House prices

Blowin's picture
Blowin started the topic in Friday, 9 Dec 2016 at 10:27am

House prices - going to go up , down or sideways ?

Opinions and anecdotal stories if you could.

Cheers

bonza's picture
bonza's picture
bonza Tuesday, 4 Oct 2022 at 10:49pm

“…I guess I'm still cheering on rate rises….”VJ.

“…tax cuts targeted at the better off in society are very on the nose…” gsco . I think gsco was arguing against wage rises recently?

And I’m certain It was flollo who supported the stage 3 tax cuts back before the election? Was that you

I think all of you have excellent insight and are very good at demonstrating historical patterns and mathematical models.

Despite that I don’t think any of you have any idea how any of this Is going to play out. What’s interesting to me is that despite recent and not so recent events at whats clearly not working when it comes to inequality and home ownership you seem to be supporting trickle down economics?

To a dumb shit like me I just see your posts as fancy graphs, big dick high fives ,schadenfreude and an avoidance of pretty simple policy shit that can make a difference to inequality.

This is what I think. Interest rate hikes will only hurt the bottom feeders on the pyramid and conversely benefit the wealthy majority
There will be no crash except for the kids who were bullied into buying. Property will keep on booming. All the crack pipe shit that protect and boost property prices will continue and therefore so will prices.
No one will touch the things that actually needs to change in order to help stabilise sanity properly markets and by default improve inequality.

No disrespect intended. I do value your posts. I’m just your regular uninformed arsehole.

velocityjohnno's picture
velocityjohnno's picture
velocityjohnno Tuesday, 4 Oct 2022 at 11:31pm

You are totally welcome to have those views. If we keep the interest rates at 5000 year lows, how big a bubble do you think we will blow, how many more people locked out by the increased unaffordability? All bubbles revert to a mean, eventually. We're living in the biggest one ever blown, and reversion to the mean is what's going to happen. Until that day, eat drink and be merry....

bonza's picture
bonza's picture
bonza Tuesday, 4 Oct 2022 at 11:43pm

Or why not apply what others have been arguing for when it comes to houses. ? Taxation overhaul.Removal of perverse incentives. ?Sustainable immigration?. Land banking developer handjobs to the wall. ?

Interest rate hikes are only hurting those at the bottom. Yet the sustained period of low interest rates only benefited the
wealthy.

Why is your only recommended tool so shit at doing what you want?

groundswell's picture
groundswell's picture
groundswell Wednesday, 5 Oct 2022 at 7:48am

The problems with my town are-
1)Bed and breakfasts have taken over removing most rental properties from renters availability and people /locals well liked characters of this town have to leave town to higher crime areas such as Carnarvon and Geraldton..

2) cyclone damage still isnt fixed to 70% of properties in town.This is partly due to how remote Kalbarri is to Perth for tradies and workers to fix everything.

3)workers who are here only work 2-3 days a week(if that) as for some reason- a slight shower or high wind causes workers to take the day off and not work on roofs etc.
-My block has had temp scaffolding setup all over several units and houses in my complex but not mine.
I have only seen workers on the roof for one day since they assembled the scaffolding structures 3-4 months ago.
4) The manager to our main local real estate agent thinks he is a king and decides who lives in Kalbarri. If they are in the so called purple circle or have a high paying mine job etc they are welcome to a propertyif you're just a cray fisherman with your own cray boat and business, make friends with a property to rent or leave town..
If you work 2-3 days a week in a servo or bottlo like myself you may end up kicked out of town once the workers are ready to fix the property.
5)After properties are fixed (within 5-6 months apparently) prices will go up for rent by around $100 a week at least. If they also do up carpet and bathrooms etc even more rent hike.
60when my property is set to get fixed we are expected to live here, strata insurance are not paying for alternative accommodation, even for heavily damaged properties such as mine. Luckily i have a friends house to move into while that happens, which is likely to be empty at the time.

