WatchThere are two measures of the money supply that I like for day to day use. The M2, which is most of the domestic monetary holdings including time deposits, and the MZM which is the M2 minus time deposits but with the addition of money market accounts. I'll post graphs of both.
M2: money on deposit in banks + cash
MZM: money at any given moment that can have a check drawn against it + cash
At the top of the real estate bubble, both the MZM and M2 stood at about $7 trillion dollars. Since then, the explosion of federal bond debt has caused the MZM to grow faster than the M2, but both are now greater than $10 trillion.
There is currently $3 to $4 trillion more money in United States checking accounts than at the top of the bubble in 2006. However the stock market is at about the same level while almost the entire sum has been either sunk into the bond market or stockpiled as cash balances.
Most bonds are effectively paying 0% which is well under inflation. Needless to say, people are not going to accept a nominal loss on their dollars (they are already accepting an inflation loss on their dollars) therefore the bond market has hit the ceiling. It will not go up anymore. It can't go up anymore. Yes I know there's a tiny bit of wiggle room left on the 10-year and 30-year bonds, however they are not generally used for money market accounts and therefore those balances are not counted in our $4 trillion.
Here's the question of the day. Where does the money go once the bond market finally turns the corner? If not real estate, what market is going to explode in a buying frenzy once the bond market starts sinking and rates start going up?
I'm betting real estate, but there's so much money available that getting this right can make you very rich.
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I have a feeling that your bet is spot on. Actually if I had any spare cash at all I would invest in RE in addition to my primary residence.
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What Iwog neglects to tell you is that the credit market is $54T, (not $3-4T) which dwarfs the growth in the money supply. If RE bubble was only fueled by how much money people have in the banks, this bubble would have never made it to the 1st base. RE was bought with credit money, which is the initial money supply from the FED multiplied by the velocity of money multiplier, which used to be around 10x. So, it doesn't matter how much M2/MZM grows, if the credit bubble is imploding, RE prices will not sustainably rise, because the velocity of money is much less than what it was during the peak.
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"what market is going to explode in a buying frenzy once the bond market starts sinking"
Gold, equities -- basically anything that's not in chronic overcapacity, like housing is.
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iwog says
You seem to think that it's like wackamole that if one market goes down in price another must be going up to offset it. I don't see it that way.
It's easy to identify times between when the stock market first hit 1000 in about 1966 and when it was at 800 in 1982, when no market was in a bubble. Yes there was a metals bubble in the late 70s. And there were significant fluctuations in many markets, but I don't see that you're assumptions make sense.
I often think of it as, "how are people going to be fooled." What happens ultimately has to be a surprise, at least with respect to timing.
Markets don't do what people expect.
Those M graphs are sort of like CPI graphs or unemployment graphs. I don't think they tell the whole story.
Someone else might pose this question:
At present we have very high levels of unemployment and underemployment. Our economy is not growing fast enough to even absorb the number of new people entering the work force, let alone improve those unemployment and underemployment numbers. Meanwhile the baby boom doesn't have enough savings for retirement and they are entering that age window.
ALso the forces of deleveraging are still in play and many home owners are "upside down" in their housing position, unable to upgrade or downgrade because of negative equity.
Then of coursee there's monetary policy which in the past was used to fine tune our economy, stimulating it at will. THat's done for now with interest rates close to zero, and real rates possibly negative.
Taxes ? Well, lowering taxes to stimulate is hardly an option, and yet we continue to do it, increasing our deficits.
How will all of these facts be reflected in markets in coming years ? I have no clue. MAybe some shock such as a sudden devaluation ? (that would be better than a war).
Honestly I have no clue. At other times I felt I knew, but just didn't know the timing (for example when the stock market bubble and RE bubble were occuring).
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The fed used to talk about controlling inflation, and money supply growth was supposed to be at least in the ballpark of inflation.
But the current money supply growth is part of this game that's being played (and has been for a few years), in simple terms it's about bailing out banks and supporting everyone's home values. It's basically market manipulation on a huge scale, not allowing "natural price discovery" to occur.
This is new territory, and it's a departure from being a real market based economy. (don't blame Obama - it started in 2008 and it isn't over yet). How we get back to even a real market based economy, let alone a healthy one is not so clear, at least in my opinion.
MY hope is that what you predict, which is basically appreciation in housing and rents, independent of wage inflation, making us all poorer (well, most of us), does not happen.
But hey, you could be right.
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And of course there's this.
