Dylan Grice: “The Bubble Is Just Beginning”
Dylan Grice: "The Bubble Is Just Beginning"
Authored by Dylan Grice via TheMarket.ch,
SPACs are hot, the IPO market is hot, credit markets are hot, commodities are hot, the crypto markets are hot. Everything is hot – only the Consumer…
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Authored by Dylan Grice via TheMarket.ch,
SPACs are hot, the IPO market is hot, credit markets are hot, commodities are hot, the crypto markets are hot. Everything is hot – only the Consumer Price Index is cold. And that is all that matters for the Fed.
The Boston Herald reported in May 1924 that a police officer, upon seeing a man groping around the pavement on his hands and knees, had asked for an explanation. «I lost a $2 bill down on Atlantic Avenue», obliged the man. «Then why are you hunting around here in Copley Square?» The man paused and turned his gaze upwards towards the officer, «because the light’s better up here».
The so-called «streetlight effect» is now a well-documented phenomenon. According to Wikipedia, it «is a type of observational bias that occurs when people only search for something where it is easiest to look».
We feel it an apt description of modern central bankers’ narrow fixation with the Consumer Price Index (CPI), driven not by any richness of information relating to the economy’s «overheating», but because it's easy.
Stimulus today is excessive and credit conditions loose in part because central banks are relaxed towards the risk of CPI inflation. On this they might be right. But they are similarly relaxed over obvious signs of overheating in financial markets, and on this we are sure they are wrong.
The historical precedents we explore below do not bode well.
We think it likely that we’re in the foothills of a policy mistake of epic proportion which will have potentially devastating consequences.
Powell’s reading of economic history
Before explaining why though, let’s first remind ourselves of the Fed’s current thinking. Jerome Powell was recently asked by Harvard’s Greg Mankiw on CNBC’s Squawk Box about how the Fed were thinking about the risks of inflation. The answer was comprehensive and is worth reproducing almost verbatim:
«The big picture is still that we’ve seen … three decades, a quarter of a century, of lower and more stable inflation and we’ve seen really the last decade be characterized by global disinflationary forces and large advanced economy nations struggling to reach their 2% inflation goal from below. So that, I think, is the broader setting.
In addition, the pandemic itself has produced lower inflation readings … as we look forward we’ll probably see an increase in readings but that’s really not going to mean very much, it won’t be very large or persistent in all likelihood, it's just a function of those readings falling out … if the economy reopens, there’s quite a lot of savings on peoples’ balance sheets, there’s monetary policy, there’s fiscal policy, you could see strong spending growth and there could be some upward pressure on prices. Again, though, my expectation would be that that would be neither large nor sustained…
We have had inflation dynamics in our economy for three decades which consists of a very flat Phillips curve, meaning a weak relationship between high resource utilization, low unemployment and inflation, but also low persistence of inflation, critically … of course those dynamics will evolve, but it's hard to make the case why they will evolve very suddenly, in this current situation.
I described our new framework and our guidance, in major part we are looking at actual inflation, we want to see actual inflation, and part of the reason for that is that all during the long expansion, many of us - and that includes me - were writing down a return to 2% inflation, and maybe a mild overshoot, year after year after year. And year after year inflation fell short of that. So we have tied ourselves to realizing actual inflation for example, that’s the way our rate guidance works is, you’d have to see inflation reach 2% - not in a forecast, but actually. So we are looking at actual inflation.»
Powell and other members of the FOMC have said they don’t expect to tighten policy «any time soon». According to Chart 1, which plots the expected policy rates, markets believe him. He describes the new framework as «a patiently accommodative monetary policy that embraces the lessons of the past» namely, that policy has been tighter, and so employment lower than was necessary because economists were overestimating inflation risk. He seems determined that there will be no such error on his watch.
The Calderwood Capital reading of history
We predict a different error, that of focussing so exclusively on the CPI that harder to interpret indicators of building financial risk are ignored. We believe history is on our side given it is an error economists have made repeatedly. Indeed, one of the original architects of the idea that the stability in the CPI was a necessary and sufficient condition for stability in the economy was the economist Irving Fisher, who first articulated his plan for stabilizing the price level in 1913, the year of the Fed’s creation.
