Moody's Talks - Inside Economics - Big Inflation and Baby Bubbles

Episode Date: December 10, 2021

Mark, Ryan, and Cris discuss the November consumer price index. The big topic is whether stock prices, housing, and crypto are in the midst of a bubble.Full Episode transcript.Slides referenced in the episode can be found here. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's analytics. I'm getting pretty good at saying that, aren't I, Ryan? You're doing really good. Yeah, we started these podcasts back in April of this year. So I think this is going to be our 36th episode. Wow. Yeah, right? And that's Chris DeReedies.

Chris is the deputy chief economist. Of course, Ryan's the director of real-time economics, my trusty sidekicks. Well, that diminishes your role, I would say. We are a co-hosts, I would say, on this podcast. Oh, that's an upgrade. Is that an upgrade? Oh, yeah, for sure. Well deserved, though, for sure.

I'm the laggard here, for sure. But it's good to you guys. Are you guys on Twitter? I mean, do you have a handle? Ryan, do you have a handle? Sarah convinced me to start one this week. Sarah Rodriguez. That's the person who's helped me out

for, I don't know, 10, 15 years, right? Yeah, she's great. She was very convincing, so we'll see how this goes. I'm afraid I'm going to end up going on rabbit holes. I know. That's what I was saying today, because the CPI number came out, the Consumer Price Index, and we'll talk about that in just a second, but did a little bit of tweeting,

and that just can take you down the rabbit hole, as you say. Yeah, really. And, Chris, are you on Twitter? I did set up by Handle years ago, but I never. I never use it. Okay, well, are you following me? You're not following me. Oh, my gosh.

You need to follow me. At the very least go up there. I don't care if you follow Ryan. I don't care about that. You've got to follow me. All right, got to find the password. Oh, of course, are you at Ryan Sweet? Is that your...

No, no. Actually, I don't know what I picked. I'll let you know. You sound pretty nonchalant about this whole thing. Yeah, I'm just not. not a social media, but now more I think about it, there's no place you can hide now. So I can like sub-tweet you on Twitter all the time. Hey, and don't mess up, Brian.

You know, we've got a lot of people reading these tweets. I mean, I don't mean to make you nervous, but yeah. Oh, no, that makes me really nervous. Yeah. Yeah, but next time you tweet out that we're in the midst of a correction, you know, I'll be right there to tell you. Okay, very good. Yeah, very good. I was going to say some. Oh, I'm at at Marksandy. There we go. There we go.

That was relatively quick, wasn't it? Yeah, it took about all but three minutes for me to tout my handle. There you go. Right out the gate. Please. Please sign up, follow. That's what this is all about, apparently. So, please do. All right, let's get the business. Well, you know, obviously today the number that we need to be focused on is the CPI, the consumer price index. Ryan, why don't you describe what the number, describe, you know, what happened here with the consumer price inflation? Yeah, I don't think there was a lot of surprises. You know, energy was a big contributor to the increase. You know, we had, you know, rising oil prices, heating costs have gone up. The good news is recently they come back down in quite a bit. So we'll get some relief in December. So I think we've talked about this on the podcast.

I think November is likely the worst of, you know, the inflationary pressures we're going to experience now. now. But prices rose across the board. Food prices were up. Take out food and energy, which are very volatile. So looking at core prices, which kind of, you know, what's underlying inflation running at, that still was up, you know, five-tenths month over a month. And it's up nearly 5% year over year. So inflation's, you know, high. But I think, as we've talked about, you know, it's only going to get better from here. So you think November, CPI inflation was up year over or 6.8% the highest since the early 80s. So a long time ago, you're saying that that's the peak, you think.

Yep. And I have a good number. I got a good number for the game. Oh, for the game. Okay. To highlight this. By the way, that's what I tweeted, exactly what you just said, that November was ugly. I use the word ugly, but that was the peak that we're going to see improving inflation

going forward. And, you know, the most obvious thing to point to most immediately is this decline. in oil prices, which is now translating into lower gasoline prices, which is key. And natural gas prices are down, right? They're down a ton. And retail gasoline prices. They've edged lower recently. They're about to drop a lot in the next couple weeks.

Right. Where are we now on the gallon of regular and leaded at Wawa? Do you know? 356 this morning. 3.56? Yeah, that will get down to three. At least my Wawa. Well, nationwide, I think it's like an average of three.

We pay a little bit more here in suburban Philly. I think it's three, last I looked, 335 nationwide. And the peak was a few weeks ago $3.50. And with oil now trading closer to $70 a barrel on West Texas Intermediate, you're saying we're going below $3 a gallon. Yeah, and it's more, I think you tweeted out the chart, the wholesale gasoline prices. They lead retail by a couple of weeks,

and they point to retail gasoline prices a little bit north of $3 per gallon. Right. For the national average. You may not know the answer to this, but I'm guessing you might. Hopefully this isn't what you were going to do for the game. So say take... Oh, no, you're going down that road. Really?

Take out energy. Yeah, yeah, no. Well, maybe let me ask it this way. So let's say the target inflation rate, you know, where the, let's say the Federal Reserve wants CPI inflation to be, consumer price inflation, to be, let's say it's two and a half percent. I think that's, you know, reasonable kind of target. But we're now sitting, let's round up to seven, okay?

So seven minus two and a half is 4.5 percentage points. That's what we're above target. Of that 4.5 percentage points, how much of that you think is energy? And that's gasoline, home heating, the whole shoot match. Do you have a sense of that? Yeah, it's two and a half percentage points. Okay, so if energy, yeah, right. So if energy wasn't.

adding, was just flat, energy prices were just flat, inflation would be, what's that, that would be 4.5%. Yeah, 4.5. Okay. And in all likelihood, energy prices are going to fall. Well, we know they're going to fall. So it's going to actually, it's going to be way on it even more. It's going to be disinflationary. Yep. Okay, let me ask you this then. Hopefully this isn't what you had planned for the game. It definitely is. Oh, really? No, it's all right. Go ahead. I'll come up a new number. I'm sorry about that. No, this is good.

I thought it was important. Yeah, 4.5 percentage points, 2.5 percentage points. 4.5 is the delta, the difference between inflation today and where everybody would want it to be, you know, broadly. And 2.5 of the 4.5 is energy. Correct. You know, that's that's going to go. Temporary. Yeah.

Energy prices. The fact is going to go the other direction here. Exactly. Yeah. Okay, that leaves you with, what, two percentage points to explain, right? Mm-hmm. Right? So are the two percentage points, how much of that is vehicle prices?

Oh, I didn't do that. So what I did is I looked at all supply constraint components. Okay. So that's new and used vehicle prices. That's all of audio equipment. So we would add up all that, and most of it is used car prices. Right. That's that in November added 1.8 percentage points.

So my number was going to be 2.5. And that's the year-over-year increase in the CPI, if you exclude supply chain issues and energy. And 2.5 is exactly where the Fed would want the CPI to be. Oh, okay. So you're, okay. So you're saying that all of the difference between where we are today, I ran into seven, but actually 6.8, so you were more precise.

So you're saying 68 versus 2.5, that can be explained by two things. One is the energy prices, gasoline prices, home heating primarily. And the other is those prices for those products that have been disrupted by the global supply chain issues that the Delta variant kicked off back in the summer. And to be completely transparent, here's the list of supply constraint components that I used. vehicle prices, use vehicle prices, motor vehicle parts and equipment, motor vehicle maintenance and repair, audio and video, supporting goods, and furniture. Okay.

All right. So, man, I listen to that and I say, what's the big, you know, why isn't this transitory? I mean, I guess you can say the ironing out the supply chains sufficiently is going to take time. You know, it's not, it's not, you know, in the vehicle industry, it's all about getting chips from Asia so that the vehicle manufacturers here can produce more, get more on dealer lots and get those prices down. And that's a process. So that's not transitory. That maybe not, that's not next month. The main name be next quarter mid next year, certainly by this time next year, you would think that that would be iron about, unless something really goes off the rails with the pandemic.

Correct. So in my mind, from a, if I guess we get into semantics about what's transitory. not transitory, but if you define transitory as not, that, you know, it's not, should not affect the conduct of monetary policy, then would you consider this, what we're observing now is transitory or non-transitory? We're more persistent. Maybe that's kind of a dumb question, I guess. No, no, I think it's good.

