Landmark Links June 5th – Asking for Trouble


Lead Story….  Since 1977, the Federal Reserve has operated under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.”  In recent years, the idea of the Fed targeting asset prices as well has been hotly debated in economic circles.  In a recent research paper circulated by the National Bureau of Economic Research, influential economist Michael Woodford of Columbia University suggests that the Fed should housing prices into account when determining interest rates.  Woodford suggests that the central bank should “lean against” housing when prices are rising and ease when home prices are falling. Greg Robb of Market Watch provides a little more color (emphasis mine):

At the moment, policy prescriptions like the well-known Taylor rule have traditional target variables only for inflation and the output gap. In his paper, Woodford suggests that a new variable for housing prices be added to the Fed’s policy rule.

IMHO, this is a terrible idea for a couple of reasons.  First off, housing is but one asset class in the world’s largest and most dynamic economy.  Using a blunt tool to craft monetary policy around a single asset class seems insane.  Second, it takes for granted the fact that the relationship between interest rates and housing prices is much more complicated than often acknowledged.  In reality, home prices are more a reflection of inventory than they are of interest rates (but rates do play a role):

In a perfectly efficient market, low rates open up home ownership to more people since falling monthly payments make qualification easier.  Builders step in to capitalize on the marginal demand that had been pulled forward with lower rates by constructing more homes.  At the same time, owners of starter-homes put their houses on the market and move up once they can afford to upgrade thanks to lower mortgage payments. When rates rise, the increased marginal demand from first time and move-up buyers recedes and we are left with excess inventory which would eventually lead to lower prices.  This makes sense in theory and sometimes happens in practice which is why it’s so commonly thought that interest rates are the primary driver of home values.

However, what happens if builders don’t construct very many new units and existing stater-home owners stay put during a period of low rates?  In that case, rising rates do not have much of a negative impact on home prices.  In fact, they tend to make owners even less likely to sell (why move if your mortgage rate will be higher) which further dries up already-low supply, potentially pushing prices even higher.  If this scenario sounds familiar, that’s because its what is happening today, which should be proof-enough that tying Federal Reserve policy to housing price fluctuations is foolish. Influencing the price of housing is relatively straight forward: if lower prices are desired, make it easier and cheaper to build more of it and do the opposite if higher prices are the target outcome.  Unfortunately, this is easier said than done in today’s political climate.


Glass Full: Any way that you look at it, the economy is basically on fire, as shown by Friday’s jobs report.  See Also: We’ve run out of words to describe how good the jobs numbers are.

Done Deal: A June Fed rate hike is now a sure thing and there are likely more on the way.

Whiplash: New tariffs intended to bolster the American steel and aluminum industries are starting to have the opposite effect in a key part of the U.S. supply chain: steel.


Don’t Call it a Comeback: REITs were the strongest performing major US asset class in May.  See Also:What REITs tell us about the commercial real estate’s market’s direction.

Short Supply: Increased RV ownership has led to the problem of a lack of adequate storage for the vehicles as the trend toward urbanization and higher land prices continues. (h/t Scott Ramser)


Overstated: There have been more than a few dire predictions about how recently-passed tax reform will cause a flight of high net worth residents from California.  Here’s why the true impact will likely be minimal.

Echoes of the Past: In a flashback to the mid-aughts, private mortgage companies are making a ton of money off originating loans to people with no savings, poor credit, or low income, often with little to no down-payment.  However, this time the government is largely on the hook as much of the mortgages are originated through federal affordable housing programs.


Power Grab: Silicon Valley financiers are increasingly losing leverage to star entrepreneurs in today’s founder-friendly era as large investments from mutual funds, sovereign wealth funds and SoftBank mean that VCs are no longer the only game in town.

So 2010: America’s teens are increasingly choosing YouTube, Snapchat and Instagram over Facebook.

Storage Wars: Renewable energy growth has been faster than almost anyone expected and costs have plummeted.  The next big thing in the space will be storage, which is required for it to achieve full potential.

This Makes No Sense: Coffee waste (dried husks that encase coffee beans) are selling at a 480% premium over coffee itself mostly because hipsters.

Chart of the Day

The labor force participation rate looks a lot better when adjusting for demographics.

Source: New York Times


Natural Selection: The US Geological Survey issued a warning, telling people not to roast marshmallows over lava on the Big Island of Hawaii.  Sometimes I wonder how humans haven’t gone extinct yet.

Science: Ever wonder how much fart is in the air on your plane at any given time?  Here’s the answer. (h/t Steve Sims)  It’s called science:

For instance, British Airways uses the Airbus 380 – which seats 525 – to fly from London to Singapore, a journey that takes 12 hrs and 50 minutes (we’ve rounded it up to 13 hours to account
for the time you’re waiting to get off the plane.

In 13 hours, your average human would let out 0.54 litres of farts- with the added cabin pressure that goes up to 0.7 litres.

If you times that by 525 passengers, that means the cabin would collect 368 litres of fart in the air across 550 square metres of cabin space – this would be halved because of air filtering to 184 litres.

Grounded: A plane headed to the Spanish island of Gran Canaria had to make an emergency landing when a passenger’s body odor became so overwhelming that it caused several passengers to vomit. (h/t Steve Sims)

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