May 29, 2023·edited May 29, 2023Liked by Michael W. Green
I remember the Volcker era recessions very well, as I graduated from college in '79 and then Law School in '82. Those classes represented children born in 1957 which was the "crest" of the wave of Baby Boomers-4.3 million kids born that year, who were all entering the job market during the Volcker recessions. I lucked out and found a good job by spring of '83. Ironically, one of my classmates who ended up being one of the most sucessful lawyers from our class (head of Bankruptcy, Reorganization, M&A practice at a major int'l law firm) could not find a legal job and went to work at a major accounting firm for a few years, before he lucked out and landed a clerkship with a Federal Bankruptcy judge he had previously interned with. I hope that history will not repeat itself for the sake of all the young people entering the work force, but I agree with you things are likely to get very tough given current Fed policy.
Thanks Michael. Really appreciate your work even when it appears you might have a bias or let emotions distort your analysis (hey we’re all humans with these darn tricky emotions).
Definitely subscribing. Very fair price.
And thanks for the reminder about the QCEW report!
Lastly, I’m surprised that second homeownership is only 5%. Is any of the data skewed by the fact that many “second homes” are also part time AirBnb (as opposed to the second homes that are used exclusively by the owner) and might not land in the 5%? Seems like a lot of gray area between traditional second homes and part time rentals vs full time rentals?
Are the rest of the Airbnb is owned by corporate entities that don’t show up and that number?
Excess savings has been continuing to support this market. Thats everything from house prices to corporate profit margins. Q3/4 is going to a doozy when we get liquidity crunch, credit crunch and earnings crunch all coming together...https://twitter.com/dunleavy89/status/1655713461677219840?s=20
Is there a good metric of people that own multiple home ownership?
Vacation home ownership must be at an historic high for ownership rates and Vacation homes of 2020s are nothing like the second homes of the 1970s. The real estate booms turned the Summer Camp and Winter ski chalet into a palace that is better equipped than the average primary residence. We retail investors have a knack for piling into an asset class during booms when the boom last long enough we become convinced there is no risk and cannot sell (until the crying stage).
Hi Mike! Regardless of whether or not rate hikes at this point affect "inflation," the rising cost of living (as opposed to the CPI model) is hurting a couple hundred million Americans. That fact seems to be largely ignored by the TV people. We're now at roughly "average" Fed Funds and 30-year mortgage rates. Since QT has been a joke so far, maybe the Fed should leave rates alone and try that.
As Stan Druckenmiller said in 2018: "When you look at the wealth disparity today, in my opinion, the biggest accelerant has been QE…it’s not even debatable.”
"These hikes perversely RAISED measured inflation due to the direct impact of higher interest rates on the prices being measured — namely monthly mortgage payments." Erdoghan justified?
Hi Mike, great piece as always. I don’t disagree with you on rising rates not being the answer here, but curious as to what you think CBs should be doing with rates? A) starting from today and B) what you think should have happened? I know there’s a lot to unpack in that!
I share the worries in that Fed meeting you highlighted, that by crushing supply as well as demand we are making the crash bigger than necessary as well as setting the seeds for another big inflation spike.
Fortunately I’ve still got plenty of construction projects to bid in Los Angeles - apartments and hotels are still big right now. I remember 2008, feeling the sword of damacles getting closer after new bids dried up, finally getting laid off in 2009.
Recessions like this are horrible for anyone affected, and nobody understands how much they permanently set people back. It is much worse post-GFC than before, both because there are so many more fake job listings and because we are so much more dominated by large corporations.
Large corporations tend to only hire new grads, leaving huge swaths of over-educated and under-employed people who will never see any wage benefits from their degrees. This isn’t about degree quality either - many more people stuck with STEM degrees after other majors were demonized as worthless in the post 2008 world, but it still doesn’t change the fact that there aren’t a lot of college level jobs to fill.
If your various arguments are right, would your inclination toward the economic "heart attack" and corresponding rise in unemployment also be the an inclination towards a reversal of the passive trends you have written about before?
A bit young for the Volcker era. Anyway, the way inflation is measured and plotted on a graph next to FED funds is a bit misleading though. Inflation is cumulative where as rates are not. Suppose its more pleasing to see inflation is up only 5% vs 2500% from 1930's
Some questions though, can maybe point me in the right direction as to good reading on this.
Using the narrative that rates has a effect on inflation, why did the opposite not really happen. Rates have been trending down for last 50 odd years and inflation mostly going from 2%-5%. Would the opposite not really be true then low rates for extended time should by default = higher inflation?
Should disinflation not be viewed as healthy at some point? Reduced prices over time due to technological improvements but at some point the technological effect will be saturated. in which case there will be an unstoppable increase in certain products.