Anyway Kalbarri real estate,tradie and insurance management at the moment is a total joke.

donweather's picture
donweather's picture
donweather Wednesday, 5 Oct 2022 at 8:24am

How’s the markets reactions to even a slight slowing of the interest rate hikes. Just imagine what happens when the Fed actually has to start pivoting. :)

Craig's picture
Craig's picture
Craig Wednesday, 5 Oct 2022 at 8:45am

Yeah pretty crazy eh.

gsco's picture
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gsco Wednesday, 5 Oct 2022 at 8:58am

And this quite unbelievable graph gives a decent indication of why - i.e. of what's driving markets right now (including property).

It plots the performance of the FANG+ index against the combined size of the balance sheets of the 5 largest central banks.

Explainers:

The FANG+ index is just a share market index containing the following shares:

Tightening monetary policy (rising interest rates, quantitative tightening via selling bonds back into the market) is effectively just another way of saying - is effectively equivalent to saying - that central banks are contracting the size of their balance sheets.

DudeSweetDudeSweet's picture
DudeSweetDudeSweet's picture
DudeSweetDudeSweet Wednesday, 5 Oct 2022 at 11:06am
udo wrote:

https://www.abc.net.au/news/2022-10-05/housing-crisis-kununurra/101497366

$115K for 450sqm of lifeless red dirt in the endless lands of the Kimberly and they wonder why no one is interested. Lolol

How’s the greed factor. Developer buys it for fuck all as it’s featureless and near infinite in supply, gets it rezoned residential, runs a dozer over the entirety, splits it into micro blocks and charges the freakin Earth for them.

Blows you away when you see this stuff in person. Billions of kilometres of land you couldn’t give away, then they throw up a colourbond fence around 0.00000000001% of it and expect crew to suddenly get keen to mortgage their lives to get their hands on it.

Shitshow

Robwilliams's picture
Robwilliams's picture
Robwilliams Wednesday, 5 Oct 2022 at 11:19am
truebluebasher wrote:

Monday ~ 4 Corners ( No Place to call Home )
https://www.abc.net.au/4corners/

Caught the rerun ttb.
Coffs harbour. having the highest rental rate increases in the country alongside some regional areas. Got to feel for the single mothers that are close to breaking point and doing it real tough. Really high lights the Australian class devide currently in focus. We can do better. We must do better. We are failing our own. And just adding to the systematic failure further down the line.

groundswell's picture
groundswell's picture
groundswell Wednesday, 5 Oct 2022 at 11:18am

When i lived in Perth i saw large multi acre blocks in East hills or whatever areas basically well east of Perth metro, land going for $20 000 which i considered buying and starting a large superhot specialty chilli farm. Would have tried to take over bunnings chilli superhot clients as they dont know crap about chillies and often label strains the wrong strain somehow.Pissing off dedicated chilli fans.
Ive seen Habs mixed as carolina reapers, trinidad scorpions labeled as habs and all sorts of mess ups.
Wouldnt take much to make a mill or two after a few easy years.
Growing chillies is piss easy, money in the bank if on a large scale like that.

flollo's picture
flollo's picture
flollo Wednesday, 5 Oct 2022 at 11:40am
DudeSweetDudeSweet wrote:
udo wrote:

https://www.abc.net.au/news/2022-10-05/housing-crisis-kununurra/101497366

$115K for 450sqm of lifeless red dirt in the endless lands of the Kimberly and they wonder why no one is interested. Lolol

How’s the greed factor. Developer buys it for fuck all as it’s featureless and near infinite in supply, gets it rezoned residential, runs a dozer over the entirety, splits it into micro blocks and charges the freakin Earth for them.

Blows you away when you see this stuff in person. Billions of kilometres of land you couldn’t give away, then they throw up a colourbond fence around 0.00000000001% of it and expect crew to suddenly get keen to mortgage their lives to get their hands on it.

Shitshow

As a side note, it looks like a beautiful area. I will need to visit at some point.

donweather's picture
donweather's picture
donweather Wednesday, 5 Oct 2022 at 12:08pm
gsco wrote:

And this quite unbelievable graph gives a decent indication of why - i.e. of what's driving markets right now (including property).

