop
2 years ago
can’t argue with you on this one. 🙂
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