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Prices change moment to moment, but the underlying factors that drive the economy and markets are often decades in the making. We tend to overlook this, caught up as we are in the Here & Now.
When forces that have been accumulating for a long time — and are supported by institutional momentum and widespread consumer beliefs — are in play, it is difficult to shift in an instant. Akin to the pressure along tectonic plates, the slow, geologic grind of forces can suddenly slip, resulting in a temblor. It serves to remind us that those forces that have been there all along.
Contributing to the current state of flux are many drivers of growth, inflation, employment, politics, and the economy. Some of these might be getting overlooked :
–Great Financial Crisis (GFC) response: It’s hard to imagine that almost a decade and a half after the GFC, we are still – STILL – wrestling with the fallout from that event. The mostly monetary response combined with a milquetoast fiscal aid led to slow growth, a low-wage recovery that lagged historical precedents.
The impact of this was twofold: First, the weak GFC rescue result led to perhaps an overcompensation in the CARES Act, via a massive set of fiscal stimuli. Second, a poor, subpar GFC recovery helped to pave the way for the rise of popularism, both here and abroad.
–Just in time inventory and lean supply chain: The efficiencies and profitability of not having to maintain a substantial inventory of goods is catnip to retailers and logistical companies. But it also makes a nation less resilient, with greater fragility to interruptions like a pandemic. This was revealed in Q1 2020 when everything from PPE / masks to Purel to Lysol to toilet paper became scarce. Solutions to this include local manufacturing and incentive changes for storage and inventory, but those shifts take time.
–NIMBYism + Housing: The insufficient supply of single-family homes traces itself in part to the overbuilding pre-GFC and the subsequent collapse of new home building in the years that followed. But there is a much broader issue that has existed for nearly the entire post-war era, and that is the concept of Not In My BackYard. Sure, everybody says they wants affordable housing, but if it’s in their neighborhood and could impact property values, then maybe not so much.
We gentrify entire neighborhoods, but fight zoning rules that would allow for greater density. The result is not just too little affordable housing, but generally too few housing options and alternatives at too great an expense. This is true regardless of local partisan affiliation (although yesterday I mentions why this has become especially bad in blue states). Build a lot more houses is a solution but this will take time. The good news is that most new Housing Units are currently under construction since 1974.
–Embedded Technology: PCs, Internet, mobility, apps, broadbands, created a set of circumstances that allowed easy access to the full suite of work tools for a broad swath of professionals to easily work from home. This includes creatives, finance professionals, legal, accounting, media, etc. Those groups all have an enormous amount of flexibility to where and how they do their jobs.
Is it surprising that hospitality, food service, health care, retail workers are fleeing those fields to enter the white collar workforce? It’s more than just money: It represents autonomy and a measure of control to feel less like a serf and more like a self-determined professional.
Part of the problem we discussed on the Bogleheads podcast boils down to our conception of the world, and the flawed model we create in our heads. We fail to market weight stocks, underappreciating both the strength and rarity of the biggest winners. And we equal weight news, putting way too much emphasis and credence on stories that are ephemeral, temporary, and not very meaningful.
The current state of affairs has been a long time coming. Our instinct is to do something (anything!) to stop the short term pain.But the reality is that the worst of it will work itself out over time. This too shall pass.
But to address the underlying long term issues, it will take more than tapping the strategic petroleum reserve or changing Fed Chiefs. That means discussing fundamental changes to how we approach housing, employment, manufacturing, capital. I am not sure how much of an appetite there is for that sort of rethink.
Previously:
How Everybody Miscalculated Housing Demand (July 29, 2021)
Faster / Better / Cheaper (November 11, 2021)
Deflation, Punctuated by Spasms of Inflation (June 11, 2021)
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