It plots the performance of the FANG+ index against the combined size of the balance sheets of the 5 largest central banks.

Explainers:

The FANG+ index is just a share market index containing the following shares:

Tightening monetary policy (rising interest rates, quantitative tightening via selling bonds back into the market) is effectively just another way of saying - is effectively equivalent to saying - that central banks are contracting the size of their balance sheets.

Interesting. Can you chart back past the GFC also please?

flollo's picture
flollo's picture
flollo Wednesday, 5 Oct 2022 at 1:22pm

Some might like to play with https://paycalculator.com.au/

It good some good updates over time + some additional inflation calculators where you can see the impact of inflation on salaries. Also, there is a good, high level overview of where the tax money is being spent.

kaiser's picture
kaiser's picture
kaiser Wednesday, 5 Oct 2022 at 1:39pm

No doves over the ditch. 50bps uplift to 3.5% and strong narrative continues. Au disparity is cast

gsco's picture
gsco's picture
gsco Wednesday, 5 Oct 2022 at 1:43pm

Don I didn’t produce it, got it from a research report (that I can’t seem to find), and not sure if FANG+ goes back that far

flollo's picture
flollo's picture
flollo Wednesday, 5 Oct 2022 at 1:53pm

Not sure if FANG+ was a thing back then and even if it was, the scale was nothing like it is today. Their market cap today compared to the rest of the market is incredibly high. Based on those graphs you could make an argument that all the QE money flooded FANG+ stocks, inflating them far outside market fundamentals (extremely high P/E ratios). A real debate should be the quality of QE spending; what proportion of it genuinely went to productivity increasing efforts in the economy and what proportion resulted in share buybacks and consequent asset inflation? This is the discussion we need to see more of.

flollo's picture
flollo's picture
flollo Wednesday, 5 Oct 2022 at 1:54pm

Meanwhile, at some point, we need to have a discussion about this in Australia - https://www.wsj.com/articles/chicago-to-convert-famous-business-district...

Fliplid's picture
Fliplid's picture
Fliplid Wednesday, 5 Oct 2022 at 2:06pm
flollo wrote:

Some might like to play with https://paycalculator.com.au/

It good some good updates over time + some additional inflation calculators where you can see the impact of inflation on salaries. Also, there is a good, high level overview of where the tax money is being spent.

A quick look shows that more than half of the education spend from that example goes to private schools. Very reassuring to know that I am subsidizing the battlers who send their kids to Kings College

I

sypkan's picture
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sypkan Wednesday, 5 Oct 2022 at 2:17pm

"...Based on those graphs you could make an argument that all the QE money flooded FANG+ stocks, inflating them far outside market fundamentals (extremely high P/E ratios). A real debate should be the quality of QE spending; what proportion of it genuinely went to productivity increasing efforts in the economy and what proportion resulted in share buybacks and consequent asset inflation? This is the discussion we need to see more of..."

".... A real debate should be the quality of QE spending; what proportion of it genuinely went to productivity increasing efforts in the economy..."

the very basis of keynsian economics no?

the quality of the spend, that benefits the majority of the population...

I said it re. corona spending... the left were so mesmerised by the right adopting keynesian economics they were caught totally off guard and failed to adequately influence the quality of the spend...

now look what we've got

that argument could be made for the last 15 years...

sypkan's picture
sypkan's picture
sypkan Wednesday, 5 Oct 2022 at 2:24pm

ever since the democrats adopted wall street...

or did wall street adopt the democrats?

looking at that FANG graph, there's lots of chicken and egg arguments to be had

who's 'influencing' what

who's 'interests' are the priority

the public really has been taken for a ride, for a long long time...

be it by accident or by design... when you think 'this just cannot possibly continue'

it just continues...

freeride76's picture
freeride76's picture
freeride76 Wednesday, 5 Oct 2022 at 2:39pm

A more existential question.

In a world dominated by digital goods and services - Fang.
Is demand destruction even possible anymore?

gsco's picture
gsco's picture
gsco Wednesday, 5 Oct 2022 at 3:57pm

Yes it’s an important concern relating to crypto/digital currencies:

If they’re widely adopted and anything can be purchased via them, then they’re theoretically and quite literally part of a nation’s money supply.

