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Economics

IMF Warns Of Significant Downside In Home Prices Worldwide

 …The International Monetary Fund (IMF) warned this week in its regular Financial Stability Report that global home prices are now stretched. Stimulus…

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This article was originally published by Munknee

 …The International Monetary Fund (IMF) warned this week in its regular Financial Stability Report that global home prices are now stretched. Stimulus policies backstopped the market, creating moral hazards. Buyers now have a “can’t lose” feeling, pushing them to pay risky premiums for property. As a result, the agency now sees a significant downside in a worst-case scenario. Their model shows the worst-case scenario has double the downside compared to pre-pandemic.

Home Prices Have Been Soaring Across The World

Home prices across the globe have been rising during the recession, which is odd, to say the least. They found soaring home prices and record sales in advanced and emerging economies. The agency attributes this to supply asymmetries, low rates, and rising disposable income. These factors have combined to drive demand (and prices!) much higher.

Typically housing correction risks are due to loose lending, and a recessionary shock. They say this isn’t the case this time. Banks are in a much better position than they were during the Global Financial Crisis in 2008. Forbearance policies have also pushed delinquencies lower, skewing price growth to the upside. This gave homeowners a significant equity windfall, sometimes exceeding their household income.

Rapidly Rising Home Prices Across The Globe IS The Risk

Rapidly rising home prices and lofty gains are the risks. A boost to home equity gives some people a cushion to weather a storm, but also a euphoric high. Lenders eliminating the risk of default and high price growth created moral hazards. The thinking has shifted to, “if they can backstop prices now, they’ll always do it!”

The IMF warns this moral hazard is creating a risk of people believing any price is justified. “Sustained periods of rapid growth in house prices can create the expectation that such prices will continue to rise in the future, potentially leading to excessive risk-taking and rising vulnerabilities in housing markets,” wrote the agency. 

People now think the risk of paying more later will always be greater than the risk of losing. This can lead to paying premiums that don’t make sense in practical terms. This can get out of hand pretty fast.

Global Home Prices Have “Significant” Downside Risk Now

Just how bad is the downside risk? “Significant,” said the agency when discussing its worst-case scenarios. In the latest report, the IMF said advanced economies can see a 14% drop in prices on average (rolling back 17% of gains). This is up from the 6% drop in the worst-case scenario pre-pandemic. The timeline for the bottom would be three years after the peak.

Downside Risks For Home Prices In Advanced Economies Rises

The current probability density of home price movements in advanced economies, compared to pre-pandemic risk.

Source: The IMF.  

The IMF elaborated, the downside risk is relative to the country’s fundamental misalignment. Countries with a low disconnect from fundamentals would see smaller declines, if any. Those with large disconnects would be overrepresented, and see greater drops. One also assumes the effectiveness of policy support plays a role. An inefficient market can only be extended so long before it spills over into other issues.

Market Inefficiencies May Begin To Spill Over And Undermine The Recovery

Speaking of market inefficiencies, why can’t they just prop up prices to infinity? Well, another risk stated in the IMF report is the impact on inflation. If high home prices trickle into rents, this drives inflation higher. Shelter costs are the largest component of the inflation basket. Everyone needs shelter, including all of the producers and service people. As their costs rise, so do the input costs of goods and services.

The higher cost of living, especially inflation not captured by CPI, becomes a big drag. As the cost of living rises, more capital is diverted from spending into essentials. Since one person’s spending is another person’s income, it can undermine recovery. A slower recovery (or double-dip recession) would end up impacting home prices anyway.

Remember, global home prices are rising, but not to the same extent everywhere. Canada and Germany’s home prices made much sharper gains than other G7 countries…

Editor’s Note:  The original post by Stephen Punwasi has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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Economics

Perfect Time To Review What Is, And What Is Not, Inflation (and why it matters so much)

It is costing more to live and be, so naturally people are looking for who it is they need to blame. Maybe figure out some way to stop it. You know and…

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It is costing more to live and be, so naturally people are looking for who it is they need to blame. Maybe figure out some way to stop it. You know and feel for the basics since everyone’s perceptions begin with costs of just living. This is what makes the subject of inflation so difficult, even more so in the era of QE.

Money printing, duh.

By clarifying the situation – demonstrating over and over how there is no money printing therefore there can’t be inflation – we aren’t saying that prices aren’t rising. They obviously are. But by dispassionately analyzing the situation given its clear lack of any monetary basis, what we are doing is pointing out what instead must be responsible for driving costs of living higher.

And what that means for the future.

If it isn’t money – it’s not – then that changes the entire macro picture. These price pressures should be temporary given what’s not actually behind them. They are already proving to be as another monthly CPI rolls in and quite predictably it’s nothing like those from earlier in the year (only a few months ago).



The annual rates of change are similar, though monthly rates have diminished back to the disinflationary paces of the pre-COVID period. And even the annuals are topped out, many of the indices peaking back around April and May, June at the latest.