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If the credit (debt) market is imploding while the money supply (cash market) is exploding, then all the money sitting on the sidelines must go into something which is not tied to debt. Something which has no liability. Something which is pure and honest. Hmm, what might that be?
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marcus says
That's correct, and a record low in the velocity of the M2 money supply is exactly why there's no new bubble yet.
The problem is this condition cannot last forever. Bonds cannot go up anymore so which market is going to catch fire? Stocks? Metals? Real Estate?
The point here is there is more money at the ready than anyone can imagine. It's all just a check or a bank transfer away from being spent and none of it relies on credit. Far more than in 2000 or 2006. The next bubble is going to be bigger and badder than any before.
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iwog says
I heard it's to be tulips. Buy some now!
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David Losh says
At 4% interest, real estate prices 2x income is totally sustainable. 3x even.
David Losh says
They also keep the property forever. Once a home is locked up in a trust or a corporation, it's almost impossible to pry it out again. It's just another cog in someone's income stream.
David Losh says
See this is why I don't understand what you're talking about. Debt markets are NOT an investment opportunity by the simple fact that bonds at 0% cannot go up anymore. Once rates do start to go up, it means money is pouring out of bonds and going into something else. The trick is to figure out what.
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iwog says
And, as I said before, it will go into something which is not tied to the debt market.
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iwog: "The next bubble is going to be bigger and badder than any before."
Possibly, but what is much more likely is that you will be dead before you see it.
This epic deleveraging/deflation is only just getting started and will be at least as long as the 30 year debt binge before it.
Welcome to a new era, the End Of Growth.
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pazuzu says
I really consider that an insane assertion. The point of this thread is that it's not just the money supply that is at record high levels, it's not just debt that is at record high levels, it's cash available in checking accounts that is at record high levels.
There is more money sitting dormant in people's accounts than ever before. As marcus pointed out with the velocity graph, that money is simply sitting there unspent, but why would it sit there for 30 years?
My not so extensive experience tells me that the next big thing is always just around the corner. Maybe a medical stock bubble as people get enamored with the aging baby boomers. Maybe metals although I think that bubble peaked last year. Maybe grains because global warming will cause more droughts. Or MAYBE real estate because they aren't making anymore land and housing construction is still essentially dead.
3 decades of people sitting on large cash balances isn't going to happen here. It never has before so why now?
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iwog says
Again there's something missing here. There is no reason why something has to go up as a direct effect of bonds going down.
About the money supply, I would like to see an analysis of how much of that money supply growth is actually money that will be available to be invested. A lot of money has been created by the purchase of bonds and bad mortgages. This is not money that's waiting to be invested.
Besides if money waiting to be invested was all that was required to create a bubble, we would have big bubbles going now, because as we know, there is a lot of money on the sidelines (so to speak) in all of the places that cash gets parked.
You think that when interest rates start going up, that has to change ?
ACtually, if people see an upward trend in interest rates, cash (short term debt securities) is a reasonable place to be, since increasing rates often are reflected in both bonds and equities dropping.
But if people percieve inflation without interest rates going up sufficiently, because of continued intervention/manipulation, that I believe would be a possible reason to expect a bubble somewhere (commodities perhaps?).
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marcus says
Bonds going down would constitute a selloff.
As higher rates are assumed by the buyers, the sellers will be seeking returns greater than whatever the bond rate was at.
I guarantee it's not a checking account so you gotta pick.
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marcus says
Money market accounts have taken over to the extent that it's accurate to say that all cash is in bonds already. Everyone uses a sweep account in their brokerage and banks have incorporated money market accounts into their standard offerings.
I'm not sure "sell bonds and hold cash" has any meaning anymore.
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iwog says
Money market accounts are typically comprised of very short tern (3 month, 6 month etc, or similar low risk extremely short term debt securities) securities. As you probably know, there is a big difference between T-Bills, and T-Bonds.
I'm not saying that money market accounts never contain Bonds, but as you should know, bonds have huge price risk inversely correlated to interest rate changes. How much risk is there in waiting 3 months for a T-Bill to mature ? This is why T-Bills or Money Market funds are often loosely called "cash." This is nothing new.
So yes, selling long term bonds, and holding cash (or T-BIlls or money market account - virtually the same as cash ) makes more sense than ever.
What doesn't make sense is anyone thinking that 10yr or 30 year bonds are anything like cash. I guess they are, if you assume you could sell before the value of the bonds drops too much, which is why some money market accounts might contain bonds or so called inflation protected bonds). I guess a money market account could also contain bonds that had less than 2 years left to maturity. But I believe if you look into it, you will find money market account/funds are comprised almost entirely of extremely short term extremely low risk debt securites.
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Keeping money in cash (T-BIlls or CDs etc), means that a few months later when interest rates are higher you will have cash available to get the higher rate.
Repeat.
This is what many people would be doing if they thought rates were trending higher.
Usually but not always in that kind of environment, stock prices would be dropping because people require higher yields due to competing yields in money markets, and CDs etc. This would be especiually true if the perception was that it was a trend that would continue.
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marcus says
Btw, money market accounts take care of this automatically.
Bonds and bond funds are by definition comprised of long term debt, and you lose with increases in rates, whereas you win if you're holding in a money market account..
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iwog says
More land may not be in the making but it can certainly be re-purposed. I seem to remember at the beginning of the crash in 2007 San Jose rezoned a bunch of commercial land to residential. There are also the hills surrounding the Bay Area that are still largely untapped. Might have to clean up some old rocket fuel but the land is there.
Basements are also an excellent way to add square footage without building up or out. They're not common here in the bay area due to cost but given how expensive land is now that may change.
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iwog says
Money in checking account is $3-4T, while private debt is $54T. The checking account money has doubled since 2000, while debt is shrinking much faster. Before, $54T was in the credit market, used to purchase real estate, now we only have $3-4T in the checking account. When FHA is gone/bankrupt, there will only be this $4T left, vs $54T 6 years ago. With $4T, you can only buy 1/10th of what you could, before.
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New renter says
Yes, its fairly clear how innovative we have become in creating new housing, several new devs have gone up in Campbell alone in recent months.
The sat maps do provide some great insight on the land availability in the south bay.
Further south of Santa Clara, land is virtually untapped and expandable in the future.
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thomaswong.1986 says
True. Coyote valley is still being developed. Depending on what type of housing is made (tract vs custom) that might take some of the price pressure off Blossom and Almaden Valleys respectively
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iwog says
This will work if the real estate is more of a cash based market. But it is not. At least it was not the case before 2008 where highly leveraged mortgages dominated. It is obvious to see that the price will be lower with cash purchases compared leveraged ones. For example, I made an offer ~ $40k on a REO with asking price ~$50k. They did not bother talking to me and dropped the price to ~$40k and I lost out to other case buyers by offering $35k (in cash.) I could have offerred a lot more with mortage than with just cash (I wife did nto want to offer too much tho.) Anyway, if anybody can find out the mortgage initiation rate, that will proabably be a good indicator for the housing price. For cash buy, it may advance the price a little bit (I call it stagnancy.) However, it won't create the exponential growth as we saw in the last decade.
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As long as the stock market is a better investment than real estate (and it is) then that's where the money is going to flow. If commodities ever regain their upward trajectory (and they will before the housing market will) then that too would still be a better investment.
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marcus says
I just reread this, and realized it sounds like a suggestion. Actually I don't have an opinion on when a bear market in bonds (ie long term interest rates trending higher) will begin. Taken out of context, it sounded like I do have an opinion on this.
No. I was just responding to what Iwog said, my point being that if interest rates were about to start trending higher that then the idea of selling bonds and holding "cash" totally makes sense. And that while holding "cash" is in no way synonymous with holding bonds or bond funds, the term does often denote holding t-bills, cds or other extremely short term and liquid debt securities.
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I'm going to agree with a previous post: Real estate is likely over ( as a bubble) because if history serves to be a teacher, bubbles don't tend to inflate and deflate over the same thing.
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iwog says
While there may be a real estate "bounce", I don't think that there's going to be another bubble immediately. Whatever happens, I expect that the banks are going to do their best to get a piece of it though. With the fed buying MBSes there's room in the CDO market, but we're thinking that bonds are at some peak. Right now I bet that the banks are happy to deposit your cash at the fed for interest while they pay you nothing.
Having said that, the momentum seems to be in inertia. Health care is a decent guess, but I expect that most of the money is old money. As in, it's not going to be going into equities but into services. I've heard rumors of building picking up here in FL, but I don't know what's going up. High-end retirement villages maybe? Near Disney for the grandkids?
For the moment, I think equity investments are where the money has to go, but real estate has good potential, too. Absent something government sponsored (ie: something from the human genome or ITER, as the dot-com arguably from the internet) I don't expect much in the way of any mad-rushes. Natural gas and oil is locking up real estate, while the commodity prices are being depressed - there may be a bubble of sorts there, but if production picks up that'll all change.
What else is there? Cruise ships and casinos? Medical school? Diploma mills? Gas stations?