patrick.net

and if interest rates rise?

This is a great sign? Stagnant wages, 9.0% unemployment (dropping mostly courtesy of a declining participation rate), more boomers retiring on fixed incomes, near record levels of over-leveraged households barely able to make their current house payments (with interest rates surging), and a tight credit market (well, relative to the home ATM heyday) speak otherwise.

Labor overseas becoming more expensive? AWESOME. Let's see how this boosts China's GDP and the speculative shuffling of commodities worldwide.

I, gulp, agree with shrek immediately above.

People wanting repeat of the 1970s need to understand that the 1950s-1960s was a beautiful set-up for what happened.

I was just looking at my book of NYT's front pages (it's perfect crapper material) and found a story from Jan '68 about LBJ proposing his last budget $180B with $20B deficit -- and that was considered out of control spending so he also requested a 10% tax rise (eg. 36% going to 39.6%) to get things back into balance.

We're about $1T/yr outside of those parameters now, and just cut taxes 10% on most people.

A weakening dollar now against the yuan is necessary but it's also going to put 1.3 billion Chinese ahead of us line for stuff. Back in the 1970s it wasn't such a big deal that the Japanese had a strengthening currency because we had twice their population (and the trade deficit wasn't half as bad as it is now).

Troy says

A weakening dollar now against the yuan is necessary but it’s also going to put 1.3 billion Chinese ahead of us line for stuff. Back in the 1970s it wasn’t such a big deal that the Japanese had a strengthening currency because we had twice their population (and the trade deficit wasn’t half as bad as it is now).

Good point Troy. I can't say I know that much about Chinese demographics, but what percentage of 1.3 billion are actually going to be put ahead?

And a little 'pushback' from the same article:

Whether shoppers will pay is unclear. “Consumers are not exactly in the frame of mind or economic circumstances to say ‘Oh, pay whatever they ask,’ ” said Joshua Shapiro, chief United States economist at MFR Inc. “There’s going to be pushback.”

Whether shoppers will pay is unclear. “Consumers are not exactly in the frame of mind or economic circumstances to say ‘Oh, pay whatever they ask,’ ” said Joshua Shapiro, chief United States economist at MFR Inc. “There’s going to be pushback.”

Oh yea, I forgot, don't get left behind on this one.

Holy christ you can't see the flawed logic in this?

Holy edit CrazyMan - who is OP?

OP is the "original poster".

I can't be bothered since I need to go to bed, but "no dead cat bounce" "no double dip", "the fearful will be left behind" got my attention.

What planet does this guy live on, exactly? He bought an overpriced house and continues to grasp at straws, obviously.

Jesus Christ, get back on the planet.

This is a great sign. The recovery has traction

Not sure how you get that from this article. Rising commodity prices has mostly to do with surging economies abroad, not much to do with what's going on here.

I think a key quote is Labor overseas is becoming more expensive. No double dip. No dead cat bounce. The fearful will be left behind.

Err.. rising wages abroad is indicative of as strong recovery the US how exactly?

Thanks Crazyman. Nighty night.

MarkInSF says

is indicative of as strong recovery the US how exactly?

rising wages abroad does give labor here a better shake at getting employed.

Though our content-creator economy isn't going to be seeing any of this increased buying power.

Plus a weakening dollar does mean our trade partners will be importing more for the same cost in their currency.

This raises their standard of living but lowers ours as we shift towards scarcity on the supply axis.

One thing that's interesting is that China is at Peak Young Adult right now. They will be entering a rather severe decline.

I don't know how it's going to affect their wages but it will reduce the severe oversupply their labor market has right now, a bit at least.

Right now there's 120M people aged 20-24.
Back in 2000 this was ~100M.
In 2020 it will be closer to 90M. 25% of the cohort, gone!

Once tech side crashes it will be "interesting" out here in CA. Rising prices, rising taxes, huge unemployment. Sure people will make it still, just living standards are going down the crapper.

A "great sign"?

There is nothing good about inflation for the ordinary working person or the prudent saver. All the money I've diligently put in the bank is going to lose value and I'm supposed to be happy about that?

Nomograph says

ChrisLA says

Once tech side crashes it will be “interesting” out here in CA. Rising prices, rising taxes, huge unemployment.

