Recession in 2019? The Great Recession 2.0
Hello All,
Is the second housing Armageddon coming in 2019/2020? If you think this, why?
Article from the Jesse Colombo at Forbes - Housing Bubble 2.0: America’s Housing Market Is Up 49% Since 2012
Since the dark days of the Great Recession in 2009, America has experienced one of the most powerful household wealth booms in its history. Household wealth has ballooned by approximately $46 trillion or 83% to an all-time high of $100.8 trillion. While most people welcome and applaud a wealth boom like this, my research shows that it is actually another dangerous bubble that is similar to the U.S. housing bubble of the mid-2000s. In this piece, I will explain why America’s wealth boom is artificial and heading for a devastating bust.
Do you think its possible to have a recession as bad as 2008? Can it be worse? Have we learned a damn thing since?
Share your thoughts!
I mean, the boom is almost certainly artificial. That's what happens when 70% of your economy comes from consumption and wages have not risen significantly. But you know, Trump is fixing everything and America is great again or something.
Everyone has debt not assets, but they don't notice it because they think they can afford more. Job availability is lowering while prices are sky rocketing and income is pretty stagnant. It is scary.
Everyone has debt not assets, but they don't notice it because they think they can afford more. Job availability is lowering while prices are sky rocketing and income is pretty stagnant. It is scary.
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I agree. People think things are hard because of the Fed, and apparently they’re making things more expensive somehow. But the number one factor hurting consumers is housing, which has been benefitting from record low borrowing costs.
And the Fed’s job is to inflate the prices of assets to push people out of conservative low risk assets. Wihout the Fed and with stagnant wages, I don’t see how we could’ve had a boom at all.
Either way, the thing that’s most clear is that even markets are starved for higher wages. But for some reason, companies won’t act and Trump thinks the only way to increase wages is to restrict movement of people, and limit labor supply in low paying jobs that nobody wants.
I cover the for sale housing market. Inventory levels are FAR below historical norms and builders have focused on smaller projects for several reasons. One is reducing land exposure (you have to jump in with two feet on big projects with 1,000s of lots) and two is reducing lawsuits.
Specifically, the boom towns tend to be on either coast as well as cheap states like Texas. Generally, these overbuilt markets are tough to develop in (except Texas)and have a lot of NIMBYs which really makes it difficult to get projects going. On the coasts, the jobs to new permit ratios are like 3-4 to 1. So new jobs for every one new house. That's going to create a lot of roommate situations and some net outward migration in these states.
As a result, housing supply relative to demand is very low which has driven up prices in near-unaffordable levels. In my market in California, roughly 13% of households could afford a home assuming they had a 20% down payment just sitting around. So the real number is like 5%.
The most bubbly stocks are obviously tech stocks. Just think for a second, Wells Fargo (or any other large financial institution) is trading near 10 P/E offering a 4% dividend yield, which is high. The company is worth around $215B and consistently makes around $22B or so a year in net income. Amazon is worth $1.8T and makes $10B a year. I know they're apples to oranges, but the disparity in certain asset classes is getting untenable.
I think you'll see pain in places like Seattle, San Francisco, Denver and (gasp!) NYC. Miami is always boom and bust as is Phoenix to some degree.
I hope there's a recession relatively soon. Pretty sick of these multiples. Even on the early stage side...finding deals not bid up by autistic VCs is a PITA.
Wall Street's commentary on housing is always entertaining. The issue is permitting and NIMBY activism in the cities that are the most desirable to live in. It takes FOREVER to get a run-of-the-mill apartment project approved in blue states that have a high quality of life (CA, MA, NY, etc..), thus driving up asset prices and making it impossible to build affordable homes or apartments. Also, in most wealthy cities, it's near-impossible to build enough luxury homes at one time to overbuild to the point of driving down asset prices for the rest of the market; there's just not enough land and the density restrictions are crippling.
