With all this Money Printing, Where’s the Huge Inflation?

Oh, it’s here alright. But we’re a little squeamish about calling it out.

This is the transcript from my podcast, THE WOLF STREET REPORT:

It constantly comes up: With all this central-bank money printing and the zero-interest-rate policies and the negative-interest-rate policies, and all these central-bank liquidity injections, in other words, with all these loosey-goosey monetary policies around the globe, why are we not seeing huge bouts of inflation?

And then, some folks take the next step and say: Well, since we’re not seeing big bouts of inflation, these loosey-goosey monetary policies should become standard, perhaps run by the government, instead of a central bank, and renamed Modern Monetary Theory, or whatever, because it will give us all this stuff for free and in terms of negative interest rates for better than free. This is finally the free lunch that we’ve been waiting for since the beginning of mankind.

But there is a fatal flaw in this logic. Turns out there are huge bouts of inflation, pernicious dangerous inflation. Here, inflation means that the dollar, the euro, or whatever other currency is losing its purchasing power. But this inflation is less focused on prices of consumer goods and services, but on prices of assets. This includes nearly all asset classes: stocks, bonds, residential real estate, commercial real estate, and so on.

Assets are highly leveraged. When their prices rise, these higher prices are used as collateral for more debt, meaning banks and bondholders are on the hook when prices turn the other way, as asset prices do. And this is when asset-price inflation leads to – you guessed it – a banking crisis and a broader financial crisis.

The term “inflation” can mean a lot of things. Here I’m not talking about “grade inflation” or “monetary inflation.” I’m talking about price inflation. Price inflation is when it takes more money to buy the same thing. There is no magic happening here. It just means the currency loses its purchasing power with regards to those things.

There are several types of price inflation, including:

  • Consumer price inflation, tracked by various measures such as the Consumer Price Index or CPI.
  • Wholesale price inflation, tracked by measures such as the Producer Price Index or PPI.
  • Wage inflation, tracked by various measures of labor costs, wages, and salaries
  • Asset price inflation.

In the US, we’re little squeamish about the phrase “asset price inflation.” When a house sold for $200,000 in 2014, and in 2019, the same house sells for $300,000, it doesn’t mean that the house grew 50% in size or got 50% more opulent or whatever. Nope, the house stayed kind of the same, it just got a little older. But what it means is that the dollar with regards to this house lost much of its purchasing power. It now takes $300,000 to buy the same house that five years ago $200,000 could buy.

As homeowners, we would like to think that some magic happened here, that we got something for nothing, when in fact, we own the same house, but now it takes a lot more dollars to buy the house because the purchasing power of the dollar with regards to housing has gotten crushed.

None of the home price indices we commonly use in the US are called “home price inflation index.”

But not every country is so squeamish about calling a spade a spade, when it comes to home price inflation. For example, the UK government’s Office for National Statistics calls its data and indices for house prices, “Monthly house price inflation.” And it says: “House price inflation is the rate at which the prices of residential properties purchased in the UK rise and fall.”

Between January 2013 and December 2018 – so over a period of six years – house price inflation as defined by the UK government was 37% nationally, and 52% in London.

Over the same six-year period, house price inflation in the US was 42%, according to the Case-Shiller index. And by metro area, it was 58% in the Dallas-Fort Worth metro, 65% in Denver, 78% in the Seattle metro, and 82% in the San Francisco Bay Area.

This just means that it takes a heck of a lot more dollars than six years ago to buy the very same house. No magic here.

When it comes to stocks, the picture of asset price inflation gets a little more complex, because, unlike houses, companies do grow. Their revenues go up and their earnings go up, and these elements are not related to asset price inflation.

However, the price-earnings ratio, the P/E ratio is a measure of asset price inflation. It measures how many dollars it takes to buy the same amount of corporate earnings.

For example, in July 2012, for all S&P 500 companies, the P/E ratio was just under 15. Meaning that in aggregate for all companies in the S&P 500 index, the price per share was 15 times the aggregate earnings per share. It took under $15 to buy $1 in earnings.

Now the S&P 500 aggregate P/E ratio is around 23. In other words, it takes $23 to buy the same $1 in earnings per share. This is 55% more than in 2012. By this measure, the asset-price-inflation component of stock price increases was 55% since mid-2012.

Over the same period, the S&P 500 has risen 120%. So nearly half of this increase was due to pure asset price inflation. The remainder was due to other factors, including earnings growth and financial engineering such as share buybacks which reduce the number of shares outstanding and therefore increases earnings per share even if earnings do not increase.

Other asset classes have gone through similar increases over the years. And this type of asset price inflation – whether its in housing or stocks or bonds – was the express purpose of the monetary policies during and after the Financial Crisis. QE was supposed to trigger the quote-unquote “Wealth Effect,” where asset holders feel wealthier due to asset price inflation, and then start spending and investing this wealth to boost the overall economy. QE and the low interest rates have accomplished precisely that. They created asset price inflation. And a lot of it.

But asset price inflation has pernicious consequences over the longer term.

In housing, the issue is that house price inflation in effect devalues the fruits of labor, when it comes to buying a house. So if there is 50% house price inflation in one city over a five-year period, but wage inflation is only 10% over the same five-year period, it now takes much more labor to buy the same house.

People who make their money by working, and who depend on their salaries, are “priced out of the market.” Their labor no longer suffices to buy the house. Or if it still suffices, the costs of the house now eat up much more of their labor, and they have less money to spend on other things, and less money to save and invest.

With house price inflation, there are definite winners, namely the asset holders; and definite victims, namely the people trying to buy a house from the fruits of their labor. This is why house price inflation eventually runs out of steam, and reverses course, with house prices heading south. Because house price inflation kills demand.

Houses are highly leveraged. In the US, there is about $10 trillion in mortgage debt outstanding. In a housing downturn, some of this debt will go into default. Last time, it worked like this: Years of rampant house price inflation was followed by the inevitable downturn in house prices, that then triggered an avalanche of mortgage defaults that then brought the financial system to the brink of collapse.

Stocks are leveraged too in myriad ways, from margin loans to banks holding stocks among their assets, which many of them do. A reversal of asset price inflation in stocks can have a nasty impact on banks. This is why a stock price crash figures into the Fed’s bank stress tests.

If a stock-price crash is combined with mortgage problems, as it was last time, it sure helps in pushing banks closer to the brink.

There is another side effect of asset price inflation: yields fall. This includes yields from bonds, loans, and commercial real estate. Yields mean income for investors. Falling incomes mean that investors will take more risks and take on more leverage in order to maintain their incomes. They are, as it’s called, “chasing yield.”

Assets are used as collateral by banks and other lenders. Inflated asset prices support larger debts. But when asset prices deflate and the borrower defaults, the collateral is no longer enough to cover the debt, and these lenders take big losses.

Asset-price inflation feels good because it translates into seemingly free and easy wealth for asset holders, but when it deflates, it tends to pull the rug out from under the banks and the broader financial system and it causes all kinds of other mayhem.

Asset price inflation is not benign. It’s not a free lunch. It loads up the financial system with systemic risks and future losses.

The Fed has expressed this worry in various forms for three years. Certain corners at the ECB have started to grumble about it too. And even the Bank of Japan is murmuring about the “sustainability” of its QE program, and its impact on the financial markets.

This is why money-printing cannot be maintained without setting the stage for another, and much bigger and even more magnificent collapse of the financial system, and all the real-economy mayhem that this would trigger.

It doesn’t make any difference whether this money printing takes place at a central bank or at the government. This is a cosmetic distinction. It always destroys the purchasing power of the currency with regards to assets, and therefore it destroys the purchasing power of labor with regards to assets, such as housing. And it pumps huge risks into the financial system that eventually lead to big losses that invariably get very costly for society to resolve.

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  116 comments for “With all this Money Printing, Where’s the Huge Inflation?

  1. Ivan
    Jul 11, 2019 at 10:12 am

    Million dollar question, when will it all come crashing down this over juiced market?

    • Mike
      Jul 11, 2019 at 5:50 pm

      The concealment of the real inflation that has occurred will continue until the 95% of Americans who are victims of this enormous transfer of wealth lift their heads and realize how they have been defrauded. Since the 1990s , our crooks in government and banksters have used fraud and the “Federal” Reserve and transferred most of America’s wealth from the poorer 95% of Americans to the richest banksters and their cronies since the Glass Steagell Act was repealed.