The BLS today said the overall CPI gained 5.39% (unadjusted) in September 2021 when compared to September 2020. A small bit faster than August’s 5.25% with oil prices moving higher, yet equal to June’s likewise 5.39% and not that much different from May’s 4.99%. No more huge acceleration.

The core rate increased by “only” 4.03% year-over-year last month, just a touch quicker than the 4.00% in August yet down from June’s high of 4.37%. The monthly changes better display just how this really is establishing “transitory” (below).



Outside of goods, these consumer price bulges – Emil’s two-humped camel – are even more clearly defined (above). As the frenzy of consumer buying in especially durable goods fades further, the downward influence from the service sector which never really got going at any point along the way is what rises. Services point to even more serious weakness, therefore deflationary tendencies and ongoing potential, than when the last recession process began (in 2019, not 2020).

All of this in sharp contrast with five decades ago.

The Great Inflation was relentless, and it was everywhere. Start with gasoline prices, one of the key substances of the seventies which everyone who lived through it remembers only too well. While pump prices today are higher when compared to the past few years, they are actually significantly lower over the longer run (thanks to the opposite of money printing).



Up more than 40% from last September, which everyone notices straight away, yet 12% less than the last time the Federal Reserve began to taper its (irrelevant, not money printing) QE back at the end of 2013.

And the reason for the intermittent cost savings? Energy prices are highly susceptible to these repeated (euro)dollar shortages which don’t just interrupt otherwise inflationary conditions, they end them before they can ever get started.

So, the good news moving forward is, if the dollar and much of recent data is correct, energy prices (which lag) might not be upward bound for much longer. The bad news is when energy prices fall, though we may pay less for gasoline when they do, it’s because the global economy, US, too, goes back in the toilet.

Compare this sporadic energy “inflation” with actual monetary inflation like that of the Great Inflation during the 1970’s:



While oil supply factors grab everyone’s attention for having elevated crude prices the most, even in between those two famous episodes the cost consumers paid was almost a straight line higher. From November 1974, the bottom of a very nasty recession, until February 1979 when Iran’s oil was removed from supply due to the Islamist takeover, motor fuel prices in between gained a nearly steady 7% annually.

But what really made the Great Inflation “great” was that it wasn’t just oil or food. This is why we scrutinize “core” rates of inflation closely. Yes, gasoline and beef go up, those alone don’t make inflation. When the money is overflowing, all of it goes up and keeps going.

Therefore, when the core rate shifts, too, that’s when we know it’s more serious and thus maybe has that legendary money printing behind it. Note: while there really had been a boatload of money printed during the seventies, it wasn’t the Fed.

Because of this, everything goes up, core included, and it goes up year after year. No breaks. No pauses. No reversals. Nowhere to hide (for consumers). The charts below are a perfect set of illustrations of what I mean:


OK, people have finally conceded the last time, aftermath of 2008, didn’t ignite an inflationary surge like “all” the Fed’s more famous critics had proclaimed. This time, though, it’s different; many are now arguing Great Inflation 2.0 began only last year (2020) given both the insane rates of QE as well as the even more insane levels of federal government deposit helicopters (recognizing the first ineffective helicopter flew in early 2008, now much bigger whirlies this time around).

How do just the past seventeen months (since first reopening) compare to the Great Inflation from the perspective of the core CPI? Not particularly well.


If anything, the trend (camel humps) in core rates more directly reveals how much is different from the early seventies as well as what’s really making the consumer price bulge this year (and last). To begin with, core inflation just exploded during 1970 even though the US economy was mired in a severe recession! How’s that for what actual money printing can do.

Since this is the core CPI, it represents how the prices in every part of the consumer bucket went up and kept going up without letting up.

Compare that to the current period since the bottom in May 2020, and outside of those few months earlier in the year core inflation has performed almost exactly like the bottom line rather than the top. In other words, it can’t have been QE’s, rather prices pushed up somewhat by epic helicopter drops and the most substantial supply problems since the seventies.

Given all of that, didn’t even match recession 1970. Outside of those few months of Uncle Sam, core inflation remains very clearly very 2010’s.

To drive home the difference, let’s further compare the last seventeen months with that same mid-70s chunk noted above; when oil prices between supply issues rose at a sustained rate so, too, did core prices.



All this is why we won’t call what’s happening right now inflation; because it isn’t. Since it is not monetary inflation (redundant), we expected it to be transitory and, to this point, that’s proving to have been the case as each monthly update is released.

None of this is to deny that consumer prices haven’t gone up, and up by a lot – if compared to more recent years.

What we are doing is demonstrating that the “going up” part, or the camel humps, are for reasons other than “money printing.” Therefore, they are exceedingly unlikely to continue. The blame for these tremendously painful cost burdens belongs elsewhere. 

