[COFFEE] Inflation, Interest Rates & Real Estate

[FIREstarter]

I don’t know if we should start a new thread or continue on this one. In general, I have a few questions about the options going forward (not directly related to real estate).

We currently see a high rise in inflation world-wide. I know there’s no consensus about if this is just a supply-chain shock or if we have a general problem. Central banks still treat it as a supply-chain shock for now.

What we have seen in the last years are huge increases money supply. Already after the financial crisis in 2007-09, and especially from March 2020. We have seen a race to the bottom in terms of interest rates of EUR, CHF and USD. If you check macroeconomic literature, the central banks should be able to fight inflation by raising interest rates again. That’s the theory according to books. Reality might look different.

Even considering that theory is true, there’s a catch 22. No central bank wants to raise the interest rates first, due to public debt. FED might be the first central bank who’s going to raise interest rates, but if they do this will have a huge impact on the stock market and other assets (real estate, crypto market). They already tried that after 2015 and it had an influence on the stock market.

My question: what’s the way out of this catch 22? Is there any way out?
@mods: might be a new thread, if no such thread exists yet.

@Cortana

Approx. 1/3 of all Swiss banks went bankrupt in the following years. People lost their homes and all their cash on the accounts and were left with nothing

I’m curious to hear more about this. Do you have some more links about 1/3 of Swiss banks going bankrupt? Also, did people who were customers of those banks lose the cash on those accounts, or was it the ones who had real estate? That’s an important one for me to know, because I don’t own real estate but I have accounts with different banks (both as a private person as well as with companies).

@Cortana

Nobody was worried because this time it’s different due to low availability of land and immigration (spoiler: this time wasn’t different either, it never is).

The quote “this time it’s different” is quite famous. In hindsight, we know it was not. One thing which is different this time is the negative interest rate for CHF. And SNB can’t simply raise the rates, unless it wants the CHF to appreciate even more. Back in the 80s and 90s, there were more national currencies than we have today. So the times are a little bit different.

I’m not a full-time economist, but at least I would expect SNB to try to keep interest rates as low as possible. Unless interest rates for USD and EUR also increase again, which would kill the idea of a central currency for EU (southern countries would go to default, bye bye Euro).

[Wolverine]

My understanding is that the ECB has signaled more hawkishness and the european markets should be preparing for it, though the ECB will not be at the point of raising rates before Q3 and they are actually still buying assets if I understand it correctly (central banks are so behind the curve on this one…): Lagarde: ECB Won't Raise Rates Until Bond Purchases Stop - YouTube (While the title is reflective of that part of the speech, the focus given in it is misleading if you ask me. My understanding of Lagarde’s speech is that the ECB is very likely to raise rates once the bond purchases end.)

The FED has started raising rates and has signaled a willingness to raise them more. Powell’s message is that they could be raised at every meeting and that a .5 raise at one or more meetings could happen. He signals the belief that the stock market has taken that into account and that the economy is strong enough to withstand it: Fed Chair Jerome Powell holds news conference after rate decision — 3/16/22 - YouTube

More importantly, overnight lending rates are just one factor of mortgage and commercial lending rates and these are still set by the market (which will become less distorted as central banks assets purchase programs come to a halt…). Mortgage rates in Switzerland seem to have already gone up slightly based on the data provided on this board. Swiss 10Y Confederacy bonds have currently a positive yield over .6% (blue line) despite the still negative SNB policy rate (green-brownish line): Swiss National Bank (SNB) - Current interest rates and exchange rates

I’d say it’s unlikely for the SNB policy rate to go up in the near future but the conditions are shifting. I wouldn’t take a bet yet on what the SNB’s stance will be one year from now.

