A weekend topic starting with Business Insider. “Prepare for house prices to slump, unemployment to spike, and the US economy to slip into recession, Kenneth Rogoff has said. The Harvard University economist issued his dire outlook during a Fox Business interview. ‘The Fed is nowhere near having conquered inflation,’ Rogoff said. The former chief economist of the International Monetary Fund noted that more than a decade of rock-bottom interest rates boosted the prices of stocks, homes, bitcoin, art, and other assets. Now that rates are higher, and mortgage costs have soared as a result, he expects home prices to drop. ‘There’s adjustments to come in the housing market,’ Rogoff said. ‘Prices are going to have to come down so that more people can afford it.’”
From Moneywise. “While the Dallas Fed has stated housing could fall by 20%, experts there do admit this is a pessimistic scenario. In fact, Dallas Fed economist Enrique Martinez-Garcia says that ideally, the Federal Reserve will ‘carefully thread the needle of bringing inflation down without setting off a downward house-price spiral.’”
From Market Insider. “A recession is not necessary to bring inflation down, but it is looking like a downturn is now highly likely since the Fed’s projections have been ‘horribly wrong’ this year, according to top economist Mohamed El-Erian. ‘It’s not necessary to have a recession to bring inflation down. It’s highly probable we’re going to have a recession. It’s also highly probable … that we may find inflation sticky at around 4%, which is going to put the Fed and us all in a difficult situation in the middle of next year,’ El-Erian said. ‘Do we crush the economy more? Not a good idea. Do we increase the inflation target? Not a good idea. Do we try to somehow see whether we can live with high inflation for a while?’”
From Reuters. “The Bank of Canada likely faces a challenge in 2023 convincing markets not to expect a swift reversal in its interest rate hiking campaign. Central bankers ‘should avoid doing anything that fans this market narrative’ of rate increases soon reversing, said Derek Holt, head of capital markets economics at Scotiabank. ‘Otherwise, we could be on an inflation and rates roller-coaster for years to come that is biased toward higher average inflation.’”
From Fortune. “In his 53 years in the investment world, Howard Marks—the billionaire and co-founder of Oaktree Capital Management—said he’s only seen two real transformations in investing, until now. ‘I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes,’ Marks wrote in a memo published Tuesday. ‘I think we may be in the midst of a third one today.’ ‘We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term,’ Marks wrote.”
Two reports from the Globe and Mail. “Bank of Canada Governor Tiff Macklem said there is a ‘greater risk’ of not doing enough to tackle inflation than doing too much and damaging economic growth, even as the bank has signalled that it is nearing the end of its aggressive rate-hike cycle. ‘If we don’t raise them enough, inflation will remain elevated, and households and businesses will come to expect persistently high inflation. With inflation running well above target, this is the greater risk.’ The speech also pointed to potential challenges for the central bank ahead. Many of the tectonic forces that have put downward pressure on prices in recent decades, including the expansion of global trade and the entry of Chinese and Eastern European workers into world labour markets, seem to be going in reverse.”
“There’s a sting coming in inflation’s tail, and you can spot it in the bowels of the figures. The low prices of the past 30 years were effectively achieved on the backs of globalization and an increase of cheap labour. Now that both trends are reversing, we’ll never get back to the low inflation of the past no matter how hard we try. In a recent study with some colleagues, I plotted core inflation over the past 40 years against a measure of worker power based on the wage-profit ratio – the weaker the bargaining power of workers, the more managers can beat down wages and boost profits. What we found is an almost perfect overlap of the two. After about 1990, as workers’ power fell, wages went down and company profits went up, inflation trended steadily downward.This was, of course, the era of globalization.”
“Advances in communications and transportation technology, and the liberalization of currency markets, then made it easier for Western firms to reach those workers via offshoring. In fact, firms didn’t even need to shift production abroad to beat down wages at home. The mere possibility of doing so restrained the demands of workers and weakened unions. Low inflation was an easy win for central bankers in the days when workers couldn’t demand much. So when the Bank of Canada flooded the economy with money, instead of raising prices in supermarkets, it filled the pockets of asset holders, with house prices and corporate profits rocketing even though the economy was weak.”