      They pressured loan officers, like my mother, to make loans that they know would not be repaid: she repeatedly warned such loans would not be repaid and was harassed for a very long time to make them despite her warnings. Why would the banksters do that? They were getting their cronies in the credit rating companies to give these loans high ratings and then selling them at premium prices as securities to the gullible.

      This “dumb money” that was purchasing these loans that would not ever be repaid, which the banksters actually bet by derivatives would not be repaid, even as they sold them, were the majority of Americans and some foreign investors: gullible pensions, Unions, schools, and other such investors. It has amazed me how banksters and financiers have gotten away with it with only the ludicrous Occupy Wall Street, fools movement which made directionless, token protests while the modern day equivalent of Pinkertons controlled them and funnelled their anger to protect the banksters.

      However, cracks are starting to appear in this monolithic, gigantic crony conspiracy. The collapse of banks like Deutche Banke may affect the linked crooks with whom they bet through trillions of derivatives: if one of the banks cannot meet its obligations, the banksters’ other banks may also fail. Each bank really only has a net, REALIZABLE, asset value after liabilities of maybe 3%, at most under the best circumstances.

      The claims of greater values made by the Fed (a bankster-controlled organization created for and acting for the benefit of the banksters not the American people) ignore how much those banks would really get if those assets were sold now. In fact, if the bank dominos start to fall and a major bank like JP Morgan fails (theoretically), for example, if Deutche bank cannot pay it any sums owed, and then the next bank fails, the net, realizable value of banks’ assets may really be zero or probably way below zero.

      If they have to sell their loan and (gambling) derivatives portfolios of hundreds of trillions of dollars in a few months, banks will get cents of the dollar. They probably cannot even get any buyers, if the economy goes into a recession or major banks start to collapse.

      Even the corrupt politicians of the U.S. government and the Fed can no longer save the banksters. The derivatives portfolios have grown so much that the IMF, World Bank, EU, and China would have to join the U.S. crooks to save the banksters. China may not cooperate. Other cracks are appearing, because the American people are starting to realize the absolute CORRUPTION of our judicial system.

      The sweetheart deal currently in the news made to the most famous pimp for pedophiles is par for the course. Judicial corruption is the norm not the exception now.

      As an attorney, I represented a woman in a civil case wherein I discovered the sweetheart, time served deal given to the wealthy, connected husband: in the preceding LA criminal case in which her then husband had tortured her, held her tied up, and been caught with her beaten up and tied up when her sister became suspicious and called the police, who arrested him in flagrante delicto. The husband was given time served, so he did not have to serve even misdemeanor time in jail.

      I was warned by a woman attorney, who “volunteered” at the trial to “help the court”, but actually claimed not to represent the husband but sought at trial to lie and to help the millionaire “pro bono” that this man was connected and that I had better drop the matter for my own good. Another woman attorney, who is a member of group A, has made a career, because she had affairs with one or more judges in LA, so now they protect her and rule in her favor.

      The corrupt, LA judge at that spousal abuse and torture civil trial, which I handled, then stepped all over my client’s rights and ignored the torture and make adverse rulings to her case. I appealed for her, but thereafter, they got to the woman somehow and she dropped the case. She did not even return calls.

      In another case, after obtaining a $700,000 fraud verdict against a politically connected broker of group X, the second case which I brought against his family members to recover assets transferred to them, the case was assigned to a judge who was a member of group X. I asked that judge recuse himself after I overheard them talking and learned that the broker and his lawyers were personal friends of the judge in group X.

      He refused and the crooked LA judge’s conduct thereafter so scared my clients that (although there was a house worth at least $200,000 which we were going to proceed to sell and collect part of the final judgment oweed by the crooked broker) they settled for about $200,000. All records of the bases, except those that I still possess, where then concealed in the LA Superior court and appeal records: the appeal by the crooked broker was defeated by me.

      That crooked broker defrauded many other persons and had a long list of lawsuits against him. All of them had the same results or dismissals, because he is a member of group X. I learned only later that they had approached my clients behind my back and may have paid them some additional sums behind my back, but I know that the main reason for the settlement was fear of the corrupt judge.

      In LA the most connected group is group X, which is well known as a group that cannot be successfully opposed in the courts because the judges of group X will always protect lawyers and defendants in group X in disregard of the laws and facts. However, in other counties, I hear, other groups are the most powerful, connected group, albeit group X’s power seems to be the greatest.

      One Hollywood producer was so secure in his knowledge that he would be protected that he raped and abused hundreds of women for decades. He knew that he would be protected because he was connected with the right group.

      Thus, we have a legal system where “justice” is given only to the members of the right group. Other groups, which I will call group W and group A will also sometimes be protected by the judges, except if they go against group X.

      Unfortunately, the majority of the LA population is made up of group H and group B, whose rights are regularly, covertly abused by legal tricks and lies by the more powerful groups. The State Bar supposedly has persons that crooked lawyers can contact to pay off to avoid prosecution. The committee for judicial performance takes no action against crooked judges, unless they are members of powerless group H or B.

      By being pleasant to them, like the fuhrer of the rich to Hispanics and African Americans in trying to convince them to vote for him, while trying to raise their taxes and deport them, crooked judges convince juries in group H and B to believe that they are fair judges. They never get to hear evidence against the protected members: e.g., in one, wrongful death case, which I handled early in my career, the jury was not allowed to know that a child has been killed due to the ADMITTED, statutory, negligence per se of an employee of a huge, multi-millionaire Agricultural conglomerate.

      That crooked judge did good work for the rich. I still regret not appealing that case for the client due to my finances and frankly, shock. I am sure that judge was well rewarded for being utterly corrupt.

      It is a shame that the majority of honest members of each of these groups are just happy when injustice is given to them for being members of the privileged group. They are like white southerners that did not own slaves but enjoyed seeing slaves whipped or Germans who were happy to see members of hated groups taken to concentration camps.

      My Italian relatives used to tell me that the people most responsible for the Mafia’s crimes were not the Mafia but the protectors of the Mafia, who protected the criminals and without whose support the Mafia dons would have been destroyed. It is a shame that otherwise decent members of group X, group W, group A, and other persons connected with such, do the same: each becomes morally guilty (like the Germans that supported the Nazis but did not participate in the persecutions) when they protect the crooks in their groups solely because they are members of their group.

      Will this change or will there be a revolution? Is the arrest of E, one of the most powerful, connected pimps for pedophiles the equivalent of France’s Affair of the Necklace?

      I hope so. However, I expect that he will be protected again by the corruption of our judges, corruption of our news media, corruption in our executive branch, and covert misconduct.

      It amazes me that in news programs it is claimed that we will see the videos of pedophiles having sex with children that the FBI has now seized in NY. I predict that the case will be quietly shelved — AGAIN. The videos will never see the light of day: they will be hidden or destroyed.

      I predict that after a long wait and much “negotiation” this pimp will again be given a mostly sweetheart deal, unless he was foolish and did not video the powerful figures who used his victims, his child, innocent, helpless, powerless victims, for abusive sex. If he did not or if the videos are all certainly seized and destroyed they may make an example of him as they did Maddof. E.g., Martha Stewart was prosecuted because she was not connected and politically powerless, while thousands of insiders carry out much worse insider trading every day and laugh at the white-wash antics of the Society of the Encouragement of Corruption.

      When will Americans realize that our justice system has become fundamentally corrupt? The members of the groups taking advantage of others should not later complain if they are later discriminated against after they lose power.

      Can we not just realize that these crooks are the enemies of the majority of Americans? The pensions and savings of ALL groups were and are being defrauded by the Fed and banksters use of low interest rates for banksters, while the bottom 99% of most groups are forced to pay interest on credit cards of 12-27%.

      • alex in San Jose AKA Digital Detroit
        Jul 11, 2019 at 9:22 pm

        Try 37%.

        Credit cards lure you in with rates of 3%- 6% then jack the rates up to 30%+ this happened to me and happened to a friend who’s actually a homeowner etc., they get whoever they can.

      • quck
        Jul 11, 2019 at 9:56 pm

        Run!

      • Andrew
        Jul 11, 2019 at 10:17 pm

        I like your story about the banks leaning on your mom to lend money to indigents, and the banks repackaging those loans and selling them on, but you lost me after that. What does the justice system have to do with banking practice?