Well, the Chris go first. All right. Is this in your mind transitory or not, Chris, what we're observing? In my mind, this feels like transitory, right? It doesn't feel like this is a persistent problem with inflation. Yeah, it's going to last a little bit longer, but that's because of the disruptions that occurred. It's not something, you know, inherently fundamentally lifting the underlying rate of inflation here on a consistent basis.

Like rank growth. Rank growth, that is, that's a different story. That's where I was going to go. That's already here, right? That's already here. It's not all there. No, it's not all there. It's really common.

Yeah, that's where I was going to go. I think the part that Ryan has identified is transitory. Yeah, a couple of quarters, it'll subside, but I see that rent tsunami coming. It's not in the number. It's not big in the numbers fully. So I think that is going to persist for quite a while. Okay. But when that comes, we're going to have a massive disinflationary force from supply chains.

Yeah, agreed. Yeah, okay. So you have some offsetting. Yeah, you have a lot of offset there. So things are going to settle back down to the Fed's target. Yeah. By the end of next year? That's what you're here.

That's what I'm saying. Yeah, I would try to say. In fact, I think the risks are pretty symmetric here. I mean, you could construct a scenario where rents accelerate more and the disinflation for these supply disrupted vehicles, audio equipment don't fall quite as much. But you can also construct a scenario where the risks are that you get lower inflation, right? That the disinflation deflation, it's not even disinflation, it's outright deflation. I mean, vehicle prices are like stratospheric. They're going to come crashing back down.

How do you like that for a metaphor crashing back? That was impressive. Is that a metaphor? It's not a metaphor. I don't know. But you get, that's a zandyism. That's a zandyism.

That's a, but you're right. If you kind of extract what trend growth is in new vehicle prices, use vehicle prices, pre-pandemic and just extend that forward and look at where we are now, we are, you know, miles, you know, higher. So those prices are mean reverting. Maybe we don't go all the way back, but even if we retrace half of it, that's a lot of disinflation. Deflation. I don't like using the word deflation.

Oh, you mean disinflation in the aggregate sense. Deflation in the sense that those prices. Oh, yeah, yes. You're right. Yeah. Right. Okay. On the rent side, you didn't explain Chris, and we took it for granted, I guess, but for the listener, what's the deal on on rents? Why are they rising so quickly? Largely has to do with measurement and how the BLS accounts for changes in rents over time. So prices, as we know, house prices have been rising. But the asset values don't go into the CPI themselves. It's some type of user cost of those properties.

So the BLS measures either the rent that people are paying, right, if you're renting a property, what is the change in that rent over time? So there's one category for that. That went up 3% on your view of your basis. They also try to impute something called the owner's equivalent rent, which is how much would you have to pay to, if you are a home, how much do you estimate you would have to pay to live in your home? What would the equivalent rent be to live there? That went up a little bit faster, three and a half percent, perhaps because homeowners are accounting for the fact that home prices have risen. and that might be working into their calculus.

So assumption is that these changes, rents tend to be sticky, right? So those contracts don't get renewed every month. It may take six months or a year to actually catch up with the changing house price environment. So for that reason, we may continue to see additional rent increases feed into the CPI over the next year or so. Yeah, that's all good information. Actually, I was asking you slightly. I let you go because that's it too. All right. Fine.

Not really answering my question, but that's okay. I was still very good information. What's the question? Why are rents rising so fast? Fundamentally what's going on out there that's going to. It's a supply demand issue, right? There's a lot more demand than supply, just like everything else. And why isn't that going to be solved any time in your future?

Because it's very difficult to build homes. There are supply issues there. Price of lumber, well, okay. Back over a thousand. Yeah, well, there was my statistic, but. I gave it away. I couldn't keep it in the bag. It's back over a thousand.

You guys haven't gotten mine yet, so I'm good. I'm still good. I got others, though, don't worry. Okay. Got some back. So, yeah, I think the costs are continuing to rise when it comes to new homes, and supply of existing homes remains very low. People are kind of sitting on their property.

He's not willing to sell at this point. Yeah, so for a lot of this, energy supply disrupted products, those prices are going to come in quickly. Energy is already coming in. The supply chains are going to iron themselves out. And those vehicle prices and other supply disrupted products are going to see prices fall. But the one place where we're going to see continued strong inflation and actually, and you're arguing an acceleration in inflation here over the next year or two is on rents. And that goes to this very severe shortage of home. you know, rental property and actually the shortage is even greater in the market for home

ownership. If you look at the vacancy rate for homes for sale, that's at an all-time record low. And of course, a lot more people are renting single-family homes as opposed to, you know, renting apartments. So that's going to be more persistent. The way I characterize that, though, is that that's the way the Fed gets from pushing inflation below their target, which is where we were pre-pandemic for really all the expansion since the financial crisis to the pandemic, to its target, which is now higher, right? They raised their target because

we were so low for so long, they want inflation to be a little bit higher for a longer period of time. And the way you get there, the arithmetic is higher rent growth. That's kind of where it's going to come from, right? That's kind of how I viewed it. That's certainly part of it. You don't I don't ascribe anything to wage, persistent wage inflation? Do you think this all gets ironed up? This is interesting. Yeah, I don't understand this completely because wage growth is up, no doubt. But all of that wage growth acceleration has been in the low part of the wage distribution.

You know, these are, and I know this from the Lanna wage, Fed wage tracker, Lano Fed tracks the same individuals over time. So it's the best wage data because it's not messed up by compositional issues, you know, industries and occupations, that kind of thing. And it shows that all of the wage acceleration that we've observed, at least so far, has been in the bottom quartile of the wage distribution. And that's lesser-skilled, younger people, you know, folks that work in industries that got nailed by the pandemic, you know, leisure hospitality, retail, restaurants, bars, personal services, that kind of thing.

And those are the places where people are most worried about, you know, they're more likely to get sick, right, because they're interfacing with people more than anybody else. They're not like you and I sitting in our back deck or, you know, I'm in my bedroom right now. And, you know, I talk to one person outside. I went to get Wawa coffee this morning. That's the only contact I had, right?

And probably the only contact I will have today with somebody. No, I'm getting my booster shot. I'm going to get my booster shot later this afternoon, so I'll have two interactions. And also these are the folks that more reasonably are fearful of getting sick, right? And they're younger, and they probably have many of them have kids and getting child cares already. So I guess my point is that's where the labor shortage has been most severe, again, as a result of the pandemic, and that as the pandemic recedes and these folks start coming back in, and by the way, you could see that happening in November, labor force participation for people with a high school degree surged in the month.

Now, maybe it overstates the case that's volatile monthly data, but nonetheless. And so I would argue that wage growth is going to slow, decelerate. And the other thing I'd say is productivity growth is up. You know, and it's not only about the wage growth. When you think about inflation, it's not only about. Chris, Chris, it's off. Oh, it's up. Come on.

Oh, I mean, you can try to hang your hat on one quarter. So we actually did have. No, no, I'm the optimist. I'm still optimistic. Oh, you're the optimist. I'm the contest, but that last data point is. So we did have some listener feedback. And they did want us to talk about productivity.

So, Mark, perfect. Okay. Okay. So there was a big drop in the third quarter and a big upper revision to unit labor costs. And what I told the listener, I was like, you know, you don't want to. Defined what that means. Yeah. Unit labor cost.

It's cost per unit of labor. Yeah. It's labor compensation. It's a proxia. It's a proxy for, you know, wages, compensation, things like that. You see how he said it's not self-evident. No, I thought you were like, you're like, quizzing me. Let's not tell what that is.

All right. There you go. So that data is really volatile. You know, even quarter to quarter, even year to year, it's subject to big revisions. And one reason we didn't talk about it a lot is that, you know, you got to look more at the trend in productivity growth and unit labor costs. Yeah. So. Yeah.

Yeah. And the trend is up. Well, in this quarter, it's going to, productivity is going to be way up, right? Oh, yeah. I mean, because GDP is going to come, it's come surging back as Delta has wound down. I mean, I saw our tracking estimate. for Q4 is now 8.7% annualized growth in GDP, right? Correct.