[Bojack]

Thanks for your post, I’ll gladly speculate on the future of the interest rates and inflation

@FIREstarter

I know there’s no consensus about if this is just a supply-chain shock or if we have a general problem

What I’ve heard by some experts is that the World War 3 is already happening, in a sense. In the 70s/80s the Americans decided to promote capitalism in China and started investing there heavily. Due to the Americans being the policeman of the World, and thanks to the fall of the Soviet Union, we were able to focus on efficiency at the cost of robustness. This allowed us to reduce supply reserves, globalize the supply chain to cut costs. China was a big winner of this arrangement, but now the US has realized that if this trend continues, then China will threaten US supremacy in the future. So the Americans have decided to put a stop to it. It’s what Trump has started, and what is being continued now.

So the inflation is due to supply chain issues, but it can be that these issues are not temporary, as the US wants to depend less on China and everyone is trying to make themselves more independent and more robust, not to get strong-armed by another.

Interestingly, this situation might be what convinced Putin to invade Ukraine. He thought he has everyone by the balls. The EU needs Russian energy, the US and China need Russian minerals. He thought he will invade Ukraine in 3 days and nobody will do anything about it. Who knows, maybe that’s how it would end if his army was more effective.

[Bojack]

On a separate note, a friend of mine took a 1 million CHF mortgage loan last year. He said he expects inflation to come as a result of covid-driven money printing, so he took a 10y fixed-term loan for 1%. So far it looks like the events might unveil into his favor.

However, some experts say that in the long term they expect a strong deflationary pressure. One factor is technological improvement. If you can cheaply manufacture robots powered with AI, who can work and produce other things at very low cost, you create a very strong deflationary pressure. Just look at robotaxi. If a robotaxi undercuts a regular taxi, car ownership, a train or even a bus, you can afford to travel more for the same money. And this effect spills over to the rest of the economy. Another factor the economists mention is aging society. Older people save more money and invest it. The money velocity decreases. That’s why you can have negative interest rates and no inflation. Because old people don’t know what to do with their money.

[FIREstarter]

@Wolverine

ECB is very likely to raise rates once the bond purchases end

Question is: when will they stop? Anyone remembers Draghis’ “whatever it takes” speech in 2012? I think that’s when they open pandoras box and started to purchase bonds. Which hasn’t stopped until today, even though there were times when the economy was doing better.

@Wolverine

He signals the belief that the stock market has taken that into account and that the economy is strong enough to withstand it

The FED graphics you linked unfortunately only goes back until 2016, and they don’t have older data on their website. I would have to double-check again, but I think they lowered the rates again in 2015 after stock market showed signs of weakness because of raising interest rates. I think back then they also announced the same statement (the one you quoted from Powell).

@Wolverine

which will become less distorted as central banks assets purchase programs come to a halt…

The three dots are the big IF here. If FED stops purchasing bonds (and stocks - yes, officially they are not allowed to buy stocks, but they do it anyway), we will have a huge impact on the markets. Most of the strength we saw in the stock market after March 2020 was due to flooding the markets with money.

@Bojack

This allowed us to reduce supply reserves, globalize the supply chain to cut costs

I think the supply chain optimization didn’t start in the US only, but is a general theme overall. Just-in-time instead of putting material on stock.

@Bojack

China will threaten US supremacy in the future

China will anyway threaten US supremacy in the future. China is the biggest creditor for the US. They own billions of USD. A few years ago, they tried to get rid of it, but the US had them by their balls when prices for commodities like wheat and rice spiked. Then China did a 180 turn and stopped selling USD.

In general, China has a big advantage when it comes to tech. Try to find some electronic today which was not manufactured in China or has at least the majority of parts from China.

@Bojack

He said he expects inflation to come as a result of covid-driven money printing

We do have money-printing from 2009 already, but yes - after March 2020 we reached a new level of money-printing.

@Bojack

One factor is technological improvement. If you can cheaply manufacture robots powered with AI, who can work and produce other things at very low cost, you create a very strong deflationary pressure.

You sound much like Keynes here (back in the 1930s). His predictions were not fulfilled though.