So central banks will thus lose a lot of control of the money supply, rendering monetary policy much less effective and possibly useless.

I see this as the main argument for governments and regulators undermining and coming down hard on crypto currencies if they get more widespread, and the only ones deemed legal being those issued and controlled by central banks or other government bodies.

flollo's picture
flollo's picture
flollo Wednesday, 5 Oct 2022 at 5:13pm

It's a good question. Not easy to answer though. Ideally, demand destruction would come through the substitution of inflationary products as consumer behavior changes. For example; what is the best way to destroy the demand for petrol? A good way would be - If it becomes expensive to the point where consumers stopped using it and moved to other sources of energy. Obviously, these transitions cannot happen overnight so you would say that in the short term, petrol demand is inelastic. You can read more about it:

https://www.investopedia.com/ask/answers/040915/how-does-law-supply-and-....

And generally speaking on elasticity/inelasticity:

https://www.investopedia.com/ask/answers/012915/what-difference-between-....

Now, the Fangs. If you think about what I wrote above the real question when it comes to demand destruction is: are there substitutes to Fangs and how quickly can they be deployed? Some are betting that metaverse and web3 are the next logical step. If true, the demand for Fangs (as we know them) would diminish. Now, the reality is, these companies themselves are heavily invested in this evolution. So, demand for 'them' would potentially even rise but demand for 'their current products (like a Facebook platform)' could become obsolete.

To put things into more context and tie it into what gsco said; imagine a metaverse world where you live, trade, and earn with Ethereum. Basically, you can get most of your life needs in this environment. If you can earn Ethereum in some ways (there are ways) and that was enough to cover your needs you would never need to leave. Let's say you could even buy groceries that get delivered to your house there. In this scenario, you would be 'off grid' from the real world. And whoever creates this world and pulls the masses in would potentially destroy the demand for Fangs. Or as I said, Fangs could be the ones pioneering this so companies themselves are even more valuable but their current product lines are not relevant anymore.

And this is not far from reality. For example, just look at Roblox. It's a game but it's a never-ending game. You can create games within games, and get rewards...Open world, talking to people, you can spend days in it.

But this is dangerous stuff in my opinion. Although I can see a lot of capital being invested and people starting things up I'm not a fan of it. If you look at the current Fangs you have to ask yourself; are we driving the demand for them or are they driving the demand for goods and services by using us and manipulating our emotions? I would argue there's a fair bit of the latter. I think we need to decide how much power are these companies allowed to have before letting them suck our kids in deeper than they sucked us in.

And I'm not the only one who thinks like this. Scott Galloway from the US talks about it a fair bit. Here's a quick snippet from last year's appearance on Bill Maher's show.

donweather's picture
donweather's picture
donweather Wednesday, 5 Oct 2022 at 5:45pm
gsco wrote:

Yes it’s an important concern relating to crypto/digital currencies:

If they’re widely adopted and anything can be purchased via them, then they’re theoretically and quite literally part of a nation’s money supply.

So central banks will thus lose a lot of control of the money supply, rendering monetary policy much less effective and possibly useless.

I see this as the main argument for governments and regulators undermining and coming down hard on crypto currencies if they get more widespread, and the only ones deemed legal being those issued and controlled by central banks or other government bodies.

CBDCs are coming. Just around the corner. And these same central banks will squeeze cash purchases down even further so that then have 99% visibility over everyone’s spending.

indo-dreaming's picture
indo-dreaming's picture
indo-dreaming Wednesday, 5 Oct 2022 at 6:17pm
gsco wrote:

Yes it’s an important concern relating to crypto/digital currencies:

If they’re widely adopted and anything can be purchased via them, then they’re theoretically and quite literally part of a nation’s money supply.

So central banks will thus lose a lot of control of the money supply, rendering monetary policy much less effective and possibly useless.

I see this as the main argument for governments and regulators undermining and coming down hard on crypto currencies if they get more widespread, and the only ones deemed legal being those issued and controlled by central banks or other government bodies.