Sarasota Magazine in Florida. “‘Properties sold in 2020, were resold in 2021 for more, and sold again in 2022 for higher,’ adds Judie Berger of Premier Sotheby. ‘Those were the jumps we saw. That’s why it got unaffordable to live here. If investors are paying more, they’re charging more rent, too. On one hand, it’s good, because our sellers who bought and overpaid for their home in 2005 were able to finally break even.’”
Elbert County News in Colorado. “Danielle and Stephan Storinsky ‘saw the writing on the wall.’ It foretold how the housing market might change. So, earlier this year, the married couple sold their Arvada townhome. They timed it just right. They capitalized before concerns about inflation took center stage. They sold their home when the metro area was gripped by historically high housing prices. They bought their townhome about five years ago for $285,000. They sold for $521,000. ‘That part’s pretty nice because now we have a decent amount of money to put down on something,’ Stephan Storinsky said.”
“But now, on the other side of cashing in, they find themselves playing a waiting game. Even with the tidy profit they hauled in, they are struggling to find a home at a good value. Houses on the market today ‘are just not worth the price that people are asking,’ said Stephan Storinsky.”
From KUTV in Utah. “According to new data released Friday by the Salt Lake Board of Realtors, home sales in Salt Lake County fell by 48 percent last month compared to November 2021 when interest rates were roughly half of what they are today. Davis, Utah, Tooele, and Weber counties saw similar percentage drops in home sales. Home prices along the Wasatch Front were generally higher in November compared to the year before, although prices have noticeably fallen from their peak in May. All Wasatch Front counties saw price growth year over year except Tooele County. Its median price for all housing types was $415,000 in November, a drop of nearly six percent from the year before. The median price for a single-family home in that county was $420,000, a year-over-year decline of nearly seven percent.”
Times of San Diego in California. “Typical monthly mortgages in San Diego are $4,457, up 105% since 2019, according to a survey of the housing market. Inflation also has eaten away at the real value of the wage gains. The Bureau of Labor Statistics estimated that consumer prices – notably in fuel and energy costs – jumped 9.1% in the 12-month period that ended in June. Other findings from the survey: San Diego’s typical home value is $877,278, down 7% from its peak.”
From Maui Now. “Maui home prices have dropped 13% since May, but higher interest rates have pushed out many potential buyers, according to a new report released today by University of Hawaiʻi Economic Research Organization.”
The Canadian Press. “It is officially a buyer’s market in many parts of the GTA as the ratio of sales to new listings continues to slide amid an ongoing housing corrections. ‘It’s no surprise to see some of the larger price declines taking place in these markets,’ RBC assistant chief economist Robert Hogue said of Ontario and BC. ‘Since the peak earlier this year, the MLS Home Price Index has plummeted in Cambridge (-21 %), London (-19%), Kitchener-Waterloo (-19%), Brantford (-18%), Hamilton-Burlington (-18%), Kawartha Lakes (-17%), Barrie (-17%), Chilliwack (-16%) and the Fraser Valley (-13%). Property values also fell markedly in the GTA (-12%) and to a lesser extent in the Greater Vancouver Area (-6 %).’”
“The average price of a home across all property types in the GTA peaked at $1,334,062 in February but has fallen by approximately 19 per cent since then amid an aggressive campaign by the Bank of Canada to hike interest rates.”
From Stockhead. “New analysis from Aviva released ahead of 2023 suggests China’s decades of growth burn is not only at an end, but structural deficits like its ageing population, rising debt and a crisis in the key domestic property market has put the whiff of stagnation around the middle kingdom’s mid-term outlook. According to Avivam China risks following Japan’s path from runaway growth to financial crisis and stagnation. A crisis in China’s property sector could yet spread contagion into other areas of the economy.”
“These factors have led some experts to draw comparisons between China and neighbouring Japan. In 1991, the bursting of an asset-price bubble brought Japan’s high-growth era to an abrupt end, inaugurating a period dubbed the ‘lost decades.’ As in China, Japan’s ageing demographics are inhibiting government efforts to rouse the economy. The Carnegie Endowment’s Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, estimates Chinese investment started becoming less productive at some point between 2006 and 2008. Since then, debt has risen sharply, the growth rate has moderated and exports decreased in importance relative to investment.”
From Daniel LaCalle. “Explaining to citizens that negative real interest rates are an anomaly that should never have been implemented is challenging. Families may be concerned about the possibility of a higher mortgage payment, but they are oblivious to the fact that house prices have skyrocketed due to risk accumulation caused by excessively low interest rates.”