The fearful *always* get left behind. Buh bye, ChrisLA.
The San Diego Union-Tribune says

San Diego tech companies can’t fill thousands of jobs
Even though the jobless rate continues to hover in the double digits, there are literally thousands of high-paid job openings in San Diego County just waiting for the applicants with the right skills, according to the leaders of the local high-tech community.

http://www.signonsandiego.com/news/2011/feb/12/why-san-diego-tech-companies-cant-fill-thousands-j/

5 billion in debt with only 48 million in annual revenue.... it will not crash at all.

I'm not fearful either, my future is fine and will be fine regardless of that industry.

Out here in LA when a new business opens there is a line of people applying for jobs. We had that on local news a few month ago. Approximately 30 job openings and a line of thousands applying for them. You can pick and choose the news you like, but no one is being left behind...just realistic. And reality for our nation is rather bleak.... perhaps institutionalized feudalism of a sort.

Nomograph says

Nobody wants a pessimist around, and businesses rid themselves of pessimists at the first opportunity.

OH Really ... is that a fact.. Here is a management topic you should learn... "Risk Assessment" every CEO/CFO knows it well.
LOL! the reality is those who were not pessimistic were the ones wiped out! They never saw it coming...

Nomo I'm not sure where you get your ideas from. But you seem to be talking on a different page about something unrelated. You sound like taputu's twin brother once in a while, when you attempt to pick a random argument just for the sake of seeing your own posts on the internet. "Lets switch from prices going up to .... optimism vs pessimism because nomograph needs to see his post on the internet to stroke personal ego"

Who is talking about pessimism/optimism here? These are not related to the core facts of present situation. Economy is doing bad and living standards will be going down for a while because as a nation we are broke. And living in a stupid bubble for a while set us back quite a few years due to the destructive and unproductive nature of this type of bubble.

I'm not being pessimistic. You just interpret it as pessimism. And I'm not sitting around on my butt crying about the state of the nation either. I'm not sure where you confer that from. I am very realistic and I want better future for this nation. I simply want next generation to have a better life.

Democracy is not a spectator sport, I participate. I write letters to congress, setup meetings with local representatives, vote. You seem to conflate irrational optimism/cockiness with confidence. Because of that I think you just have a very (almost naive) young mans view of the world, at least thats how you come across.

And I'm aware of the fact that destitute Mexicans swim the border to come here. But that isn't my benchmark, not sure why one should be happy about that. If they lived next to Germany, Japan, etc... they would go there too. As a nation we don't strive to be a notch above poverty. That would be a rather shallow uninspiring bench mark.

I don't think optimism / pessimism or risk loving / risk aversion has much of anything to do with predictions on housing.

The guys at Magnetar Capital (http://en.wikipedia.org/wiki/Magnetar_Capital) were very optimistic about their chances of getting wealthy & took huge risks based on an idea that was very 'pessimistic' about housing.

Buying one house is probably the safest bet. If a big bust comes you're in the same boat as everyone else for the most part & will be baled out to some degree & maintain a buying power similar to your peers. If there is inflation & house appreciation, the buyer is looking good. This might be a reasonable thing to do for someone who is risk-averse.

Buying 10 houses constantly leveraging up is very risky. If the market goes down & rents stay flat or decrease, you might go belly up. Plenty of late night TV watching housing speculators found that out. This is a strategy for either a risk loving person, or someone who starts with nothing. There is a reasonably good chance at making lots of money & if you have nothing to lose, and can get someone to loan you the money, go for it.

Having a sizable cash position, but no house, property investments, or inflation hedge is pretty risky as well. If there is a lot of inflation with house appreciation (an effort to bale out others), and you are one of the few of your peers without a house, you will be screwed. Your relative buying power will go in the toilet. So, this might be a good position for a risk-loving person who is optimistic about their future but thinks that housing is going in the crapper (the Magnetar position). This position is a pretty strong bet on continued deflation / housing depreciation. Nomo might label a person with this position a chronic pessimist, doom and gloomer, or toxic person. However, the bet you make has nothing to do with a persons sense of personal optimism or emotional state.

Calling people pessimists, losers, or afraid of risk does not move the conversation forward in any useful way. It's just a distraction & sales tool of Realtors at times.