If you have ever used Crypto currencies like Bitcoin you will know they are slow and not cheap to use and of course fluctuate hugely in price when a dip happens you can literally loose a lot of value in a short period, so keeping money in them is risky, so to use crypto as a currency for everyday use you would need to keep your money in fiat then transfer to crypto, if you are doing something illegal its worth the time and effort but not for normally people for everyday use.

When I've used them even just moving from place to place you literally just cross your fingers waiting for them to go through hoping all is good and from memory things slow down with the more transactions happening, hence why you can use some that aren't as popular like Litecoin and they will be quicker.

The reality is its so much easier, cheaper, quicker and safer to use other modern electronic payment systems like say Wise or even PayPal that are fairly cheap, safe and in many cases instant, unless of course you dont want the transaction traceable, which is mostly only a worry if you are doing something illegal.

Maybe the tech is there for crypto currencies to be better from a speed and cost perspective, but they would also need to be stable in price, which takes the motivation out of having them or securing them with mining etc

Plus its hard for any single new one to really gain popularity like Bitcoin has, kind of like now its hard for a new search engine to take over from Google.

Other than some small use of mostly Bitcoin being used for mostly dodgy purposes the whole crypto thing is more just a huge giant pyramid scheme.

Everyone invest money and the smart ones pull the money out collecting others money.

I think the main argument for governments and regulators undermining and coming down hard on crypto currencies, is to prevent money laundering and illegal activity etc.

udo's picture
udo's picture
udo Wednesday, 5 Oct 2022 at 6:14pm
bonza's picture
bonza's picture
bonza Wednesday, 5 Oct 2022 at 7:14pm
donweather wrote:

https://www.realestate.com.au/news/its-personal-the-woman-tasked-with-fi...

“It’s really heartbreaking that in a country as wealthy as ours, too many Australians don’t have a safe place to call home.”

https://openpolitics.au/member/julie-collins#real-estate

What a cynical piece of work.

freeride76's picture
freeride76's picture
freeride76 Wednesday, 5 Oct 2022 at 7:26pm

thanks Flollo, thats' exactly what I was thinking about.

DudeSweetDudeSweet's picture
DudeSweetDudeSweet's picture
DudeSweetDudeSweet Wednesday, 5 Oct 2022 at 7:40pm
donweather wrote:
gsco wrote:

Yes it’s an important concern relating to crypto/digital currencies:

If they’re widely adopted and anything can be purchased via them, then they’re theoretically and quite literally part of a nation’s money supply.

So central banks will thus lose a lot of control of the money supply, rendering monetary policy much less effective and possibly useless.

I see this as the main argument for governments and regulators undermining and coming down hard on crypto currencies if they get more widespread, and the only ones deemed legal being those issued and controlled by central banks or other government bodies.

CBDCs are coming. Just around the corner. And these same central banks will squeeze cash purchases down even further so that then have 99% visibility over everyone’s spending.

Visibility and control.

DudeSweetDudeSweet's picture
DudeSweetDudeSweet's picture
DudeSweetDudeSweet Wednesday, 5 Oct 2022 at 7:42pm

Flollo….exactly what Musk wants to do with his X app.

https://www.zerohedge.com/markets/now-twitter-belongs-elon-here-what-he-...

frog's picture
frog's picture
frog Thursday, 6 Oct 2022 at 12:46pm

Back to finance with implications for all of us everywhere including house prices... an interesting, understandable account of how "the end of the world" almost happened the other week in the UK. A day with the most turmoil in UK bonds in 230 years!

First 6 minutes covers the drama if you just want a snapshot summary. The rest is more about analysis. Jim Bianco knows his stuff.

Not so sure about Truss and Kwasi ("a little turbulence") - more like a couple deer caught in the Bond Market headlights.

gsco's picture
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gsco Sunday, 9 Oct 2022 at 12:27pm
donweather wrote:

Interesting. Can you chart back past the GFC also please?

Can do this with some other largely equivalent data. I also wrote some commentary in case you and VJ (and others) may be interested.