@Bojack

Just look at robotaxi

I know you hold TSLA, but from my humble point of view we are still at least 10+ years from having robotaxis. Even if we had, I don’t think it would be cheaper. There would still be a need for buses for the masses, and robotaxis might be for the rich people who are able to afford it.

@Bojack

Another factor the economists mention is aging society. Older people save more money and invest it. The money velocity decreases.

This is something I would need to check. Not sure if money velocity is directly related with inflation.

[Bojack]

@FIREstarter

I think the supply chain optimization didn’t start in the US only

I’m saying JIT was enabled by Pax Americana. Duties get abolished, trade deals signed, you can plan ahead and do business globally without having to worry about politics. I’m afraid this kind of comfort could be gone.

@FIREstarter

China will anyway threaten US supremacy in the future

China’s clock is also ticking, their demographics is bad. So they have a time window in which they can threaten the US. The US still has a young and growing population, also thanks to immigration.

@FIREstarter

China is the biggest creditor for the US

Yeah some years ago we thought that China could put the US under pressure by selling US debt. But the Fed can just print USD into infinity. Also, if you owe a bank $10’000, it’s your problem. If you owe $10 billion, it’s the bank’s problem too.

@FIREstarter

In general, China has a big advantage when it comes to tech

One more thing I heard is that the Chinese bet hard on the economics of manufacturing real stuff, whereas the US are famous for digital & financial services. The Chinese bet that in the end it’s the former than really matters. One of the players in the West World who also believes in making stuff is Elon Musk. So let’s see if his companies can rival China.

[Bojack]

@FIREstarter

You sound much like Keynes here (back in the 1930s). His predictions were not fulfilled though.

If you want to insult me, this is the way I hate Keynesian Economics.
I guess JPY and CHF are quite deflationary, no? Negative interest rates since years, and still no inflation. If you turned off money printers (or never turned them on), I wonder what the exchange rate would be to the USD.

@FIREstarter

robotaxis might be for the rich people who are able to afford it

The cost will gradually go down. I don’t what the starting price per km will be, when it launches in Switzerland. Maybe 1 CHF/km, maybe less. But already at this point, car ownership for many people becomes a luxury. What I mean is, it is cheaper not to have a car, and a garage, and a parking spot, and pay insurance, and speed tickets, and tyre changes etc etc, just get the robotaxi. If your car costs you 6’000 CHF per year, that’s enough for 6’000 robotaxi km. Drop the price to 0.50 CHF, you can afford 12’000 km. There are almost 5 million passenger cars in Switzerland. This means that not only rich people have them.

@FIREstarter

Not sure if money velocity is directly related with inflation.

Monetarist Theory: Economic Theory of Money Supply

M * V = P * Q

If V goes down, while M & Q remain stable, P has to go down.

[Wolverine]

@FIREstarter

Question is: when will they stop?

My crystal ball is fuzzy. Lagarde says it will be (has been) assessed by the ECB in March, so we should know about the 2022 program shortly.

I had pointed to the wrong video, earlier, by the way, I wanted to point to the whole press conference: https://www.youtube.com/watch?v=yXHehAdOYkI

Edit: Sorry, I had a press conference lag. She pointed to Q3 2022 provided medium term inflation expectations don’t change, with the usual conditions that they’ll remain data dependent and will adapt to the situation. All seems very linked to inflation in her speech of the March 10 press conference: https://www.youtube.com/watch?v=qdQYkgS-SoE

@FIREstarter

The FED graphics you linked unfortunately only goes back until 2016

Federal Funds Effective Rate (which is, as I understand it, the rate at which banks lend to each other) has a broader displayed history:

I wasn’t paying much attention at the time and don’t remember interest rates moves in 2015, at any rate, they don’t show on the charts. 2015 was, for me, the year the SNB dropped the minimum exchange rate. I remember 2018, at the end of which the FED backed off of raising rates more and then, later, in 2019, started to bring them back down.

