Inflation Expectations

Always preternaturally concerned with whether or not an economy is growing or dying, macroeconomic commentators insist on being able to determine whether or not a given society is experiencing, or about to experience, inflation or recession. Central banks around the trans-Pacific are in unanimous agreement that a “stable” level of ongoing inflation in an economy is healthy, indicating a widely shared belief that economic growth is intrinsically implied in the idea of economic health, and also that indication of that health can be monitored in a single parameter. We strongly encourage readers to decompose new inflation information when they come across it; 3% core inflation in an economy whose population is growing by 5% percent a year has very different effects than in an economy whose population is contracting by 1% percent (see: Demographic Trends). 

Every economy is always either expanding or contracting in many different and overlapping ways, simultaneously, and ever-changing, with constantly recalculating relationships based partially on uncontrollable and international variables. Whether or not inflation is “good” is a nonsensical question, and the real impacts on an individual’s economic profile are relative to the individual investor, spender, or saver, what country they live in, and how they use their money over time.

National governments look fondly on growth in general, and virtually all central banks target a varying-but-moderate level of growth (usually ~2-3%; see Charts) in virtually all economic environments. Even when overly-optimistic, managing inflation expectations is preferable to abstaining from the process, resulting in less-severe financial shocks and greater benefit from recovery and strengthening efforts.^(FED)

Property Ownership

Property ownership is intrinsically bound up in discussions of a given economy’s strength due both to large capital flows and supply chain impacts as well as common misconceptions about economic and financial behavior from individuals.

On the production and provision side, at least half of the raw material humanity extracts from the earth every year is sand, gravel and limestone, mostly for cement and/or concrete for buildings, cities, and the roads that connect them.^(B.TWS) Between a third and a half of all the materials extracted in a given year are used to produce housing, so capital flows related to property development are an enormous factor in global economic dynamics.

Furthermore, notwithstanding the constant expansion of current metropolitan areas and the grounds-breaking of new developments around the world, older cities and homes also have a recurring need for updating and renovations. Most of the buildings constructed during the early-to-mid 20th century were done so with, by today’s standards, low-grade and low-tech concrete, only capable of holding a few stories of weight and rated to last a handful of decades. Homes and infrastructure alike must be rebuilt over time with new materials and technologies; nothing lasts forever.

So we find ourselves with a global construction industry whose supply chains have been globalized, whose materials pricing regimes are now fairly rutted in their cost-effective international sourcing efforts, and whose primary components (ie: cement) have no existing alternatives. And on top of all that, most national governments smile brightly on greater levels of individual homeownership as a universal signal of greater economic development and international prestige, constantly encouraging progress in the sector and greater access to financial resources for new and first-time homebuyers.

Over the decades, these factors have created a home construction feedback loop that has become increasingly disconnected from the evolving mindset of potential home occupants. A growing percentage of people no longer desire stand-alone homeownership, with the long mortgage obligations at exorbitant rates, the large material and environmental footprints of being in a single-family home, less flexibility to move because of major housing cycle swings, and with less convenient access to the more abundant set of urban resources that a growing portion of the global population is getting more accustomed to. Many people don’t want a world full of spread-out neighborhoods of single-family homes, but rather more-eco-conscious urban environments; greener, higher density, more walkable, less wasteful, etc. That many governments know this, and hold data on the trends, yet still push single-family homeownership and construction as the answer to economic woes is an ever-growing befuddlement.

It’s great if the housing construction sector is doing economically well, but obviously not so great if the result of all that extra construction is a bunch of houses nobody can afford to live in (housing overhang) and that aren’t contributing to the health of the nation. Property construction is always ahead of property occupancy, but if the actual economic growth conditions required to boost up new homeowners don’t exist, those properties will go under- or unutilized, “ghost towns” are likely to pop up. By way of comparison, many  of the ghost towns that have sprung up in the PRC since the year 2000 have started to attract and retain a core population. The construction of large multi-family buildings in these cities has made it easier for individual units to be bought and purchased by investors who are more willing to sit on an empty property until life starts seeping into the area, when the property can be turned over to a newly-eager and capable buyer.