So in job growth is, if anything, it's kind of, you know, it's, it is what it is, 500,000 per month, which is strong, but no acceleration. So if anything, we're going to get a bounce up, back up in Q4 productivity growth. And that's neither here nor there, really, when you're thinking about what it means for inflation. It's really about the longer running trend here. Exactly. And you can see productivity growth has definitively started to move higher.

you look over the last five years, for example, just to smooth out some of the quarterly volatility in the data to get to the underlying trend, it's definitively accelerating at this point. Pretty much, almost back to the 2% that's prevailed since World War II, which is quite surprising, if you believe it. Yeah. Okay. All right. Okay.

Anything else on the CPI number that we should call out? I know you dig real deep into the battles of these reports. Anything, you may want to save that for the game, which we're going to go to next. Yeah, we can save it. I got to come up with another number. Okay, okay. I'm going to go first because mine is very apropos. Oh, boy.

And it's another. Oh, I'm not going to give you this hint because it might give it away. But here's, it's two numbers. You ready? University of Michigan. Is that it? No. No.

No, all right. I don't go back to that well very often. You see how he does this is this is he's guilty of this. And now he's like making me feel guilty. I don't do this. There's nothing wrong. There's nothing wrong with it. Chris's second number, something housing related.

Yeah. Chris, we already gave you the second. Okay. I already gave you the lumber. Two numbers, two numbers. All right. And actually, I better check these numbers before. Okay.

Because there's so many numbers in these reports. Okay, ready? Yeah. You got to tell me what these two numbers represent. 5% and 3.3%. And this has a, this is a, this is a, very important to the outlook for inflation as well. Jolts. Year from now. Joltz. This is not Jolts's job opening labor turnover survey, which was,

that came out this week too. That was pretty interesting. Yeah. Let's not go down that. No, no. Although there were 11 million unopened, uh, close to a record number of open job position. So, uh, yeah, the difference between the number of job openings and the number of unemployed is a record high. I saw that. Yeah, I'm a little surprised that wasn't your number, for the game here we're playing. And by the way, everyone knows this game, right? I just give a statistic. We each give a statistic and the other guy's got to guess it.

As you can see, these guys are stalling because they have no idea. No, no. Are you going down the median CPI and trimmed? No, no, but I could have done that. You could have. Is it the change in the CPI over the last two years? Oh, you got it. Core CPU.

Core CPU. Okay. All right, let me explain. But you definitely, you got it. You got it. You deserve credit for this. So 5% is the year-over-year growth in core consumer price inflation, core being excluding food and energy. By the way, for folks out there, they go, well, why do you keep stripping stuff out?

You know, why are we doing that? And the reason is because there's been a lot of research that shows that the core CPI is the best predictor of near-term inflation. So out six, 12 months from now. because the energy prices that we've been discussing and food prices, you know, go up and down and all around in a given month. So you don't get any information about where we're headed if you look at overall CPI. But if you want to forecast the future for inflation, the best measure to start with is the core CPI because it gets rid of that volatility and energy and food. And that was up 5% year over year through November, which, you know, that's, again, that's high.

That's double where you'd want it to be. Again, the target here is 2.5%. here double. And the 3.3%, the second number I gave, is the annualized growth in core CPI over the past two years through November. And this highlights a very important point. And that is another reason why inflation is so high today is what economists call base effects. That is, inflation was really, really low last year at this time because of the negative consequences of the pandemic. This was before the vaccines. You know, businesses were shut down in the same way as they were earlier in the year, but economy was still struggling.

You remember back, we were talking about possibility of going back into recession in December of last year. In fact, the economy lost jobs in December of last year because it was really struggling. It hadn't gotten any additional fiscal support from Congress and the Trump administration, so it was really struggling. But if you look over the past two years, you abstract from those base effects, right? So November of 2021 versus November of 2019, I look at the annualized growth. says well that abstracting from those the weak inflation of a year ago those base

effects it's three three three is high it's higher than 2.5 again that's your target but not that high not that high and by the way this is the other point why inflation could be really low a year from now because the base effects are gonna go in the other direction right now at 6-8 on core I'm at 5% right 5% year over year through November so that's gonna make it much easier than inflation and here I'm gonna go so far to say I talked about the risks and inflation. I think there's a reasonable probability. Inflation is actually going to be, you know, close to zero. Top-line inflation could be close to zero

because of the next year this time because of these base effects. Base effects, yeah. All right. Now that's that's, this is a good, what I gave was a good statistic. Why? Because it wasn't, it wasn't too hard, right? Ryan eventually got it. It took him a little while, but he eventually got it. It wasn't too easy. You know it too easy if Chris got it. it then that would have been 20s season. Chris's lumber price number would have been. And it's relevant to the conversation.

That is a beautiful statistic. Would you, would you agree or disagree? Yeah, I would agree. Absolutely. That's a good one. A little self-promotion.

Okay, right, right. Pat on the back. By the way, at Mark Zandy. I'm just saying, at Mark Zandi. You got to tweet that one out. Okay. I'm feeling too giddy.

It feels like, you know, it's already 9 o'clock at night. Yeah. Anyway, okay, who wants to go next? Although, Ryan, you had something you wanted to say. I interrupted you. I wouldn't let you. No, I was going to say, no.

No, I just agree with you. Oh, whoa, I was going to say, are you coming closer to my inflation forecast? No, that's a point forecast. That isn't, you know. All right. I don't know. You'll get it. I don't know.

Starting to drift. He's inching. He's inching. Yeah. All right. All right. All right. Chris.

In the club. I'll go to go to. Sure. 3%. On the nose? On the nose. On the nose. 3.0.

3.0. Is this related to the CPI number? Nope. Joltz? No. It's not Jolts. It's not CPI. Umish came out today.

No. Is that one year inflation expectations? Oh, you're so close. Oh, 1. 12 year. Or 12 months. Nope. Long term inflation?

It's got to be one of these. Five year. I would have gotten there. So eventually. Is that the, Is that ours? Is that ours? No, it's the UMISH.

It's UMISH. Oh, UMISH. University of Michigan survey did come out. And it's 3% over the next five years? 3% over the next five years, unchanged. Oh, okay. Pretty much unchanged all year. I mean, it's balanced around a little bit.

It's interesting. I point to that just because of the expectations aspect that we've talked about in the past being so important. You know, we got a little volatility. We got a lot of volatility here now. But in terms of those longer-term projections, I do agree with you that we're, you know, We're not going into this hyperinflationary environment. Yeah. That's a good one.

Consumers seem to agree. Yeah, that's interesting. If you thought anyone would be a little spooked by the inflation, it would reflect in their inflation expectations, it would be consumers, but you don't say it in the University of Michigan survey. Even the one year, it's 4.9%, but that's unchanged as well. Is that right? Well, the other inflation expectations measures all look pretty good.

I mean, the ones that I tend to follow more are those that come, out of the bond market, you know, five-year, five-year forwards, the break-even inflation from Treasury, inflation, protected securities. They all look pretty good, right, Ryan? They don't. They don't show any real-term. Yeah, they're sure any sign of getting dislodged where the Fed would have to panic. We talked about this in the past. You know, the Fed can be patient as long as inflation expectations remain anchored. And all signs are that they are. And of course, economists expectations, you know, is measured by the Philly Fed survey, which we participate And that's right on, it's moved up, you know, but I, you know, it's moved up largely because

the way the question is asked, and I know it's because I answer the question is, you know, what's your average annual inflation rate over the next five, 10 years? And just simply doing the arithmetic, you know, inflation is high right now, you know, that you're going to get a high number, you're going to provide a higher number than you otherwise would, right? If you ask me, what is inflation a year from now or two years from now? It would be right back down to, you know, we're, you know, low. two and a quarter percent, two and a half percent.

So economists' inflation expectations are right on target as well. So no sign that inflation expectations are coming untethered here. At least right. Yeah, okay. So I had a, I got a couple client questions asking me, now I want to pick your brains, see if I wouldn't, you know, too confident with this one. What's the probability of hyperinflation in the U.S.? What percent would you own?

For that? Hyper. Basically, to think about, you know, the doubling of prices every year. That's hyperinflation. You mean like Germany, circa? Venezuela. Venezuela. Yeah, so I had a couple client questions.