I'll state my conclusions up front:

1. The US tech/dotcom share bubble and the pre-GFC property and share bubbles were not caused by unbridled central bank (Fed) money supply/balance sheet expansion (this started post-GFC), but rather were basically pure speculative bubbles (won't go into the reasons here).

2. The unbelievable, spectacular post-GFC US property and share bull markets/bubbles were caused by unbridled, out-of-control Fed money supply/balance sheet expansion that far outstripped the growth in the productive capacity (GDP) of the US economy. A useful relative value indicator (the Buffet Indicator: share index divided by GDP) indicates that even after the recent US share falls, shares are valued relative to GDP right where they were at the height of the tech/dotcom bubble...still insane...

3. But this is not a fault of the Fed, which has been doing the best it can in the circumstances. Rather, the great US neoliberal experiment of low taxes, minimal government, privatisation, and free market provision of basically everything, while leaving macroeconomic management solely to the Fed, has spectacularly failed and needs to be rethought.

4. Quite simply, Fed money supply/balance sheet expansion without the corresponding increase in the productive capacity of the nation (supply side economics: things like population and labour market participation rate growth, and productivity growth via things like govt investment in infrastructure, health and education, research and development, etc), massively outstripped GDP growth and led to the biggest asset price bubbles of all time, and now inflation.

5. The basic mistake US policy makers made is that they are not in the business of managing the economy properly, but instead of going down the neoliberal ideological curve of massive wealth creation for the wealthy elite, all the way to the bitter end of economic destruction by excess debt. The US political and economic systems, and military, exist only as tools for the US wealthy elite to get even wealthier, at the expense of the US's own citizens and every other country in the world.

6. Money supply (equivalently Fed balance sheet) also effectively translates equivalently into US govt debt. This excess govt debt is the real problem the US is facing and needs to be addressed. Failure to handle this debt problem by either paying it off or having it extinguished will spell the end of the US economy as we know it and the end of the US's economic hegemony. This is what Ray Dalio (and many others) keep banging on about. The US needs one or both of two things to happen here:

7. It either needs a miracle of all the stars aligning of: a long period of economic prosperity and growth, a reversing of the neoliberal experiment, a refocus on supply side economics, low inflation, a stable international security situation and global economy, a return to globalisation in terms of open and free markets and trade, no asset price bubbles or bad recessions, etc, over many decades in order to slowly pay off the debt.

8. Alternatively, the other quicker and more efficient solution is the US needs a war that either decimates countries it owes debt to so it can extinguish the debt (since these countries will no longer exist as "going concerns"), or enables the US to step in a "save" countries it owes debt to in order to distinguish the debt in return for helping them (remember the UK owed the US a massive amount of debt after WWII that considerably weakened the power of the UK). Historically wars are the best vehicles for quickly extinguishing debt.

9. The US owes most of its debt to Japan, China and the UK (in that order). The US needs a war in Europe so those EU/UK countries destroy themselves and/or the US can step in and help (mostly the UK). The US also needs a war with China, ideally one between China and Japan, that will destroy one or both and/or enable the US to step in and help Japan (and still destroy China). Of course this is exactly what the US is working towards with Ukraine and Taiwan...

10. Luckily Australia is in a different boat since it didn't participate in this neoliberal experiment to the extent that the US did, and rather only engaged in unbridled RBA money supply expansion during covid. But we need to learn the lessons of history and the RBA needs to contract its balance sheet (equivalently reduce the money supply) back to its long run steady growth trajectory.

11. Australia needs a massive U-turn in its foreign policy objectives to unhook from the US's agenda of debt-fuelled war and become a neutral state, or else we'll become a hole in the ground courtesy of China.