What’s different today, in my opinion, is twofold. First is the amount of liquidity available. The FED’s reverse repo operations are very high (the FED lends out securities to banks, who park their cash with them overnight), which means banks are sitting on cash. Taking that money out of the markets should be mostly painless. In comparison, 2018 is the time when the FED’s reverse repo operations bottomed near 0:

The other difference is inflation. Inflation is an important political risk. It’s easy to blame it on supply-side causes but in a country like the US, the previous FED and federal policies can also come into scrutiny, so pursuing expansionist monetary policies would carry some big political risks that it didn’t earlier.

@FIREstarter

If FED stops purchasing bonds

If we’re speaking of net assets purchases (that is, they aren’t increasing the assets positions on their balance sheet but can buy more bonds to replace the expiring ones), then they have stopped as of the end of February 2022. That was the prerequisite to the raising of rates, which is the next step (on which they have taken a fairly readable stance of “rates will go up steadily and may also do so more surprisingly”), together with a decrease of the balance sheet (on the timing or scale of which they haven’t taken any commitment).

@FIREstarter

(and stocks - yes, officially they are not allowed to buy stocks, but they do it anyway)

I need a citation on that. As far as I know, they have bought Treasury bonds/bills, munies, mortgage backed securities (basically, mortgages bought from banks, so private commercial institutions) and corporate bonds (which is a big subject of contention already). They haven’t crossed the stocks barrier yet and are not allowed to by law.

[FIREstarter]

@Bojack

I’m saying JIT was enabled by Pax Americana

Not sure if this is true from a historical point of view. We tend to think that globalization only started in 20th century, but it’s already older.

@Bojack

China’s clock is also ticking, their demographics is bad

They can always revert their one-child policy (yes, nowadays you can have two children if your first child was a girl). Agree with the time window though.

@Bojack

The Chinese bet that in the end it’s the former than really matters

I was indeed refering to tech in a manufacturing way, e.g. chips, phones, laptops etc.

@Bojack

If you want to insult me, this is the way I hate Keynesian Economics.

I don’t care about if someone likes Keynes or the Austrians more. I think all have some valid arguments, but also all of their theories have flaws.

@Bojack

I guess JPY and CHF are quite deflationary, no? Negative interest rates since years, and still no inflation

I think you have to see JPY and CHF in the bigger picture of things. If you remember one or two years back, Trump and the US was saying that the Swiss are currency manipulators. Which they are, to some extent. Look at how many US stocks SNB bought in the last years, to keep the conversion rate low.

@Bojack

What I mean is, it is cheaper not to have a car, and a garage, and a parking spot, and pay insurance, and speed tickets, and tyre changes etc etc, just get the robotaxi

That’s a valid point. If the price is really going to be 0.50CHF per km, more people might be using it. Still that would consider that people can actually calculate (not everyone is member of a FIRE forum ) and also that people wouldn’t care too much anymore about status symbols. Who owns a Tesla in here?

@Bojack

M * V = P * Q

If V goes down, while M & Q remain stable, P has to go down.

That’s the problem with theories. They assume perfect conditions, everything else equal. But indeed I would have to dig deeper again into Hayek & Co. and Keynes.

[Bojack]

@FIREstarter

They can always revert their one-child policy

They did that many years ago (edit: ok it was 2015). It’s too late. Their society is too old and too rich to have more kids.

[FIREstarter]

@Wolverine

I need a citation on that. As far as I know, they have bought Treasury bonds/bills, munies, mortgage backed securities (basically, mortgages bought from banks, so private commercial institutions) and corporate bonds (which is a big subject of contention already). They haven’t crossed the stocks barrier yet and are not allowed to by law.

Seems like you right. I was trying to find some citation for it, but couldn’t find it so far. FED pumps money into the repo market using reverse repos. So they are not directly pumping money into the stock market.
Will check further if I find something (I thought I remembered that I read it somewhere, but not sure how trustworthy that resource was - can’t find it anyway atm).