Interesting analysis. So what good inflation hedges are currently available for purchase besides housing? TIPS? Gold? All seem arguably overpriced. And in the case of strong inflation, won't deposit rates go up?

Consider this alternate possibility: what if there is strong price inflation (CPI-U) and house prices simply inflate at a lower rate or stay flat? Given the strong historical correlation of nominal house prices and CPI-U (well, at least from 1970-2000ish) this may seem like an unlikely scenario. One possible way this might happen is if prices of most major contributors to CPI-U increase (like food and fuel) but rents flatten out due to stagnant wages. Weak rental pricing could then limit investor demand for houses, which would help to keep nominal house prices flat. All other things held constant (unlikely, of course), the non-house owning cash holder comes out ahead here if interest on their cash deposits pays out better than equity gained from housing appreciation (also unlikely, but possible).

Not sure if this has happened in the past, but consider: Wages are going nowhere currently, people have to eat and drive from the burbs to the buy the food (and maybe even to work), house prices are still unaffordable to people in many parts of the country, and credit is still tight for wage earners.

Sure, landlords may want to raise rents to cover their increasing expenses from inflating prices, but if tenants can't afford the rent they can simply end/break their lease and cohabitate with family or friends without major financial consequences (unlike the aftermath of a foreclosure). Isn't this part of the reason rent prices DO respond well to market conditions?

terriDeaner says

Interesting analysis. So what good inflation hedges are currently available for purchase besides housing? TIPS? Gold? All seem arguably overpriced. And in the case of strong inflation, won’t deposit rates go up?

I don't know what the best inflation hedge is. Personally my money is in index funds (weighted a bit more overseas than typical), lifestyle funds, and cash. My wife and I do not own a house. We have moved around too much, are moving to another state again in a couple of months, and will probably move again a year after that. I recognize that where my money is at the moment is a bet against inflation over the short term. On the other hand, my wife has high student loans from vet school. If we get high inflation, at least those will decrease in size (relatively). That is our hedge. On a related note, I do not think that house prices can appreciate much without wage appreciation. That is just not sustainable.

Let's say, you are interested in buying a house for $100,000 & you have a 20% down payment of $10,000. I used these numbers, because it is easy to scale everything for some other purchase price. Lets also say that inflation is 10%, housing goes up 10% per year, and you get 10% on your money in CDs or conservative investments.

You might think it is a wash to buy, but it is not.
If you buy today, you take a mortgage for $90,000.
If you buy in 5 years, you have $16,100 in the bank, but the house went up to $160,000. So, you get to take a mortgage for $144,000.

In an inflationary environment, housing would have to appreciate at 1.2% while you earn 10% over 5 years to break even (in this oversimplified model). In that case, the the mortgage in 5 years will be $90,000, which is the same as it would be if you bought today. The reason is that the house purchase is a highly leveraged investment, and is therefore a highly leveraged bet on inflation.

In a deflationary environment, it's pretty hard to win on a mortgaged house.

Nomograph says

There’s a huge difference between good risk assessment skills and chronic pessimism.

Im glad you enjoyed the cover, the book is actually worth reading.

You have so much to learn young grasshopper!

terriDeaner says

Interesting analysis. So what good inflation hedges are currently available for purchase besides housing? TIPS? Gold? All seem arguably overpriced. And in the case of strong inflation, won’t deposit rates go up?

In my understanding best inflation hedge is stocks of companies that can raise prices, or invest into own business. But I'm not seeing an inflation.

Prices on some raw materials have gone up due to weather (at least thats what is on the news), but I would not really consider that inflation since it would be localized to a few sectors and rebound by next cycle. Our supply chains are not that completely dependent on a single supplier either, and production costs are so negligent that impact might simply get absorbed by lower profit margins due to competition. I think if anything we should have deflation for next few years as we'll be slowly transitioning from the bubble economics to reality.

Thanks again for interesting advice. I too am not hedging against short term inflation, my concerns are more long term.

YesYNot says

On a related note, I do not think that house prices can appreciate much without wage appreciation. That is just not sustainable.

I agree with this, unless more credit is again made available to people who really can't afford to buy a house (e.g. via government supported programs like FHA loans). Then we reflate the bubble of course.