      • Mike
        Jul 12, 2019 at 5:12 am

        Term limits on judges and ALL politicians are the best solution to reduce corruption. I do not think that an independent ministry of justice to investigate and prosecute criminals/politicians/judges or development of effective lie detector tests or public identification of powerful psychopaths and sociopaths to deter misconduct will ever occur.

        We have the worst people ruling over us. It is like communist China now. Randomly chosen people would likely be more honest and decent than current U.S. politicians, executives, judges, etc.

      • California Bob
        Jul 12, 2019 at 11:02 am

        re: “When will Americans realize that our justice system has become fundamentally corrupt? ”

        We now have the most flagrantly corrupt president in my lifetime-Nixon included (I’m 66)–sitting in the White House (when he’s not out golfing). 40% of the American public, give or take, love and idolize him. I’d say they’re OK with the corruption (kinda like the Germans who weren’t Nazis but, you know, were OK with what they were doing).

        • Jon
          Jul 16, 2019 at 5:38 pm

          I abominate Trump personally but like his policies in general barring few. Of course I hate some o his policies.

          He is much better then HRC or anyone else from the establishment

    • Nicole
      Jul 12, 2019 at 2:14 pm

      Even before this whole crash, we need to prepare and protect ourselves. This is also a reason why I invested in gold bars so I can stack them and sell them later on as well.

    • Silly Me
      Jul 14, 2019 at 4:56 am

      As soon as there is anything else to buy.

  2. IdahoPotato
    Jul 11, 2019 at 10:13 am

    Sounds like the 1920s.

    • phillip sawicki
      Jul 11, 2019 at 12:45 pm

      It seems to me that Wolf’s reports are directed primarily to the investor/creditor class. While I find some of them interesting, I would also like to see a little more emphasis on life among the debtor class. For instance, what percentage of higher education loans are more than a month late (if information like that is available somewhere).

    • van_down_by_river
      Jul 11, 2019 at 3:47 pm

      In the 1920’s gold was money so the government could not command the central bank to create more of it. Today money is an electronic value arbitrarily typed into accounts of mostly wealthy investors. The central banks have completed the heavy lifting of an “inflation is good” PR blitz and feel they have paved the way to 1) type as much money into accounts as necessary to guarantee assets continue to levitate and 2) type as much money into accounts to fund the government (government jobs, government welfare, government military/warfare spending).

      The Fed is actually complaining about too little government deficit spending. They gripe that the government “isn’t doing enough with fiscal policy” and that the Fed is “doing all the heavy lifting”. The Fed believes the government must do more to pull us out of this economic downturn. For the first time in history we have an economic downturn in the midst of the strongest economy in our history – so enjoy your cake everyone as you will no doubt be able to eat it and have it too.

      You know what’s happening. Everyone knows this is happening. You can’t get something for nothing forever. Eventually there will be a currency crisis. When this occurs there will be untold suffering.

      No doubt central bankers will announce no one could have predicted the rabid inflation outcome.

      • Kasadour
        Jul 12, 2019 at 11:28 am

        You are absolutely right. This is what I’ve been telling my relatives since the 2008 GFC and now they’re complacent believing all danger has passed.

        The suffering will be great. A LOT of people aren’t going to make it; prepping really isn’t going to do much except extend your standard of living by, oh, maybe a few days up to a month at most. I learned a few years ago prepping is in the mind and spirit (emotional fortitude) and body.

        The bankers will pretend they didn’t, or couldn’t have possibly, see coming but that’s a lie they’ve already floated before and will no doubt float again. They know what’s coming, but worse than that, the bankers and financial central planners have actually designed this entire financial catastrophe and it’s going exactly as planned. They won’t get away with it- James 1:5

  3. IdahoPotato
    Jul 11, 2019 at 10:15 am

    “The 1920s may not have been characterized by a “price” inflation, but there was, in the words of John Maynard Keynes, a “profit” inflation. After the 1920-21 depression, national output (GNP) grew rapidly at a 5.2 percent pace, substantially exceeding the national norm (3.0 percent). The Index of Manufacturing Production grew much more rapidly and virtually doubled between 1921 and 1929. So did capital investment and corporate profits.

    Like the 1980s, there was also an “asset” inflation in the U.S. A nationwide real estate boom occurred in the mid1920s, including a speculative bubble in Florida that collapsed in 1927. Manhattan, the world’s financial center, also experienced a boom.

    The asset bubble was most pronounced on Wall Street, both in stocks and bonds. The Dow Jones Industrial Average began its monstrous bull market in late 1921 at a cyclical low of 66, mounting a drive that carried it to a high of 300 by mid-1929, more than tripling in value. The Standard & Poor’s Index of Common Stocks was just as dramatic–Industrials, up 321 percent, Railroads, up 129 percent, and Utilities, up an incredible 318 percent.”

    https://theihs.org/blog/friedman-vs-austrians-inflation-1920s/

    • Kent
      Jul 11, 2019 at 12:56 pm

      Interestingly, I think the 1920’s stands somewhat against Wolf’s premise here. There was no significant reduction in interest rates over the period of the 1920’s and yet there was massive asset inflation.

      Though the counter-argument might be that the Fed should have tried to find a way to engineer a significant increase in interest rates in order to counter the mass increase in bank liquidity. Though I don’t know if the fed had that ability in the 1920’s.

      • IdahoPotato
        Jul 11, 2019 at 1:21 pm

        Those were the days of the gold standard and the Fed did not intervene or “manage” rates the way it does today.

        Though the Fed was involved in setting “discount” rates, the short and long end were dictated by the market. The 20s saw a shift since the Treasury needed the Fed to intervene more aggressively to manage the short and long rates to manage wartime deficits.

        The Fed has never looked back since then.

  4. GP
    Jul 11, 2019 at 10:19 am

    With all the easy money policies of the past decade, Fed has contributed a lot to asset price inflation. But not much to other inflation indicators.

    As you pointed out, all this asset inflation has locked out working class people from owning their first homes. Retirees get less for their saved, now devalued, dollars.

    So is Fed now proposing it needs to do more of the same? Sounds like a genius move. /s

    • Paul
      Jul 11, 2019 at 7:51 pm

      I sincerely hope people don’t forget that there are TWO big factors in determining how well people live.

      One is flows of money, as is being discussed here (but without any reference to Velocity, which is as important as Money Supply).

      The other is simply how big is the pile of goods and services that people collectively produce and people have to share.

      The flow of money determines how the pile of goods and services gets distributed.

      The size of the pile determines what we have to consume.

  5. sc7
    Jul 11, 2019 at 10:20 am

    There’s nothing wrong, keep proping up real estate speculators at the cost of the country’s future economic growth. This will be bad when it finally stops.

    SCJ told me Boston is full of bidding wars, but even the shills at Redfin-ished can’t keep that lie going, I see it with my own eyes in that market. Bidding wars down BIG time, price cuts and inventory up, and that’s with rates 100+bp lower than this time last year:
    https://www.redfin.com/blog/june-2019-bidding-wars/

    • chillbro
      Jul 11, 2019 at 10:42 am

      We need an anecdote from timbers about how a cousin got multiple offers over asking…

      • IdahoPotato
        Jul 11, 2019 at 10:56 am

        Here’s an anecdote from last week in Boise, Idaho. House down the street. 489k asking. Within 24 hours, five offers, two cash. Sold at 27k above asking.

        Nothing special. Just a regular house in a regular neighborhood. This house was purchased for around 245k in 2012. No remodeling since.

        • sc7
          Jul 11, 2019 at 11:18 am

          Would love to see a link to the house. Redfin-ished says that the average for a house in Boise is 2 offers, at around list price. The house you’re citing must be an exception, possibly priced below market value to create competition, the newest tactic from Realors.

          Boise is bubble central, lots of reason to attract interest, but price growth has outstripped the economic productivity in the area, leaving it heavily overvalued. Your house isn’t going to the moon alice, and Idaho isn’t the next SF/NYC/Boston. As we learned in 2006, those that rose the quickest, fell the hardest.

        • Longtime Listener First Time Caller
          Jul 11, 2019 at 2:07 pm

          I suspect the growth in Boise is an echo of asset inflation from the large coastal cities of the west. People cash out, or decide its too expense, or want a quality of life that does not face the same transformational pressures of San Fran or Seattle.