Not coincidentally, that was the very same Irving Fisher who would later predict that stock prices had «reached what looks like a permanently high plateau» just nine days before the Great Crash of 1929. And in this context one can clearly understand the man’s optimism. After all, in preceding years, CPI inflation had exhibited precisely the kind of calm, reassuring steadiness which Fisher’s theories predicted would guarantee economic, and even social stability (Chart 2).
As the stock market continued its plunge, therefore, poor old Fisher doubled down. It was merely «shaking out the lunatic fringe» he reassured anyone who would listen. «Security values in most instances were not inflated».
A little-known backdrop to the 1920’s «Go-Go» years is that the Federal Reserve was then embarking upon a policy experiment. The growing consensus amongst economists, both in the United States and abroad, largely influenced by Irving Fisher’s ideas, was that central banks should focus entirely on delivering CPI stability. In 1925, the then-head of the Federal Reserve of New York, Benjamin Strong, wrote privately that: «It was my belief, and I thought it was shared by all others in the Federal Reserve System, that our whole policy in the future, as in the past, would be directed towards the stability of prices, so far as it was possible for us to influence prices.»
The years of 1926 and 1927 witnessed the so-called Stabilization Hearings before the House Committee on Banking and Currency, which discussed amending the Federal Reserve Act to, among other things, «assist in realizing a more stable purchasing power of the dollar».
During the hearing, Governor Strong was asked whether the Federal Reserve Board could «stabilize the price level to a greater extent» than in the past. He replied: «I personally think that the administration of the Federal Reserve System since the reaction of 1921 has been just as nearly directed as reasonable human wisdom could direct it towards that very object.»
Congressman Strong (no relation to Benjamin Strong) agreed: «Governor Strong has convinced every member of this committee . . . that the Federal Reserve is now properly trying to bring about stabilization of the financial condition of the country, and I believe they have been doing it satisfactorily for several years.»
John Maynard Keynes himself was convinced of the wisdom of the new philosophy, hailing «the successful management of the dollar by the Federal Reserve Board from 1923 to 1928» as a «triumph» for currency management. Unsurprisingly, perhaps, Keynes failed to see the crash coming with any more clarity than Fisher had.
A detached observer would have thought that, in light of the crash of 1929 and all that followed, the experiment would have been declared a failure, and Irving Fisher a bedlamite. But economists are a strange bunch. The need to narrowly focus on price stability remains at the core of the central banker’s self-narrative, and Irving Fisher has gone down as one of the greats.
Too little attention given to policies preceding the crash
Of all the retrospectives on the 1930s Great Depression, most have focused on the aftermath of the crash, and in particular the tightness of monetary policy which likely exacerbated it, but few seem to have given much thought to the policies which preceded the crash, or the extent to which those policies where responsible for its subsequent savagery. This is probably why the mistake was repeated.
In June 1999, as the Nasdaq bull-run was turning into a euphoric parabolic, then-Fed Chairman Alan Greenspan soothed growing concerns thus: «It is … up to us at the Federal Reserve to secure the favourable inflation developments of recent years and remain alert to the emergence of forces that could dissipate them. For, at root, it has been the remarkably quiescent inflation that has provided the favourable financial conditions and stable economic environment in which businesses have been able to function most efficiently … [and] in the event, the performance of the American economy over the past seven years has been truly phenomenal.»
There was no bubble according to Greenspan, only prosperity. Replicating the thought process of Fisher seventy years earlier, the possibility that the Fed were stimulating a mania wasn’t even entertained. How could monetary policy be too loose when inflation was so low?
Only a few years later, in 2006, as a grotesquely inflated U.S. housing market was already rolling over, beginning a descent which would lead to a generational global economic collapse, Ben Bernanke was famously oblivious to the risk: «The effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.»
Bernanke had acquired the nickname Helicopter Ben after a speech pointing out – correctly – that in most circumstances, there was no limit to the inflation a central bank could create.