What would you put the probability of that happening in the U.S.? I said zero. Zero. All right. The Fed's going to clamp down. How would that happen exactly under what, you know? Usually it happened when you have like a loss of confidence in the currency, and the central bank's just printing money left and right.

That's the only way, right? I can't think of any other way. But I'm asking in our, in the current. context in which we live in the United States of America in, you know, December 10th, 2021. What's the scenario? I couldn't come up with one. That's why I said zero percent.

Oh, yeah, I agree with you. Okay. I'd say, yeah, I don't, I, yeah, zero. Usually as a kind of people want to say there's absolutely no probability of something happening, but this one I'm pretty confident would not happen. Well, okay, I'll take that back. Let's say a meteor lands in the middle of, you know, the bread, the, the, the, the, the, the, you know, Central Valley of California, I could envision it's hyperinflation in that scenario.

In wine, a small meteor? That's the dimension of this. That would be a pretty sizable supply side disruption, I'd say. All right. So 0.1%. Okay. There you go. All right.

Of course, we now, we have, apparently we have technology to push meteors off track to hit us. Did you see that? They're testing it. Yeah, yeah. Yeah. You're testing it. Yeah. All right.

Okay. That was a good one, though, Chris. All right, Ryan, have you, have you gathered yourself here? You got it came over the new one? Okay, okay, fire away. $219,000. It's not initial unemployment insurance claims because that came in. Unbelievable.

188, $18,000 in a week. Lowest since the 1960s. Actually, I'm a little nervous that it's too low now. Well, yeah, that's going to be verified. Yeah, I don't know. Well, I mean, that. For a few weeks now, it's going to be. Week to week, you have to ignore Java's claims.

It was all seasonal factors. So the seasonal, the seasonal factor anticipated roughly 100,000 increase in new filings. We got a 60,000 increase. So the seasonal adjustment factor just crushed the number that was reported. Which reality? Where are we? That's why. That's my number.

That's why we went with the four week moving out. There you go, Chris. Oh, wait a second. Don't I get credit for this somehow? I mean, I'm not going to call attention to the UI claims. Yeah, you, I was getting there. No? No, Chris jumped in.

Oh, I didn't hear him. You can get partial credit. All right. We can share. Some credit, I mean, I'll share. You'll share. All right. And I mean, I did it so gracefully, too.

I didn't even like take credit. I just started talking about it, right? Yeah, you get your, watch you ask for credit afterwards. It wasn't very gracefully. Yeah, that's good point, actually. I should just let it lie. Let's sink in, everyone would realize, you know.

Oh, that's Andy guy. But now. Right. Now, oh my gosh. What an ego. You've got to get credit for everything. There's truth to that, though. All right.

219. 219 is a four-week moving average, and that's reality? No, I mean, much of reality. It's closer to reality. Yeah. Okay, what's reality? We think we are. Where are we on UI claims?

Initial claims from unemployment insurance. This is layoffs. 230? 2.25, 230? That's low. That's low. Yeah, yeah, for sure. Yeah.

You don't think we're full employment, though. No, no. Prime age. Yeah, right. Prime age, e-pop, you know, employment to population. Okay. But it's encouraging. I mean, it's not surprising that we're getting very low levels of claims because, you know,

businesses aren't laying off workers. You know, people are, quitting left and right, but layoffs are very, very low. Yeah. Hey, it's almost like we could call the podcast right here. It was a pretty darn good podcast, you know, but we should move on, don't you think? Yeah. You thought I was serious.

We could, but no, we should keep going, I think. No, our listeners have become accustomed to, you know, one, two-hour dialogue. Yeah, well, we've already been talking for like 45 minutes or something. Yeah. I think so. Wow. Really? Wow.

Time flies. All right. Well, that's okay. We're going to push forward. So the topic that we're going to tackle, you know, as you know, we do the statistics check, and then the game check. And then the big topic. And the big topic is the deep dive.

And this week I thought we dive into bubbles, asset markets. And it just feels like a lot of pieces of information data out there that signaling that these, that asset markets. When I say an asset market, it's stocks, that's, that's bonds, that's housing, that's crypto, uh, if you can call that an asset, which we, you know, we can debate, some people view it as an asset. Chris Wood. Yeah, Chris Wood, obviously. Commercial real estate, uh, you know, commodities to some degree, you know, anything that people attach a value to and is a store of quote unquote store of value, that's an asset. And asset prices, the price for you pick it, pretty much everything, I mean, has gone

like completely skyward here. And the question is on the table, is it a bubble? You know, and first, to answer that question, is it a bubble? And of course, if it's a bubble, that's not a good thing because bubbles often burst and that means prices fall and people lose money and that has economic implications. I mean, the housing bubble burst and that created the financial crisis. And of course, we had the Y2K bubble. That was the internet bubble in the equity market back in the late 90s, early 2000s. That blew. That did less damage because that was equity, not debt, which we can talk about the distinction there.

But nonetheless, bubbles generally end badly. So it's an important question. They have to end, right? If it's by definition, it's not a bubble, right? No, is that right? Is that true? Well, can't they, can't you have this metaphor of a bubble and I can take the air out? Can I? And, you know, doesn't necessarily. Can you think of an example where that happened where we deflated a bubble without a popping?

Uh, well, there's only, I mean, I can only think of two historical examples of bubbles. I mean, one is the housing bubble and the other is the Y2K bubble. Are there any other I mean I'm thinking about in the U.S. context I'm sure there's cases overseas that I'm not thinking about So when oil prices skyrocket and then they come down Do you consider that a deflation? Oh, that is a

Is that a bubble that deflates or how would you characterize that? I remember a few days or years ago we had this huge run up in prices and then the economy didn't actually collapse or anything. Yeah, that's a good point. I mean, oil is an asset, right? And it goes up and down in price, and it can be subject to speculation because, you know,

it's prices determined in a market, you know, financial market. So, yeah, I think you would consider that. So, yeah, that rose and then burst. Well, that's deflated. That might be your example. That's my example. Yeah. Is that what you're saying?

Yeah, then I don't, but I don't consider. that a bubble then. It's just a right. Oh, you don't. Would you say for me, a bubble has to cause damage right there? Right. Let's no, no. I don't know. Well, that's my definition, right? So let's let's agree on the definition here. All right. All right. How would you define it? I'm, I have, I'll hold mine in reserve, but how would you define a bubble? I would define a, yeah. A bubble I would define as a situation where prices are outstripping fundamental values, and they are followed by a significant or sharp correction back towards that.

They may overshoot or they may land close to the fundamental value, but it's not a gradual return to equilibrium. I would include speculation. I think speculation has to be part of a bubble. Exactly. Yeah. Yeah. Well, yeah, I guess that's what I mean by outstripping fundamental value.

No, no, you can have, like, I'd say markets right now are stripping fundamentals, but I'm not sure they're a bubble, right? You don't think they're speculative? Oh, I'm getting closer saying there. Well, that's why we're talking about it because I'm moving in that direction. I guess it depends which asset we're talking about. Yeah, it depends on which asset we're talking about. But I, but you would say then a bubble is a asset that is overvalued, one, that it's prices outstripped, its underlying source of, value, corporate earnings, stocks, rents, housing, crypto, who the hell knows, that's why it might be a bubble,

you know, that kind of thing, right? The second criteria is that there's speculation. Okay, define speculation. What does that mean? Oh, I would describe it as just people buying something because the price is going up. Yeah. So I'm going to buy today. They're just chasing, yeah.

Because I think I can flip it, you know, that would be the terminology in the housing market. I can flip it and make it. and make a quick buck, right? That's the only reason I'm buying this that has nothing other than I'm going to find the greater fool, the bigger fool than me, and I'm smart enough to get out of this quicker

than anybody else before it goes down. Okay. So you need overvaluation, you need speculation, you need speculation. What else would define a bubble? Anything else to find a bubble? There's always the question about leverage. Yeah, good.

That's a good one. Is that... Does it have to have leverage, though? I don't think it has to, but I don't think it's a necessary condition, but certainly it's supportive. So the idea there, leverage, you mean the buyer of the asset goes, borrows money to buy the asset. Correct.

And if that happens, that bubble blows and the price falls, of course, the value of the amount of debt owed doesn't decline. It's still the same amount of debt. Right. That's the prescription for... the borrower, the buyer of that asset not paying back that debt. And then you got a financial crisis, right? Then you've got a financial problem because all those creditors,

all those banks and finance companies who ever extended the credit now got a problem. And then that reverberates around the, you know, that hurts everybody, right? Because everyone is going to be affected by that because even good people, good credits can't get credit to do whatever they want to do. Okay, so it's overvaluation, it's speculation. leverage definitely is a tell, but it's not a necessary condition for a bubble, is what we're saying. Right.

But it's generally an element of a bubble, generally. Right. Okay. And then there's the, so I guess our- It has to blow? It has to go. Yeah, the correction. Is that necessary or I guess that's where we differ in the definition?

I'm saying it does. Yeah, because there's a bubble can burst and prices, meaning, go crashing down. or the bubble can deflate, meaning prices go flat, right, and stay where they are and let the underlying source of value. Catch up. Or rents catch up, right? Mm-hmm. Okay.

I would say, my sense is that that's the possibility. You know, bubbles can burst, and they do burst, and we've seen that. But that isn't a necessary condition. Because you only know, then you're saying, I only know. a bubble ex post. I see it first. It's a bubble. I don't believe that to be the case. That's partially true, though. It's really difficult to identify bubbles in real time. I'm pretty good at it, actually. I'm pretty good at it. Yeah. I think the challenge is the fundamental value. What is value, right? That's always been the challenge. Yeah. Okay. Actually, our models,

by the way, help us with this, right? Yeah, correct. They really help us. They do. Because the way we You want to describe how we model, Chris or Ryan, how we model asset prices? I mean, it's actually, I think it's a pretty cool way of modeling things, I think. I don't know how, I don't think it's that novel, but it's very interesting. And I think it's a useful way of, by the way, I don't think as economists you can talk about the economy and the prospects for the economy without talking about asset prices, particularly when asset prices are significantly high relative to their, you know, know, underlying source of value or very, very low relative their source of value.

You know, generally we don't talk about stock prices or bond prices or housing values unless that's the case, unless values are very high or very low. And then that becomes a, that's a macroeconomic issue. That's an issue for policymakers. I mean, asset prices are in the reaction function of the Fed explicitly. The Fed is saying, hey, this is part of what I look at when I make a decision around interest rate. So this, you can't not, you can't put your head in the sand here. This is you've got to have a view, you know, and you have to forecast these asset prices.

Well, for the Fed, it's financial stability. They're not necessarily saying, we want the S&P 500 to be X. They're not aiming for a certain level of the S&P. They just want financial stability. And that's why they're concerned. And they put out that financial stability report, I think, twice a year, that they're seeing signs of fraud in a number of asset markets. Well, that's interesting. So, I mean, if you said to me, you know, we had a bubble overvaluation, speculation,

but no leverage, therefore if that bubble burst, it's not a financial system problem, they would not be worried about it. Correct. They would not be considering that. Right. There's got to be some sort of contagion component to it. Yeah.

I guess that's reasonable. But again, we think leverage is a, if it's not a necessary condition, it's pretty close, you know, for a bubble. I guess there could be indirect leverage, right? Oh, yeah, for sure. So they could still certainly be concerned about a market blowing up if the counterparties then are, you know, have leverage elsewhere, right?

So. Or I'm using the asset to buy other stuff. Right. Yeah. Yeah. Yeah. That's my collateral. Yeah.

That's your point. Yeah. That makes a lot of sense. Okay. All right. So we've had two, in recent modern history, two bubbles, because it checks all the boxes, right? The equity market bubble, the Y2K bubble. bubble in 2000 and the financial, the housing bubble that led to the financial crisis.

Any differences in those bubbles? You know, things that are important in the context of identifying a bubble or in terms of the implications of the bubble burst for the economy and for the financial system? I think from the super. Speculation was both of them. Yep. So you think of Y2K, everyone was buying tax stocks, anything that had dot com. attached to it. I also know someone that started a business with a dot com in there around that time.

Oh, yes, that's me. Yeah, economy.com. You're a little slow on the trigger there. That was a long time ago, yeah. Yeah. Actually, you know, overhanded. Yeah, I paid a lot for that URL. Well, you know, we paid a lot for that URL. Economy.com. Although I think we got our, I got a pretty good return out of it, I think. It's still around. We still have it to, We sold it to Moody's and they paid for it. So, you know, they paid a pretty price for it. So I think we didn't. But I mean, back then, you know, you had, what was it, pets.com and it was all these

tech speculation. People were buying anything that was tech related, created a big asset bubble. Well, what's the big difference? There's a, in my mind, this is a quiz. My mind, there's a big difference between the Y2K bubble and the housing market bubble, circa, you know, 2005, 2006. And at least in terms of its implications. implications, you know, for the economy.

Oh, well, in terms of, I see lots of different, but in terms of implications is just, I would say, the scope who holds stocks versus who owns a home. That's a good one. So that's certainly, you hit housing, you're hitting a lot of people versus a relatively small group of stock ownership. Home ownership is what, two-thirds, right, roughly? Right. I mean, give or take, you know.

Yeah, yeah. And how stock ownership broadly defined is about 50% of the population. And that, you know, there's a big chunk of those that don't own much stock at all. It's really concentrated. And that's the other big difference. You know, you're talking about very wealthy individuals compared to the middle income American. And when you say contagion was a lot different. I mean, you know, when the tech bubble burst, that was isolated to, you know, people that own stocks, when the housing bubble burst, banks were holding these worthless assets and that just

caused the financial crisis. Well, the way I would frame that, or just, you know, to say that is the big difference between the two is one was the bursting of the equity bubble. It means equity. It's not debt, right? There was some debt, margin debt presumably, because people can borrow to buy stocks. But that was relatively limited, small amount of margin debt. And that was an accelerator then, right? Yeah, housing, that's, that was all, that was leverage.

That was people borrowed a boatload of money. you know, two years exploding subprime arms. And also there was a lot of fraud, as we know, certainly in hindsight, in those mortgages. You know, people were lying. You know, they weren't owner investor. They were investors. They weren't owners. They lied about their income.

They lied about, you know, the appraisals. Appraisals, you know, biased. So very, very different. So the fallout from the bursting of the Y2K bubble was, we had a recession. But here, I'd say this, we wouldn't have had a recession after. the Y2K bubble, not for 9-11. 9-11 is what did us in, you know, ultimately, and that's how we got the recession.

It would have been a tough, you know, period after the Y2K bubble burst, but I don't think we'd had a recession. Of course, after the bursting of the housing bubble, that was a mess, you know, we had a, you know, paying the price 10 years later until the pandemic. Okay, so I view that as a big difference. Okay, oh, let's go back. I asked the question, I don't think we answered it.

How do we model asset, prices. You want to describe that? Sure. So we use an error correction framework, which is very intuitive in the sense. It follows that process you just described in terms of assessing what is a fundamental value of an asset. So in the first stage of an error correction model, we consider what is the underlying, what are the under fundamental drivers of an asset? So if we're talking about housing, we might look at different supply and demand factors, population, or other factors that might influence how much housing really need to support a particular economy. So that we establish what the fundamental value is. We then project what that,

how those values might change over time. So we might look at different ratios like a price to rent ratio or price to income ratio. We might assume that in the equilibrium, house prices should grow at the rate of income growth to maintain an equilibrium type of relationship. And then as a second stage, we model the difference between where the prices are at any given point in time and this fundamental value and how quickly and by which process should prices change to converge to that longer run equilibrium. So it's those two stages in which I think is a really nice mental. device, if you will, because first you think about, okay, what is the value, what should the value of

this asset be? And then as a second stage, as, okay, how do I get there? And the speed at which you get there can vary depending on the asset. So if we're talking about stocks, for example, you might assume prices can adjust really quickly, right? They're fairly liquid, established markets. With housing, you have a lot of transaction costs may take a longer time to actually adjust to those longer term values. So that's a good description. In a nutshell. Yeah, yeah, yeah. It does beg the question, though, you can't have a bursting of the bubble in our models. You know, that doesn't happen. The model isn't going to say an asset market that's overvalued and speculative is going to burst, right? I mean, it will basically say you're going to have prices come back down in a reasonably orderly way to where they should be given the underlying thing that drives the value of that asset, right? Yes, and no, you couldn't have swings, right? The model certainly can generate.

You could have a fundamental value, and if you are well above that fundamental value, the model could have you swing around, right? Could induce a cycle. The model is really, yeah, I mean, and I don't mean this is any kind of criticism, you know, because we built the model. It's pretty hard to, you know, to estimate a model that's going to give you that kind of correction, you know, the error correction process, getting back down to the equilibrium value, so to speak. Here's the other thing I'd say is if you look at our forecasts, when we're in a market that's

significantly overvalued and you look at our forecast, it always shows the price of that, let's say stocks, for example, or housing, basically going flat, maybe down a little bit over time to let earnings catch up or let rents catch up to that value. We don't, and, you know, we look, that forecast can actually look silly for, for periods of time, right? Because by definition, a bubble keeps going. You know, it's not a bubble unless it keeps going. And it gets bigger and bigger and bigger. And it finally sucks everybody in and says, and once everyone's in, then it blows.

So you could look stupid along the way, right? Because you keep saying, oh, this market's overvalued. It's going to correct. It's going to, price is going to go flat, come down. But no, it keeps going, but you even become more convinced that the market's going to go down, right? Am I making any sense at all? Yeah, so it's difficult to model, the discontinuity, the sudden jump, right? At what point do we decide, you know, to correct, right?

Why was it that particular Black Friday and not the Monday before? Well, look at our stock price forecast. I mean, it's been, you know, whatever value it is when we do the forecast, that's the peak. Because the model says that, you know, it's overvalue. Yeah, that's right. But of course, then it goes up the next quarter, and then we have to, the same thing happened. So, you know, someone looking at the forecast goes, you guys, idiots?

You know, what the hell are you doing? You know, but that's the reality of a bubble. You have to have the courage of your convictions. And you're saying, actually, I'm even more confident that this thing's going down than I was a quarter ago, you know, and it's not, it's just you're the dumb one for buying into it. This is what happened in the housing bubble, right? I mean, for two, three years leading up the housing bubble, we were saying housing's overvalue, we got a problem.

Housing's over value. We got a problem. Prices kept going up. And then people say, well, what are you guys thinking? You know, what are you guys doing? And it affects, you know, it has impacts. You know, that's a bubble. That's when everyone is sucked in.

That's by definition of bubble. Fortunately, we didn't get sucked into that housing bubble. We stood our ground. Same with the Y2K bubble, by the way. Go back and take a look. So maybe another criterion is the justifications, right? Once the justifications get out of whack, I remember during the housing bubble, right? It was nesting and, you know, people don't want to travel anymore because of 9-11,

therefore they're going to invest in their home, right? So that you can start to come up with all kinds of ideas to justify why values can hold at this level. Yeah. Maybe it's a quarreled. The other anecdotal thing is, you know, the infamous one, I get into a taxicabre. And the taxi cab driver saying, oh, I was just buying, you know, pets.com or I just bought that my fifth house on Long Island. Yeah. And that's a kind of crypto.

Crypto, well, that gets us to brass tax here. So the listeners now saying, enough already. Are these markets bubbles? What's going on? So let's take them one at a time. Which one do you want to start with? And then let's let's do stocks because, you know, we could do this forever. Let's do stocks.

Let's do single family housing, obviously. And let's do crypto. Anything else we should be doing, do you think? Should I throw anything? Is that enough? Again, asset market, all the asset markets are pretty highly valued here. No bonds to throw in. Ryan's 10 years.

Spreads in the bond market. Oh, the 10 year. You want to talk about interest rates in general? By the way, people get a little confused here, but low rates means high prices, right? High bond prices. You know, so the lower the rates are, the higher. bond prices. And by the way, that that's also another way of thinking about overvaluation, which I think we'll get to in just a, excuse me, just a second. So you want to talk about bonds as

well? That's it. Then we got the whole personal finance. Ten year treasury yield. We go back into that debate. The discussion around crypto should be really quick. Oh, because it's. It is a bubble. It's clearly a bubble. Yeah. So there you go. Well, Chris is going to take the other side of that. No. All right. Maybe the Zandi coin is in a bubble. Okay. All right.

All right. Okay. We're going to do stocks. We're going to do housing. And we're going to then do, we're going to do crypto. Okay. Because we've got to do crypto. When I say crypto, that's not becoming a catchall for all kinds of wacko stuff, you know.

NFTs. Yeah. Okay. Stable coin and, you know, so forth and so on. It's just a matter in time until Mark has a NFT. I know. You're on Twitter. You're going to be on TikTok soon.

He created an NFT with something. I can't remember what it was. I don't know if they sold it or not, but he was telling me about it. Anyway, okay, stocks. Okay, S&P 500. I'm looking at it today. I'm going to pull it up here just to see where it is. I'm guessing the S&P 500 is around 4,700.

It's, oh, yeah, 4,696. There you go. And I think that's within spitting, yeah, it's like, that's a record, that's pretty close to a record. high. I mean, pretty close. And we're up, I don't know, like 20% this year at least on the S&P, and that's after multiple years of, you know, whatever rise in price. Our model, you know, going back to our model, says this market's overvalued by, you know, like 15%, you know, even at these low interest rates. By the way, that's an important point. Asset prices can be

high and they should be high when interest rates are low. And obviously interest rates are very low, so asset prices should be very high. But we're saying is here, they're higher than even you would think they would be given these low interest rates. Correct. So, okay, with that is backdrop. Is the stock market a bubble? Yes. It's overvalued. Well, no, no, no. That's not fair. It can be overvalued. Remember, overvalued? Yes. Okay, overvalued check. I think we all agree on that. Yes. It's outstripped where it should be given where interest rates are, and the source of that value is corporate earnings at the end of the day. And they're okay. They're pretty strong. So again, you would expect stock prices to be high, but it's overvalued.

We're saying it's even higher than you would expect given rates and given corporate earnings, you know, roughly speak. Do you use the Schiller PE? I haven't looked at that recently. But in terms of overvaluation, that's my gauge, right? Oh, the Schiller's not just, it's not just the level. it's relative to earnings. Okay, so there's a lot of trying true measures of valuation. And you're saying, what is the Schiller PE? That's like a long run PE, right? Yeah, secretly adjusted price to earnings.

Yeah. Or earnings ratio. And it's, I think it's just, all the PEs are elevated, certainly. Choose whatever you want. You have the Buffet Index. What's that? You have the Buffet indicator, just the total value of stock or equities as a share of nominal GDP. Yeah, that's the one I like.

Yeah. Or I like even more than that. I like the value of all publicly traded stocks in the numerator and the denominator and the denominator. Corporate GDP, corporate GDP. The BEA Bureau of Economic Analysis calculates GDP produced by corporate entities that are publicly traded. That's a good one. No, not publicly traded. All corporate entities.

But the bulk of that is corporate or publicly traded company. And that is, if you look at it, got a nice chart of it. it's very, very close to the peak during the Y2K bubble. So, okay, overvaluation. Check. We got that one. What about speculation? So this is where I changed my view.

I was like, it's overvalued, but not a bubble. It's a bubble. Yeah. Why? When you say, what kind of speculation are you focused on? When you say that, I mean, in speculation, that's more of an anecdotal generally kind of thing. So what do you think? I'm going to share a chart.

Now, people are listening, you know, on the podcast won't see it, but on YouTube, you can see it. And Mark, I'm sure I can send it to you and you can tweet it out. Okay. We'll do it. So you're going to pull up a chart. Yep. Okay. So this is the value.

I think we talked about last week, the value of margin accounts of brokers and dealers. And just look at what's happened recently. Well, this gets to the leverage. Yeah. This is leverage. And but also when you're, this is probably speculation you're saying. Yeah, I mean, you got to. finance, you know, buying your meme stock somehow.

Yeah. So meme stock is what I point to. Yeah. Right. That was consistent with the Y2K bubble, right? I mean, it's lower net. I mean, back in 2000, you know, obviously the economy was a lot smaller. So we should probably deflate this with something, right?

Yeah, you can look at it probably as a share of GDP or yeah. Yeah. I can come up something. But I mean, even so it's doubled in a few quarters. All right. explain this to me. So you're saying it's going from $300 billion. This is debt. This is what people borrow.

their brokerage accounts to go out and buy stock. Correct. You're saying it's doubled since the pandemic hit. Correct. So $3 billion to $600 billion. Right. So this could be an accelerator to a correction. So a correction starts, you start to get more margin calls.

If you don't have the cash to bring up your accounts, you're going to have to sell that asset. And then you start this cycle where, you know, we get a bigger drop in stock prices because of any of these margin calls. Is there any other benign explanation for this, Ryan? What else could have to be explaining this other? than people are starting to lose their minds. Well, I go to that one that people have lost their minds. Really? Okay. Chris, any, you know any other explanation for that?

Surgeon margin debt? No. I'm sure. Can you buy crypto on margin? On that margin debt. That would be interesting. Well, I guess there's other signs of, that's a really good one, Ryan. I guess there's other signs of speculation.

I guess meme stocks, right? Yeah. Game stop. Good example. Like they're just picking a stock and just buying it just to do it. Yeah. Drive hedge funds that have shorted it crazy. I mean, I guess that was GameStop.

Yeah. I guess the options activity is another. Oh, I haven't looked at that. Have you looked at that recently? Just at a high level. I understand that options activity is through the roof. People are actually buying and selling more options than underlying stock. So the speculation is.

I'd love to see that data. I haven't seen that data. That would be interesting. Yeah. Do you have something, Ryan? We can track it down. Yeah. Yeah.

There is an indicator. I don't remember exactly. It's like, you look at the share of puts versus calls, something like that. And it's like a, you know, a bearish signal or a bullish signal. So I can take a look at it. I guess SPACs would also be kind of another sign of froth, at least. Those are special purpose acquisition companies, I think. So these are kind of shells of.

corporate entities that have been established to go out and, you know, instead of IPOing, you know, you can create a SPAC and put stuff in, put assets into it and create a company, I think. I guess that might be a sign of froth. Well, okay, so Ryan thinks this is a bubble. We've now reached the threshold for a bubble. Overvalued, speculative, and leverage. Correct.

Chris, would you say it's a bubble? It's a bubble now, but we have to wait for the correction, right? Well, it's coming. The stock market corrects every, you know, on average. There's a high probability of this is a bubble if you want to put it that way. Okay, I'd say it's a baby bubble. That comes, we're going back to the tongue. Baby bubble.

Baby bubble. Well, I think we've got the title of our podcast. That's the title of the podcast somehow, in some way, baby bubbles. Yeah, we'll get it in there. It's a baby bubble because it feels. like a bubble, but it's not quite big enough to really be a bad bubble. You know, a big bad bubble. Oh, I love that. It's even better. Big Ben. Baby bubble. Ben, are you? Ben signed off.

He's out. He's out. Big bad bubble. I'm going to write about big bed, Jesus. Big, bad. Big, bad. Jesus. Big, bad. bubble this weekend. That's what I'm going to write about. That's your COVID-19 update. Oh, did I tell you guys at Mark Zandi? Did I tell you that today?

At Mark Zandi. Yes. I'm having way too much fun. There's your viral tweet. Something in the Wawa Coffee this morning. Yeah. Oh, geez. All right.

Okay. Well, it stocks. Okay. We concluded. that we're you know if stock prices rise another 20% in the coming year I think we got a problem you know especially margin debt goes from 600 billion to 800 billion yeah or trillion yeah so keep your eye on that one baby uh all right okay single family housing all right Chris you got lead the way on this one what do you say is it a bubble I don't think so oh okay all right

overvaluation yes big time check right yes yes Price to income, price to rent, ratios. Take your pick. They're all... Well, you did a really cool chart, though, Chris. I don't know if you can pull it up, Brian. You know, the percent of metropolitan areas across the country, there's 400 plus MSAs, metropolitan statistical areas,

that have had house price growth of over 10 percent in the past year is 80 percent of them. 80 percent of the MSAs have experienced double-digit price growth. And 25 percent, 25 percent of them have experienced 20 percent. percent plus year over year growth. Yeah. And of course, incomes, that even risen,

rents haven't risen that fast. Yeah, and it was 50% during the housing bubble. Yeah. So by this, if you looked at that measure,

you'd say, this is even worse, what we're in now is even worse than the bubble we were in back in the mid 2000s, right? That's right.

All right. So over evaluation, that does get the check. Check, check. Problem, I would say, no problem. Although someone might argue,

just to press you on that one a little bit. remember the affordable housing shortage we talked about. So, you know, hey guys, you know, there's no supply. You know, why do you think it's overvalue? And by the way, fixed mortgage rates are 3%. So why shouldn't house prices? And we've got remote work, meaning all these New Yorkers are moving into Atlanta and

driving up prices or Bay Area residents moving into Boise and driving up prices. So isn't that account for the high house price growth we're observing? So I would say there prices right now are disconnected from fundamentals today, right? Price to income ratio is out of whack. Price to rent ratio is out of whack. But, you know, if, so if you wanted to claim that in the future, incomes are going to rise faster or rents are going to rise faster and restore that balance, sure. It's possible.

I don't see it. I don't see incomes screaming ahead to compensate. Yeah. Okay. All right. Overvalued. Speculative? At a national level, I don't see it.

Some markets certainly look frothy, but on a national level, I don't see what we saw during the housing bubble. Flippers, you know, guys coming in, people coming in, buying, and then quickly selling for a quick buck. A quick buck, right. That's right. HGTV. You see investors, but they're a longer term, right? That's right. So you do see investors coming in.

I think that's motivated by the lower interest rates, right? They're looking for yield, but they seem to be more of the buy-and-hold variety. I'm going to buy this property. I'm going to rent it out, income generating, right? I'm not looking to flip it right away. A lot of these investors are coming in with cash. I guess this goes to number three, which is the leverage. They're coming in with cash, so there too.

They're not going to flee necessarily at the first sign of a small decline in prices. So I don't see the investor leverage, and even on the homeowner's side, we also see mortgage standards are pretty tight. So overall, leverage doesn't look that concerning, but it's starting to get concerned. Mortgage debt is growing at an accelerated pace now, about 9% year every year versus 5%. Have you dug into that at all, that acceleration in the growth in mortgage debt outstanding and what is driving that? Do you have any sense of that? And, you know, we get this nice data from Equifax, the Bureau, so we can look at it by scoreband, we can look at by region.

You know, we can look at it in lots of different ways. Have you noticed anything in particular in that data? Is it broad-based? What's going on? That's fairly broad-based. So it's not that I don't see subprime. I don't see that we're lending, a lot more lending in 620. But if I look at the Fannie Mae Friday Mac reports,

and they do show some loosening of it. of the standards there. So again, it's not all the way back to those crazy levels, but you do see more folks with higher debt-to-income ratio above 43%. That is growing. The fraction of loans that are to put people with less than a 680 credit score also growing. So there are some signs of concern. So I would say not a bubble right now, but if we keep at this for another year, then I'm concerned. Then I'm concerned. That's the red flag. Yeah. And house prices, are up, I don't know, 15 to 20 percent, depending on which house price measure you look at over the past year through, let's say October. What I'm hearing you say is the housing market

is overvalued, but it's not a bubble yet. If the house prices rise another, say, 15 to 20 percent between now and this time next year, you'll probably be saying this is a bubble. Yeah. Yeah. What about some irrational behavior? You know, people buying houses and dropping the appraisal or home inspections. That's, that's, that those are, that's an interesting point. That's a sign of specular way. So this is just a very, one house down the street from us.

Yeah. Sold on the first day. Someone put an all cash offer, no contingencies, never even saw the house. Yeah. Well, I think a lot of, you know the statistics, it's better than I, Chris, but I think a pretty high percent of all sales are sight on scene, right? Well, they look on the web. They were.

You know, and you've got some pretty good technology, LIDAR technology, take a look at what's going on in a lot of these homes. But I can't replace actually going to see the home. It can't be, right? Yeah, that's right. Yeah, so there's certainly signs there. That's why, you know, I think they're good to be cautious here and concerned, but I don't know that we're in for a sudden crash.

