All Forum Posts by: Dan DiFilippo

@Scott Lepore pretty much all of the points being made here are very good. As a real estate agent, I tell my clients to forget about what all of the color and all of the noise in real estate. There are two variables (and kind of two more lesser variables) that it reduces down to. And these are the same variables observed in economics.

Every deal is a simple matter of net cash position and future cash-flow. In economics this is condensed into two concepts that are converses of one another. The future value of present money and the present value of future money. Present money is your net cash position in a deal and future money is its cash flow. The secondary variables to consider are risk and the value of your time/energy/peace. But I cannot stress enough the power of understanding interest rates. Which is what PVoFM and FVoPM are.

@Simon Obas unless they have rockstar credit and their income is somewhat guaranteed, don't do it.

 I'm not though.  I'm describing how debt commonly works.  Houses are a possibility, sure.  Again though, you need to keep in mind that the residential housing market is intrinsically boring.  It is not supposed to be exploding higher.  It's been permitted to partly because of term transformation and rate refinancing over years - all monetary expansion.  But the idea that a home has doubled in the period in which you are still seller financing it is pretty wild.  Unless it has been a very long time and you have also put a ton of money into it to maintain it.  And that's not to say that I don't believe you, but it is to say that the scenario you're citing is A) particularly to residential real estate, and B) mostly enabled by the expansionary monetary regime we've been under for a half century.  Your home is not itself worth that much.  Comparable houses have sold for that much.  A market can only sustain so many defaults, foreclosures, and sales before prices get borne down on.  Boomers created all of these beautiful upper-middle class suburbs nearby to the cities in which they worked.  But that's going to be changing as they go to retire and millennials wonder why they would pay top dollar for a house in San Mateo when they are still in student debt and their office building just went fully virtual so now they're looking at $300,000 listings in Madison, Wisconsin.

But really all of this is well outside of the main point.  Which is that we don't have debt creation to uphold the existing debt obligations.  This is reflected clearly in the dropping off of monetary velocity (down almost to 1.0 in M2).  Not sure if you want to say that is something simple that I'm making unnecessarily complicated.  Do you have anything to say about my obvious main points, instead of just trying to snipe off a very particularly and situational piece of the supporting evidence using anecdote?

Ad hominem is one of the most abused accusations in discussion, but you have almost nothing else to come at me with.  In 30 years of experience and having a standing lunch with a mortgage broker, you have very little understanding of finance.  That's fine.  I wouldn't expect you to.  You have the very common/basic understanding of monetary policy and that's it.  Let me know when you have an actual point.  I will address it.  Otherwise, you're being firmly dismissed as faking it.  I feel especially sorry for anyone on here who listens to you.

That's what you'd think, but it turns out not to be the case.  Because defaults aren't what caused the banking meltdown in 2008.  It was the creation of "money" via interbank lending, derivatives contracts, and financial insurance.  And I put money in quotes there because what I'm referring to is not money (nor bank reserves which are also not money), but eurodollars.  Or what are more commonly referred to as "shadow money" (and yes, eurodollar is a term used for offshore dollar deposits, but in the financial industry vernacular it refers to non-money that performs monetary functions).  In the case of the crisis in 2008, the liability sides of these eurodollars were called into question and created liquidity impairments.