He was keen to demonstrate to the politicians who had appointed him that there was no substance to the monicker and the first thing he tried to do when he took over the Chair of the Fed was show that he was no dove. He’d been watching the CPI index like a hawk in the run-up to the Global Financial Crisis, but all that focus on the CPI gave him scant warning of the menace which was building in the financial system, or the calamity which was to follow.
Powell’s new old policy mistake
To this day then, economists remain willing to use CPI inflation as some kind of proxy for financial stability. So long as there’s no CPI inflation, shout their actions loudly, we have nothing to worry about.
Benjamin Strong did it in the 1920s, Alan Greenspan did it in the 1990s, Ben Bernanke did it in the mid-2000s, and Jerome Powell is doing it today. He outlined the Fed’s new policy framework at Jackson Hole last August. Low inflation would be treated as the green light for monetary policy to be kept sufficiently loose for jobs to be created in
disadvantaged communities.
We wrote in September: «We don’t question the laudability of these aims. We do question the degree of know-how presumed to achieve them. Particularly when the new ‹big idea› being rolled out for battle is … er, lots of monetary stimulus, albeit in larger and longer dosages. It doesn’t seem very new, and so we expect the same old consequences. We remain broadly bullish of risk-assets, and concerned about future bubbles.»
Last year we documented the David Portnoy phenomenon. This year we’ve seen the reddit uprising. As the stock market made new all-time highs, Tesla’s market capitalization in early February surpassed that of the entire S&P 500 energy sector as stock prices hit all-time highs. The SPAC market is hot. The IPO market is hot (chart 5), credit markets are hot (chart 6), commodity markets are hot, the crypto markets are hot.
Everything, it seems, is hot.
Except for the CPI, which is cold. And that’s all that matters for the Fed. It’s not interested in the distortions in financial markets. It’s just interested in the CPI indices, and those indices are conveniently convincing them that everything is just fine...
* * *
Dylan Grice is co-founder of Calderwood Capital, an investment company specialising in portfolio construction and alternative investments.
Uncategorized
Key shipping company files for Chapter 11 bankruptcy
The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.
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The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.
The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.
Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible
Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.
The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.
Lawsuits force companies to liquidate in bankruptcy
Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.
California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.
The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.
The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.
In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.
Shutterstock
Nationwide Cargo seeks to reorganize its business
Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.
The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.
Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)
The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023. From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy pandemic covid-19 stocksUncategorized
Key shipping company files Chapter 11 bankruptcy
The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.
Share this:
The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.
The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.
Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible
Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.
The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.
Lawsuits force companies to liquidate in bankruptcy
Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.
California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.
The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.
The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.
In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.
Shutterstock
Nationwide Cargo seeks to reorganize its business
Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.
The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.
Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)
The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023. From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy pandemic covid-19 stocksUncategorized
Tight inventory and frustrated buyers challenge agents in Virginia
With inventory a little more than half of what it was pre-pandemic, agents are struggling to find homes for clients in Virginia.
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No matter where you are in the state, real estate agents in Virginia are facing low inventory conditions that are creating frustrating scenarios for their buyers.
“I think people are getting used to the interest rates where they are now, but there is just a huge lack of inventory,” said Chelsea Newcomb, a RE/MAX Realty Specialists agent based in Charlottesville. “I have buyers that are looking, but to find a house that you love enough to pay a high price for — and to be at over a 6.5% interest rate — it’s just a little bit harder to find something.”
Newcomb said that interest rates and higher prices, which have risen by more than $100,000 since March 2020, according to data from Altos Research, have caused her clients to be pickier when selecting a home.
“When rates and prices were lower, people were more willing to compromise,” Newcomb said.
Out in Wise, Virginia, near the westernmost tip of the state, RE/MAX Cavaliers agent Brett Tiller and his clients are also struggling to find suitable properties.
“The thing that really stands out, especially compared to two years ago, is the lack of quality listings,” Tiller said. “The slightly more upscale single-family listings for move-up buyers with children looking for their forever home just aren’t coming on the market right now, and demand is still very high.”
Statewide, Virginia had a 90-day average of 8,068 active single-family listings as of March 8, 2024, down from 14,471 single-family listings in early March 2020 at the onset of the COVID-19 pandemic, according to Altos Research. That represents a decrease of 44%.
