Unintended Consequences
The side effects of tampering with free markets
The lady in 6E is crazy.
Larry the Super told me her hovel is so appalling he wears a face mask when called in to make a repair.
Super is the capitalized abbreviation for Superintendent, the equivalent of a human closed circuit television monitoring system in any cooperative apartment building. Keep this person close. That means periodically thanked with a pink U.S. Grant $50.
Speaking of face masks, the crazy lady in 6E is one of those people who wore a one before the flu panic required it. Meaning, the lockdown for her was business as usual.
And business in this case has a different look. According to Hogan, the real estate private equity executive down the hall, she only leaves the apartment every few days. To go where is anyone’s guess.
He’s put out by the unacknowledged salutations. The 6’4” southerner expects a reply when he greets people with pieced eye contact. Instead, one of her gnarled hands grips a wheeled cart while the other holds two pieces of mail in front of her face leaving only a small slit to examine him.
And that’s a problem, according to the man who spends his days levering up real estate nationwide. Like your editor one floor below, he knows the high per-square-foot valuation of apartments sold in the building doesn’t groove with the tin-foil-covered windows of unit 6E. Or the 50 years of newspapers we guess sit stacked floor to ceiling throughout the unit.
Either way, I know why she’s been there since the ‘70s. I also know why she won’t leave until the coroner bags her up.
Tinkering with Markets
In the 1970s, inflation hit the average American like a rogue wave.
They didn’t notice or didn’t care in the years prior, as the country spent its way into trouble during the post-World War era. By the 1960s, it had more obligations than means. Everyone outside the country knew it. When Nixon closed the gold window in ‘71, it was too late to fix the root of the problem.
Because overspending is a one way street. The sacrifice required to get things back on track is more than people can handle. Debtor’s prison might work on an individual level, but the society doesn’t take pain well. People herd up and throw rocks.
And that’s what they did in the 1970s. In New York, it meant property conditions so bad some building owners bribed fire officials to engineer total loss insurance claims. Thing were not good, and didn’t improve for a while.
Compounding the problem, local politicians promised relief. Desperate to hold on to power, they pandered to residents, like the one in 6E. They offered a solution called rent control.
Generally, people want simple answers to complex problems. They can’t handle the harsh facts about the situation they eased into over a long period. It’s like dealing with a person in the throes of addiction. Just one more chance, please. But kicking the can doesn’t do anyone a lasting favor. Rock bottom is the only fix. And people resist it like the plague.
That’s why rent control felt good to the unaware voters of a beleaguered city. Blame the situation on greedy landlords. They’re the ones who did this to you, Ms. 6E resident. You deserved better. We’ll help…by fixing the price of rent forever.
People Respond to Incentives
Thrilled with the anti-capitalistic fix to the problem, the resident in 6E never moved.
Moving meant facing the rising cost of renting. Repairs, licenses, permits, paint, copper pipes, it all goes up over time. It has to, to match the cost of producing or paying for real things in a debt-based system.
We forget the fact that borrowed money funds everything in the U.S. From home values to the companies behind the stocks we own. We talk about being thrifty, but what we really like is the feeling we get when more air goes into the balloon. We want rising asset prices and falling living costs. It’s a contradiction.
Then there’s the question of what happens to a person nestled into the palliative care of rent control. Same for the addict with a punch card to overpriced rehabilitation centers. No junkie self-admits to a real, lasting recovery. And no subsidized renter ever returns to the free market.
It’s hard to argue the resident in 6E thrives wedged between stacks of old newspapers. Decades of meaningless mementos and fixed rent bring her false comfort. The owner of the apartment prays for her demise, which would finally free the unit to find its fair market value.
Nothing is Permanent
Rent control ends when the tenant dies.
It means eventually everything returns to the free market. Palliative care only lasts so long. The junkie does the rehab circuit until the money runs out. You can run but you can’t hide from market forces.
And those market forces are only difficult if you say they are. It’s our feelings about them that cause problems.
The minor rent increases 6E avoided meant never moving. Instead of wasting away in the comfort of cheap rent, she might have had more fun in a renovated apartment. And sure, maybe she has her reasons, which feel valid.
People do this in different ways. Warped feelings towards money seem to drive odd behavior.
Larry the Super told me his retirement account took a big hit early this month. I asked him if he’d considered selling a little, he’s 72, maybe it’s a warning shot, a chance to get some money out of the market. He looked at me like I was a fool and said, “It’s too late to sell…it’s already down!”
Most people always think it’s too late to sell. They remember the highest price ever recorded for their stock. They felt rich at that moment, the way they remember it. But it’s not true. They only feel rich in retrospect, now they suffer.
But the suffering is imagined. It’s our feelings about the situation, and feelings aren’t facts.
It’s part of the problem when you run on emotion. And the central planners behind the U.S. system know most people run on pure emotion. So, after the 2008 financial crisis they concocted a plan to prevent future unrest.
Think back to when we had Occupy Wall Street protests, general discontent, and near failure of the debt-based financial system. That can’t happen…according to the keepers of the game.
Take the 2010 editorial written by at the time Fed Chair Ben Bernanke. He explicitly said he aimed to engineer rising home values, and 401k account values… to make people feel wealthy. That in turn would make them borrow and spend, creating what he called a virtuous circle.