How has this different approach translated to the total homeownership rate? In the PRC, homeownership is around 90% ^(ERPH), with indications that >80% of homes are owned outright with no mortgage obligations ; in the US in Q4 of 2022, the homeownership rate was 65.9% ^(FED). Which population is better off with their approach? Since the economy of the PRC has passed the US in terms of purchasing power parity^(CIA), Chinese yuan now go further for Chinese purchasers than do US dollars for US consumers. Perspective is important.

As another example of property ownership misconceptions and malfeasance enacting ruin on financial system mechanics in the US, many first-time American home buyers have been finagled into mortgage situations that are unsustainable due to income volatility, job loss, economic shocks, or any number of shady banking tactics to squeeze extra capital of financially illiterate consumers. These were the bulk of the unfortunate who lost their homes in the Great Recession in the US from 2007-09, and for many of them, part of the downfall was the fact that they shouldn’t have been living in that home that they couldn’t afford to make future payments on in the first place, and the bankers who pushed through their mortgage applications for the associated fees and earnings are to blame.

It doesn’t matter if homes are built “faster than usual” as much as it matters whether or not the domestic economic environment and the potential new homeowner’s economic inflows and wealth have expanded sufficiently enough to support a greater expense profile. GDP/capita figures, particularly for the US (~USD$75,000 in ‘21-’22), are not helpful in evaluating the general ability of the average American to afford homeownership because they collapse the upper wealth echelon into the much larger lower class, distorting the spread of incomes that actually exists towards the lower bound. It is also well above the average US per capita income (in ‘21 equaling USD$37,638, half of the GDP/capita)^(USCB), a figure that itself still contains the top earners. Putting people temporarily into homes that they cannot afford and will soon be evicted from does not really count as increasing homeownership. Unable to broadly reign in home prices, the US has a long way to go to improve this situation and reconnect homeownership to macroeconomic wellbeing. 

In terms of equities in the trans-Pacific sphere of influence, housing production, sales and overhang volume impact current equity markets in very indirect and temporally-lagged ways. TPDEARR readers can monitor current housing market dynamics for indications of good exit points on their currently-held equities. For example, determining whether or not a drop in current sales volume corresponds to diminishing domestic consumer wealth, decreasing foreign demand, interest rate changes, or some other factor, will indicate whether and how the appetite for risk has shifted among the human participants and how that may affect equities holdings. Panic often spreads even quicker than greed (see: Other Events and Black Swans.)

Competition

Competition is the beating heart of the commercial world. Expansion of access to the competitive commercial environment and increases in the number of competitive participants results in increases in innovation, lower prices for consumers, inter-sector collaboration, and an international advantage by becoming a relatively more attractive magnet for intellect. In so many words, “the competition” is never finished, never paused, and ever-changing; there always remains an opportunity for a commercial advantage for the competitors most determined to acquire it. As such, (and because it is social human beings that we are specifically discussing,) the notion of competition is ubiquitous across industries, nations, companies and individuals.

Creativity thrives in competition, so more-competitive environments, despite their shortcomings, produce a greater volume of more-competitive, more-creative solutions and ideas to all manner of human problems. Thus, market environments with fewer barriers to entry, greater competitive pressures, and more flexibility will produce a greater number and variety of novel innovations and be more adaptable to forward progress. Economically, central authorities are very interested in managing the competitive dynamics, but opinions vary widely about best practice therein, frequently presenting opposites as equally viable options.

A federal government can effectively stifle competition in an industry or sector by tipping the scales in favor of a major player in the space. Subsidies, exclusive contracts, barriers for competitors, biased policies or executive actions, and state intervention of corporate ownership and process are all ways in which the competitive environment is manipulated by central authorities. Since different international economies vary widely in their governmental organization, an endless variety of competitive environments potentially exist. Competition is a fundamental feature of human society, and the effects of the feature on the lives and wellbeing of those humans (and the surrounding environment) is directly influenced by the host nation’s ability to manage market participation.