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I’m not sure I agree with you here. Average Joe has been investing in houses just as eagerly as Rich Ralph. The difference is that Average Joe will be brought t

by ttul 5y ago

I’m not sure I agree with you here. Average Joe has been investing in houses just as eagerly as Rich Ralph. The difference is that Average Joe will be brought to his knees if house prices should fall. Rich Ralph will still be rich, just a little less so. I think that in the fullness of time, it will be seen that today’s high asset prices were directly and unambiguously a consequence of extremely low interest rates and the creation of money by central banks and nothing more than that. When returns on lending are low, investors have to switch to riskier asset classes in order to generate the returns that they need to service their future cash flow requirements. For example, pension funds have to generate a certain amount of cash flow to cover their future pension liabilities, which are fixed and unchangeable. When central banks make money cheaper by lowering interest rates, pension funds have to shift to classes of assets that generate higher cash flow, even if that means taking on more risk. They don’t really have a choice in the matter. There is a positive feedback loop here. Low interest rates cause large investors like pension funds to shift to riskier assets. This stimulates the risk appetite of retail investors, who pile in when they see the trend of increasing prices in these riskier assets, such as stocks and houses. The increase in asset prices reduces the effective returns on those assets, forcing pension funds another large investors to shift to even riskier things, like venture capital. Rinse and repeat. I suppose nobody can say for sure that there hasn’t been some kind of long-term shift in global economic growth because of changes in technology, but it sure seems to me like cheap money is a more reasonable explanation for all of the craziness we have been seeing in the past year or two.

anigbrowl 5y ago
Average Joe will be brought to his knees if house prices should fall I'm not so sure - it depends on how heavily leveraged buyers are and what % of them have used price increases to secure more capital. If your home has significantly appreciated in value but you haven't taken equity out of it, it could be said that you were leaving money on the table but only if you knew of a better investing opportunity. If you just let the property appreciate and didn't securitize that gain, a decline from peak values doesn't hurt because you have no loan to service.
- dillondoyle 5y ago
  I had the same thought but would add there aren't many variable interest rate home loans anymore? If any? This source [1] also says HELOCS or 2nd mortgages are only 8% of owners, 1/2 of what they were in 2009. But that was 2018 maybe pandemic upped the %. So to get another 2007 meltdown this thesis would be that a lot of people would have to lose their jobs first. Interest rates going up wouldn't matter if they make the same (or more) money. But could argue collapsing real estate values would cause weak job market. [https://www.socialexplorer.com/blog/post/once-viewed-as-easy-cash-source-second-mortgage-market-collapsed-over-decade-10289 https://www.socialexplorer.com/blog/post/once-viewed-as-easy...]
- nwatson 5y ago
  But all the savvier investors will sell the inflated assets at higher prices before the dip/fall and go on to use their increased capital to over-inflate the next hot asset class to the detriment of the average Joe.
dnautics 5y ago
You're not thinking far enough. Of asset prices crater, then we'll have an acute deflationary shock, which will prompt the fed to inflate, and that is what will screw the poor.
- Panzer04 5y ago
  Inflation screws the rich, not the poor. Statistically, the wealthy have way more cash than the poor, while the wage-earning population will get increased income along with inflation.
  - xwdv 5y ago
    No it doesn’t, most of the wealthy do not keep large sums of cash on hand, it’s invested in other assets that grow with inflation.
    - deleted 5y ago
      [deleted]
    - dnautics 5y ago
      The wealthy are also the hands into which the printed money goes, and it also makes the real cost of leveraged investments lower. Triple threat!
    - imtringued 5y ago
      Most of them keep 10% of their portfolios in cash or treasury bonds.
      - rsj_hn 5y ago
        When inflation is low, yes. But as inflation goes up, interest rates will increase to fight it while at the same time, households reallocate their wealth.
  - dnautics 5y ago
    > will get increased income along with inflation. By magical means of course. Inflation is a sneaky way to give the poor a wage cut. How else do you suppose the fed is supposed to be able to increase employment using inflation? Edit: down voted, ok here is a citation from an economics Nobel laureate: https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/ https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi... > when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation would lead to lower unemployment By its very nature, giving laborers inflation-matching pay raises counters the explicit, intended policy effect of using inflation to increase employment. Or, your employment model could be relying on "let's use increasing prices to light a fire under people's asses to get them to look for jobs". Which, if you ask me, as a neoliberal programme is far crueler, far more pernicious, than any slash-public-services scheme that fiscal conservatives dream up.
cool_dude85 5y ago
I think you have pension funds exactly backwards. They are typically managed with the goal of reaching their assumed rates of return at minimal risk. With performance so far above assumed returns, if anything pension funds can afford to take on less risky assets and still meet their goals.
- MatteoFrigo 5y ago
  This was in the news recently: CalPERS (a giant pension fund of California state employees) is going to add risk in the form of 5% leverage. See https://www.pionline.com/pension-funds/calpers-adds-5-leverage-entire-portfolio https://www.pionline.com/pension-funds/calpers-adds-5-levera...

by ttul 5y ago

anigbrowl 5y ago

Average Joe will be brought to his knees if house prices should fall I'm not so sure - it depends on how heavily leveraged buyers are and what % of them have used price increases to secure more capital. If your home has significantly appreciated in value but you haven't taken equity out of it, it could be said that you were leaving money on the table but only if you knew of a better investing opportunity. If you just let the property appreciate and didn't securitize that gain, a decline from peak values doesn't hurt because you have no loan to service.

dillondoyle 5y ago
I had the same thought but would add there aren't many variable interest rate home loans anymore? If any? This source [1] also says HELOCS or 2nd mortgages are only 8% of owners, 1/2 of what they were in 2009. But that was 2018 maybe pandemic upped the %. So to get another 2007 meltdown this thesis would be that a lot of people would have to lose their jobs first. Interest rates going up wouldn't matter if they make the same (or more) money. But could argue collapsing real estate values would cause weak job market. [https://www.socialexplorer.com/blog/post/once-viewed-as-easy-cash-source-second-mortgage-market-collapsed-over-decade-10289 https://www.socialexplorer.com/blog/post/once-viewed-as-easy...]
nwatson 5y ago
But all the savvier investors will sell the inflated assets at higher prices before the dip/fall and go on to use their increased capital to over-inflate the next hot asset class to the detriment of the average Joe.

dnautics 5y ago

You're not thinking far enough. Of asset prices crater, then we'll have an acute deflationary shock, which will prompt the fed to inflate, and that is what will screw the poor.

Panzer04 5y ago
Inflation screws the rich, not the poor. Statistically, the wealthy have way more cash than the poor, while the wage-earning population will get increased income along with inflation.
- xwdv 5y ago
  No it doesn’t, most of the wealthy do not keep large sums of cash on hand, it’s invested in other assets that grow with inflation.
  - deleted 5y ago
    [deleted]
  - dnautics 5y ago
    The wealthy are also the hands into which the printed money goes, and it also makes the real cost of leveraged investments lower. Triple threat!
  - imtringued 5y ago
    Most of them keep 10% of their portfolios in cash or treasury bonds.
    - rsj_hn 5y ago
      When inflation is low, yes. But as inflation goes up, interest rates will increase to fight it while at the same time, households reallocate their wealth.
- dnautics 5y ago
  > will get increased income along with inflation. By magical means of course. Inflation is a sneaky way to give the poor a wage cut. How else do you suppose the fed is supposed to be able to increase employment using inflation? Edit: down voted, ok here is a citation from an economics Nobel laureate: https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/ https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi... > when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation would lead to lower unemployment By its very nature, giving laborers inflation-matching pay raises counters the explicit, intended policy effect of using inflation to increase employment. Or, your employment model could be relying on "let's use increasing prices to light a fire under people's asses to get them to look for jobs". Which, if you ask me, as a neoliberal programme is far crueler, far more pernicious, than any slash-public-services scheme that fiscal conservatives dream up.

cool_dude85 5y ago

I think you have pension funds exactly backwards. They are typically managed with the goal of reaching their assumed rates of return at minimal risk. With performance so far above assumed returns, if anything pension funds can afford to take on less risky assets and still meet their goals.

MatteoFrigo 5y ago
This was in the news recently: CalPERS (a giant pension fund of California state employees) is going to add risk in the form of 5% leverage. See https://www.pionline.com/pension-funds/calpers-adds-5-leverage-entire-portfolio https://www.pionline.com/pension-funds/calpers-adds-5-levera...