Thanks for updating the picture on the funds effective rate. Again, I read about spikes in 2015 somewhere. Man, I read too much stupid stuff during the day…

To whom it may concern: Project Syndicate about Arthur Burns and inflation in the 70s. There are quite a number of similarities to today.

[FIREstarter]

@Bojack

It’s too late. Their society is too old and too rich to have more kids.

That’s a bold projection, especially when it’s about a country with 1.4 billion people. I still think they are able to adjust. Also, I would have to check the age distribution in China.

You are right about the one-child policy. Just checked and indeed they stopped it in 2015. Man, I’m too old

[Wolverine]

Thanks for the Stephen Roach’s article. It puts things in good perspective.

I was feeling that way about the FED last year too but it seems they’ve realised that what may have started as a suply-side phenomenon is now enabling a price-wage spiral. Q1 earnings reports will be interesting, the last batch had a whole lot of “we have pricing power so are well positioned to face inflation”. In the mean time, the job market is very tight and employees also have negociating power to get inflation beating (or at least matching) raises. As inflation expectations go upward (which would be the real issue, rather than actual inflation), so would preemptive prices and wages increases, boosting it up further.

It feels to me that they’ve turned around and are now committed to regularly raising rates. They seem to have settled, as well as the ECB, for 2-3 years of high inflation and 1.5% rates won’t bring 8% inflation down but the plan seems to be to make do with it, spot when things start turning around and then stop raising rates.

Another viewpoint on central banks communication: I’ve just listened to the last press conference of Christine Lagarde linked in my previous post. Decisions are not taken by the chair, there’s a board of voting members who all get a say in them. Working with politicians, all the talk about “being data reliant” and having plans that may change based on medium term inflation outlook as well as her answer to one of the journalist looks to me like the board is divided on the topic and the only way they could reconcile it is by making it “data dependent” and inflation linked (as in, if inflation is at that level by then, we do that, and if it is at that level, then we do that). It’s probably the only way to get a consensus out of the lot and something they can communicate on without sounding schizophrenic. My take is we should not focus on it too much, the main viewpoint seems to support raising rates but they still need to make do with the vocal minorities who live in a different world (potentially has to do with sovereign debt servicing and different countries’ take on it).

[Cortana]

My GF is worried about the current interest rates development.

I’m I being naive in not worried at all? Japan is basically at 0% since 25 years. I expect the same from Switzerland. Don’t see the SNB going to positive rates ever again in the coming decades.

[FIREstarter]

@Cortana

Don’t see the SNB going to positive rates ever again in the coming decades

Let me get out my crystall ball… Just joking

I guess there are a lot of factors here: SNB trying to not let CHF get too strong, so they have to play the game of negative interest rates. If FED and ECB are starting to raise rates again (which would put southern european states at risk of default), then SNB might also raise their rates again.

Another aspect is the comment Wolverine made above:

More importantly, overnight lending rates are just one factor of mortgage and commercial lending rates and these are still set by the market (which will become less distorted as central banks assets purchase programs come to a halt…). Mortgage rates in Switzerland seem to have already gone up slightly based on the data provided on this board.

I don’t know about Switzerland (you have more insights into this one), but in Germany the rates for mortgages have been starting to go up again in the last 3-6 months. Not by huge amounts, but still.

[Cortana]

In summer 2021 you could have got 0.6-0.9% for a 10 year mortgage here. Now it’s around 1.6-2.0%. Interest rates for fixed-rate mortgages weren’t that high for 10+ years.

[Bojack]

@FIREstarter

especially when it’s about a country with 1.4 billion people. I still think they are able to adjust.

IMO you’re not being logical. What does it matter if the country is 1.4 billion or 1.4 million. Totally irrelevant when talking about growth rate.

Able to adjust? There is no evidence in history of any country reverting its negative birth rate trend. Btw it’s not just China, the problem is also present in Europe.