Is disinflation possible? As an example if you take a food produce like corn. there is no real room for disinflation. Producer margins can only drop by x% before you either plant something else or close shop. no in between. Which still leads to increased cost >> equal demand >> lower supply = price going up
Thanks for the reading Mr Green. only recently stumbled on your twitter/substack.
Fed funds are up 425 bps in the past 12 months. How much of this has been digested by the economy? For example, how much of the rate hikes have appeared in different types of borrowing (complicated by an inverted yield curve)? How long does it take higher rates to slow borrowing, and how long for less borrowing to reduce investment and consumption?
Because when I look at corporate bond yields, core capital goods orders, or construction spending over this period, I see surprisingly little movement. Although housing permits & starts have fallen from their peak, they are still at pre-Covid levels.
I suspect that bank lending didn't tighten over much of the time because banks had a surplus of zero cost deposits until the past couple of months. So will our lag be longer this time?
I'm intrigued by the idea that the skilled labor market is where there are problems. Aggregate measures tend to be fooled by a change in composition, in this case leisure & hospitality are still offering raises to recover head count. Good point on the Atlanta Fed's censoring of high income. But I'm hoping for more proof rather than inference on the plight of high income workers. What do you think of the ECI, the supposed 'gold standard' of wage inflation?
Great post Mike. Really appreciate all your insights as always. One completely unrelated question : What was the Fed/Treasury rule change in Jan (ish) 2018 that you think was a contributor to Feb 2018 Volmageddon? I have heard you reference this on past podcasts. It was something related to margin requirements changing for swaps I think. I saw that Tier 1 flagged the potential for SEC rule changes potentially coming around monitoring of daily margin requirements on the back of 0 dte options. Just trying to pin point the exact notice around Jan/Feb 2018. Cheers.
Michael-I can’t cavil with your figures/citations….but I will 😜what is this denominator ‘per employed american’ …that’s a strange (even Powell - like !🤨) adjuster. Is the total number employed? Unemployment rate standardized/calibrated? Why not just report absolute passenger volume ? If everyone is employed, volume per employed American can drop appreciably even as airport volume raising appreciably-to be sure, airline Capacity has dropped, but look at road traffic, how backed up freight deliveries are, talk to anyone trying to hire someone today-it’s a madhouse, worse than anything I’ve experienced in 50 years as a taxpayer. But I don’t disagree that traditionally decoupling has been a myth; but things HaVE changed..and maybe this time Is different . People are having To come back to work, but my kids will never take To a job where they have to commute every day, they will work for cash, take side gigs, even baby sit at $45 /hour before they do that as long as one spouse has health insurance. CBD office building s will not get back to full capacity for at least a decade even if we don’t have a recession-which of course we will, jay po or not. The real economy is not wall- maybe thsi time we will see that manifest ? I’m not banking on it, but it’s not implausible.
Michael- I must assert you live in a bubble. Not everyone lives in Marin ,New York city. There are a Great number of very affluent people making beaucoup dollars who have nothing to do with the finance industry and its various parasites. Consequently, I don’t accept at face value a massive shaking out of employment, even among those lower on the food chain at the brokerage houses and banks (let’s say on average grossing almost 200 k a year) . While I am nit so confident about tech industry not having second order impacts, it’s going to hit California mostly, not the Midwest, south west and southeast. Yes I know there’s tech and banking in Tampa, and Texas, but their economies are not remotely dependent upon it. I think it’s highly plausible we could have a ‘recession’ on Wall Street and the st of country do pretty well , esp the housing industry. Demand is just too high, people are spending not saving again (have you been to N airport Recently > people are flocking to the beaches and Europe like they’re spect to see Gregory peck on a submarine whisking waltzing Matilda) absent a micro event, a contraction in te and esp finance would also have some positive effects -people could return to earning decent returns on bonds and not have to subscribe to pundit investing newsletters. If the economy tanks it’s not because Jamie dimon has to lay off some people, that flips cause effect from reality. And let’s be honest -Wall Street says it’s worried about rate hikes, they just as worried about interest rates staying this high and funds Continue to be flowing out of ‘stonks’….what’s best for the overall economy is we finally shake out excessive valuations, esp for public traded equities, so we get it over with and then move todays irrational exuberance and overconfidence, and stabilize long term interest rates to where bonds can-and should-compete with equities. There is a lot of dollars sitting in the sidelines (and please, no bromides about people being ‘all in’ -they are not. As long as dollar doesn’t float away with inflation or collapse as reserve currency we will be just fine, and people -and Wall Street-will have to learn to live with many more poeple be renters.