        • John henderson
          Jul 11, 2019 at 4:41 pm

          I m in Glasgow Scotland.
          Called the agent yesterday around 5 pm for a flat that was put on sale yesterday around 11 am.
          No reply yesterday and that’s unusual.
          She called this morning , owner accepted an offer yesterday. Bust the price for the street too.

      • sc7
        Jul 11, 2019 at 11:20 am

        His boss’s cousin’s friend’s sister’s uncle sold his house and totally had multiple offers. Then he was one of 118 offers on a house in that went 33% over list. Never mind the real metrics showing Boston area homes selling below list, often times with 1 offer after multiple open houses. The only things still hot here are the really desirable areas like Newton. If you’re in an average suburb like Burlington, you missed your chance to sell last spring.

        And then all 5 of his coworkers are all engaged in multiple bidding wars and have lost out on 20 properties. What kind of place of has that many knife catchers all trying to buy at the same time, at the top of the market?

        • IdahoPotato
          Jul 11, 2019 at 11:30 am

          Wolf doesn’t like cluttering this place with links. Besides, you need to ask nicely.

        • Jul 11, 2019 at 1:53 pm

          If sc7 asks nicely, you can post the link :-]

        • IdahoPotato
          Jul 11, 2019 at 1:24 pm

          @sc7. No one is disputing your thesis about a slowdown in the works. However, there is a frenzy in some markets and it is real.

        • IdahoPotato
          Jul 11, 2019 at 4:52 pm

          Ok, sc07, here you go.

          This place went under contract for around 515k last week.

          https://www.realtor.com/realestateandhomes-detail/3350-S-Ashbury-Pl_Boise_ID_83706_M16974-79229

          And I know for a fact that it went for around 245k just a few years ago.

        • sc7
          Jul 12, 2019 at 11:06 am

          @IdahoPotato – thanks for the link, and thanks @Wolf for allowing it, its good to see the data. Looks like a very nice house and neighborhood. The growth you mention, however, echos what happened in Las Vegas 2004-2006. If prices fall in the “primary” coastal cities, the money will rush back out to those cities. That’s simply too much growth, too fast to stick, if history is any indication. Doubt that house will ever see the 200s again, though.

      • Alberta Davidson
        Jul 11, 2019 at 11:30 am

        Food. Food prices are escalating quickly.

        This last winter one cauliflower was selling for $10. Dropped to $6 in Spring. The soup I make calls for 3 heads.

        Unaffordable.

        • Rowen
          Jul 11, 2019 at 4:42 pm

          At least with fish/meat, the spread between what the processors are charging vs what they’re paying the suppliers (ranchers, fishermen, etc) is widening. Wall Street realized the barrier to entry was in the processors, and has been consolidating (monopolizing) that market.

          Supposedly, the chicken market (3 processors control 90% of the market) will be facing DoJ antitrust scrutiny soon.

        • Gandalf
          Jul 12, 2019 at 2:46 pm

          It would be good to know how much of the rise in food prices is due to the sharp clampdown on illegal immigrants.

          Fruits and vegetables that require hand picking seem to have gone up the most. Meat packing industries also hit by the illegal immigrant clampdown.

          Things harvested by giant machines like corn and wheat – not so much

          Nuts have stabilized and even gone down a bit in price – China had developed a fondness for American nuts, but their retaliatory tariffs shut down demand for American produced nut

          And as usual, none of this shows up in the hedonics rigged CPI numbers

        • sierra7
          Jul 14, 2019 at 11:46 am

          From a former (long, long time ago! Back in late 1940’s early ’50’s) produce dealer…..a “crate” of 12 heads of cauliflower sold for average price of $1.50 wholesale in my day!! Just a little anecdote! LOL!
          Material asset price rises: good
          Labor/wage asset price rises: bad

      • Ethan in NoVA
        Jul 11, 2019 at 12:24 pm

        Northern VA, townhouses @ $600K+ seem to be selling. Detached house went on market near me and switched to under contract in 2 days. *Shrug*

        No signs from what I can see of market slowing down. Tons of new construction way out, miserable commute from the job centers. Signs everywhere in medians and such.

        • sc7
          Jul 11, 2019 at 12:34 pm

          Everyone has a story about a house near them selling super quickly, so everything must be just fine.

          For one, Northern VA may very well be an exception, particularly with the Amazon relocaiton. I’ve been watching that market, and it does seem to be exceptional right now. It’s not at all indicative of what I am seeing in the other “hot” cities, though.

          The signs of the slowdown for now, while the economy is good, will be mild:
          -Homes may still sell quickly, but it will be for one or two offers, and at or below asking price
          -Home prices “fall off a cliff”. Gains will continue to erode in terms of YoY percentage, eventually falling below inflation, making the home in nominal value cheaper than the same time last year. Some markets are already here
          -Home sales will slacken, but won’t completely fall off as long as the economy is good.
          -Soft benefits to buyers, such as seller-paid closing costs, more repairs and concessions, will appear. These are not represented well in the real estate transaction data.

          My contention is, with record low unemployment, and near record low mortgage rates, when we are seeing the market cool. All it takes is for a recession and surging unemployment/falling confidence to pop the balloon, at least in the overheated coastal cities. This cities have simply pulled forward demand from rates being too low, too long.

        • sc7
          Jul 11, 2019 at 12:35 pm

          I meant that to be home prices *won’t* fall off a cliff, at least not when unemployment is so low.

        • Ethan in NoVA
          Jul 11, 2019 at 4:24 pm

          New Amazon seems silly. It’s over 10 years, and it’s not easy to commute across the region during daytime work hours. But everyone thinks they’re going to get rich dumping overpriced houses on these Amazon employees.

        • Jul 11, 2019 at 10:08 pm

          If it helps, I can tell you rents are still high and climbing in Los Angeles.
          I need to move so that the homeowner can let his son move in. I gave up on studio apartments … My next scheme is to get my employer to rent a 2-bedroom apartment for me and a coworker (he’s been staying in hotels during the week). Rent here in Van Nuys will be $2200/mo for 2 people but we can save in taxes if the employer rents it for us and reduces the cost from our pay. Our side of payroll taxes plus state and federal is already up to 37.7% at the $50k/year level, so we save a lot there.
          Gotta get creative to survive this housing market.

        • Jul 11, 2019 at 11:54 pm

          “…but we can save in taxes if the employer rents it for us and reduces the cost from our pay.”

          You better talk to a tax accountant about that strategy before you and your company get caught evading taxes in this manner :-]

        • Jul 12, 2019 at 1:33 am

          https://www.corporatehousing.com/blog/corporate-housing-tax-deductible/
          Dang you’re right Wolf.
          I had corporate supplied housing back in the Navy, doing FEMA work, and contracting for a year long refinery project in Indiana … I just thought it was a good idea.
          Now I’m just trying to find a cheap bed & shower for my work week in LA. At least if I room with my coworker my rent will stay at $1100/mo and I’ll be able to invite friends over (which I can’t do now).
          I wish I could get a 401k but I tried a year and a half ago … My employer looked into it and the fees for small businesses to offer those are horrendous.

        • sc7
          Jul 12, 2019 at 11:07 am

          @John Taylor

          Serious question, no disrespect intended, why would you not move out of that area instead? If I were renting somewhere that required that poor of a living condition, clearly the job isn’t good enough of a justification for me to stay. I don’t care how “great” an area may be, if my home conditions are poor, where I spend the majority of my time, I’m out.

          I frequently think of cashing out all of my real estate profits in Boston and heading to Raleigh. I could buy a beautiful house in cash.

    • SocalJim
      Jul 11, 2019 at 3:33 pm

      SC7, something is wrong with the redfin data you mention. Right now, in Suffolk and Norfolk counties ( Boston metro ), for every home listed for sale, another home is under agreement. That is a 1 for 1 ratio. That is red hot. 2 listing for 1 under agreement is considered hot. 1 to 1 is crazy. Eventually, this will end but after a spring stall, home are moving again.

      • SocalJim
        Jul 11, 2019 at 3:38 pm

        Middlesex county, which is another Boston metro county is even hotter … “white hot”. There are more homes under agreement than available. Burlington is in Middlesex county. Sooner or later, someone will get burned, but the question is how much higher will prices go before the recession hits.

