History never repeats itself exactly. But there are patterns.
A reader writes asking whether I think we are headed for recession or a post-pandemic boom. Either is possible. After World War I, there was a post-war recession as the war economy wound down. After World War II, there was a post-war boom - accompanied by inflation, shortages, wage hikes, and labor unrest. Sounds familiar. After the flu pandemic of 1917, there was the roaring 20's (after that post-war recession). Something happened after that, though. In 1929 I believe. Can't remember what.
The real estate bust of 1989 wasn't as large as the one in 2009 and the causes were different. The first "dot-com" bust in the 1990's was different than later tech booms and busts. There are patterns, but the pattern isn't always the same. Predicting the future is nearly impossible without a time machine.
For example, in March of last year, the stock market tanked and then rebounded with a vengeance months later. If only I had just bought some mutual funds back then! I could have nearly doubled my money. As it is, I bought some mutual funds in January, and they went up ten percent in a matter of a month or so. All you can really do is diversify, invest for the long-term, and hope for the best. Trying to time the market usually results in tears.
So what does the future hold for us now? Will the economy take off like a rocket, with all the pent-up demand? Or will we see a post-pandemic crash as people come to their senses? Or maybe both? Maybe there will be a post-pandemic euphoria where people spend money like its the roaring 20's again, only to be followed by a crash years from now when the bills come due. Maybe. Who knows?
There are some interesting signs, though. And June 30th is one of them.
On June 30th, the rental eviction moratorium will end.
The moratorium on foreclosures was slated to expire at the end of March, but may be extended by three months - to June 30th (although there is some talk of extending it to 2022! This is a sign of a booming economy?).
Extra unemployment benefits are slated to end on Labor Day (irony alert) but some States may be ending them as soon as June 12, while others are making the "looking for work" requirement mandatory again.
July 1 may really suck for people collecting unemployment who are behind on their rent or mortgage payments. The good news is, people are hiring like mad and offering better wages and even signing bonuses. Our gas station is offering a $500 signing bonus (you have to work there for several months to collect it). The problem with this scenario is, what about the poor slob already working there? They see the "new hires" given bonuses and higher wages. Is that fair?
So, Lurleen quits the Circle-K and joins Friendly Express, getting a $2-an-hour raise plus a signing bonus. And now the Circle-K has to poach an employee from Friendly Express. All this talk of mandating a $15-and-hour minimum wage is sort of moot - most places are paying close to that already.
It is a crazy time, and much like the post-war era of 1947, when there were strikes, materials shortages, housing shortages, car shortages and lots of pent-up demand. Similar, but not exactly alike. We are also seeing inflation - perhaps not at the levels of 1979, but getting there. People are noticing that prices are higher. And they are higher in part, due to higher labor costs. Again, not exactly like 1979, but similar. People hoarding gas - I remember that! But again, different causes and not the exact same thing.
Meanwhile, retirees living on fixed incomes or fixed assets (Me!) are spending less money because the price of everything is scary. On the other hand, those who have money are spending it before prices go up. It is a weird economy.
There are no houses for sale on our island, at any price. Today, two new listings come up for dilapidated duplexes that have been in the rental pool for decades. Someone sold a duplex for an astounding amount last month, and it didn't go unnoticed. An investor from Rich People's Island decided that now was the time to unload his duplexes, which will need to be gutted and remodeled, possibly converted to single-family vacation or retirement homes. Prices have gone up to the point where people "sitting on" real estate have been motivated to sell. It's how markets are supposed to work.
Umm.... Is he selling now because he thinks the market has peaked? Or maybe personal reasons that have nothing to do with the bull market in real estate - he wants to retire, or needs the money to remodel his mansion on rich people's island. We'll never know.
I digress, but as I noted before, efficient market hypotheses is bullshit. People do irrational and emotional things, even with valuable assets like houses. Especially with houses. Not a dozen houses down the street from me is a house that has been abandoned for at least 20 years. The owner is in a rest home and doesn't want to sell it because it has "sentimental value". The power has been off for 20 years. If it isn't crawling with termites, it is full of toxic mold. Another home was recently re-claimed by the Authority when the heirs stopped paying the $500 annual lot rent. They "couldn't be bothered" to sell as $500,000 asset, so they let the Authority take it back. It was filled with rot and termites and bulldozed - and the Authority is now auctioning off the site to builders.
People to irrational things - this is what causes the boom-and-bust cycle. It is what causes bubbles. And right now, we are seeing a lot of irrational exuberance. The pandemic is over! Ally-ally-all-come-free! Everyone come out and PARTY! Yeeee-Haw! It is akin to the irrational exuberance of the roaring 20's or perhaps the early 2000's. Again, you might see patterns, but nothing is ever exactly the same, twice.