“The magnitude of the monetary insanity since 2008 is enormous, but the glut of 2020 was unprecedented. Between 2009 and 2018, we were repeatedly informed that there was no inflation, despite the massive asset inflation and the unjustified rise in financial sector valuations. This is inflation, massive inflation. It was not only an overvaluation of financial assets, but also a price increase for irreplaceable goods and services. The FAO food index reached record highs in 2018, as did the housing, health, education, and insurance indices. Those who argued that printing money without control did not cause inflation, however, continued to believe that nothing was wrong until 2020, when they broke every rule.”
“All of the excess of unproductive debt issued during a period of complacency will exacerbate the problem in 2023 and 2024. Even if refinancing occurs smoothly but at higher costs, the impact on new credit and innovation will be enormous, and the crowding out effect of government debt absorbing the majority of liquidity and the zombification of the already indebted will result in weaker growth and decreased productivity in the future.”
From Ryan McMaken. “With inflation running near 40-year highs, many are wondering what will be necessary to bring price inflation back down to the target level. More specifically, how many hikes in the target interest rate will be necessary, and how severe of a recession will be required? Naturally, the banker class wants a return to ‘normal’—i.e., quantitative easing and ultralow interest rates—as soon as possible. Moreover, Washington wants the same thing since the political class wants low interest rates to help ease the path to ever more government debt and higher deficits.”
“It’s not the least bit surprising that we’re already hearing calls for the Federal Reserve to abandon the 2-percent inflation target and instead embrace even higher perpetual inflation rates. For example, last week Bank of America economist Ethan Harris suggested that the 2-percent target CPI inflation rate be raised. We’ve seen similar urgings from both the Wall Street Journal and from think tank economists in recent months.”
“The push for higher inflation rates is just the latest reminder that wealthy bankers and other members of the ruling class aren’t harmed by price inflation the way that ordinary people are. We’ve been down this road before. 26 years ago, the debate was over whether or not the target inflation rate should be raised to 2 percent. Before that, Congress had put into legislation a target of zero percent. In the “Full Employment and Balanced Growth Act of 1978” Congress explicitly added a ‘stable prices’ mandate to the Federal Reserve Act, and stated that CPI inflation should be reduced to 3 percent or less. Moreover, by 1988, the Act imagined that the official inflation rate should be reduced to zero: ‘Upon achievement of the 3 per centum goal … each succeeding Economic Report shall have the goal of achieving by 1988 a rate of inflation of zero per centum.’”
“The drive for zero-percent inflation had advocates among some monetarists and other ‘hard money’—’hard’ in the relative sense—advocates who opposed the Keynesian consensus that had produced the runaway inflation of the 1970s. The triumph of these hawks was short lived, however, and by the end of the 1980s, the more dovish forces had come to the fore in the form of Alan Greenspan and up-and-coming economists like Janet Yellen. Even Volcker had again moved back toward easy money as can be seen in his support for the Plaza Accord.”
“The Volcker Fed’s abandonment of ‘hard money’ policies and the monetarist experiment led directly to the global monetary inflation of the late 1980s featuring virulent asset inflation, most spectacularly the bubble and bust in Japan. Germany was the last to abandon monetarism formally with the launch of the euro. Within a few years there was the start of anew stabilization experiment-the targeting of perpetual inflation at 2%.”
“Now in 2022, we’re talking about hiking the target inflation rate yet again, perhaps to ‘between 4% and 6%’ as The Wall Street Journal suggests. Not mentioned is the fact that the upward creep in inflation targets enabled the Fed to ignore inflation as it relentlessly rose throughout 2021. The Fed at that point wanted inflation well above 2-percent in order to achieve that new ‘average’ of 2 percent. The result was a complacent Fed that let inflation rise to a 40-year high.”
“The allure of easy money never fades, especially for those who benefit from easy money most. This latter group includes a growing army of zombie corporations, governments mired in debt, and a financialized Wall Street where valuations disregard fundamentals but are based on the ability to borrow at cheap rates and capitalize on rising stock prices. The easy-money chorus couldn’t care less about small entrepreneurs squeezed by high prices, or by old ladies on fixed incomes. All that matters is a return to easy money, and if that means ever higher inflation targets, so be it.”