Let’s say, you are interested in buying a house for $100,000 & you have a 20%(edit-10%) down payment of $10,000. I used these numbers, because it is easy to scale everything for some other purchase price. Lets also say that inflation is 10%, housing goes up 10% per year, and you get 10% on your money in CDs or conservative investments.
You might think it is a wash to buy, but it is not.

If you buy today, you take a mortgage for $90,000.

If you buy in 5 years, you have $16,100 in the bank, but the house went up to $160,000. So, you get to take a mortgage for $144,000.

In an inflationary environment, housing would have to appreciate at 1.2% while you earn 10% over 5 years to break even (in this oversimplified model). In that case, the the mortgage in 5 years will be $90,000, which is the same as it would be if you bought today. The reason is that the house purchase is a highly leveraged investment, and is therefore a highly leveraged bet on inflation.
In a deflationary environment, it’s pretty hard to win on a mortgaged house.

Makes sense. So unless we get great (and historically unusually high) deposit rates relative to housing appreciation, or more house price depreciation, cash holders are screwed.

"When house prices rose, everyone cheered. Why so glum now that commodities are finally getting their due?"

"This is a great sign. The recovery has traction and rising commodity prices will lift stocks too."

Amazing analysis. U-6 unemployment is approaching 20% ... foreclosures continue to rise at record pace ... unemployment benefits continue to expire for tens of thousands of people per week ... nearly 50 million Americans are on food stamps, commercial real estate resets due this year and next will put further pressure on the financial markets (along with real estate), etc. etc. and somehow you interpret rising prices with "recovery." Do you think maybe, just maybe, the dramatic rise in energy costs to transport goods & services along with the huge influx of paper money might have something to do with commodities increasing in price?

CrazyMan says

OP is the “original poster”.
I can’t be bothered since I need to go to bed, but “no dead cat bounce” “no double dip”, “the fearful will be left behind” got my attention.
What planet does this guy live on, exactly? He bought an overpriced house and continues to grasp at straws, obviously.
Jesus Christ, get back on the planet.

I'll give you this, according to Zillow I've lost $50,000 on my house since the remaining homes in the tract are selling for $50,000 below what I bought at one year ago. Wha-what?!?!

Or did I? The remaining homes lack the upgrades my house has. They also lack the low financing and the $8,000 check from Uncle Sam.

In any event, I freely admit I didn't purchase at the absolute bottom. If life circumstances allowed me to wait six more months I probably could have shaved $20,000 off the purchase price in a comparable home in this development.

None of this matters to me, as I have a wonderful roof over my head. I have a stunningly low 30 year fixed rate that I can afford without my wife working right now. And I now enjoy all of the wonderful tax benefits of home ownership.

So, I'm not "grasping at straws". I am a contrarian investor who believes you shouldn't buy the conventional wisdom. Doom is the conventional wisdom. People forget just how incredibly wealthy the United States has become despite "deficits" and "national debt".

Example, a blackout hit an area where I live this morning. All the street lights were out. Did panic ensue? Did traffic grind to a halt? Did businesses close? No.

Businesses pulled out a pencil and some paper. People took turns at the stop lights. Hospitals weren't affected. Life carried on.

This level of societal organization just doesn't exist in emerging economies (perhaps China excluded). The level of fear on this board simply does not match reality.

Socal, I think words are important.

Only ever saw one post where someone expressed "fear", and it was SFAce, one who is positive in his posts, who said he had some fear in early 2009.

They are not fearful. They are skeptical. Nomograph wrote that one of them was negative.

You brought up the word fear in the same post rationalizing all the good things that came from your recent purchase.

SoCal Renter says

I’ll give you this, according to Zillow I’ve lost $50,000 on my house since the remaining homes in the tract are selling for $50,000 below what I bought at one year ago.

SoCal Renter says

If life circumstances allowed me to wait six more months I probably could have shaved $20,000 off the purchase price in a comparable home in this development.

SoCal Renter says

They also lack the low financing and the $8,000 check from Uncle Sam.

$50,000 + $20,000 - 8,000 = loss of $62,000

Did I read that correctly?

joshuatrio says

$50,000 + $20,000 - 8,000 = loss of $62,000

Did I read that correctly?

Not sure what was intended but I read $20K- $8K = 12K loss. The of course you have to subtract out the amount that would have been spent renting, no? That would almost certainly mean a gain.