A new neighbor from Atlanta buys a house from a little old lady's estate. They pay a half-million dollars for it, which I used to think was a lot of money. It is. They plow another $200,000 into it to update it, and then use it for two weekends a month. Just the carrying costs of insurance, taxes, lot rent, and utilities are $1000 a month, even if the house was paid-for. You could rent a room at the club hotel for less money than they are spending on this house for four nights a month.
Or maybe not. After hemorrhaging cash for years, the club hotel is booked solid through August - even the new beach annex. Even the $700-a-night Presidential suite. Boom times or irrational exuberance?
Again, hard to say. Someone out there has money - or thinks they do. Not me, although I used to think I did - or I thought I had more than I had, or that I could earn more, indefinitely.
Exuberance doesn't just apply to houses, but to other investments. I mentioned GameStop, which made no sense at all, other than people were giddy that they stuck it to some short-selling Wall Street type. Other "investments" like Bitcoin are driven by nothing more than exuberance. A tweet from Space Jesus is all it takes for the price to soar or plummet. Is that a stable model? And, as in 1929, when the grocery clerks are trading stock tips, it is not a good sign. Retail investors drive instability, as they are the least rational players.
The problem with the boom/bust cycle is predicting when the cycle will turn. And this isn't easy to do without a time machine. I thought for sure things would blow up in 2005, but it coasted on for two to three more years before it peaked. I didn't think we hit bottom in March of last year, but it turns out, that was the inflection point in the stock market.
And even as a "rational" player in the market, you can be "outvoted" by the irrational ones. For example, the stock analysts who short-sold GameStop were shouted down by a rabble of people on Reddit who found out that brigading could be used for more than upvoting Trump postings. You can make money at this shit! But is that a sign of a stable market - when the rabble can cause huge, irrational swings in a stock price? Even though GameStop stock went up 1000% or whatever, that doesn't mean the company is doing well or has a solid business plan going forward. Never use rising stock prices as a sign of a good investment!
Will there be a recession? Well, duh. There always is. The boom/bust pattern goes on and on because we are irrational as humans. We get scared when the market goes down and it under-shoots. We get giddy when it goes up and it over-shoots. Predicting when the inflection points will occur - that's the trick. And if I could do that, you wouldn't be reading this right now.
We were headed for at least a mild recession by the late 20-teens. We were on a tear with the longest bull market in history (Thank you, President Obama, for logical fiscal policy and responsible financial regulations!) when Trump opened up the taps of free money in the form of tax cuts and yet more deficit spending - doubling Obama's spending before the pandemic took hold. Then the pandemic, and everyone is paid to stay at home - often more than they made working. If you can't see the danger in that, look at all the help wanted signs out there and the long lines at restaurants. This isn't healthy for a civilization, to pay people not to work. Rome tried it. Didn't pan out. Guaranteed annual income is a recipe for disaster. Andrew Yang isn't a wealthy businessman, but a failed academic.
But then again, the idea of "free money" is another example of the irrational exuberance present in our economy. Republican, Democrat, Liberal or Conservative, everyone has their snout in the trough - or wants to. No one thinks about who will pay the bill when it comes due - and it always comes due, make no mistake about that. We live an era of record debt - government, industry, and personal - and record deficits, and yet people want to spend more and give away money to people who largely don't need it. We live in the richest country in the world, but whine about "how hard we have it!"
Is this rational thinking? Is this a sustainable economic model? At the very least, printing more and more money will lead to hyper-inflation over time. It always does, you know. As your friends in Venezuela how that is working out. Ask your friends in Argentina. Hyper-inflation is nothing to laugh at. It brings down governments. It brings down civilizations. It can bring down an empire.
But I think something will give before we end up like Argentina or Venezuela. Let's hope, anyway.
I am taking a wild-assed guess here, but I suspect this will be the summer of irrational exuberance, with people going nuts and spending money, going on cruises and going to Disney, buying vacation homes and more RVs and cars - if they can find them, that is. But over time, exuberance wears off, particularly when the bills come due, literally or metaphorically.
In 2009, it was real estate. And I got out when I figured out that we could rent a house in Pompano Beach for $1500 a month, or own it for $3000 a month. Why own it? Eventually, a lot of other people figured this out as well, but not until they lost a lot of money on "investment properties" they rented out at a loss, convinced that someone else would pay more for them later on. The people who bought our condos both lost them to foreclosure. At the price they paid, it was inevitable.
Will that happen again? Maybe. When it costs more to own than rent, you are likely in a bubble. And maybe that is already happening in some markets. It might already be the case in our market here. Maybe it is the case elsewhere, I am not so sure.
Again, I call this rubber-band theory. The further you pull back on a rubber band, the more pain you feel when it snaps back and hits you. We might goose the economy for another few years, but then what? It may make the inevitable crash even worse.