      • sc7
        Jul 11, 2019 at 3:59 pm

        The Redfin data is purely how many homes have multiple offers. Not sure why the disconnect from the sales data. I have seen a higher number of homes fall out of escrow this year than last, there’s some data on it, I don’t have the link on me at the moment. I believe because homes are still selling fast, but the competition is dropping off as demand eases relative to supply, over asking ratios seem to be down, and I find it concerning it took a 100bp cut in rates to get here, feels to me like squeezing the last juice from the orange a bit.

        I’m not sure what’s wrong with Burlington, to be honest. It seems like far-out suburbs are a bit hotter this year, I’m seeing more activity in Billerica, Tewksbury, Ashland than Burlington/Stoneham. I wonder if it is because there’s more entry level supply there. I’m noticing softer sales with new construction as well, when compared to 1940s-1980s 3br/2ba which seem to still move briskly. I woulnd’t be supprised to see that high end inventory start to drag prices, and is likely what’s keeping things from going higher.

        Your point is a good one, it is a question of how much higher it is. Diving into some of the finer details of data (some of this being subjective measures), I’m seeing the trend go slower (from white hot to hot), but I suspect this area won’t let up until unemployment starts to tick up noticably with a recession. With wealth gap, sentiment, etc… I think a lot of the hot cities are in for quite a bust. (and by quite a bust, I mean no more than 20% MAX, lixely less)

        I’m long on RE for Boston in general. Too little supply, too many universities and employers. We won’t touch Bay Area prices unless salaries match the Bay Area here, which they aren’t going to. Why pay that much for crappy weather, old housing and terrible traffic? Oh, right, I do it…

        Waltham, Malden, Medford are the next big places to invest. I think the casino is going to hurt Everett values in the long run.

        • SocalJim
          Jul 12, 2019 at 8:08 am

          Just checked Burlington … right now 36 properties are active and available. 52 homes are under agreement. That is a very hot market.

        • sc7
          Jul 12, 2019 at 11:10 am

          @socaljim

          Redfin’s market data is saying it is “somewhat competitive”. Average sale prices are down from last year (though that could be a mix issue). Homes receive only 2 offers on average (different than the 7 last year), and typically sell below list price.

          Much, much different than the market last year where 5-7 offers were the norm, and prices were selling as much as 10% above asking price. I see a lot of completed sales there go below ask, some above ask include cash back to the buyer for closing costs.

  6. wkevinw
    Jul 11, 2019 at 10:20 am

    Asset price inflation and inflation in general are defined by how an “index” is constructed.

    Housing/Real Estate- usually in CPI-type indexes, BUT poorly tracked.
    Medical Care/Insurance- usually in the CPI indexes, BUT also poorly tracked. The new technology that gets to be “standard of care” lags in the indexes because they are concerned with “constant quality”. What’s the constant quality entry in the CPI for MRI in 1970 vs 2019?
    Paper/Financial Assets- Not in the CPI, so not tracked.
    Education Costs- In the CPI, BUT poorly tracked- and hard to track, because the high costs only relate to people going to college, which isn’t that big.

    So, as usual, it’s not that easy to get it right.

  7. Lee Blockchain
    Jul 11, 2019 at 10:22 am

    A worldwide depression is the cure, much needed reset, have to pay the Piper eventually.

    • chillbro
      Jul 11, 2019 at 10:44 am

      Workers lost out a lot of purchasing power during this boom cycle and will be even more devastated during the up coming bust. Such is the life of the working people’s in 21st century, lose-lose.

    • DawnsEarlyLight
      Jul 11, 2019 at 12:46 pm

      Won’t happen. Too many suckers out there!

  8. RD Blakeslee
    Jul 11, 2019 at 10:46 am

    There is not much “REPORTABLE” price inflation in consumer goods, because so many folks are aware of it in their lives every day and their reaction must be avoided at all costs.

    IMO, it is much greater than reported, because of the myriad little ways the data can be collected and fudged.

    • Endeavor
      Jul 11, 2019 at 2:20 pm

      As mentioned before, price inflation in consumer goods come mainly as a diminished in quality product. I swear, sometimes the packaging that the item comes in is sturdier than the lousy product itself.

  9. Alex Gerard
    Jul 11, 2019 at 11:09 am

    and last but not least…
    5) Stupidity inflation.

  10. Bobber
    Jul 11, 2019 at 11:38 am

    The artificially high asset prices the Fed has created have big consequences.

    I hear about lots of people leaving the workforce early to live off their nestegg. The Fed has convinced everybody that 15% annual stock price gains are normal. What happens to these people when stock prices drop 50% because the Fed loses control?

    What happens to pension funds that are relying on 7% asset price growth from here?

    What happens to millions of people that are relying on social security and Medicare? How will the government afford these entitlements when deficits and debts are growing faster than GDP, with no end to that in sight?

    What will happen to all the millennials who are taking on mega-debt to buy an overpriced house? Will a housing price drop take away their wealth and put the in a financial hole for decades?

    What will happen to otherwise prudent individuals who decide a 2% return on savings isn’t adequate, so they then get into a stock market at all-time valuation highs?

    What happens to national security when the financial system falls apart because of systemic risks the Fed does not appreciate?

    What happens to the country’s social fabric when the Fed exacerbates the wealth divide by assigning more wealth to stock and bondholders (i.e., 10% of the population)?

    The Fed will have to answer many questions when it loses control and its plan fails.

    • Eamonn Harter
      Jul 11, 2019 at 12:15 pm

      “What will happen to all the millennials who are taking on mega-debt to buy an overpriced house? Will a housing price drop take away their wealth and put the in a financial hole for decades?”

      Foreclosures and short sales… History may not repeat itself, but it certainly rhymes.

      • Paulo
        Jul 11, 2019 at 3:53 pm

        My biggest lessons were always discovered by making mistakes. A millenial taking on mega debt to buy a house is a problem of their own making.

        Hopefully, this wisdom will be passed down to their children in the same way I learned about security and debt from my folks who were brought up with nothing during the Great Depression.

        I know people who had pulp mill jobs who thought destination weddings in Hawaii were normal. Really? Life isn’t a beer commercial and a home purchase as seen on the HGTV RE channel is not reality. The RE markets in rarified cities are not places millenials can afford, so why would they even try?

        Asset inflation is bad if the assets are leveraged. The article states this quite nicely. However, it’s the leverage/debt creating unrealistic demand that actually furthers asset inflation to a great extent. If people bought what they could realistically afford this situation would not exist. Case in point, I have some neighbours who are in poor health and are also financially poor. They had about 100K to put towards a house, but due to their dodgy health they aren’t likely to ever work again. Instead, they bought a used trailer that has 2 pullouts and is actually quite large and comfortable. They paid 13K cash for it. They will be saving about $700 in monthly rent after paying for their site rental, and still have 85K in the bank if they need it. They have no more than a grade 8 education and have never had jobs above menial labour and kitchen work. It’s funny their life choices are so much more intelligent than a leveraged homeowner.

        • TXRancher
          Jul 11, 2019 at 4:42 pm

          ” It’s funny their life choices are so much more intelligent than a leveraged homeowner.”

          Only if you like the inevitable coziness of living in a trailer…not sure I would call that intelligent.

        • FluffyGato
          Jul 12, 2019 at 8:59 am

          “Life isn’t a beer commercial and a home purchase as seen on the HGTV RE channel is not reality.” – One of the best quotes I’ve seen on here.

          Far too many (esp Millennials, whom I feel sorry for due to circumstances both within and beyond their control), believe they need to live an “Instagram Life.”

    • Gold is just..gold
      Jul 11, 2019 at 2:29 pm

      “The Fed will have to answer many questions when it loses control and its plan fails.”
      Not at all. The incumbents retire/resign and the new ones say, ‘this time it’s going to be different’

  11. Brant Lee
    Jul 11, 2019 at 11:50 am

    A good example of over-valued real estate may be the land where many shopping centers are located. Still in the books as prime location busy-corner acreage but practically unsaleable near current levels due to the retail meltdown.

  12. IdahoPotato
    Jul 11, 2019 at 11:54 am

    Meanwhile those Boomers are everywhere mocking supposedly profligate young people who eat avocado toast.

    A recent survey from Temple University found that nearly 50 percent of students at more than 100 schools couldn’t afford to eat a balanced meal and 35 percent of students were skipping meals entirely because they did not have enough money for food.