And I hang my hat on demographics. I think the demographic trends are still very, very favorable. We have all these 30-year-olds. Yeah. So even at the, yeah, the first sign of prices coming down, there's quite a bit of demand there. So you're just going to say millennials will save the day here.

Yeah. That's weird to say, actually, but okay. They always do, right? Oh, by the way, a batroyd, I don't know if we ever talk about this, but we, as you can tell, we do a lot of modeling. We model at a metro level, even. lower than that. But at a metro level, metropolitan area level, we can, we use that modeling methodology Chris described to identify which markets are overvalued under value into what degree.

And I think in the last we were doing this work a few weeks ago, I think we saw Vero Beach, Florida as being the most overvalued market in the country, I believe. I think that's changed a bit. That's kind of critical because I have a home in Vero Beach, Florida. So it concerned me a little bit. But it goes to another issue in a lot of the modeling. It's helpful, but it's not proof positive, right? Because everything you need to go, it's really saying, hey, go look at me, what's going on?

In the case of Vero, you got a lot outside money coming in, right? Yep. So that kind of cushions your thinking about how over or undervalued it is. Yeah. But okay. So no, it's not a bubble. Not a national bubble. Yeah.

might be some local. Local bubbles. Phoenix might be a bubble. Boise might be a bubble. Idaho, yeah. Yeah. Ryan's neighborhood could be a bubble. Who the hell knows?

But not his house. Not his house. Every house there is overvalued. Not his house. Right. Definitely not a bubble of his house. Yeah. Okay.

Ryan, you agree with that? I agree with that. Yeah, I agree. It's with me. So stocks, baby bubble. Housing, not a bubble yet. And by the way, I have a Washington Post op-ed coming out shortly on, did I send this to you guys on bubbles, housing bubbles?

No. Oh, I'll send it to you. Yeah, because this is where I land in the piece on the, in the Sopad, same place we just landed. Let's now quickly talk about the other market we want to talk about crypto, crypto markets, Bitcoin, Ethereum, Stablecoin, let's throw in NFTs. Okay, is this a bubble? Let's do the checklist. Ryan, you want to go through the checklist?

we can just skip the checkpost it's a bubble right there's no this is like the poster child of a bubble well because there's a lot of leverage value the question becomes well where's the value yeah what is the value yeah I don't know what the yeah exactly well hold on let me push back the intrinsic value of that okay I mean it does I mean the value is that it serves as a payment system for places where the payment system's broken down right Like, I am an immigrant working in the Central Valley of California.

I want to send money back to my family in El Salvador. Right now, I got to go down to Western Union, given my cash, they turn it into a wire. Three days later, it ends up in El Salvador. They have a big vig on top of that. And I'm now nervous that, you know, my family members come to get Western Union in El Salvador is going to get robbed on the way out. Right. That's really pretty bad.

But if I have Bitcoin, I can, or Ethereum or whatever it is, I can do this. Yeah, I'm taking some risk here with the value, but I'd much rather take that risk than the risk getting robbed. Right. For the sure thing of handing over, you know, some big chunk of cash to Western Union to, and I don't mean to pick on Western Union, although I think I should be picking on Western Union. You know, they do charge a pretty hefty fee, you know, for the service. So there's value there, right? Well, there's value in the service, right? Certainly.

But the coin itself, is that an asset? Yeah, exactly. And if you look at the volatility of Bitcoin or these cryptocurrencies, they're extremely volatile. Well, no, no, that's not fair because, you know, think about a dollar. If I hold a dollar bill in my hand, that's an asset, right? Although, why would that appreciate in value relative to everything? I mean, I can appreciate it like this has been appreciating.

But, you know, dollar has value. Because it serves as a stable source of medium of exchange and is this store of value. It's going to hold its value. But I get your point. Okay, so it's definitely overvalued because we can't really figure out what the value is. Yeah, the value is zero. The value is zero. Speculation?

A lot of specula. You would have to assume. Yeah. Yeah, you can check that one off. Check that one off. I mean, here's another. I went to the gasoline, to the gas station. And there is a Bitcoin ATM next to the regular ATM.

Where's this? Right here in Westchester. No way, really? Not at Wawa. Not at Wawa. ATMs are free of charge of Wawa. How does that work? I can stick in my hand card and get Bitcoin come out?

I don't know. Oh. I'm not touching that thing. There's nothing coming out. It's $50,000 per Bitcoin. What do they? Yeah, people are buying like fractions of Bitcoin. Fractions of Bitcoin.

I'll take a picture next time I'm there. Yeah, I'd like to see that. It's fascinating. I'm surprised Chris wasn't there. I haven't seen that. It's his key. This is a side business now. You see DeRides on the side of the ATM?

Look for the Doretti's coin. Yeah, DeRidi's coin. Actually, that's nice thing to it. Okay, so, okay, overvalue, speculative leverage. This I don't know. There must be. Well, we saw that big swing in. Bitcoin prices, Ethereum prices last weekend around, you know, something wacko going on,

derivatives related to, to crypto. So I'm sure there's leverage here. I just, no one's measuring it as far as I can tell. Someone might be, but I don't know about it. I hear rumors about people using their credit cards and taking out consumer loans. You know, kind of what happened during the dot com. Yeah, right. Right?

Remember that? Home equity loans. and yeah but that can't be that big a deal right because or or maybe all that increase of mortgage debt going into the crypto market oh no that's a conspiracy theory yeah all right okay so we've come to the conclusion this this is a this is a bubble in that it will therefore high probability of a crash here it this is not going to end it's hard to see how this ends well we've come to that conclusion okay all right Okay. We could be wrong, but... Could be wrong. Yeah. But the technology has value.

Yeah. I want to emphasize that. And maybe that's the value and that's what has to catch up to the price, right? They figure out new ways to improve the technology so that it truly does solve some of the underlying inherent problems as it, as a medium of exchange and store a value. It becomes truly a currency more broadly. Or the technology gets applied to other... Or other things. Problems, right?

Yeah. But that doesn't help Bitcoin out, though, does it? No. I mean, no. No, no. So still. Yeah. No, to help Bitcoin out, the problems inherent in Bitcoin, like the volatility and all

the other things that make it unlikely to become a widely used currency, certainly in the developed world, that could happen, I suppose. Yeah. And you see some signs of irrational beings. behavior. If Moody's came to you and said, we're going to pay you in crypto, would you say yes? So think about it. He's taking a pause. Wow. I thought it was an immediate no. Yeah, me, no. Chris? I'm only getting tired. That's why I took me along a little bit more. I'm running out of juicier. I was on a high, like as you could tell 15 minutes ago. Now I'm crashing.

Because you see some professional athletes are getting paid in crypto. Is that right? Is that right? Wow. Okay, there's another sign. Well, there is takers. Yeah. By nature, right? All right. So I think we concluded housing, not a bubble, but let's watch it. The current rate of price growth of sustained. That could be a problem. Stocks, a baby bubble, kind of the early stages of a bubble. If that keeps rising in their price, then that's going to be a problem.

Crypto, big time bubble, you know, don't know when that's going down, but it feels like it's going down. Okay. All right, very good. I thought that was a very useful conversation. There's other assets to consider. You know, maybe we'll do that down the road. We'll come back and reevaluate, but clearly a good discussion.

And I think, I think our very first podcast back in April, which I mentioned earlier, was around bubbles, right? It was. Yeah. I don't know where we landed then, but I think we've. I think pretty much the same place. It was. Okay. All right.

Okay. All right. Very good. Anything else before we call it a podcast? No. Your Twitter account is not a bubble. I take it. No.

No. People should subscribe. Are you kidding me? It's undervalued. Big time. There's real value there. Just listen to my tweets. I am the word that Ryan's going to crowd me out.

Did you just say listen to my tweets? Did I say that? Yeah. We want to rewind a tape. We could do a podcast. Did you say tape? Oh, yeah. That would be a good one for the blooper real.

Yeah. All right. All right. I'm tired. We're going to call this a podcast. Hey, everyone. Thank you so much for listening. And talk to you next week.

Take care now.