Recently while at my favorite Denver watering hole, I was again reminded of the prevailing unease around housing costs. It all started with a random comment and the subsequent conversation with the woman next to me at the bar which yielded a not-so-surprising revelation: that we’re both from the same hometown of Columbus, Ohio. After engaging in the ceremonial mantra of Ohio State alums which involves beginning and ending each sentence with ‘Go Bucks,’ I learned that she was a newly minted transplant to the Mile High City. She went on to note that her excitement around the rich opportunities available for mountain hiking expeditions, skiing and other outdoor activities here had been tempered by something that caught her completely off guard when she moved here. She said:
“I had no idea that housing was going to be this expensive when I relocated here. The substantial raise that I received from my employer with this promotion and transfer is now gone!”
Frankly I wasn’t all that shocked to hear this common refrain because Denver’s meteoric population growth has led to a corresponding rise in housing costs. Home prices aside, rental apartments rates are hotter than the blistering rays of the high altitude sun. And for those scrambling to locate a new abode, it’s been all-out war as anxious bidders compete with one another for available units in the tight rental market.
Like many cities, Denver is in the midst of an unprecedented construction boom as builders burn the midnight candle in an attempt to mitigate the swelling demand. In fact, the city has more than 86 projects under construction, and is currently poised to build more apartment properties than at any point over the past 40 years. Since the end of 2009, rents have soared by about 40%.
The unfortunate reality for many renters, not only in Denver but in other parts of the nation, is that rental prices have increased at roughly twice the pace of average hourly wage growth, which has hovered at a paltry 2.1% over the past year. Millennials are taking the full force of this hit, according to findings by Harvard University’s Joint Center of Housing Studies, which found that a shocking 46% of renters ages 25 to 34 (the epicenter of the millennial cohort) is coughing up more than 40% of their income on rent, up from 30% a decade ago. It should be noted that the housing industry generally regards a figure above 30% as being financially burdensome.
Back to the bar just for a moment. My conversation with the fellow Ohioan seated next to me sent my mind off to random thoughts about my own housing situation. Much of this has been informed by previous accounts shared by friends about their travails in locating suitably priced places. One common theme seems to be landlords who tour several rental suitors at once in a manner akin to a group date on the show The Bachelorette. Listening to reports back from friends who have experienced this, it quickly becomes clear that the spoils often go to those who have a wad of upfront cash.
On Wednesday afternoon, the Federal Reserve released minutes from their July 28-29 Federal Open Market Committee meeting. Investors were looking forward to the minutes to discern if the Fed might start hiking rates this September, as previously expected. The minutes were somewhat muddled as they showed members continue to debate whether it is appropriate to start raising rates. But in the end, the minutes appeared to show a bias toward keeping rates low, largely due to inflation not being near the Fed’s target figure.
Conventional theory says the Fed, in trying to fulfill its dual mandate of stable prices and full employment, must try to interpret economic data to see which way the economy is tilting; is there slack in employment and therefore low rates are needed, or is inflation becoming a risk and therefore higher rates are needed? While this teeter-totter of prevailing conditions sounds good in theory, what we often find is the Fed is faced with contradictory data on economic conditions.
The recent release of July’s minutes is an example of this confusion. The Fed noted the labor markets have been improving with unemployment at 5.3%, the lowest rate so far since the recession. But historically, this isn’t that low; unemployment reached lows of 4.4% and 3.8% before the last two recessions in 2008 and the early 2000’s, respectively. Furthermore, the Fed itself admitted the labor force participation rate and the employment-to-population ratios both declined. Translation: the unemployment rate continues to decline, as less people look for work.
GDP remains tepid. Recall that growth estimates for GDP were well above 3% not too long ago, which is why many expected a rate hike as the Fed wouldn’t have as much trouble hiking rates going into a stronger economy. Meanwhile, the Fed continues to brush off the weak first half of the year as being ‘transitory.’
Inflation continues to sit below the Fed’s 2% target. The meeting minutes also labeled this as transitory, as the low inflation was attributed to lower energy prices and the decline in import prices due to past dollar appreciation.
China’s central bank has caught the markets off-guard by unexpectedly devaluing the yuan by nearly 2 percent against the U.S. dollar, roiling stocks as a result, especially those that sell to China. The central bank of China has tried to brush aside the magnitude of the move, calling it a ‘one-off depreciation’ and saying the change in policy will help drive the currency toward more market-driven movements. However, this is just another chapter in the worldwide currency war we are experiencing, and it should not come as a surprise at all.
First, it is helpful to examine more closely what China actually changed. The yuan has been pegged to the dollar for many years now, with Chinese officials allowing the yuan to trade 2% above or below a midpoint they set called the daily fixing. Officials can look at the daily trading when setting the midpoint, or they can arbitrarily set it higher or lower as they please.
The central bank has now changed its policy, saying it will base the midpoint off of the previous day’s closing price as well as market-makers’ quotes. As a result, it set the midpoint 2% lower than the previous day’s. This was the biggest devaluation of the yuan since 1994 when they let it fall by one-third as part of a breaking away from Communist state planning.
Because the rules are now more ‘market based’, it will be interesting to see if this really will be a one-off devaluation or if China will let the currency slide further. They could also continue to influence rates by entering the foreign exchange markets themselves with their reserves.
In the end, the mechanism or specifics are minor details compared to the real reason for the devaluation; participation in the global currency war. Almost nobody doubts that China is now fully engaged in the same game that developed countries have been playing for years now. Each one is devaluing their national currency as a last-ditch effort to stimulate more growth.
News stories of high-frequency trading, market rigging and interest rate manipulations make the average individual investor feel like they have no chance of making any money in the markets. It seems like the guys on the inside track, such as the hedge funds, private equity funds and other “accredited investors,” only have access to all of the great deals. But there is a huge advantage you, as an individual investor, have over Wall Street and the entire investment management industry – independence.
What I mean by this is you as an investor of your own money only have to answer to yourself. Almost every hedge fund or investment manager in the industry is managing money for someone else and therefore have to answer to to their clients every month or quarter and report on their performance. This is of course a good thing in itself, but it can be a hindrance to the manager and something you can use to your advantage.
For example, hedge fund manager David Einhorn has recently been under fire for his bet on gold. His publicly traded reinsurer, Greenlight Capital Re, is down 18% year-to-date partly due to the fund’s gold position as well as other positions that have not been working out.
Top highlights from the interview.Five of the ways that inflation is misunderstood in today’s world:
1. “Demand pull” inflation (Keynesian concept) a.k.a. an “overheated economy”
2. “Cost push” inflation (Keynesian concept) e.g., increase in the price of oil can spark inflation.
3. Velocity can exacerbate or mitigate inflation (when it reality it does not exist and is a poor proxy for monetary demand).
4. Demographics directly impacts the price level (e.g., an aging population is “deflationary” per people like Harry Dent), the impact is really indirect and only results from the nature of fractional reserve banking
5. The Federal Reserve can not successfully control inflation, it can only contribute to the price increases with its ability to print money at its leisure.