    “When it comes time to hang the capitalists, they will vie with each other for the rope contract.” – Major George Racey Jordan

    • GP
      Jul 11, 2019 at 4:42 pm

      Whoa whoa, deficit spending ($10T) and Fed’s easy money policies of last decade suddenly get attributed to capitalism?

      Boomers with assets might be sitting pretty, but those living off their savings are toast.

  13. Jul 11, 2019 at 12:03 pm

    When the system gets out of balance what rips it apart is volatility; hyperinflation to deflation and back again. Should the Fed lower rates successfully ahead of the recession, their continued policy of micromanaging the economy will cause these minor moves to amplify, there simply are no feedback systems that work without implementing an hermetically sealed centrally run economy.

  14. Eamonn Harter
    Jul 11, 2019 at 12:11 pm

    With housing prices, the government and central bank haven’t exactly printed money and thrown it out of helicopters while telling people to go buy houses with it. No, all they have done is make it extremely easy to qualify for 30 year fixed rate mortgages with virtually no money down. Furthermore most of these loans have been created by lightly-regulated shadow banks with shoddy underwriting standards. And low interest rates have allowed ‘investors’ to do essentially the same thing. It’s all about the financing terms, and this housing bubble is currently in the process of cratering just like the last one.

    • Kent
      Jul 11, 2019 at 2:12 pm

      +100. I tend to believe that the Fed’s interest rate policy is not the prime driver of asset inflation, it’s the Fed’s regulation (or lack thereof) of banks.

      Suppose the Fed had a policy that said a bank can only originate a mortgage with 20% down and the house price no more than 200% of the buyer’s income and the total mortgage cannot be for more the last sale price of the house + inflation – 20%.

      Housing would now be housing, not a speculative asset. There are alternative policies.

  15. David Hall
    Jul 11, 2019 at 12:11 pm

    From previous commentary at wolfstreet I learned people in Europe have been stashing cash in safe deposit boxes because of negative interest rates. That is not inflationary. Buying collectibles produced inflation in classes not tracked in the CPI report. Someone investing in antiques does not make the price of cabbage go up.

    • Jul 11, 2019 at 12:33 pm

      There are Hummel figures in my closet worth just about what my parents paid for them 75 years ago. The wealth disparity gap has been no more obvious that in the collectible market, where mass market items zero out and one of kind impressionist art goes for millions. There are people who put a sizable amount of their retirement in collectibles, who are bitterly disappointed, not because inflation hasn’t produced value, but it produced value across the same inequitable class barriers.

      • Bet
        Jul 11, 2019 at 12:48 pm

        collectibles=good marketing
        try selling stamp collections, my father had and we still have thousands and thousands and thousands, but it only costs 300.00 plus an hour to take to a stamp shop ( are there any left) expert to tell you what they might be worth. I just want the upside down biplane

        • dbee
          Jul 13, 2019 at 7:02 pm

          Try coin collecting. The new silver washington quarters have no market except to the greater fool.

  16. Abomb
    Jul 11, 2019 at 12:15 pm

    So is the housing market really going to head down as it has in the past or due to QE have we entered a new era that won’t be like the past unless the Fed balance sheet returns toward historic values? I can’t convince myself one way or the other. Impatiently waiting here…hope we have the courage to do what’s in the best long term interest of the nation but maybe it’s already too late. Way to overdo it with QE…nice global financial experiment. Friggin morons. Do I sound frustrated? At some point this could become a huge political force for the younger “assetless” generations if something doesn’t change. Squandering the future for the present

    • SocalJim
      Jul 11, 2019 at 3:21 pm

      If a decent recession hits, home prices will go down substantially. If no recession, then no deals.

      • sc7
        Jul 11, 2019 at 4:03 pm

        Ha! Agreeing with you twice today. It’s going to take unemployment ticking up for this to happen. Otherwise, just a slowdown…

        However, that slowdown paired with a recession could be the recepie for something quite ugly.

    • Kent
      Jul 11, 2019 at 3:25 pm

      We could certainly have another housing price drop in the near term. And that would generally be caused substantial drop in employment and income.

      So, the question becomes, in that moment are you ready to swoop in, or will you be one of those who have been effected by the substantial drop in employment and income?

  17. Old-school
    Jul 11, 2019 at 12:40 pm

    S&P div is $56. Hard to believe people will pay $3000 for it. Sure it tends to grow, but it does go down during a recession.

  18. Iamafan
    Jul 11, 2019 at 12:58 pm

    Once they realize that lowered Fed Funds will not do much to spiking the profits of firms (like the last Tax and Repatriation Bills), most will realize it’s game over.

  19. otherbrother
    Jul 11, 2019 at 1:29 pm

    Sorry to add-in 2 links, but I just found an interesting connection — and still pondering what a tsunami of MBS supply implies; this is a bit beyond my pay grade!

    1: Nor is it just the effective fed funds rate that isn’t responding to changes in the Fed’s administered rates as it’s supposed to. As the next chart shows, although the New York Fed’s Secured Overnight Lending Rate (“SOFR”) — an average of rates for a broad set of overnight repos collateralized by Treasury securities — has always been closer to the Fed’s IOER rate than to its ON-RRP, it has recently been persistently above it. Despite its broad base, consisting of several lending markets that are far larger and thicker than the fed funds market, the SOFR has also been considerably more volatile than the effective fed funds rate. It’s therefore far from obvious that the Fed could improve its rate-targeting score simply by switching, as some have suggested, from a fed-funds-based target to one based on overnight repo rates.

    The Federal Home Loan Banks in particular now find it attractive to exchange their surplus Fed balances for securities in the repo market instead of offering them on the fed funds market . The Fed’s unwind has in turn reduced the total supply of such balances available to banks for meeting their LCR and other regulatory requirements. Consequently some banks have found themselves having to bid more aggressively for fed funds. It’s owing mainly to its desire to avoid seeing this tendency increase that the Fed decided earlier this year to end its balance-sheet unwind in October.

    https://www.cato.org/blog/feds-shifting-goalposts

    2: Regardless, the Fed’s shift away from mortgage bonds could present a risk for the MBS market if 10-year Treasurys — the benchmark for 30-year mortgages in the U.S. — fall below 2.25 percent, according to Walt Schmidt, head of MBS research at FTN Financial. Those levels could trigger an influx of supply as lower rates prompt homeowners to refinance their mortgages.

    “There will be no Fed to sop up supply,” he said.

    https://finance-commerce.com/2019/03/trillion-dollar-bond-dilemmas-emerge-for-fed/

    • Iamafan
      Jul 11, 2019 at 5:00 pm

      IOER used to be high enough so EFFR did not exceeded IOER. In other words the banks had too much reserves that there no was no need to borrow reserves. After March 20, EFFR was higher than IOER so IOER could no longer contain the cost of trading reserves. Meaning liquidity is tighter.

      You can also see that both SOFR rate and volume has increased. That means that financial institutions are paying more for funds. The demand also suggests these cash like securities are getting rarer.

      I wonder what lowering the FFR will actually do.
      Without increasing the supply of reserves and secured collateral for Repo who’ll be willing to lend at lower rates? I guess if they lower IOER enough, something different might happen as hoarding reserves might not pay as much.

      • Jul 12, 2019 at 11:15 am

        Powell repeated this in hearing IOER is his main tool. Yellen started RRPO, used it to raise rates, and now JP uses it to keep rates higher than they might be if the market wanted to set them lower. It’s sort of a bizarro RRPO, if rates fell sharply that could be a problem. Like who will fund the government?The next crisis is going to be in Treasuries. The shadows are not the problem, they are being fast tracked circa 2007, to avoid WF becoming the next Countrywide in a collapse of government debt.

        Primary Dealers

        Amherst Pierpont Securities LLC
        Bank of Nova Scotia, New York Agency
        BMO Capital Markets Corp.
        BNP Paribas Securities Corp.
        Barclays Capital Inc.
        BofA Securities, Inc.
        Cantor Fitzgerald & Co.
        Citigroup Global Markets Inc.
        Credit Suisse AG, New York Branch
        Daiwa Capital Markets America Inc.
        Deutsche Bank Securities Inc.
        Goldman Sachs & Co. LLC
        HSBC Securities (USA) Inc.
        Jefferies LLC
        J.P. Morgan Securities LLC
        Mizuho Securities USA LLC
        Morgan Stanley & Co. LLC
        NatWest Markets Securities Inc.
        Nomura Securities International, Inc.
        RBC Capital Markets, LLC
        Societe Generale, New York Branch
        TD Securities (USA) LLC
        UBS Securities LLC.
        Wells Fargo Securities, LLC

        https://www.bloomberg.com/news/articles/2019-05-01/fed-makes-third-tweak-to-interest-on-excess-reserves-rate

  20. TownNorth
    Jul 11, 2019 at 2:19 pm

    “Because house price inflation kills demand.”

