Inflation vs deflation. The true economic definition of “inflation”
is the rate of increase in the money supply in excess of the rate of
increase in wealth output. Inflation is monetary in nature. Rising
prices are the manifestation of inflation. Someone I follow on Twitter
posted an ingenious example from which to conceptualize the true concept
of inflation using the game of Monopoly:
The players all start out with reasonable
amounts of money to speculate on real estate. As the game proceeds,
players collect $200 by simply passing Go and use this money to
speculate on real estate. By the end of the game, only $500 dollar bills
are worth anything, the whole thing blows up, and most players end up
destitute. In a twist of irony, an original game board sells for about
$50,000.
A fixed amount of real estate and continuously increasing money
supply, with “passing Go” functioning as the game’s monetary printing
press. The monopoly analogy is readily applied to the current real
estate market. The Fed tossed roughly $2 trillion into the mortgage
market, which in turn has fueled the greatest U.S. housing bubble in
history. The most absurd example I saw last week is a 264 sq ft studio
in Los Angeles listed on 10/26 for $550,000. The seller bought it a year
ago for $335,000. This is the degree to which Fed money printing and
easy access Government guaranteed mortgages have distorted the system.
Here is monetary inflation as it is showing up in the stock market and housing markets:
The graphic above shows rampant credit-induced monetary inflation. On
the left, home prices nationally are measured by the Case Shiller index
going back the 1980’s. On the right is the S&P 500 going back to
1930. According to the Fed, real median household income has increased
5% between 2008 and the present. In contrast, based on Case Shiller,
home prices nationally have soared 34% in the same time period.
Expressed as a ratio of average price to average household income, home
prices are, at all-time highs in the U.S. This is the manifestation of
rampant inflation in credit availability enabled by the mortgage “QE.”
This growth rate in money and credit supply has far exceeded the tiny
growth rate in average household income since 2008.
The stock market reflects the monetary inflation of the G3 Central
Banks, primarily, plus global Central Bank balance sheet expansion.
Please note that “balance sheet expansion” is the politically polite
term for “money printing.” The meteoric rise in stock prices have never
been more disconnected from the negligible rate of growth in nominal GDP
since 2008. Real GDP has been, arguably, negative if a realistic
inflation rate were used in the Government’s GDP deflator.
Inflation is not showing up in the Government CPI report because the
Government does not measure inflation. The Government’s basket of goods
is constantly juggled in order to de-emphasize the rising cost of goods
and services considered to be necessities. In addition to the increasing
cost of necessities like gasoline, health insurance and food, inflation
is showing up in monetary assets. This is because a large portion of
the money printed remains “inside” the banking system as “excess
reserves” held at the Fed by banks. This capital is transmitted as de
fact money supply via the creation credit mechanisms in the various
forms of debt and derivatives. The eventual asset sale avalanche grows
larger by the day.
Do not believe for one split-second that the U.S. has reached some
sort of plateau of economic nirvana that will self-perpetuate. To begin
with, it would require another round of even more money printing just to
sustain the current bubble level. Read the inflation example above if
that idea is still not clear. In 1927, John Maynard Keynes stated, “we
will not have any more crashes in our time.” In the October 16, 1929
issue of The New York Times, famous economist and investor, Irving
Fisher, stated that “stock prices have reached what looks like a
permanently high plateau. I do not feel there will be soon if ever a 50
or 60 point break from present levels, such as (bears) have predicted. I
expect to see the stock market a good deal higher within a few months.”
Two weeks later the stock market crashed.
The above commentary is from last week’s Short Seller’s Journal.
Speaking of the housing market, admittedly my homebuilder short
positions are crawling up my pant-leg with fangs as the housing stocks
have entered into the last stage of a parabolic “Roman candle” apex and
burn-out. The homebuilders appear to be cheap relative to the SPX on a
PE ratio basis – approximately an 18x average PE for homebuilders vs a
32x Case Shiller PE for the SPX.
However, in relation to
their underlying sales rate, earnings and balance sheet, the homebuilder
stocks are more overvalued now than at the last peak in 2005.
While the homebuilders are are squeezing higher, I presented two
“derivative” ideas in recent issues of the Short Seller’s Journal:
Zillow Group (ZG) at $50 in late June and
Redfin
(RDFN) at $28 in late September. ZG just lost $40 today and RDFN is
down to $21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to
homebuilders because they derive most of their revenues from housing
market-related ads, primarily real estate listings. Their revenues as
such are “derived” from housing market sales activity. These stocks are
overvalued outright. But as home sales volume declines, the
revenue/income generating capability of the ZG/RDFN business model will
evaporate quickly. With home sales volume rolling over, the decline in
the stock prices of ZG and RDFN relative to the “bubble squeeze” in
homebuilder stocks validates my thesis.
If you want to learn more about opportunities to exploit this
historically overvalued stock market and access fact-based market
analysis, click here:
Short Seller’s Journal info.
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Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals. Contact Dave at dkranzler62@gmail.com.
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