So, yes, housing prices have skyrocketed since the bottom of the worst recession since the Great Depression. However, that's not a surprise to anyone with even a cursory understanding of urban economics. I mean, how many people often think about Zipf's law and positive feedback loops driven by economies of agglomeration?
The housing issue needs to be solved at the regulatory level-- by reducing regulation. You can't tell developers they can't build and simultaneously be upset about how much your housing costs. Oh wait, the truth is no one is upset about their home value skyrocketing due to regulation and activism until they have to move somewhere more expensive than where they currently live, i.e., very infrequently. Ever wonder why it's cheaper to rent and buy down South? Lots of land and fewer regulatory hoops to jump through for developers (labor is also cheaper, admittedly).
Regarding the rest of the article, I read it and it's mostly surface-level commentary. He waited until the very end to discuss wealth inequality, which I believe to be a major factor in asset prices today. You see it manifest in everything from stock prices to stainless-steel watch prices.
In his article, the author neither asked nor answered a key question: what happens after the Fed raises interest rates to a point at which the market turns bearish? Couldn't they just reduce interest rates and implement QE once again? It may not have the same effect, sure, but how do we know the next economic recession will be as bad as the previous recession? This probably won't work forever for the next 50 years, but why is now the time it won't work?
I think a lot of this comes down to economic inequality. Fact is, the vast majority of wealthy people have very few options in which to invest their capital. "But multiples of great tech companies are so high!" Yeah, man, it's acceptable when you literally have no where else to stash your millions without spending all your free time searching for a deal. It's not like the middle class has the ability to say, "Oh stocks are way too expensive we are going to pull out of the market for a bit." They don't even have the money to be in the market. And then these massive corporations with insane amounts of capital on their books just keep repurchasing stock to drive values higher.
Yes, it does sound unsustainable, and it probably is. But why? And what will be the catalyst? If you can't answer a "why?" at a deeper level than interpreting some basic graphs, then I don't think you should be writing commentary on Forbes (but who am I to judge; plus I've always hated Forbes). Lastly, this guy has a website to help coach people to make money during the next crash. Sounds legit, fam.
Btw, despite the high asset prices, I really don't want there to be another crash any time soon. I think too many young people on this forum discount the negative impact that situation could have on society due to where we are at politically. Last thing we need is a big crash right before an election that will likely pit a quasi-socialist against Donald Trump. Maybe I'm overestimating the probability that this could send society down a bad road, but even if I am, I think it's one of those things where if it's 1 in 1,000, the negative impact will be so bad that we really want to avoid it at all costs.
TLDR: Anyone can copy and paste a bunch of graphs. Come at me ColomBro.
Great Analysis!
As for your commentary on young people underestimating the effects I could not agree more.
Also, definitely worth mentioning that he has his own coaching site......... a bit convenient.
Anyhow while I am not a trump fan at all, the last thing we need is another proclaimed socialist.
As for rent being cheaper in the south, there are a lot more factors in my opinion then being red states, but nonetheless the regulations are a shit show in the cities you mentioned. That is definitely a contributor for blue states.
Of course we want to avoid it all costs, but what levers are left to pull? Equities and real estate appreciation has been completely driven by cost of debt. The Fed is already backing off further rate increases inferring that Fed Funds target rate will stay around 2.5%. The truth is that the Federal Reserve is well aware that an American economy with record corporate, automobile, margin, and credit debt cannot stomach major rate rises even though we are coming off of unforeseen record lows.
Ever wonder why it's cheaper to rent and buy down South? Lots of land and fewer regulatory hoops to jump through for developers (labor is also cheaper, admittedly).
I think your post understates how much harder it is to deal with zoning/regs in a place like NYC versus some middle of nowhere town in the south with 28 people and a donkey as residents.