    I hope so. Logical yes. But here is So Cal I’m only seeing things go up. Of course we’re on the frustrating “want to buy” side of the equation. I wonder what will happen to asset prices if and when the Fed cuts again? I hope there’s not more room for prices to expand. Frustrating.

    • sc7
      Jul 11, 2019 at 5:18 pm

      Rate cuts may work inverse to mortgage rates this time. If a rate cut sparks optimism, treasuries will go up (which dictates mortgage rates). In this case, a rate cut could actually hurt housing.

      Historically they’ve been tied together because the cuts came as the economy was going down. Here? It’s a cut with some all time economic highs.

  21. Jul 11, 2019 at 2:42 pm

    Lots of price inflation in essential or nearly essential services, e.g. pharma, healthcare, and education Might have more to do with monopolistic behavior than Fed easing, although easy money definitely supports tuition increases. Clearly easy money is a culprit in real estate inflation; Michael Hudson has been all over this. And note that most money creation is by private lending, not government deficits. The QE stuff is more like an asset swap than straight-up money creation. But banks can be reckless in lending ’cause they know the Fed’s got their back. I would point to easy money, reckless lending, and yield chasing more than QE as inflation culprits (except for QE and bailouts as indicative of a backstop to recklessness).

  22. Karl
    Jul 11, 2019 at 2:43 pm

    Consider a negative interest loan. I loan you a dollar for a year and you pay me ninety nine cents at the end so that looks like a one percent inflation to me. I have to add a penny more for a dollar purchase. Further more, that penny represents a destruction of capital. Hungry? eat the seed corn.

  23. MCH
    Jul 11, 2019 at 3:24 pm

    Wolf, here is the question of the day. Relative to the other economies of the world, would the US still be considered the “cleanest shirt?”

    If you look at the economies of Europe and Japan, it’s getting challenging there. China is still kind of growing, if we believe in the stats there.

    Or perhaps is this the time to consider hard assets (gold), although I do see gold have gone up a little recently. But with interest rate cut ahead, it seems like gold is on the way down again.

    • Jul 11, 2019 at 8:10 pm

      To your first question: Yes, it looks like that to me. The thing with China is that its GDP data is essentially a government-mandated number. It says what the government wants it to say. So it’s hard to draw comparisons to economic growth of other countries.

    • The Colorado Kid
      Jul 12, 2019 at 12:57 pm

      Gold generally goes up as interest rates fall. The Dollar usually weakens with an rate drop. Brent Johnson of Santiago Capital thinks that the Dollar AND gold with both rise in unison during the next downturn as Folks seek safe haven. I dunno, but I own both asset classes as I believe in diversification.

      • Jul 12, 2019 at 1:58 pm

        Rise in the dollar implies falling purchasing power. The gold panic buy is not in evidence yet. Gold Silver passed a significant benchmark at 80 and has room to run. There is not a bull market in gold but who cares?

  24. Chauncey Gardiner
    Jul 11, 2019 at 4:14 pm

    Begs the Questions:

    1.) How have they controlled and directed the flow of funds into increasing the prices of financial assets and real estate and prevented Consumer Price Inflation from increasing at a higher rate?

    2.) The “Wealth Effect” is a canard IMO. Why did they adopt this assets price appreciation policy? Who has most benefited from it?

  25. Gian
    Jul 11, 2019 at 4:16 pm

    My point is, I find it confusing using the word “Inflation” for virtually every price increase and then discussing about the FED that targets only Consumer Price Inflation. The question is, why the FED does not succeed in pushing up Consumer Price Inflation?
    For consumer prices to rise, we need either more demand or lower offer.
    By injecting money the FED would like to obtain a rise of wages that would push demand up. This would happen if money were invested in productive new business, thus creating employment, wages, more spending. But is this analisys correct? Why should that happen?
    One possibility: if the portion of income distribution that goes into wages is too low, demand will always not be there, no matter how much money we push into the system. Injected money will create savings, malinvestments going around seeking low yelds or, even worse than that, seeking some place to hide at any cost, bonds with negative rates, criptocurrencies, gold, fine arts.
    So the money has to go to push demand. Not in a forceful way, but slowly. At this point, the only way to drain this money will be that of offering products and services to those who are demanding them and have the money to pay for them.
    It is harsh to say, but give the money to those who are in need of products, not too much but only what is needed to go a little little over production capacity, and demand will create some consumer price inflation and firms will start investments to increase production capacity

    • Bobber
      Jul 11, 2019 at 6:39 pm

      The benefits of that to the economy are obvious. It makes you wonder why the Fed continues to provide handouts to Wall Street. Is the Fed an ethical institution?

    • Jul 11, 2019 at 8:06 pm

      Gian,

      To your question, “why the FED does not succeed in pushing up Consumer Price Inflation?” I have addressed this issue more or less here:

      https://wolfstreet.com/2019/06/14/my-personal-dive-into-the-murk-of-official-retail-sales-inflation/

      • Gian
        Jul 15, 2019 at 6:51 am

        Thanks !!!!

        • Gian
          Jul 15, 2019 at 8:17 am

          Wonderful piece of yours. Recommended reading for anybody, no matter if they need Levi’s jeans or not.

    • Duke
      Jul 12, 2019 at 10:04 am

      Money supply can be “drained” back with taxes. ?

      • Gian
        Jul 15, 2019 at 7:20 am

        Yes, but this is perhaps not the preferred or easier way, certainly not the only way. Yours is a small question with a big answer. There are several ways to withdraw or inject “money” and Central Banks have made wonders. But yes, we can safely say that taxes “destroy” money while Govnmt spending “creates” it.
        Why are you rising this question?

  26. Mean Chicken
    Jul 11, 2019 at 4:20 pm

    It’s all about the credit cycle.

    Objects in mirror may be larger than they appear.

  27. WSKJ
    Jul 11, 2019 at 4:48 pm

    XLNT post; thx, Wolf.

    re the CPI, I want a tee-shirt index: the fabric weight, the fabric, the fabric content; …..the quality of the dye for printed tee-shirts, and its typical lifespan….and so on. Predicted lifespan for the tee-shirt itself, as well.

    No I don’t trust the federal agencies to calculate an honest rate of inflation for the tee-shirt index, but I do have some 20-yr old favorites which are getting pretty ragged now- they have become work shirts- and the weight of fabric is heavier than any new one that I have recently purchased. Spandex, by the way, is it by definition a type of plastic ? Anyway, in some articles of clothing, it has become a reportable percentage of the fabric.

    Just wondering.

    And by the way, I plan to update the Cod Index of inflation, after my next trip to the supermarket (there’s an outdated term).

  28. Stan Sexton
    Jul 11, 2019 at 5:18 pm

    If you give it to Wall Street instead of Main Street, you can hide lots of money printing. The Rich don’t spend and create inflation, they save. The middle-class and poor will spend and create inflation. This game has worked for years and creates huge inequality.

    • medial axias
      Jul 12, 2019 at 12:57 am

      The rich do not hang on to newly printed money, they’d soon be poor if they did. No, they spend it, ASAP, on assets that keep their value, such as land/property. That’s why we’re seeing the price of those assets rising. Which is what this report is about, AIUI.

      In general, if you flood a market with some product then, all things remaining equal, the price of that product will fall. If the product’s money then it’s called inflation. Hopefully, in the future, we’ll see other currencies, such as Libra and bitcoin, in the market which, IMO, will make all currencies behave better, as they’ll have to compete as none will have a monopoly.

  29. C1ue
    Jul 11, 2019 at 6:11 pm

    No debate on asset price inflation or any panther major causes/effects mentioned.
    However, a possible major driver not listed: taxation.
    Taxation in democracies is very difficult, but sovereign level money printing is a way to get taxes for “free”, because the newly generated money devalues all of the outstanding money in creating value itself.
    The regular folks can’t protect themselves against this because their incomes aren’t indexed to purchasing power; the wealthy ate more able to via ownership of the “hard” assets. Not the largest factor, but perhaps a significant one?

