Everything Is ‘Transitory’ in the Fed’s New Economy — Inflation Outlook

‘Transitory’ is catching on.

First, it was inflation that was transitory, as Federal Reserve Chief Jerome Powell put it.

Now, it’s housing…transportation…even love.

Startling statistics

A startling statistic:

While the US population has grown by nearly a third since the 1970s, the number of married couples with children in the house has fallen by a third.

On the other hand, the number of households with only one parent has more than doubled. Father and mother don’t seem to stick together.

A young colleague recently announced that he had become a father.

I didn’t even know you were married,’ we replied.

I’m not…my partner and I aren’t getting married. We’ll stick together only as long as it works for both of us.

Hmmm…’ we replied, as if we knew something he didn’t.

People don’t feel much loyalty towards their cars or houses, either.

Even when houses and cars are ‘bought’, they are often never fully owned.

Mortgages are refinanced. Why pay it off when you can refinance at a rate below zero (inflation adjusted)?

Car payments stretch out. Often the muffler falls off before the last payment is made.

Subscription economy

It’s a ‘subscription economy’, say the buzz mongers.

The CEO of a company called Zuora claims to have invented the term. This is from its website:

Customers have changed. They’re looking for new ways to engage with businesses. Consumers today have a new set of expectations. They want outcomes, not ownership. Customization, not generalization. Constant improvement, not planned obsolescence.

The result? Businesses are changing the way they sell their products and services. Over the past nine years, we’ve seen an explosion of new types of business models all designed to keep customers consistently engaged in long-term relationships — think Netflix, Amazon Prime, Uber, Spotify, Salesforce, Zendesk, Box.

The Subscription Economy® is a phrase (coined by our CEO, Tien Tzuo) to describe this new era of companies and business models.

In the old world (let’s call it the Product Economy) it was all about things. Acquiring new customers, shipping commodities, billing for one-time transactions. But in this new era, it’s all about relationships. More and more customers are becoming subscribers because subscription experiences built around services meet consumers’ needs better than the static offerings or a single product.

Largish companies are even giving up their offices altogether. Employees are expected to work from home…and make episodic appearances in shared workspaces.

Rent. Lease. Borrow. Squat. Own nothing.

Market Expert Predicts ‘Double Bottom’ for ASX. Find out how to safeguard your wealth.

Prisoners of cash flow

Perhaps something is gained in the subscription economy — spontaneity? Flexibility? Optionality?

But something is surely lost, too. Instead of being shackled to capital assets, people are now prisoners of cash flow. And what if their subscriptions are cancelled?

A dear reader recalls what it was like when the economy suddenly stopped last year. Blanca H writes:

Before the pandemic: we were working on remodeling our home to start a bed and breakfast. I was forced into retirement and hubby ended with medical issues that limited his ability to work. But the best was there was no mortgage payments…

Yes, there are some times when you don’t have to pay a mortgage or rent. But in the Brave New World ahead, only a few will escape them.

A few people — the elite — will get rich. They will own the capital assets.

Most of the rest will become ‘subscription slaves’…able only to enjoy their homes, their cars, their lives…as long as their monthly incomes continue.

Enter the financiers

Following the mortgage finance blow-up in 2008, houses were cheap. And financing was cheap, too.

Enter the financiers, richly funded by the Fed’s ultra-low-priced credit. They bought up thousands of houses. Home ownership began a decline.

If the previous rate had remained, there would be 3.3 million more homeowners (and fewer renters) today. In 2004, home ownership reached 69%. Now, it is only 65%, a huge swing.

There is no particular reason to think that owning is better than renting. Each has its place.

But like everything in the financial world, what matters is that the numbers be true and honest, and not persuaded by the heavy-handed feds.

But as they manipulate and distort, the feds inevitably slap around the real estate market, along with everything else.

Steve Schwarzman, Blackstone’s jefe, can borrow a lot cheaper than the typical homeowner. (Blackstone was one of the big investment firms to buy foreclosed homes in bulk in the aftermath of the ‘08 crisis.)

And when the Fed puts rates so low, it puts Schwarzman into competition with homeowners.

The homeowner wants a place to live. Schwartzman aims for yield. And when yields are below zero in real terms, it doesn’t take much yield to make a good investment.

That’s why Blackstone can pay more for a house than a family can. And that’s why house prices are going up…to the point where the average family can no longer afford to buy the average house.

Routine manipulation

So here is another brick in the wall we’ve been talking about for the last 10 years.

As asset price goes up, Wall Street makes money. But the homeowner, who works in the Main Street economy, doesn’t earn more money. He’s stuck, trying to pay for a more expensive house with the same old income.

The same thing, more or less, happened in the stock market.

In 1980, before the Fed’s manipulation became routine, it took an average working person 160 hours on the job to buy the 30 stocks that make up the Dow Industrial Index.

Today, it takes 1,400 hours — more than eight times as much.

In 1980, he was greatly aided, too, by a decent return on his savings. He could get 10% on his deposits, plus a free toaster oven for opening an account.

Today, the going rate is less than 1%.

Subscription slaves

Oh my…pity the callow youth! A subscription slave.

Burdened with student debt…dumped into an economy in which the good-paying manufacturing jobs have been exported to China…unable to save money (on which he would earn nothing anyway)…

…with no capital and little chance of ever getting any…no house. No car. No business. No family.

He sits in mum and dad’s basement…

…gambling his stimmy money on meme stocks and cryptos…and waiting for real life to start.

More to come…


Dan Denning Signature

Bill Bonner,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion