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Well, what happened in 2008? Stocks down 50%, housing down 30%. Buying housing was a better investment than stocks. But as both were down, simply holding cash w

Well, what happened in 2008? Stocks down 50%, housing down 30%. Buying housing was a better investment than stocks. But as both were down, simply holding cash was better. But that's only because the wealthy were hedging against a hyper-inflation scenario, and that scenario didn't occur. In fact you can see this hedging as a reason for the inflation in the first place. Even things like target date funds that need to have 10%(or some other number) bonds have this same issue. When the interest rate rises, the value of bonds gets wiped out. But target date funds need to have a set percentage, so all of these indexes rush INTO bonds at this moment. The more stocks are up in this moment, the more these passive investments are selling stocks and buying bonds. You can imagine that as stocks go up, the more stocks go up, wealthy money managers buy more and more homes in the exact same way they buy bonds. When they see that we might be about to hit an inflection point with stocks anticipated to go down, they should be selling stocks and buying whatever does better. In 2008, housing did better, so they'll probably do it even more with history on their side. Now that houses are up 30%, maybe they look for another investment. There it is, used cars. There it is, lumber, steel, oil. There it is, commodities futures. All with unprecedented demand, not from common folk, but the wealthy. Hedging against a stock market crash causes inflation, and inflation causes interest rate rises, which is a positive feedback loop that causes more hedging, which causes more rate rises until the common folk can not handle it, in which case the economy falls over. At the end of the day we get a recession, massive job loss, and the Fed resets the interest rate back to zero and they start selling their assets and re-buying stocks. Cycle starts again anew.

chii 4y ago
But how does purchasing assets by the wealthy (what you call hedging) produce inflation? Inflation can only be produced if the demands for goods and services cannot be met and the price rises as a result. Asset price increases are not inflation. A house's price going up is not inflation. Rent going up is. A house's rent is only indirectly related to the price of the house - there's a lot more that directly affect rents such as population growth or movement of people, changing preferences (some people might used to have house mates, but now prefer to live alone due to covid etc).
- ItsMonkk 4y ago
  Right, inflation is based on consumption. So home prices going up is not inflation, as homes are considered investments. So when Bill Gates becomes the world's largest private farm-owner and buys a billion dollars worth of farmland, there's no inflation there, or is there? Bill is in it for the short-term capital holding. He's going to do what he can to make as much money as he can, but if he thinks this is just a short-term flip, no need to build a full company around this, it's not worth it. He'll rent out what he can rent, find some sub-contractors to do what they can, and the harder to rent stuff just sits there. That's the problem here. He's one man, with many responsibilities, hoarding over what might be 4000 different lots worth $250k. He just doesn't have the attention to deal with that. So while normal farmland owners will use everything they have, now we have a bunch of land empty, and that empty land is pushing the supply demand curve of all farmland over. And that's just one man doing a one percent hedge. This same exact issue is happening in housing, and its happening at a scale much larger than a single billionaire. I bet there are thousands upon thousands of used cars just sitting in a field somewhere. There are legitimate business that need to ensure that they can get oil or steel or lumber or whatever else they need, and the futures markets are all insane because these investors know that the recession will hit before they need to buy, and everything else will drop in proportion to these commodities.
deleted 4y ago
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chii 4y ago

But how does purchasing assets by the wealthy (what you call hedging) produce inflation? Inflation can only be produced if the demands for goods and services cannot be met and the price rises as a result. Asset price increases are not inflation. A house's price going up is not inflation. Rent going up is. A house's rent is only indirectly related to the price of the house - there's a lot more that directly affect rents such as population growth or movement of people, changing preferences (some people might used to have house mates, but now prefer to live alone due to covid etc).

ItsMonkk 4y ago
Right, inflation is based on consumption. So home prices going up is not inflation, as homes are considered investments. So when Bill Gates becomes the world's largest private farm-owner and buys a billion dollars worth of farmland, there's no inflation there, or is there? Bill is in it for the short-term capital holding. He's going to do what he can to make as much money as he can, but if he thinks this is just a short-term flip, no need to build a full company around this, it's not worth it. He'll rent out what he can rent, find some sub-contractors to do what they can, and the harder to rent stuff just sits there. That's the problem here. He's one man, with many responsibilities, hoarding over what might be 4000 different lots worth $250k. He just doesn't have the attention to deal with that. So while normal farmland owners will use everything they have, now we have a bunch of land empty, and that empty land is pushing the supply demand curve of all farmland over. And that's just one man doing a one percent hedge. This same exact issue is happening in housing, and its happening at a scale much larger than a single billionaire. I bet there are thousands upon thousands of used cars just sitting in a field somewhere. There are legitimate business that need to ensure that they can get oil or steel or lumber or whatever else they need, and the futures markets are all insane because these investors know that the recession will hit before they need to buy, and everything else will drop in proportion to these commodities.

deleted 4y ago

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