This is not to led the Fed off the hook, either; policymakers are very much responsible for quite a lot because they don’t actually print any money. Doubly to blame for allowing a confused public to remain confused about QE’s and bank reserves while simultaneously being unable to fix the real monetary problem (shortage), leaving the global economy to have long ago normalized to a disinflationary world which simply means one which has been robbed of vitality and growth for a criminally prolonged period.

And that is what makes even these recent bulges all the more painful; workers as consumers unable to absorb them without legitimate economic growth despite all the constant talk of labor shortages and unnaturally fattened lazy couch potatoes.


Even more confusing, Jay Powell’s Fed having been right in its diagnosis of transitory about those prior humps is now committed to making an even bigger inflation mistake going forward. Frustratingly, the public has been led to believe the central bank printed too much money leading to this (these) consumer price bulge(s), while the Fed understands it didn’t and the bulge wasn’t, but because the Fed doesn’t pay any attention whatsoever to effective money conditions (how would it?), it is back to making its inflationary predictions as a matter for the Phillips Curve therefore the low unemployment rate.

Tapering later this year won’t be based on money, either, which very appropriately puts the Federal Reserve into the same category with current consumer prices.


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Economics

What is Stagflation and How Will It Affect the Global Recovery?

According to the National Bank of Canada the risk of global stagflation is surfacing due to rising oil prices, soaring food costs, and slow economic growth…

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According to…[the] National Bank of Canada…the risk of global stagflation is surfacing due to rising oil prices, soaring food costs, and slow economic growth…[which] threatens to undermine the global recovery. 

What is Stagflation?

Stagflation is high inflation during a recession, when it typically shouldn’t be seen.

  • In a healthy scenario, inflation is the result of rising productivity and a tight job market. It’s viewed as a side effect of too much success.
  • During stagflation, inflation rises with high unemployment and slow growth. It’s often the result of lower confidence in a currency. Rising inflation for essential goods means diverting spending from other areas of spending. Diverted cash diverts revenues for certain companies, which can further slow growth.

Early Signs Of Stagflation Have Begun To Appear

One of the most well-known periods of global stagflation was the early 1970s. Oil trade restrictions resulted in rising energy costs, which trickled into most goods. This made already elevated inflation even worse, especially for food. Since this was during a recession, it exacerbated the difficulty of unemployment…

The National Bank sees some signs of stagflation beginning to appear in the economy. Like in the 1970s, it’s starting with a shock to energy prices due to a shortage, and rising carbon permit costs in OECD countries and this can slow global trade. in addition, the pandemic recession is still raging on, with elevated unemployment…

Rising Global Food Prices May Slow Global Economic Growth

Global food prices are rising at an unusually fast rate these days, and it’s not a base effect. The United Nations Food Price Index shows the basket price of food is up 30% year to date, from it’s 2020 average…[which is] the highest level of growth since the 1970s…

…Food is one of the largest components of household expenses in emerging economies (about 60% of global GDP)…[and,] as food prices rise, capital will be diverted into essentials… killing emerging market consumption…[which] will drag global trade. “Clouds are forming over global economic growth forecasts for 2022,” concludes the National Bank of Canada.
Editor’s Note:  The original post by Daniel Wong has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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Precious Metals

Bitcoin Is Going To $500,000 and the Rationale Is Simple

While our year-end price target for Bitcoin is $100,000, we believe that Bitcoin prices will soar much, much higher in the long run – like 5X higher….

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…While our year-end price target for Bitcoin is $100,000, we believe that Bitcoin prices will soar much, much higher in the long run – like 5X higher. That’s right, we think Bitcoin is going to $500,000 and the rationale…is simple.

Bitcoin, in its most fundamental form, is the digital version of gold. The gold market is an $11 trillion market. If Bitcoin gets that big, you’re talking an $11 trillion market on 21 million tokens, which implies a price per token of about $500,000.

Of course, that back-of-the-envelope math rests on the huge assumption that Bitcoin is, indeed, the digital version of gold but it looks like that may already be the case. Just take a look at the chart below. The blue line tracks Bitcoin prices. The purple line tracks the 10-year Treasury yield, which is widely seen as the market’s dynamic proxy for inflation and the green line tracks the price of gold.

The blue and purple lines correlate strongly to one another but the green line doesn’t correlate to either…[and,] to us, it means that the market has already confirmed Bitcoin as the digital version of gold – and, indeed, as a superior version of gold.

Long story short, as inflation expectations rise, investors sell bonds, and the 10-year Treasury yield rises, too. To protect against that inflation, investors typically buy gold as a store of value, but this year, instead of buying gold, they’re buying Bitcoin.

Conclusion

Bitcoin has become the go-to hedge against inflation in 2021 – not gold… Fundamentally speaking, Bitcoin is better than gold.

Editor’s Note:  The original post by Luke Lango has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

A Few Last Words: 

  • Click the “Like” button at the top of the page if you found this article a worthwhile read as this will help us build a bigger audience.
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