“I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning.”
— Eugene Fama
Thursday Overpriced Mailbag
CPI is 8.5%. Mortgage rates are 5%. Elon is sort of (not really) trying to buy Twitter. Markets are stubbornly refusing to crash. There’s a lot going on this week, so let’s get to some questions.
Q: How come the market isn’t freaking out about a 40-year-high inflation print?
Markets remain discounting mechanisms.
Our collective judgment of the future, as reflected in market prices, is still the best indicator of coming events, in my opinion.
Arthur Hayes predicted a crypto crash on Monday, saying he expects bitcoin and ether to get dragged lower by tech stocks when tech stocks inevitably get dragged lower by interest rates.
But that’s been the narrative for months now.
To believe the market hasn’t priced that in at this point is to believe that Eugene Fama’s entire life’s work has been for naught.
And maybe it has been, who knows. But I suspect we’re all underestimating the hive-mind of markets.
Instead of assuming the market’s being irrational, we should maybe ask ourselves what it’s trying to tell us.
It may be that the relative strength of risk assets like tech stocks and crypto has been telling us that inflation is already peaking.
Q: Inflation’s peaking already?
I know, it seems too soon. But I saw at least three prominent sell-side analysts make that call after the CPI print on Tuesday.
And it’s starting to feel that way, too, with gasoline prices falling for four straight weeks now.
That may be because releasing the strategic reserve has temporarily put a lid on prices. But even if that is the case, it’s been quite helpful: Smoothing out the inflationary effect of gas prices may avert panic over lofty CPI prints.
The problem now is that even if we have peaked, CPI will remain artificially elevated because of the lagged effect of housing prices.
So here’s my great idea: What we really need is a strategic reserve of houses!
The government should buy up millions of houses in the next crisis and then release them into the market when we need to keep CPI from overheating.
Q: A strategic reserve of houses? Seriously?
Well, no, not really.
But it’s not a lot worse of an idea than trying to deflate housing prices with interest rates.
If house prices are in a bubble (whatever that means) it’s because of zoning restrictions, not artificially low interest rates, in my opinion.
Raising supply is a better (and fairer) way to fix a market than lowering demand.
Q: What’s it all mean for crypto?
Rates going up seems to have been bad for bitcoin and ether, so I guess rates going down would be good?
But if they’re going down because of deflation, that would be bad.
So, I don’t know.
But I feel like it doesn’t matter much, anyway. I’m increasingly of the opinion that thinking about crypto in terms of risk on/off is not particularly helpful.
There’s so much happening under the surface. Things are going every which way for reasons that have nothing to do with interest rates, bonds or tech stocks.
There’s a lot of alpha to be had.
So much so that I suspect even Eugene Fama, enemy of stock pickers everywhere, would consider doing some crypto picking if he didn’t have a lot of books to write and stuff.
Getting beta right in crypto seems far less important than it used to be.
Which is great. Alpha is way more valuable than beta. (And more fun, too).
Q: How many things did you get wrong in last week’s newsletter?
I mistakenly defined QT as the Fed selling the bonds it bought during QE, but mostly they just let their bond holdings “roll off” — which is to say they stop reinvesting the principal repayments they get when their holdings mature.
I did phone-a-friend on that one, linking to a Joseph Wang post explaining it correctly, so hopefully you all read that instead of taking my word for it.
The Fed probably will sell some mortgage bonds at some point, however, which is partly why MBS spreads are widening, pushing mortgage rates up to 5% this week.
The selling will be small, but the fact we now have to worry about them selling some bonds after all this time buying them I think is evidence that trying to micromanage markets is a fool’s errand.
I’d definitely tell them about my amazing idea for a strategic reserve of houses. But they will be demanding actionable ideas from their guests, so…long homebuilders!
US housing was under built pre-pandemic due to the lingering effects of the 2008 crisis, and many of the houses that were built were built in the wrong places.
Because now, post-pandemic, we’re all moving, and we’re all moving to the same handful of places: Florida, Texas, North Carolina.
Unless you live in an RV, you can’t take your house with you, so those places are going to need A LOT of new construction.
Mortgage rates at 5% are, of course, bad for house prices. But it’s not going to change the number of houses we’re short of. (Unless the Fed really goes nuts and forces everyone to move back in with their parents.)
Trading on 6x earnings, I’d tell Alf and Andreas that homebuilders are priced for the Fed to kill the housing market, which I think is unlikely: The market will force Powell to stop raising before he gets to a level high enough to offset all the structural drivers of housing demand.
So, that would be my pitch: long US homebuilders.
The fun part would then be watching them tell me why I’m wrong.