You also skipped over the fact that nobody really wants to live in the south. Compare the level of opportunity available in a place like SF/NYC...you can't. Look @ what a HUGE chunk of VC money goes to companies in the bay area/SF alone.
really? I know you're not this ignorant, cmon man
I've written on this topic pretty extensively, all I'll say is you can always find the usual suspects no matter the market environment
here's the thing though: none of these jackaloons ever post their track record. I don't give a fuck what you think unless you tell me how you've performed. I can make a strong case for bullishness, bearishness, despondency, or irrational exuberance, but unless I back it up with how I'm investing in it (and have been correct a reasonable amount of the time), my opinion is like my asshole, my wife likes it but it still stinks and is of little value to society.
if you let one article define your view on the housing market, it's like being at the poker table for 30 minutes and not knowing who the sucker is...it's you homie. not saying you (OP) are doing that, but this is a dangerous thing that we (as people, not WSOers) do, take everything at face value. who's the source? what else has jesse colombo written? has he always been bearish on housing? does he have a vested interest in housing collapsing? does he always write about the wealth gap? are there any experts who agree with him and have a good track record?
You are ignoring people with very legitimate track records like Jeffery Gundlach, Ray Dalio, and Bill Gross who are seriously concerned about the future of the economy due to record levels of debt. Ray Dalio's "Big Debt Crises" (I am reading currently) presents a scary look at the data behind past debt cycles and how we are increasingly seeing signals that the end of the long cycle is near.
bill gross is a great example, because he has made public comments many many times before, but he's been wrong on stocks nearly all the time.
article from 2012: https://www.pimco.com/en-us/insights/economic-and-market-commentary/inv…
within, he predicted that high yielding companies and gold were good plays (gold was at $1550). and said stocks should return 2-5%.
as far as gundlach is concerned, he said sell everything in september 2016, about 8-900 S&P points ago: https://www.cnbc.com/2016/08/01/sell-everything-doublelines-gundlach-sa…
dalio? well his track record certainly speaks for itself, but since his performance isn't public knowledge I have to plead ignorance.
gross, gundlach, and others are near gods in the bond world, but they approach the stock market through the lens of the fixed income world, and that has caused them to be overly bearish at times when investors should be buying.
my point is this, while they've been right (gross & gundlach, don't know enough about dalio's comments on stocks and subsequent performance to judge) on the bond market, I'm ignoring them for their comments on the stock market. my views on global debt are completely independent of my portfolio. I agree with you: this country's debt and deficit are the #1 issue I would like to see washington solve and it's despicable to see us spend money like a spoiled college student who just got his tax return.
HOWEVER, if I own shares of MSFT (or pick any quality company) and they self fund, have diverse sources of revenue, and a growing business, what the fuck does a debt crisis have to do with their earning power? too often, people conflate their worries about the economy with their underlying holdings. if we see a recession, will my portfolio go down? well yeah, just like everyone's, but will they go out of business? if I've done my homework well, I'll be just fine. moreover, if I own multinationals, a devaluation of our currency could actually be good.
the other scenario is one where the debt just poisons the entire well, we go back to the stone age, and the only valuable assets are gold, guns, and land, in which case most of us are fucked anyway.
EDIT: @Iguler" thanks for clarifying, just wanted to be sure you didn't drink the permabear kool aid
All I want to know is when the whole goddamn market is going on sale again. My numbers originally pointed to end of 2018 but that pullback this time last year I think staved it off. Now the chatter from the executives is H2 2019.
On a side note, with rates effectively near/approaching zero (especially if cut) and the balance sheet at holy-fuck-ton-bazillion dollars.....what exactly does everyone think the game plan for recovering from the next recession will be? And I'm asking this earnestly, not rhetorically, because aside from the obvious political/social upheaval path, I'm curious what anyone thinks is a viable alternative. Either that or open the borders, raise taxes, and go full steam ahead with national infrastructure reinvestment. (and don't shit yourself, we heard "it can't happen again almost immediately after 1999 and now asset prices are 2x the levels in 2008).