First some notes:

Instead of using central bank balance sheet size below I use the M0 money supply since this M0 data goes back further (on tradingeconomics.com) and both are nearly identical to each other:

Also, money supply (here defined more broadly as M2) is effectively equivalent to US government debt (since the money supply was increased via quantitative easing, namely the Fed buying US govt bonds):

First note that after the GFC, the Fed radically changed its approach to monetary policy (started using QE), resulting in the money supply spectacularly outstripping GDP, whereas before the GFC it was a very different picture:

Important to note that the increase in the money supply had NO impact on the long-run growth in GDP, since GDP growth is determined by the productive capacity of the nation, which has been undermined by the great neoliberal experiment. I don't understand how US policy makers could get things so wrong, other to conclude that they are engaged in some other activities than prudently managing the US economy.

I think the graphs you want to see are the money supply vs shares (here the 30 largest shares in the US) and vs property:

Over all the data they look like:

Over the last 25 yrs:


Ignoring the pre-GFC speculative bubbles, since the GFC shares and property have closely followed the money supply, particular since covid.

Also interesting to note that post-GFC, shares have far outstripped GDP:

Hence, all the increase in the money supply over and above GDP growth went into asset price bubbles. And this is better reflected in the Buffet Indicator, which indicates that sharemarkets are currently valued at precisely where they were at the height of the tech/dotcom bubble:

We saw above that money supply (more broadly defined as M2) equivalently translates into govt debt, which relative to GDP is currently astronomical:

A lot of this debt is owed to the US citizen, but internationally it is owed to Japan, China and the UK:

The US will have a hard time getting on top of this debt problem without war and a massive amount of good fortune. The US needs war.

Luckily, Australia is a much saner country. We only participated in this unbridled money supply growth (quantitative easing) in covid:

But we need to get control back over things. This will happen naturally as the govt bonds the RBA holds mature over time (3-5 yrs mostly) and as the RBA engages in quantitative tightening when it is prudent to do so. But the RBA also need to hold its nerve and not re-engage in quantitative easing, and Australia as a nation needs to reverse going down the neoliberal experiment curve - we need to reverse our "neoliberal demise by 1000 cuts".

sypkan's picture
sypkan's picture
sypkan Sunday, 9 Oct 2022 at 1:17pm

excellent work gsco, I hope you have a real (more important) job to do to maximise all this knowledge over educating the swellnet plebs

or, perhaps educating the swellnet plebs is the most important you'll ever do...

either way, thanks

now, Im going to need to read all that about 5 times to even remotely get it, but i do have a quick question or two...

"A lot of this debt is owed to the US citizen, but internationally it is owed to Japan, China and the UK"

I don't quite get how the US can be so indebted to japan, china, and UK, when their economies are basket cases too and also heavily in debt...

shouldn't someone (something) be holding all the cash?

who... (what)? ...or is that too impolite a question?

I'm guessing, all that debt is distributed amongst these country's populations peoples through a complicated web of iou's and bond markets etc.?

much like you suggest... ""A lot of this debt is owed to the US citizen..."

am I on the right path?

and if so... this must be an incredibly complicated web... (much like the sub prime mortgage one) ...where it's almost impossible to know who actually owes / owns what?

and therefore, by extension, pretty much impossible to know the true wealth and value of anything in such inflated bubbles...

excuse my ignorance - and feel free to ignore my blatherings if Im way off track

andy-mac's picture
andy-mac's picture
andy-mac Sunday, 9 Oct 2022 at 1:30pm
gsco wrote:
donweather wrote:

Interesting. Can you chart back past the GFC also please?

Can do this with some other largely equivalent data. I also wrote some commentary in case you and VJ (and others) may be interested.

I'll state my conclusions up front:

1. The US tech/dotcom share bubble and the pre-GFC property and share bubbles were not caused by unbridled central bank (Fed) money supply/balance sheet expansion (this started post-GFC), but rather were basically pure speculative bubbles (won't go into the reasons here).

2. The unbelievable, spectacular post-GFC US property and share bull markets/bubbles were caused by unbridled, out-of-control Fed money supply/balance sheet expansion that far outstripped the growth in the productive capacity (GDP) of the US economy. A useful relative value indicator (the Buffet Indicator: share index divided by GDP) indicates that even after the recent US share falls, shares are valued relative to GDP right where they were at the height of the tech/dotcom bubble...still insane...