“…lower mortgage rates will make housing more affordable and allow more homeowners to refinance. […] And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
Ben Bernanke – Washington Post November 3, 2010
It worked. Perhaps better than intended.
Asset prices rose for fifteen years. The total value of all listed U.S. stocks rose more than 4x from around ~$15 trillion at the time of the Fed Chair’s 2010 proclamation, to a recent peak of ~$65 trillion.
It’s almost as if the administration of the time, and the central planners, agreed on the scheme as a way to manage the mood of the nation.
The problem is, we have a new regime now. One that a lot of people asked for. Thrifty types, who fear the nation might fail if it continues on this path. Maybe so… but don’t forget the virtuous circle caused the fluffy valuation of plywood homes and 401k accounts. Before deleting the 15-year policy, you might want to prepare for unintended consequences.
We published the following chart several times over the past two years. It’s the market value of all listed U.S. stocks. Earlier this quarter it hit the all-time high mark of ~$65 trillion. We suggested, “Stock owners might not be ready” for a pause. Last week, they got their pause…
The recent pullback is merely ~$5 trillion off the high… and that’s less than ~8%. Not even technically a correction. The Q1 2020 panic was ~35% and the late 2018 pullback was ~22%.
The Danger of Being Comfortable
Humans can get used to almost any conditions. Being comfortable is by far one of the most dangerous.
When the auto pilot flies so well, we stop looking at the radar, we lose our defense against avoidable risks.
It happens in all parts of life. Some people get lazy in a relationship. They feel comfortable, and lose motivation to stay fit.
It’s not entirely bad. It’s nice to be comfortable. In a perfect world, you’d have both. Comfort and keen awareness.
But the type of comfort Fed Chair Bernanke engineered back in 2010 is very dangerous. Steady gains in asset prices tranquilized the public. From Larry the Super to some stranger who approached me before a dinner out last night, people with low financial acumen can’t tell down from up anymore.
This self-identified real estate executive and podcast viewer approached me with the dreaded salutation, “Hey…I think I’ve seen you on a podcast!”
If you don’t want to end up in a newsletter, don’t say things like this to strangers who write a newsletter:
Are you a day trader?
No.
What’da you just mess around with stocks?
I’m not sure I’d call it messing around…
Oh, well what’da you think about TSLA?
It’s expensive.
What! It got killed today, I bought a bunch.
It’s now a MAGA car nobody wants, and it’s ~$733 bil mkt cap.
I don’t know what that means.
Well, why’d you buy it?
Elon will have an army of robots soon.
OK, so you bought a $733 bil mkt cap robot company with a car manufacturing subsidiary?
Well, I bought some NVDA too… that got killed.
This simple exchange, while anecdotal, tells me the market decline is in the first inning. People who think this way are ill-equipped to be stockholders.
Evaporating Gains
The Bernanke Fed plan to engineer a virtuous circle of perceived property was all about managing your emotions. About preventing social unrest. Stamping out overall discontent in the wake of the financial crisis. Fixing you like a cart behind a political horse. And that horse just got tossed. We need to assume regime change means the virtuous circle is broken.
Think about that… the centrally planned strategy of lulling you to sleep with rising asset values worked. And now it’s over. The new regime tells you you’ll need to make some short-term sacrifices… but people like the real estate junkie above buy stocks on the first downtick, it means as a society, we have more money than skill to manage it.
Most people didn’t take the Fed Chair seriously back in 2010. He said he’d raise asset prices to control the mood of the populace. He sent stocks up more than ~4x over that time. Some individual stocks grew at a multiple of that.
If hindsight helps, maybe we take the new Sheriff at his word. It’s a new regime, new cabinet, and clearly a new mandate. If the plan is to remove the excess from the U.S. system, the last thing you want to hold, or worse, buy, is excess.
TTL subscribers know we trimmed everything that fell into our sell signal over the past few months. There were complaints, and we stuck to our plan. In some cases, taking the small loss saved us from far larger losses.
Comments and inbound questions from subscribers show a theme in the class of moneyed Americans. Nobody has time to analyze what they own. Which means they’ll likely lose it.
We wrote numerous times last year about Aunt Nancy, who stumbled onto an unexpected $100,000 inheritance. We advised her to think about the $100,000 in terms of what she’d want to own as aligned with her personal life goals… which were greater stability and increased wealth.
But she didn’t want that advice. She wanted a magic code, secret tip, validation it’s finally safe to buy into obscure crypto tokens… etc.
People generally repel the idea of looking at hard-earned money this way. As a consequence, they often lose it, then blame some YouTube show, or other far-away source of information they found and acted on. It’s crazy… when you consider how hard it is to earn any amount of saved investment capital.
What it says about us generally is, we’re unwilling to get involved in tending to wealth. We’ll take drive by tips from strangers. We’ll engage in hopeful desperation, and resort to blame and pity when things don’t work out.
But it’s not entirely our fault. We all want to earn, save, invest, and eventually have more autonomy over our life. Do more things we enjoy, less things we don’t.
And after 15 years of Fed money games, we’re reluctant to think squarely about the facts. However, it’s not too late.
Being involved right now means selling the hot air growth stocks of the last boom, and swapping for companies producing things people need. We’re going to do more of that today.