I remember the Volcker era recessions very well, as I graduated from college in '79 and then Law School in '82. Those classes represented children born in 1957 which was the "crest" of the wave of Baby Boomers-4.3 million kids born that year, who were all entering the job market during the Volcker recessions. I lucked out and found a good job by spring of '83. Ironically, one of my classmates who ended up being one of the most sucessful lawyers from our class (head of Bankruptcy, Reorganization, M&A practice at a major int'l law firm) could not find a legal job and went to work at a major accounting firm for a few years, before he lucked out and landed a clerkship with a Federal Bankruptcy judge he had previously interned with. I hope that history will not repeat itself for the sake of all the young people entering the work force, but I agree with you things are likely to get very tough given current Fed policy.
Thanks Michael. Really appreciate your work even when it appears you might have a bias or let emotions distort your analysis (hey we’re all humans with these darn tricky emotions).
Definitely subscribing. Very fair price.
And thanks for the reminder about the QCEW report!
Lastly, I’m surprised that second homeownership is only 5%. Is any of the data skewed by the fact that many “second homes” are also part time AirBnb (as opposed to the second homes that are used exclusively by the owner) and might not land in the 5%? Seems like a lot of gray area between traditional second homes and part time rentals vs full time rentals?
Are the rest of the Airbnb is owned by corporate entities that don’t show up and that number?
Excess savings has been continuing to support this market. Thats everything from house prices to corporate profit margins. Q3/4 is going to a doozy when we get liquidity crunch, credit crunch and earnings crunch all coming together...https://twitter.com/dunleavy89/status/1655713461677219840?s=20
Is there a good metric of people that own multiple home ownership?
Vacation home ownership must be at an historic high for ownership rates and Vacation homes of 2020s are nothing like the second homes of the 1970s. The real estate booms turned the Summer Camp and Winter ski chalet into a palace that is better equipped than the average primary residence. We retail investors have a knack for piling into an asset class during booms when the boom last long enough we become convinced there is no risk and cannot sell (until the crying stage).
Hi Mike! Regardless of whether or not rate hikes at this point affect "inflation," the rising cost of living (as opposed to the CPI model) is hurting a couple hundred million Americans. That fact seems to be largely ignored by the TV people. We're now at roughly "average" Fed Funds and 30-year mortgage rates. Since QT has been a joke so far, maybe the Fed should leave rates alone and try that.
As Stan Druckenmiller said in 2018: "When you look at the wealth disparity today, in my opinion, the biggest accelerant has been QE…it’s not even debatable.”
"These hikes perversely RAISED measured inflation due to the direct impact of higher interest rates on the prices being measured — namely monthly mortgage payments." Erdoghan justified?
Hi Mike, great piece as always. I don’t disagree with you on rising rates not being the answer here, but curious as to what you think CBs should be doing with rates? A) starting from today and B) what you think should have happened? I know there’s a lot to unpack in that!
Mike, I know this may not be the forum, but I'd love to hear your take on the short interest in SPX and bonds in the non-commercial CFTC futures.
I share the worries in that Fed meeting you highlighted, that by crushing supply as well as demand we are making the crash bigger than necessary as well as setting the seeds for another big inflation spike.
Fortunately I’ve still got plenty of construction projects to bid in Los Angeles - apartments and hotels are still big right now. I remember 2008, feeling the sword of damacles getting closer after new bids dried up, finally getting laid off in 2009.
Recessions like this are horrible for anyone affected, and nobody understands how much they permanently set people back. It is much worse post-GFC than before, both because there are so many more fake job listings and because we are so much more dominated by large corporations.
Large corporations tend to only hire new grads, leaving huge swaths of over-educated and under-employed people who will never see any wage benefits from their degrees. This isn’t about degree quality either - many more people stuck with STEM degrees after other majors were demonized as worthless in the post 2008 world, but it still doesn’t change the fact that there aren’t a lot of college level jobs to fill.
If your various arguments are right, would your inclination toward the economic "heart attack" and corresponding rise in unemployment also be the an inclination towards a reversal of the passive trends you have written about before?
A bit young for the Volcker era. Anyway, the way inflation is measured and plotted on a graph next to FED funds is a bit misleading though. Inflation is cumulative where as rates are not. Suppose its more pleasing to see inflation is up only 5% vs 2500% from 1930's
Some questions though, can maybe point me in the right direction as to good reading on this.
Using the narrative that rates has a effect on inflation, why did the opposite not really happen. Rates have been trending down for last 50 odd years and inflation mostly going from 2%-5%. Would the opposite not really be true then low rates for extended time should by default = higher inflation?
Should disinflation not be viewed as healthy at some point? Reduced prices over time due to technological improvements but at some point the technological effect will be saturated. in which case there will be an unstoppable increase in certain products.