By current projections, the Chinese population will shrink by half by 2100, at which point they will have been overtaken by Nigeria

[FIREstarter]

@Bojack

By current projections, the Chinese population will shrink by half by 2100, at which point they will have been overtaken by Nigeria

“Prediction is very difficult, especially about the future”
We’re not even able to predict how the weather is going to be tomorrow (or take any other example of your choice), but they feel they can predict something which is going to happen in 80 years???

All those estimations are not better than anyone pretending to know the stocks which will be winners in 2022. What they are doing is extrapolating the current data, ceteris paribus, into the far future. That’s stupid beyong belief, from my humble point of view.

It would mean that China is not able to adapt for 80 years, that people in Nigeria will keep getting children like rabbits for 80 years etc. It’s not too long ago when we had a virus which nobody could have predicted.
What about wars, earthquakes etc? All not taken into account.

@Bojack

IMO you’re not being logical. What does it matter if the country is 1.4 billion or 1.4 million. Totally irrelevant when talking about growth rate.

For growth rate, it might not be as relevant how many people you already have, that’s true. Even though larger populations usually have smaller growth rates than smaller populations, if you look at it from a large scale (not only looking at humans).

Still, China has 1.4 billion people. You would have to check the age distribution to get a better feel (who’s able to work, who is retired already). Then also see how skilled are those people. Which is the overview about the NOW, not the future.

Your assumption is that the US will always have immigrants. That’s an if, not set in stone. At the moment, they can still lure people with high salaries and the “dishwasher to millionaire” story. If that story no longer holds true: bye bye growth in US.

@Bojack

There is no evidence in history of any country reverting its negative birth rate trend. Btw it’s not just China, the problem is also present in Europe.

That’s true, but it has more to do with increased standard of living and more options. If your country is poor, and people die by the dozen, of course you will have more children. If your country is more industrialized and you care more about money, you’ll think twice about having children or not.

If you connect growth rate just to the population growth, I think it’s too short-sighted. If that would be the case, the biggest growth would come from muslim countries most probably.

[Bojack]

@FIREstarter

they feel they can predict something which is going to happen in 80 years???

They have the example of Japan to see what can realistically happen in the next 30-50 years.

@FIREstarter

It would mean that China is not able to adapt for 80 years

How would China adapt? Implement a “minimum 2 children policy”?

@FIREstarter

What about wars, earthquakes etc?

I’m sure that would boost China’s population.

@FIREstarter

You would have to check the age distribution

Lol, you think the projections don’t take that into account? They know exactly how many people there are in which age, and how likely are they to have children. They know the economic projections and how it affects fertility. What do you think, that they take 1.4 billion and multiply by 99% each year?

@FIREstarter

If your country is poor, and people die by the dozen, of course you will have more children

“of course”. Actually, it is not that obvious what causes people to reproduce. One theory says that humans have many children, because most of them don’t survive infancy without modern medicine. Children are an insurance policy for old age. So is a pension fund. So countries with top healthcare and pension system de-incentivize people to have children.

@FIREstarter

If your country is more industrialized and you care more about money, you’ll think twice

Huh? I don’t get the logical connection again. Why should you care more about money in an industrialized country? You usually care about the stuff that’s lacking. Our lives are easier than 100 years ago, but we don’t take advantage of these modern amenities to have more kids. It’s a great mystery.

Why don’t I have kids? I ask myself this question, because maybe the answer lies there. Money? I guess I have enough to support a family. Maybe it’s convenience? Education? The awareness of how much your life changes when you have kids, and what the World has to offer as an alternative to being a parent.

[FIREstarter]

I’ll let you have your day with the 80 year prediction. If you think this holds true, fine with me.
I don’t think that someone is able to predict 80 years into the future.

I won’t discuss the China topic anymore: you have your opinion, I have mine. It’s not directly related to the initial topic anymore.

On a side note: using words like “lol” or “huh” and taking things out of context is not good practice. I understand that some of my words might have triggered you, but we can still discuss in a civilized way.