In Newcomb’s base metro area of Charlottesville, there were an average of only 277 active single-family listings during the same recent 90-day period, compared to 892 at the onset of the pandemic. In Wise County, there were only 56 listings.
Due to the demand from move-up buyers in Tiller’s area, the average days on market for homes with a median price of roughly $190,000 was just 17 days as of early March 2024.
“For the right home, which is rare to find right now, we are still seeing multiple offers,” Tiller said. “The demand is the same right now as it was during the heart of the pandemic.”
According to Tiller, the tight inventory has caused homebuyers to spend up to six months searching for their new property, roughly double the time it took prior to the pandemic.
For Matt Salway in the Virginia Beach metro area, the tight inventory conditions are creating a rather hot market.
“Depending on where you are in the area, your listing could have 15 offers in two days,” the agent for Iron Valley Real Estate Hampton Roads | Virginia Beach said. “It has been crazy competition for most of Virginia Beach, and Norfolk is pretty hot too, especially for anything under $400,000.”
According to Altos Research, the Virginia Beach-Norfolk-Newport News housing market had a seven-day average Market Action Index score of 52.44 as of March 14, making it the seventh hottest housing market in the country. Altos considers any Market Action Index score above 30 to be indicative of a seller’s market.
Further up the coastline on the vacation destination of Chincoteague Island, Long & Foster agent Meghan O. Clarkson is also seeing a decent amount of competition despite higher prices and interest rates.
“People are taking their time to actually come see things now instead of buying site unseen, and occasionally we see some seller concessions, but the traffic and the demand is still there; you might just work a little longer with people because we don’t have anything for sale,” Clarkson said.
“I’m busy and constantly have appointments, but the underlying frenzy from the height of the pandemic has gone away, but I think it is because we have just gotten used to it.”
While much of the demand that Clarkson’s market faces is for vacation homes and from retirees looking for a scenic spot to retire, a large portion of the demand in Salway’s market comes from military personnel and civilians working under government contracts.
“We have over a dozen military bases here, plus a bunch of shipyards, so the closer you get to all of those bases, the easier it is to sell a home and the faster the sale happens,” Salway said.
Due to this, Salway said that existing-home inventory typically does not come on the market unless an employment contract ends or the owner is reassigned to a different base, which is currently contributing to the tight inventory situation in his market.
Things are a bit different for Tiller and Newcomb, who are seeing a decent number of buyers from other, more expensive parts of the state.
“One of the crazy things about Louisa and Goochland, which are kind of like suburbs on the western side of Richmond, is that they are growing like crazy,” Newcomb said. “A lot of people are coming in from Northern Virginia because they can work remotely now.”
With a Market Action Index score of 50, it is easy to see why people are leaving the Washington-Arlington-Alexandria market for the Charlottesville market, which has an index score of 41.
In addition, the 90-day average median list price in Charlottesville is $585,000 compared to $729,900 in the D.C. area, which Newcomb said is also luring many Virginia homebuyers to move further south.
“They are very accustomed to higher prices, so they are super impressed with the prices we offer here in the central Virginia area,” Newcomb said.
For local buyers, Newcomb said this means they are frequently being outbid or outpriced.
“A couple who is local to the area and has been here their whole life, they are just now starting to get their mind wrapped around the fact that you can’t get a house for $200,000 anymore,” Newcomb said.
As the year heads closer to spring, triggering the start of the prime homebuying season, agents in Virginia feel optimistic about the market.
“We are seeing seasonal trends like we did up through 2019,” Clarkson said. “The market kind of soft launched around President’s Day and it is still building, but I expect it to pick right back up and be in full swing by Easter like it always used to.”
But while they are confident in demand, questions still remain about whether there will be enough inventory to support even more homebuyers entering the market.
“I have a lot of buyers starting to come off the sidelines, but in my office, I also have a lot of people who are going to list their house in the next two to three weeks now that the weather is starting to break,” Newcomb said. “I think we are going to have a good spring and summer.”
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Part 1: Current State of the Housing Market; Overview for mid-March 2024
Tight inventory and frustrated buyers challenge agents in Virginia
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