Is disinflation possible? As an example if you take a food produce like corn. there is no real room for disinflation. Producer margins can only drop by x% before you either plant something else or close shop. no in between. Which still leads to increased cost >> equal demand >> lower supply = price going up
Thanks for the reading Mr Green. only recently stumbled on your twitter/substack.
Fed funds are up 425 bps in the past 12 months. How much of this has been digested by the economy? For example, how much of the rate hikes have appeared in different types of borrowing (complicated by an inverted yield curve)? How long does it take higher rates to slow borrowing, and how long for less borrowing to reduce investment and consumption?
Because when I look at corporate bond yields, core capital goods orders, or construction spending over this period, I see surprisingly little movement. Although housing permits & starts have fallen from their peak, they are still at pre-Covid levels.
I suspect that bank lending didn't tighten over much of the time because banks had a surplus of zero cost deposits until the past couple of months. So will our lag be longer this time?
I'm intrigued by the idea that the skilled labor market is where there are problems. Aggregate measures tend to be fooled by a change in composition, in this case leisure & hospitality are still offering raises to recover head count. Good point on the Atlanta Fed's censoring of high income. But I'm hoping for more proof rather than inference on the plight of high income workers. What do you think of the ECI, the supposed 'gold standard' of wage inflation?
Great post Mike. Really appreciate all your insights as always. One completely unrelated question : What was the Fed/Treasury rule change in Jan (ish) 2018 that you think was a contributor to Feb 2018 Volmageddon? I have heard you reference this on past podcasts. It was something related to margin requirements changing for swaps I think. I saw that Tier 1 flagged the potential for SEC rule changes potentially coming around monitoring of daily margin requirements on the back of 0 dte options. Just trying to pin point the exact notice around Jan/Feb 2018. Cheers.
Michael-I can’t cavil with your figures/citations….but I will 😜what is this denominator ‘per employed american’ …that’s a strange (even Powell - like !🤨) adjuster. Is the total number employed? Unemployment rate standardized/calibrated? Why not just report absolute passenger volume ? If everyone is employed, volume per employed American can drop appreciably even as airport volume raising appreciably-to be sure, airline Capacity has dropped, but look at road traffic, how backed up freight deliveries are, talk to anyone trying to hire someone today-it’s a madhouse, worse than anything I’ve experienced in 50 years as a taxpayer. But I don’t disagree that traditionally decoupling has been a myth; but things HaVE changed..and maybe this time Is different . People are having To come back to work, but my kids will never take To a job where they have to commute every day, they will work for cash, take side gigs, even baby sit at $45 /hour before they do that as long as one spouse has health insurance. CBD office building s will not get back to full capacity for at least a decade even if we don’t have a recession-which of course we will, jay po or not. The real economy is not wall- maybe thsi time we will see that manifest ? I’m not banking on it, but it’s not implausible.
Michael- I must assert you live in a bubble. Not everyone lives in Marin ,New York city. There are a Great number of very affluent people making beaucoup dollars who have nothing to do with the finance industry and its various parasites. Consequently, I don’t accept at face value a massive shaking out of employment, even among those lower on the food chain at the brokerage houses and banks (let’s say on average grossing almost 200 k a year) . While I am nit so confident about tech industry not having second order impacts, it’s going to hit California mostly, not the Midwest, south west and southeast. Yes I know there’s tech and banking in Tampa, and Texas, but their economies are not remotely dependent upon it. I think it’s highly plausible we could have a ‘recession’ on Wall Street and the st of country do pretty well , esp the housing industry. Demand is just too high, people are spending not saving again (have you been to N airport Recently > people are flocking to the beaches and Europe like they’re spect to see Gregory peck on a submarine whisking waltzing Matilda) absent a micro event, a contraction in te and esp finance would also have some positive effects -people could return to earning decent returns on bonds and not have to subscribe to pundit investing newsletters. If the economy tanks it’s not because Jamie dimon has to lay off some people, that flips cause effect from reality. And let’s be honest -Wall Street says it’s worried about rate hikes, they just as worried about interest rates staying this high and funds Continue to be flowing out of ‘stonks’….what’s best for the overall economy is we finally shake out excessive valuations, esp for public traded equities, so we get it over with and then move todays irrational exuberance and overconfidence, and stabilize long term interest rates to where bonds can-and should-compete with equities. There is a lot of dollars sitting in the sidelines (and please, no bromides about people being ‘all in’ -they are not. As long as dollar doesn’t float away with inflation or collapse as reserve currency we will be just fine, and people -and Wall Street-will have to learn to live with many more poeple be renters.