SoCal Renter says

Did panic ensue? Did traffic grind to a halt? Did businesses close? No.....This level of societal organization just doesn’t exist in emerging economies (perhaps China excluded).

LOL. The rest of the world is not so chaotic as you seem to think.

RayAmerica says

Do you think maybe, just maybe, the dramatic rise in energy costs to transport goods & services along with the huge influx of paper money might have something to do with commodities increasing in price?

This is a pretty popular idea these day.

But I have yet to see anybody explain why, if this were so, why more cash would cause higher prices of commodities, but have almost no effect on the prices of anything else.

Nor have I seen anybody explain why, if this were so, the peak prices of many commodities (like oil, copper) were in 2007 and 2008 before quantitative easing was even a twinkling in Bernanke's eye.

No, it's all about surging demand in China and elsewhere, flat oil supples, a bad crop year for corn and wheat. Throw in some physical hoarding of select items like cotton and US ethanol production that has surged in the last decade to consume enough corn to feed 200 million people and it's pretty clear it's supply/demand issue.

MarkInSF says

US ethanol production that has surged in the last decade to consume enough corn to feed 200 million people

Corn-as-ethanol is the day of the locusts for our country. It is archetypical of the egregious lack of critical thinking skills of the general American population. We deserve everything we get if nobody cares about the tremendous damage to our natural resources and our health caused by gov't subsidized ethanol production.

WTF do I need fcking corn syrup in my Wheaties for???? Evil, evil, evil interests controlling everything for money, and it's pretty easy b/c most of us are incapable of self-governing our country out of a wet paper bag.

MarkInSF says

Not sure what was intended but I read $20K- $8K = 12K loss. The of course you have to subtract out the amount that would have been spent renting, no? That would almost certainly mean a gain.

It's either a loss of 12k or 62k.

Couldn't figure out if he can buy his home for $50k less, and with some bargaining, get another $20k off.... or if it's just 20k off for his exact home.

joshuatrio says

MarkInSF says

Not sure what was intended but I read $20K- $8K = 12K loss. The of course you have to subtract out the amount that would have been spent renting, no? That would almost certainly mean a gain.

It’s either a loss of 12k or 62k.
Couldn’t figure out if he can buy his home for $50k less, and with some bargaining, get another $20k off…. or if it’s just 20k off for his exact home.

I meant $20k off the exact same home with the upgrades. Minus $8k in government stimulus means a $12,000 loss. This data can only be gathered from new home sales since the development is so new I'm not aware of anyone actually finalizing the sale their home yet. Three or four appear to be on the re-sell market based on my seeing realtor signs in the front yard (flippers?).

The area where I purchased has space for one final planned development. The builder selling these new homes have been undercutting the used-home market by a substantial amount. (That's why I purchased a new home rather than a used). Pre-foreclosures in nearby developments sit unsold because of seller asking prices.

Now, whether this means I can sell my home in the future with a $12,000 loss or a $62,000 loss cannot be known. I never plan to sell. But my car has lost $22,000 in value over the last eight years. I won't even get into how much money I spent on food over the last decade only to crap it out and flush it away.

I didn't buy a house. I bought a home. :P

sybrib says

Socal, I think words are important.
Only ever saw one post where someone expressed “fear”, and it was SFAce, one who is positive in his posts, who said he had some fear in early 2009.
They are not fearful. They are skeptical. Nomograph wrote that one of them was negative.
You brought up the word fear in the same post rationalizing all the good things that came from your recent purchase.

I wasn't really claiming that the folks on this board were the fearful ones. It's the overall conventional wisdom - the editors in the media who greenlight stories about the economic crisis, the pundits who shill gold, the bloggers who write post-apocalypse survivalism screeds, and the opinion shapers in our country who spout off about the coming collapse of America.

No one is saying things are rosey. That's my point.

patb says

and if interest rates rise?

Interest rates will rise. This will strengthen the economy as investors relax and realize a strong recovery is underway. The Gold and Commodity bubbles will deflate as money is moved back into Stocks.

shrekgrinch says

I have a documentary DVD called “The Fantasy Worlds of Irwin Allen”. So, when I see this post of yours I immediately think “The Fantasy Worlds of SoCal Renter”. Dude…learn some Econ 101. Seriously. (Some basic knowledge of the Constitution wouldn’t hurt you, either.)