Open ended question: what the f*** happens when this current delusion wears off?
you and I have had some spirited banter in the past. I have a feeling you and I agree on more than our post history would indicate (national debt & deficits, artificially cheap money, etc.), and what I'll reiterate is debt cycles and corporate earnings are not one and the same. there are plenty of companies out there growing cash flows with stable business models, just do some under the hood looking and you'll find em. you may not get the "sale" you're looking for this year, on average markets tend to return >25% after a quarter like Q4 2018.
I'd love 25% Q1 2019 gains on the S&P500/DOW. Those things are easy: just buy in while it's going up and have an itchy trigger finger around earnings time. I don't even have time for that so I'm in cash at the moment: I sold out of some positions that were up hundreds of percent since 2009 so I'm not sweating a few points. Me personally, I'd have liked to see tightening starting in 2014/5, it would bring market prices in line with historical valuation metrics. (as in, I don't care what gimmicky chart CNN Money produces cheering on the 'rally'; every goddamn thing is overpriced, especially tech, and everyone is over leveraged..
What I'm looking at is the cyclical interest rate apocalypse, which is inevitable. Higher corporate earnings and FED rates low (to facilitate 2020 elections) only push said apocalypse out. The more time passes, the worse these things tend to be, especially considering high market prices driven by easy money are so far above levels ever seen before: what happens when the gravy train stops?
Can't lower rates, can't add more to the balance sheet, absolutely won't alter political course....other means of getting america moving again will be needed. And I have no worry that is when the desperately needed structural reforms will come (spending reevaluation, infrastructure plan, etc). My concern is how much damage it does before, during, and after. I think people really discount how ugly things got in the era right after the Gilded Age...strikes, wars, famine, etc. There's no way to calculate the risk, so it becomes an uncertainty. An expected uncertainty essentially making long term planning perhaps not worth the risk for a while.
So what I'm getting at is seeing something like that on the horizon....it makes me pause to make large investments like rental properties, construction projects, and even purchasing alternative investments with long lockup periods. On the corporate side, despite announcements day and night of bringing all sorts of jobs all over the place, there's a pause in planning. That's the part where I'm concerned.
I have yet to see any answer of what happens in 2021 or 2023, or 2025 when the rates cycle finally catches up with us. No one even wants to entertain the idea. They simply want to run up the prices as high as they can and then drop the hot potato.
How about the housing market too? I don't understand who is buying all of these new $400-600k homes in North Dallas when the median household income is $60-70k...
Literal answer: almost-sophisticated people who can't really afford them, made low down payments, and assume the economy will continue steaming ahead ....without disruption.... forever.
Yes-- prices will rise, but if you think that a market collapse is going to happen because prices have risen, you may be in for a big surprise.
Edit: mildly surprised by how many professionals here are completely illiterate on interest rates and debt.
Nominal interest rates are comprised of real rates, expected inflation, and risk premia. Real rates compensate an investor for the time value of money--which is determined by long-run productivity growth, population growth, and capital (Solow-Swan anyone?). Real rates are global, and the variance between real rates of individual countries can be described as the difference in economic performance. For the second part, expected inflation is really the market view on expected financial conditions (increase or decrease in money supply). Risk premia is the return an asset generates above the risk-free rate (think: CAPM & SML). All of these can be measured and tracked and your actions as an investor impact them.
For example, if you think that markets are overpriced and that a crisis is going to happen, then you will shift money out of risky assets and buy (or prefer) risk-free ones (cash, short-term sovereigns, etc.). By doing this, you are depressing the yields on bonds (by pushing up the price) within the range of tenors (or years) you feel a crises will occur through. By doing this, you are part of the reason why the yield curve inverts and interest rates stay low. If you're a true contrarian and think that interest rates will rise, then you're betting on a huge upswing in the market (where the perceived opportunity cost drives up real rates) and/or easy financial conditions (monetary expansion).
So if you think rates are artificially low, then I regret to inform you that you do not know what you are talking about.