All Forum Posts by: Dan DiFilippo

@James Hamling sounds like you're happy to make your points until you can't make your points. How convenient for you.

@James Hamling what does your "math and data" say regarding the stretched equity valuations? These are absolutely unsustainable in an economy in which the FOMC has advanced its ~0 rates timeline to 2023. The bond market is screaming ********.

@David Lewis in commodities, they say the marginal ton prices the whole. And real estate aren't commodities, but they are illiquid enough to have pricing work in a similar manner. I keep asking people, what is going to happen when all the A tier and B tier cities that have suburbs crowded up with Boomers start to hollow out? It's going to completely change things.

@Juan Quezada I'm a broker in Fayetteville, NC. We have one of the best cashflow markets in the country. Historically we have poor appreciation, though I even expect that to change over the next decade. I would love to tell you more about it on a PM. Let me know!

Very prescient there by Jeff Booth.  The only issue, recall is that we are nowhere near the hyperinflation yet.  In fact, we haven't hit the real deflation yet.  As Danielle DiMartino Booth has put it, we haven't had the "Lehman Brothers Moment" yet in this cycle.  We haven't yet had cascading insolvencies.  Hyperinflation, though it is not completely agreed upon in definition, is some 15% increase in consumer prices on a monthly basis.  Jeff made his best comments at the very end of his discussion there when he said that the Federal Reserve can't create inflation even though they think they can.

@Jesse Morrell @Derrick Dill, no you're both mostly wrong here.  I do encourage you both to look through all my comments history on here.  Several thousand words of what are essentially essays explaining to people the common misunderstandings of monetary policy.  Or I can point you to people to start reading/listening-to in order to get a better understanding of money.  There is a lot you can learn.  It's not really a bad thing though.  It's an extremely complicated topic and 95+% of the people who comment on it are sorely uninformed.  Especially lately.

You can stimulate the economy using monetary policy when you have people willing to make loans.  Since the middle of the century, economists have had difficulties measuring the money supply.  Indeed, before interest rate targeting policy, the Federal Reserve was targeting supply of money directly adding and withdrawing currency as needed to regulate prices.  But the Federal Reserve was aware that this was not sufficient, in fact.  People think we went off of the gold standard in 1971, but in actuality, the peg was being strained for a long time before that.  In fact, it was clear to policy-makers that there wasn't enough gold in the system.  The gold price shot up throughout the next decade and it was much less to do with money printing that proceeded to take place as it was to do with money that had already existed eventually finding its way into gold.  What was reflected here is that money is broader than we often perceive.  Indeed, the Federal Reserve adopted various different measurements of the money supply throughout the second half of the twentieth century and dug deeper and deeper into balance sheets in an effort to track the creation and circulation of what are known as "eurodollars" in an effort to determine how much money should be in the economy.  This happened until Greenspan eventually gave up and figured they would just control the whole show by manipulating the price of money (interest rates).  This was done with the idea in mind that this would bypass the need to measure something so complicated; just determine at around what rate it would be most appropriate for banks to be lending at (Federal Funds Rate) and use open market operations and forward guidance to get there.  This earned him the nickname "The Maestro".