    • medial axis
      Jul 12, 2019 at 1:03 am

      Land Value Tax would help level things. However it’s not a good idea to use it as a sticking plaster to fix the harm done by all this money being given to one sector in preference over others.

  30. yewtai
    Jul 11, 2019 at 8:34 pm

    US Federal Reserve believe they have discovered the secret to perpetual prosperity by printing US Dollar toilet paper and force Japan to take it.

    PetroDollar is supported by unique genius residing in the Ivy League universities such as Harvard, Yale, Princeton, etc.

    These highly intelligent super academic continue to write ambiguous economics and financials principles, using BOMBASTIC english words, in order to mislead ordinary people into believing their glorified high level financial PONZI scam, is the only way to improve their lives.

    The other taker of US dollars are China, UK, Caribean offshore financial centers, Switzerland, oil exporting Arab countries, Taiwan, HK.

    If Americans FDI send to China in trillions of dollars, when USD1=8.8 Yuan, why are they not making great profit by sending US dollars home, now USD1=7.0 Yuan ?

    Is Wall Street genius forcing China to revalue Yuan upwards to USD1= 5.0 Yuan, then only profitable to bring home USD to America ?

    http://econbrowser.com/archives/2013/04/who_is_holding

    The largest US supranational firms have invested trillions of dollars cumulatively abroad since the 1970s-80s. The bulk of the dollar-denominated reserves held by the PBoC is against US supranational firms’ deposits in Chinese banks (in non-convertible Yuan) and other non-convertible financial holdings from the massive FDI invested in China over the past 15-20 years.
    Moreover, the US State Dept., CIA, and military intelligence services have billions of dollars in walk-around cash as part of black box projects and foreign accounts to facilitate US imperial policy on the ground around the planet, including affiliated banks’ involvement in arms and drug trafficking, murder for hire, money laundering, bribing politicians and businessmen, etc.
    Therefore, of course most of the dollars in circulation over the past 20 years are held and circulated abroad.
    When the PBoC begins selling US securities en masse, it will be because US firms are repatriating dollars, for whatever reason.
    One of the primary reasons the US (banks) is (are) pressuring China to float is so that the US firms can freely repatriate and banks can speculate with hot money directly (rather than through the back door via Hong Kong and Singapore today) and use their power over financial markets to influence/co-opt the leadership in Beijing. So far, the Chinese have not taken the bait nor succumbed to the imperial bankster propaganda and pressure.

  31. NotMe
    Jul 11, 2019 at 11:35 pm

    Asset price inflation is nothing but theft of savings by the central banks, as does any form of money printing.

    Essentially money printing occurs when interest rates exceed the rate of inflation for any economic segment, such as real estate, finance, etc.

    Right now with negative real interest rates, the money printing is more than obvious. Only central banks can afford to buy negative rate debt. No human or company can afford this garbage. At the end of the term of debt then money that was printed at the front end by a CB to buy the bond, cannot now be retrieved, it has been cut free to float in the sea of debt. It has simply been printed.

    • Iamafan
      Jul 12, 2019 at 6:11 am

      And they give themselves a pat in the back, congratulating each other for saving the so called economy by printing close to 5 trillion. Yup they saved themselves.

  32. Mike
    Jul 12, 2019 at 4:59 am

    The corruption in the justice system ENABLES the corrupt to act/defraud/rape without fear. None of the bankers or credit rating companies nor loan brokers, except a very, very, very tiny portion made up of members of unconnected, powerless groups suffered as a result of the 2002 to 2009 banksters ‘ frauds (the sale of securities that they knew would fail continued until the banksters were caught with those bad securities.)

    Their banks had to be bailed out and that bail out continues effectively due to the ultra low interest rates banks pay now while gambling with derivatives and buying shares or paying huge dividends/salaries with unfair profits from our government’s funds. Our corrupt justice system means they can defraud 95% of Americans without fear of punishment like the famous pedophile-pimp now in the news. Protectors of that pedophile-pimp and of the banksters are the cause of much of the victims’ damages including corrupt prosecutors and judges.

    Without the protection afforded them by a large group of persons that are not technically criminals or crooks, the banksters and the pedophile -pimp would have feared punishment. LA judges that caused a famous rapist to be certain that he would not be punished similarly were thereby enablers of the rapes.

  33. Iamafan
    Jul 12, 2019 at 7:20 am

    Can’t you see it? This is nothing but a big casino. Whether it’s houses or Treasury rates, there’s a massive bet on them.

    The market has bet on a rate cut. Just compare the lower Treasury yields to IOER, EFFR, and SOFR. The Fed better deliver on a rate cut or else there will be big losses on their bets.

    Now housing is the middle class and poor man’s bet against currency inflation. Because you want to protect your money or game that price increases will be more than your mortgage interest, you make a housing bet.

    The problem is people and Wall Street whine too much. This is part of the betting Dynamics, too. Honesty is really a virtue.

    • RD Blakeslee
      Jul 12, 2019 at 8:24 am

      “Now housing is the middle class and poor man’s bet against currency inflation.”

      Anyone with this mindset about the family home deserves to remain poor.

  34. John
    Jul 12, 2019 at 7:34 am

    So the dollar weakens, right?

  35. MB732
    Jul 12, 2019 at 9:49 am

    Been doing my best here for two years to learn all I can from Wolf and excellent commenters, but one thing cannot get my head around…

    How does cheap money inflate PE ratios? I understand that cheap money facilitates share buybacks, which will increase the earnings per share, and logically that will cause the share price to rise to seek equilibrium at a reasonable PE. But why higher to an unreasonable PE?

    Cheap money is like cheap diesel for a trucking company. Sure it lowers their costs, but it lowers the costs for the competition also, so really no competitive advantage. Why is cheap money sending PE’s in general to a level where most companies seem to believe they have a future competitive advantage?

    • Bobber
      Jul 12, 2019 at 10:27 am

      When the Fed reduces interest rates, it makes investors want to own higher yielding financial instruments like stocks, so stock prices rise. As you imply, this is not logical. It’s speculation.

      Corporate earnings may improve a bit with lower interest rates, but this doesn’t justify a rise in p/e ratio. Hussman has made lots of comments on this matter.

      The takeaway is that stock prices are elevated by Fed policy and related speculation. If investors ever return to fundamental analysis, look out below.

  36. WSKJ
    Jul 12, 2019 at 10:17 am

    Wolf, I had missed your June 14 (2019) post, to which you give the link above. My remarks re decline of quality in T-shirts belong there; that was a superb post with a wealth of information re aspects of inflation, and its measurement by the government.

    It’s hard to be objective about some of the comparisons we make, so I keep a few old articles of “Made in USA” clothing for old time’s sake, and they can always serve for close comparisons.

    Your June 14 post did not mention spandex, and I believe that it has had a role in the lessening of clothing quality, probably mostly wrt women’s clothing.

    Will update the Cod Index, when I have the latest datum.

  37. Jul 12, 2019 at 1:28 pm

    Inflation is a tendency for nominal prices to increase.

  38. Kimm Warren
    Jul 17, 2019 at 9:57 am

    It is possible tax law change of $10k max mortgage interest deduction will eventually bring down housing prices

  39. TommyRay
    Jul 20, 2019 at 1:02 pm

    It seems there is a missing component when understanding asset price increases: the context of what you are implicitly getting when you buy the asset.

    For example, when I bought my house in a small town there was limited internet access available, few upscale grocery stores, limited flights into our small airport etc. Now there is cheap gigabit fiber internet to my house, Whole Foods/Wegmans/Trader Joe’s within 10 minutes, 12 jet flights a day to major cities etc. this is not captured in Case-Schiller as far as I can tell.

    Another example for stocks is that over the past fifty years or so the liquidity, trading costs, earnings and market pricing transparency, and commitment to shareholder returns has dramatically changed in the US and other markets. I am taking less risk buying a stock today than in 1960 and so should expect a higher PE or lower earnings yield as a consequence. Again, not reflected in the Schiller PE10.

    Not saying anything about whether or not we’re currently in an asset bubble. Just commenting on other factors that do have some impact on asset prices but which are not commonly considered.

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