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Yesterday’s memo about Jeremy Grantham sparked numerous emails saying he was a nasty old permabear who always has something bad to say about stocks. My own opinion is that its best call was bullish, made precisely when the market was bottoming in 2009 (see here).
In any case, you bulls will have to wait one more day, because today I will again tell you about unpleasantly high prices. Tomorrow I’ll find something more cheerful to write.
Do we also have to worry about housing prices?
If you must have asset bubbles, it is best to have them one at a time. In Japan in the 1980s, there were epic bubbles in inventory and housing at the same time, and the damage was immense. So if we want to be paranoid about US stocks (as this newsletter has been over the last few days), shouldn’t we ask ourselves if US home prices are also ready to pull us in?
Here’s what US home prices have done, using the most canonical index, the Case-Schiller:
House prices have been accelerating steadily since last summer. More timely, albeit less reliable, data from the National Association of Realtors suggests that the Case-Shiller Index will continue to accelerate as this happens over the next few months:
The question is whether the remarkable recent growth (nearly 20% in April!) Is entirely due to post-pandemic supply bottlenecks (massive spikes in timber prices, for example) and to demand increased reopening of the economy, or if there is we see late speculative activity in bull markets / a desperate search for yield intersect in housing.
A standard measure of this would be the percentage of home purchases that are not owner-occupied, that is, bought to flip or rent for performance (see this paper, for example). But I haven’t been able to come up with any timely estimates on this yet, so we need to look (for now) at the background, anecdotes and expert opinions.
Dimitris Valatsas, chief economist at Greenmantle, gave me an important piece of the general context, which should make us less worried about speculation. He says the sheer scarcity of homes in the United States is more important than the much-talked-about labor and material bottlenecks. In the long recovery of the past decade, the United States has underbuilt. For every job added, only 0.5 houses were built. The long-term average is 0.7. This ratio suggests that in 2020 the United States was short of 3.5 million homes.
So, as the United States builds more homes (and builds more), the price pressure should ease (Valatsas is more worried about rising second home prices).
Professor Robert Schiller himself, developer of the index and expert on why markets overshoot, said at the end of last week on economic news channel CNBC:
“There are times in [market] story where we have more leeway for our emotions and more social excitement and it seems to be one of those times. . . Just now [we set] a new record in real terms, [house] the prices have never been higher, so that’s something. . . I don’t think everything is explained [by] central bank policy. There is something going on in the sociology of markets. The question is whether they can stabilize it without crashing it, and that’s hard to do. “
This is the President of the Federal Reserve Bank of Dallas, Robert Kaplan, speaking a few weeks ago. He sees the capital of Wall Street entering the market hard:
“Home prices are at historically high levels, and furthermore, increasingly over the past six to eight weeks, I hear more and more often reports from private investors entering the home market. single-family, in competition with families, often making offers on sight. invisible above the asking price and asking that the house remain furnished. So we are in a position where single parent families are being foreclosed, or evicted, from being able to buy their first home. . . This is an example of an excess, perhaps an unintended consequence, a side effect of these extraordinary [Federal Reserve] Actions. “
There are many such anecdotes to be found. Large investors have a lot of cash and want returns. Bloomberg history released Friday noted that Cerberus Capital Management bought more than 200 homes at home fins in the first quarter, which the company will lease. The most striking:
“Cerberus. . . operates over 24,000 rentals through a holding company called FirstKey Homes. The company recently borrowed $ 2.5 billion against part of the real estate portfolio at a fixed rate of 1.99%, according to Kroll Bond Rating Agency.
If it is possible to borrow $ 2.5 billion at 2% fixed to finance rental housing, what will house prices do and what will they do if interest rates rise?
There are solid fundamental reasons why house prices are rising rapidly, but a strong smell of cheap currency and speculation looms in the market as well. I will continue to search for better data.
Email is no longer for cowards: telephone canvassing
With a touch of nostalgia, I read that Bank of America trainee brokers no longer be authorized to potential cold calling customers. In this age-old practice, ambitious young people on Wall Street call millions of complete strangers and ask them to buy stocks or bonds (see this scene of Boiler room, in which Giovanni Ribisi plays a “pinball machine” – a recruit who must immediately hand over the first contacts to a more experienced salesperson).
I’m nostalgic for cold calls only because I’ve never done them. So I spoke to two people who started doing it.
The first described his coldness calculations this way: he dialed 100 numbers so that someone spoke to him for more than 30 seconds. Out of 100 of those “real” conversations, 10 turned into leads, people he had real luck with. One in 10 leads turned into a sale. So: 1000 calls, one sale. These numbers have been robust over time. “It really, really worked,” he said. “It was remarkable that people give their money to someone they had never met.”
The downside, he said, was that cold calling gave a big advantage to wealthy kids, who could grab the phone book of the country club where they had grown up playing tennis (or whatever) and work their own. relationships. “It doesn’t give a damn about the kids without the networks,” he said.
The other former cold caller, who worked in a particularly bare shop, had a darker point of view (I took out an adjective that was repeated everywhere): “Psychologically, it is better not to cold call at all. . It’s hard. A lot of people tell you to go. Who is going to give you money on a cold call? It’s supposed to be about relationships. “
A good read
Paul krugman says the Fed is not monetize the national debt. I hope he is right, but I need to think more about it.