The point I'm making here is that "money printing" and "money creation" are not the same thing.  Part of what you neither of you understand is that the Federal Reserve does not actually print money.  Neither digitally, nor physically.  Regardless of what Jay Powell tells you.  They do handle cash, but the US Treasury is responsible for the actual manufactury of paper money.  What the Federal Reserve does is they suck collateral out of the system and they replace it with a form of base money called bank reserves.  These bank reserves are valued as dollars, but have only a very narrow functionality.  They sit on a bank's balance sheet and serve as collateral that can be made on loans.  Recall, the monetary base right now is $5T (with another $5T or so set up in temporary liquidity lanes).  Do consider, however that the various means of measuring money (all of which are still incapable of accurately measuring the true breadth of the money supply) are registering amounts in another zipcode.  With dollar denominated debt over 100T.  This is the reality of the US Dollar problem.  The monetary base serves as the foundation for our monetary system.  And that can be printed, but the vast majority of money is *loaned into existence*.  In keeping with the structural metaphor, it is like the literal basement of a building, or really even the foundation.  It can be used to get you actual living space, but it itself is not living space (especially if its bank reserves).  When banks write you loans, they don't actually give you money that was sitting in their vaults (and I don't mean to say they give you digital money that they had either).  They have a certain reserve of money that they lock up to back of their loan and the rest of it is created right there in your bank account.  That's where money really tends to come from and that's where real inflation comes from.  If you look at the US 10-Year Treasury Rate throughout the last half century, you see it starts up in the stratosphere and then comes down over time.  That's the risk-free rate of return.  Various factors, among them Federal Reserve policy) have caused that rate to decline over time.  When the Federal Reserve seeks to step in, they essentially buy the existing collateral in the system and replace it with bank reserves which can then be lent on.  And the banks then go out and make loans at the lower rates.  This can work as long as there is room to lower interest rates from 17 to 10 to 5, but it can't work once the Fed is at 0.  And we hit 0 in 2008 and have had trouble getting comfortably off the ground since.  That's a reflection of banks not able to make loans.  Powell even said himself this past week that the purpose of keeping interest rates above 0 is so that the Federal Reserve can cut rates to support the economy as needed.  Which is, of course, absolutely silly.  Interest rates should be above 0 because that is indicative of a healthy economy.  It's probably not necessarily the case that you want them in the double digits either, but the idea that cutting rates down to 0 somehow supports the economy means that you are trying to force it to work in ways that it can't fundamentally support.  His entire frame of reference for the economy is focused around the central bank.  But his central bank isn't central to the money supply.  The economy has been telling us for a while that it can create anymore.  We've increasingly seen it financialized in a number of ways (not really to do with the Federal Reserve) as a subconscious effort to keep things going.  The other help we've had over the last decade was cheap oil and shale, which put a little life into our economy.

But overall, if inflation worked the way you seem to think it does, we would have seen some explosive inflation these past few months.  We haven't.  And that's not to say that inflation will not come.  It will.  But it won't be by the hand of the Federal Reserve.  The Federal Reserve doesn't know how to create inflation anymore.  Contrary to what he said this week, the Federal Reserve is out of tools.  The inflation will come from the government.

I know that was a lot.  Does it make sense?

@Jesse Morrell yes, new construction is down. But not because lumber is expensive. It's more to do with lending and undertaking of debt as well as employment uncertainty.

The idea that lumber is expensive because supply is down because permitting is down is just silly. It's self-defeating. It describes a demand shock and a commensurate supply shock. It does not make your case.

And no. It's not money printing. People commonly think it is, but it's not. People hear headlines and they want to think they know what they mean, but you're out of your depth here. For starters, the Federal Reserve doesn't print real money; it prints bank reserves. It's okay that you likely didn't know that, but I don't recommend your prosecute your doomed case any further.

@Jesse Morrell except housing starts are generally down and the "money printing" isn't real money printing and it certainly isn't inflationary.

That's all really cool, man! You're multidisciplinary or at least exposed. If you like, I'd be happy to discuss some investing, and most specifically REI with you. I'm a broker in the Fayetteville area. Although I am personally in Durham a good bit; I do like the area. Speaking on the most fundamental level, Durham has some good flip opportunities, but the cash-flow is a little weaker. Fayetteville doesn't tend to have as large margins on flips, but we have good BRRRR and longer term rental income opportunities.

I think this is a huge discussion.  I zealously encourage every real estate investor to take the step forward to learn about monetary policy and macroeconomics.  Because we are right now in the final couple years of a half century long monetary regime.  Very few people alive today have an adult memory of a time when finance was different.  And a mere sliver of them actually derived from the experience a cognizance of the ways in which monetary landscapes change.  Ultimately, I do believe that real estate and equities will be good investments going into the future.  But only if done in the right way.  Because the rules about investing in both asset classes are about to change monumentally.  Equities are going to change as the global economy rearranges itself.  And real estate is going to see tremendous upheavals in terms of the conventional wisdom as untold millions of people move towns, states, and regions.  The American socioeconomic balance is maintained by a gordian complex of systems that are fraught with inefficiencies.  And they are being threatened by tensions civil, social, economic, and geopolitical.  The staggering beast will eventually succumb to its wounds.  The news headline we will be reading are going to make the last fifty years look like a stay in Hobbiton.

Don't accept my ramblings on it, though.  Hustle up and learn your macroeconomics and finance.  You're missing the greatest show of our time!  We're watching the Fall of Rome captured through a million GoPro's.