There's no free lunch.
Lacy Hunt, "devastating" inflation, unaccountable Fed Groupthink, and more.
Sam: “You know what I realized trying to understand people? Don’t try to understand them. I know what I killed for and what I’d die for. You served. You do too. And every day on this job we get to see what other people would kill and die for, and I used to think it was different, but it’s not. It’s the same: love, hate, with a side of stupid.”
Brian: “You sound…”
Sam: “Old?”
You can always count on The Economist, “the suavely British-accented voice of globalization":
“A good portion of the risk that we saw during the Great Recession that resided on bank balance sheets, now resides someplace else.”
Lacy Hunt Great interview. Watch the whole thing.
"Inflation is devastating. It robs everyone, but the modest and moderate income households the most...if you look at median household income, it's declined for 3 consecutive years...unfortunately, these inflationary losses will probably never be made up."
Julia La Roche: "Dr. Hunt - what do you think folks are missing, because it certainly seems like there is this narrative of a resilient economy, but it sounds like there's some real issues when you look under the hood?"
Lacy discusses the significance of the University of Michigan: Consumer Sentiment survey…
“In October households told Michigan that they’re in wretched shape. In fact, the Michigan index is below where we entered all of the recessions since 1953. A very, very worrisome indicator that things are not all right.”
University of Michigan Consumer Sentiment For some odd reason, the St. Louis Fed FRED site decided to “discontinue” this 1953 series in the 1970’s, and then start it up again after that, so here I’ve pieced the two series together:
For a simpler view without the recessions highlighted, there’s this:
“When gross government debt goes above 90% of GDP, for more than five years, you lose about one third of your trend in growth, and the trend in growth is real, per-capita GDP - that’s the standard of living. So before we became heavily overindebted, the economy was growing about 2.2% per annum, and now we’re growing 1.3% per annum, and we’ve lost about 40% of our growth rate…the debt is going to be a constant source of pain for us.”
U.S. Debt to GDP went above 90% in Q4 2010:
“There’s no free lunch.”
Lacy Hunt on Milton Friedman & the end of the gold standard in 1971.
"The gold outflows served as a kind of control mechanism on bad policy, monetary and fiscal...if you look at what happened prior to the closing of the gold window to today, we've lost a significant amount of our trend economic growth."
Lacy Hunt on the Fed
"They have complete discretion to do whatever they do, and, by the way, they're not held accountable... there seems to be no collective memory...there's no auditing of the Fed, and so no one is held accountable."
"I think there's two real problems. I think that the Federal Reserve is controlled by Groupthink, and second, there is really no diversity of opinion in the way that most of the economists in the Fed operate."
“The Federal Reserve has 400 PhD economists. It’s the most expensive economic research organization. The basic problem is they’re virtually all neo-Keynesians. I don’t even know any Austrian economists there, there’s very few neo-classical economists - I would consider myself more closely aligned with neo-classical…”
“They’re diversified in every way - they’ve got all kinds of people from all types of ethnic backgrounds, everything, but when it comes to the thought of how the economy works, they all view the world the same way, and that’s not a good situation.”
After I listed some of the top CRE lenders the other day, subscriber John made a good point:
Those CRE "lenders" look primarily like originators, who hold as little as possible. The holders of the debt are usually life companies, commercial banks, pension funds, and some mutual funds. The originators will probably get creamed, but the holders will get crushed if they have too much
In August I had posted this chart, noting that in CRE banks are #1, #2 are insurance companies, with U.S. taxpayers coming in strong at #3:
On a related note, about the multifamily syndicators, friend of the show Chris also added:
The Syndicators Dilema left out a crucial piece of the structure. Bridge lenders exist to tie up the future fee income from originating agency loans. Every big bridge lender, directly or indirectly, has an agency lending arm that generates both origination and servicing revenue. The bridge product is the “loss leader”(risk leader) to tie up the agency business.
A bridge lender gets aggressive on proceeds betting on the come that down the road a property will generate enough NOI to be able to support a refinance to agency at the higher leverage level. It works until it doesn’t.
Thanks guys!
I haven't gone over CPI weightings in a while. e.g., "Relative importance of components in the Consumer Price Indexes: U.S. city average, December 2022."
The word "tax" is nowhere to be found. Homeowners (and indirectly renters) may find that amusing. Also, self-employed "Health insurance," my biggest expense, gets a 0.77 weighting (CPI-U, out of 100), the same as "Sporting Goods" (0.764).
A reminder that, historically, problems arise when the yield curve stops inverting.
What group of homeowners will be the first to cut and run?
Top comment:
It always starts with the investors
Why?
B/c it takes nothing for them to cut a home loose, it's much more difficult for an owner occupant (ie a family)
It started with the investors in the run up to 2008, it will start with them again this time. Whether it's STR investors or MTR or LTR....it's the investors
I'm saying this as an investor, b/c I've seen the activity over the last 1.5 yrs and I know full well some of these properties are not cash flowing. I looked up the liens so I can see what they put down, I see what they are renting them out for, they are not cash flowing. When I say not cash flowing, I mean there is no net positive income when accounting for PITI, and repair/capex reserves. So they are either OK with breaking even or some jokingly low 2% return, or OK with operating at a loss, or OK with not saving everything for repair/capex b/c maybe they have a pot somewhere else for that. Who knows.
The Mortgage Market Is So Bad Lenders Want Ex-Employees to Give Back Their Bonuses
David Siegel went to work for an affiliate of Guaranteed Rate in 2021 and got a signing bonus of more than $100,000. Interest rates were super low, and mortgage bankers were raking in cash. Now that business has dried up, the mortgage company wants its money back. He said it fired him one month shy of the date when it could no longer ask for the bonus back, then demanded the money. Guaranteed Rate and its affiliates are also telling hundreds of other former employees that they have to return their signing bonuses, people familiar with the matter said.
“I am strangely unhappy because the pattern of my life is complicated, because my nature is hopelessly complicated; a mass of contradictory impulses; and out of all this, to my intense sorrow, pain to you must grow. The centre of me is always and eternally a terrible pain - a curious wild pain - a searching for something beyond what the world contains, something transfigured and infinite - the beatific vision - God - I do not find it, I do not think it is to be found - but the love of it is my life - it's like passionate love for a ghost. At times it fills me with rage, at times with wild despair, it is the source of gentleness and cruelty and work, it fills every passion that I have - it is the actual spring of life within me.”
I recently rewatched all 10-seasons of Columbo. It helped my state of mind to remember a time when I didn’t know a group of elites wanted us all broke and/or dead.
Hans Landa: Neo-Keynesians are nothing but neo-Marxists. Is that how you say it?
Aldo: Ya just say commies.
Hans: Commies! How fun!