A Flattening Yield Curve: Is “Housing Inflation” The New “Wage Inflation” (Only Worse)?

In a time when wages are stagnant and retail and related layoffs are pervasive, people are taking jobs for lower wages and with little future income growth-potential (such as in Amazon’s warehouses, walking dogs, and opening food trucks). If home prices continue to rise but wages do not- that is still inflation- a dangerous kind of inflation. It is, once again, as earlier in the decade, interest rate-driven housing inflation … or, a bubble.

Is such inflation partly due to house-flippers replacing a lack of growth in their wages with short term real estate speculation (i.e. house-flips)? I have house-flipper clients (they refer to themselves as real estate investors); they don’t have “jobs”; they buy, fix, and resell houses as quickly as possible. Is housing-inflation from house-flipping a substitute for wage inflation? Is this why the yield curve is flattening- because of burdensome asset inflation- a bubble that may pop with interest rate hikes? Why not? This is exactly what caused the last recession. This is what happened the last time the Federal Reserve over-juiced the system. And we know that it (the Fed) juiced the system with all it had following the 2008 meltdown. So, how can this be any different? The symptoms are the same … lots of technology earnings and tech stock growth, too much home-price appreciation making housing unaffordable, and stagnant wages; and the causes are the same … cheap money and the Fed making a potentially incorrect presumption about technology and how this time it’s different; except, in addition, this time Amazon is assuring that we get no PPI or CPI inflation, causing weak earnings growth outside of technology, and also that we are losing a vast number of brick and mortar retail jobs and replacing them with weak substitutes, causing wage-frustration across the nation and leading to excessive asset bubbles where people over-invest to buttress their incomes … so, maybe this time it’s actually worse.

The other side of the coin of poor wage growth being replaced by house-flipping is that at least poor wages are being replaced by something. But most Americans are not house-flippers and actually need places to live. Using houses as short term investment assets in the long run probably hurts more people than it helps. Most people need affordable homes. If they have to rent, instead of buy, ultimately housing will suffer and bubbles will burst on their own- even without Fed intervention. Housing is supposed to grow due to macroeconomic and household income growth, not despite them- or in lieu of them.

The combination of low wage growth and excessive housing inflation will reach a pain point … just like last time. Inflation from high wages can be good if managed properly (and can lead to higher long-term bond yields). Inflation in vital human assets (homes and food) with stagnant wages is neither good nor sustainable (and can lead to recession fears). We have such latter inflation … and the Fed knows it … and the bond market may be catching on, too. The Fed may be raising rates to address this, while the bond market may be panicking in response to it. Inflation from wage growth can lead to economic concerns, but inflation in assets that are basic human necessities- like housing- in the absence of wage growth is an economic concern that can be even worse. It would be seen as a speculative and unsustainable bubble, and would, certainly, explain a flattening yield curve. Moreover, if the asset being targeted by the Fed can be negatively affected while also taking down jobs with it and negatively affect wage growth even further, there is even more reason for concern. If a housing bubble pops, as in 2008, the rest of the economy can follow. Inflation due to wages can be tempered by a rise in interest rates, but excessive inflation in housing, when tempered by interest rates, can completely take down the economy like a house of cards- as we know all too well. It’s one thing to soften labor demand, which actually, ultimately, helps companies get (labor) costs back to an acceptable level- it’s another thing to diminish or reduce asset values (and take down jobs and wages with them)- which can be very dangerous. Interest rates do not, necessarily, make or break labor markets and businesses, but they can, and do, make or break real estate markets, which is why this overheated real estate market should never have been allowed to develop after the lessons of 2008. Real estate is too dangerous of a place to allow inflation to blossom- or fester. But it keeps happening these days because of cheap money and the need in this country for a wage growth alternative, in the form of house-flipping, because of global outsourcing (and now, also because of the Amazon-effect causing restrictions in retail job growth and in PPI and CPI inflation – i.e. causing a lack of pricing power for companies- while operation costs, in the form of cost of capital, rise- which hurts job and wage growth).

While wage inflation historically led to home-price inflation, in this day and age because of low interest rates and house-flipping, the wage inflation aspect is skipped-over and we just get the consequences of wage inflation– higher housing costs (and higher equities prices). So now you have housing inflation but without wage growth … so much worse than housing inflation with, and resulting from, wage growth, and a real danger to a society. Inflation that results from prosperity and growth is different than inflation that results from liquidity and speculation. The latter is a bubble with no underpinnings of prosperity and income growth. This type of inflation- or bubble- pops- rather than slowly and responsibly deflates through effective monetary policy. The Fed waiting to see wage inflation in an economy of outsourcing (which depresses wage inflation) and house-flipping (which accelerates home inflation) before it will declare the arrival of inflation is irresponsible, unrealistic, outdated, and potentially dangerous to an entire economy. The bond market may be indicating this sentiment.

At the end of the day, the yield curve flattening on the way to inverting is, potentially, a predictor of recession which would result from interest rate hikes rapidly reducing inflation in housing, causing investors to get stuck with depreciating assets, creating job losses in the real estate economy, and causing contractions in household wealth, nationally … a triple whammy of consequences that can be, simultaneously, affected by interest rate hikes. Banks would lose the ability to recoup interest and principal on loans (real estate and business loans) causing liquidity to dry up, damaging the overall economy further. But hikes may be necessary to stop more housing inflation- which may be displacing wage inflation, but is more dangerous; dealing with it could have disastrous results. No wonder the bond market is reacting with concern. Strong economies have bubbles. But bubbles in weaker economies that take down jobs, wages, and household wealth when they burst can have, well, “2008-like” consequences; especially when they formed out of needs (or desperation) to create incomes.

Always watch the bond market- and never fight the Fed- and per the 1980’s and the early 2000’s … never play chicken with an interest-rate-driven real estate bubble- especially one that is supplanting paychecks … because such a bubble is filled with desperation and greed, and knows no bounds.

 

Endnote.

A flattening yield curve can indicate a market that believes that inflation is under control. So a flattening yield curve can be a positive indicator instead of a recession indicator.

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About the Author

Neil Siskind is: President of The Siskind Law Firm, focused on product investments, trademark licensing, product distribution, and real estate; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 7 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products.

Other Recent Articles by Neil S. Siskind:

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
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Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
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The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

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To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
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You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskind help children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

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– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

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– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

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