“That’s what these people seem to think: Inflation—and the more severe hyperinflation—affects all goods and services and asset classes equally, in a rippling effect. Sort of like a rising tide.
But this is wrong: It is at best sloppy thinking, at worst dangerously stupid.
Inflation—and hyperinflation—affects two things immediately: Near-term necessities (such as food and fuel), and credit.
The effects on basic necessities is obvious—but the effects on credit are more subtle and complex.
How does inflation and hyperinflation affect credit? By driving up interest rates—obviously. But what is the effects of rising interest rates in an inflationary/hyperinflationary environment?
Real estate price collapse.
Don’t believe me? Well, I can empirically prove this. During the 1979–‘83 inflationary recession, this is exactly what happened in the United States: Nominal real estate prices were essentially flat, even as inflation peaked at 15%. The same in the UK during the early Seventies, in fact the same in every advanced economy that experienced low-double-digit inflation in the post-War period: Real estate prices remained nominally flat or even fell, as inflation rose and the currency was debased.”
- Gonzalo Lira, Inflation, Hyperinflation and Real Estate

And how exactly do we get to hyperinflation when the Fed will simply raise interest rates to cool down the economy?

Real estate prices are not going anywhere but up. Along with interest rates.

SoCal Renter says

Real estate prices are not going anywhere but up. Along with interest rates.

Hmm, that sounds like a familiar mantra. Better lock-in while we can, huh!

http://online.wsj.com/article/SB10001424052748703312904576146500586838290.html?mod=WSJ_hp_LEFTTopStories#articleTabs%3Darticle

Saw this just today. Price increases may not occur due to the competition.

^ yup, good article.

Doesn't really go over that well the actual difference between goods and services, though.

"Goods inflation has outstripped services inflation for long stretches since mid-2007, something that hadn't happened since the 1970s. For most of the last 30 years, goods prices had been held down, in part, by cheap imports from low-wage countries like China. But recently, China and other developing markets have become huge consumers of commodities, which is putting upward pressure on American prices for many globally traded goods.

"U.S. households spent $7 trillion on services last year, accounting for 67% of total consumer spending. Because the services sector is so immense, the U.S. economy is less exposed to the cost pressures imposed by global trade than many other countries."

A dollar in a service economy is subject to less friction than in a goods economy. Goods are tied to producer costs -- a goods producer will simply refuse to create a good if he sees he will lose money on the effort -- while many services have no set marginal cost of production and the service provider prices his services somewhere between what the market will bear and the limit of the opportunity cost of the time involved in providing the service.

Realtors made $70B in commissions in 2005 . . . 0.5% of GDP -- nice skim, equivalent to 1 out of 200 people in the economy doing nothing but buying and selling houses. That's how a service economy inflates itself, a lot of make-work circle-jerk jobs with money changing hands for not much actual growth in wealth stock.

In a deflationary process the consumer pulls in his horns and looks for value. Rules of the game can more easily change as new service providers innovate ways to win profits at lower costs to bargaining consumers.

This is called price discovery.

ChrisLA says

http://online.wsj.com/article/SB10001424052748703312904576146500586838290.html?mod=WSJ_hp_LEFTTopStories#articleTabs%3Darticle

Saw this just today. Price increases may not occur due to the competition.

Forget balance between labor and capital. The balance between labor and tangible commodities is shifting and has been for over a decade. The amount of skilled labor is rising far, far faster than the amount of commodities that can be produced/extracted per unit of labor.

This has absolutely nothing to do with inflation or deflation, and the balance will continue to shift regardless of whether your currency is under monetary deflation or inflation (e.g china or japan). It just means labor of most kinds is worth a lesser amount of tangible commodities.

The 750-mL bottle of Foxbrook wine I've been getting at Lucky's/Savemart was $1.99 for at least the past 4+ years.

This weekend it's now bargain priced at $2.49.

That annualizes out to 5-6% price increase. Damn. When the price of my jug wine goes up like that it sure feels like inflation to me. Gotta give something up to pay for it, like one less protein evening meal per week, or less milk for my kids.

Or maybe, find a cheaper rent situation.