The system is so leveraged that dollars aren't really what matter in these systems.  The debt instruments are more valuable and tend to function more as money.  If you know enough about the repurchase agreement market (and granted, not everyone does), you can understand eurodollars.  The summary on it is it's a market in which banks can functionally borrow against their Treasury's in order to meet their day to day liquidity needs.  And this can be done because of how perfectly liquid Treasury's are.  The crazy thing though is that Treasury's are worth more than their actual face value.  Because the par value of a Treasury (really any debt, but especially a Treasury because there's no risk premium) is some function of the time to maturity and the inverse of its rate.  As a result, Treasury's become more dear to banks than cash during times of crisis.  It's a means of hoarding liquidity.  In fact, it's not helping that the Federal Reserve is removing Treasury's from the system and replacing them with bank reserves.  Because the Treasury's act as the lubricant for the banking system.  The plane of liquidity upon which they transact, in many ways and even at the most basic levels.  Taking Treasury's out of the system hurts these banks' abilities to function and finance.  Those are what are needed.  Not bank reserves.  Bank reserves protect against default, but if the monetary system came crashing through, a $3T levy of bank reserves will not withstand $100T+ of dollar based debt (about $45T foreign and $55T domestic), plus all of the sovereign debt, plus all of the eurodollar system.  And recall, someone's debt is someone else's asset.  So if there is a default on a debt, bank reserves will be debited and the loss can be handled on that basis, but the asset itself is destroyed.

This is about the most advanced finance gets.  Most people who work in finance don't even know this stuff.  They just sit at one desk and move contracts between counterparties on one side of their computer and counterparties on the other side of their computer.

That's correct. You realize the banks actually have reserves on their balance sheets that aren't doing anything, right? They would be at the Federal Reserve if they were being lent on. Like the idea that you go straight to residential real estate as a gauge of economic activity is an extremely poor idea of monetary analysis. 30 year mortgages make fantastic debt instruments and contribute to a robust financial system, but they are very unexciting for a few reasons. The main ones being that they are 360 months long and they are extremely well collateralized. And this even permits them to have low interest rates, low volatility, and high liquidity premiums. And their installments are comparatively *diminutive* as a result of their longer terms. Again, these characteristics make residential mortgage an excellent monetary ballast, but ultimately a poor barometer of economic activity and read on money more broadly. You can get a better look at money by looking at business credit lines. Typically the larger ones, but an aggregation of smaller business credit lines will do as well. These are commonly lent out at somewhat higher interest rates and shorter terms. This means that the money creation is greater in its immediate volume. As long as businesses see a viable project to undertake, they will borrow money for some 12-60 months in order to complete their project. That is explosive monetary expansion that usually contributes to the economy in other ways too (job creation, product innovation, etc.). As long as this money creation is continual, we can assume a positive economic outlook. As it stands, however, the money multiplier has crashed down through the floor. Money is no longer being loaned into existence in order to finance ventures. You can look at monetary velocity and see just how low its gone this year.

Also, just looking at your data, I'm not sure what point you're trying to make. I'm not a California expert, but I'm seeing all markets with home prices that are above or well above national average. I'm not seeing any volume data in absolute terms, however.  And we know that pretty broadly, inventory has been in decline over the last few years (again, however, not a CA expert).  Just because you have a comparative increase in volume across counties doesn't necessarily mean that more money is being loaned into existence to finance these purchases.  Finally, you need to keep in mind that this is all in spite of the fact that the Federal Reserve did squeeze rate toothpaste out of the tube three times in 2019 in an exact attempt to stimulate lending broadly.  The reality of that though is that more and more recently, the only people it's supported are the people buying in these wealthy areas.

As far as lending goes, we are at the end of the largest monetary expansion in history.  It was a lot of fun over the last half century, but the contractions are due.  The debts have been being called on since 2007 and we've just been playing musical chairs of term and rate transformation since then.  Lower for longer has turned into lower forever.

So you still have managed to dodge almost every point I've made.  And I wish you were right about the definitions of economics, but you just aren't.  I'm just not sure what to tell you.  I think it's pretty clear that you just don't have any answers.  You had the very rudimentary understanding of Federal Reserve monetary operations.  And by the way, this is completely forgivable.  Most people don't understand how they work.  But again, you can feel free to address stretched equity valuations or the bond market (which is pretty much never wrong).  But you don't seem capable of doing any of that.  You're outmatched here, bro.

I kind of don't like to speak like this to you because you're 1) you're not actually that dumb, and 2) I'm starting to feel kind of bad for you.  But really I have to say you're quite confused here.  I'm a whole level over your head here.

First, as someone who has *literally studied* economics, let me tell you that micro economics is not "local economics".  Micro economics is the economics of an *individual* entity.  Think fundamentals, PnL, balance sheets, production frontier.  Typically a firm, although it can be a consumer.  Or even the US government.  The US government's cash-flow itself is a micro economic problem.  It's not necessarily intuitive, but it is something you learn in economics 101.  Macro economics is the study of the economics of broader economic systems comprised of multiple parties and how they find equilibria within and across markets.

Now regarding money printing, you took what I said, which was perfectly clear and makes sense, and you muddled it up with your terms that aren't *really* right.  The Federal Reserve doesn't issue liquidity.  It *credits* reserve accounts.  But they don't credit them with "money" or "liquidity" because bank reserves aren't money because they only function in an extremely limited capacity and they aren't really liquidity for pretty much the same reason.  Ironically (and this is an altogether higher level discussion), the Federal Reserve actually removes real liquidity (US Treasury's) from the system when it performs its monetary operations.  What you go on to describe here is the money-multiplier effect, or "monetary velocity".  And exactly how low monetary velocity is right now depends upon how you calculate the money supply because that's not widely agreed on.  But what we do know is that no matter which way you like to you calculate it, monetary velocity is tanking to all-time lows.  What you go on to sort of terribly and incoherently attempt to explain is that banks turn around and lend money out and therefore there is an increase in the money supply as a result.  But again, banks aren't lending and people aren't spending.  And primary dealers are sucking up every Treasury they can find even at less than 150bps of yield (this is hoarding liquidity).  Corporate revolvers have been drawn down on in hundreds of billions by firms just trying to weather the storm.  You suppose that there is economic lending because you speak to a mortgage broker.  I am thoroughly unimpressed.  Presumably he sticks to consumer residential, because that's about the only place any lending is occurring.  Commercial real estate, different story.  Anywhere else non-real estate, different story.  The only other exception is the government.

The reason that monetary policy isn't historically hyper-inflationary and front-loaded in its effects is because it essentially shaves the most competitive edge of the capital stack, puts a price premium on it, and advances the next round of bank reserves to be loaned out at lower interest rates.  It takes some time for the lending institutions to calibrate these expectations lower.  But as long as there is room to lower interest rates, then asset prices can be jawboned higher and new issuance can be lower and everyone can be forced to find the newly created monetary opportunity.  It works out that it's a bit of a thrown pass that the economy has to "run onto".  And if you want to see deflation over half a century, take a look at the historical chart for the 10 year yield.

And, yes, you would think that about inflation/deflation.  It's not really wrong, but it does ignore a bit of a reality.  Debt is the undefeated champion over all empires and it's what causes financial ruin over a long period of time.  Inflation is usually the response to a final breakdown.  Very commonly, of course, this inflation coincides with a war.  Which, because of economic fundamentals, the power will often lose.  So inflation tends not to be as visible as a result.

 What's interesting though is that the money mostly didn't go anywhere.  Because the banks aren't lending it out.  And when the Federal Reserve "prints money", it doesn't actually print money.  It prints base money - bank reserves.  But lending across the board fell.  I think home values broadly are going up for a number of systemic reasons, but that will change.  As some people have pointed out on this thread, the housing market should be looked at more regionally and even down to a sort of local basis.  Also, I had a thought about this that I mentioned in a different post somewhere, but if you think about it in terms of home appraisals, the market can turn very sharply and that will cause sales values to decline, but homes will still appraise highly given the lookback is 3-12 months depending on where you are.  Kind of wild.  The housing market is so incalculably megalithic that it takes years to fully reorient itself.

@James Hamling not specifically sure what any of that has to do with equity valuations, but hey, if you can't attack the arguments, you've gotta go ad hominem. I get it.