3. But this is not a fault of the Fed, which has been doing the best it can in the circumstances. Rather, the great US neoliberal experiment of low taxes, minimal government, privatisation, and free market provision of basically everything, while leaving macroeconomic management solely to the Fed, has spectacularly failed and needs to be rethought.

4. Quite simply, Fed money supply/balance sheet expansion without the corresponding increase in the productive capacity of the nation (supply side economics: things like population and labour market participation rate growth, and productivity growth via things like govt investment in infrastructure, health and education, research and development, etc), massively outstripped GDP growth and led to the biggest asset price bubbles of all time, and now inflation.

5. The basic mistake US policy makers made is that they are not in the business of managing the economy properly, but instead of going down the neoliberal ideological curve of massive wealth creation for the wealthy elite, all the way to the bitter end of economic destruction by excess debt. The US political and economic systems, and military, exist only as tools for the US wealthy elite to get even wealthier, at the expense of the US's own citizens and every other country in the world.

6. Money supply (equivalently Fed balance sheet) also effectively translates equivalently into US govt debt. This excess govt debt is the real problem the US is facing and needs to be addressed. Failure to handle this debt problem by either paying it off or having it extinguished will spell the end of the US economy as we know it and the end of the US's economic hegemony. This is what Ray Dalio (and many others) keep banging on about. The US needs one or both of two things to happen here:

7. It either needs a miracle of all the stars aligning of: a long period of economic prosperity and growth, a reversing of the neoliberal experiment, a refocus on supply side economics, low inflation, a stable international security situation and global economy, a return to globalisation in terms of open and free markets and trade, no asset price bubbles or bad recessions, etc, over many decades in order to slowly pay off the debt.

8. Alternatively, the other quicker and more efficient solution is the US needs a war that either decimates countries it owes debt to so it can extinguish the debt (since these countries will no longer exist as "going concerns"), or enables the US to step in a "save" countries it owes debt to in order to distinguish the debt in return for helping them (remember the UK owed the US a massive amount of debt after WWII that considerably weakened the power of the UK). Historically wars are the best vehicles for quickly extinguishing debt.

9. The US owes most of its debt to Japan, China and the UK (in that order). The US needs a war in Europe so those EU/UK countries destroy themselves and/or the US can step in and help (mostly the UK). The US also needs a war with China, ideally one between China and Japan, that will destroy one or both and/or enable the US to step in and help Japan (and still destroy China). Of course this is exactly what the US is working towards with Ukraine and Taiwan...

10. Luckily Australia is in a different boat since it didn't participate in this neoliberal experiment to the extent that the US did, and rather only engaged in unbridled RBA money supply expansion during covid. But we need to learn the lessons of history and the RBA needs to contract its balance sheet (equivalently reduce the money supply) back to its long run steady growth trajectory.

11. Australia needs a massive U-turn in its foreign policy objectives to unhook from the US's agenda of debt-fuelled war and become a neutral state, or else we'll become a hole in the ground courtesy of China.

First some notes:

Instead of using central bank balance sheet size below I use the M0 money supply since this M0 data goes back further (on tradingeconomics.com) and both are nearly identical to each other:

Also, money supply (here defined more broadly as M2) is effectively equivalent to US government debt (since the money supply was increased via quantitative easing, namely the Fed buying US govt bonds):

First note that after the GFC, the Fed radically changed its approach to monetary policy (started using QE), resulting in the money supply spectacularly outstripping GDP, whereas before the GFC it was a very different picture:

Important to note that the increase in the money supply had NO impact on the long-run growth in GDP, since GDP growth is determined by the productive capacity of the nation, which has been undermined by the great neoliberal experiment. I don't understand how US policy makers could get things so wrong, other to conclude that they are engaged in some other activities than prudently managing the US economy.

I think the graphs you want to see are the money supply vs shares (here the 30 largest shares in the US) and vs property:

Over all the data they look like:

Over the last 25 yrs:


Ignoring the pre-GFC speculative bubbles, since the GFC shares and property have closely followed the money supply, particular since covid.

Also interesting to note that post-GFC, shares have far outstripped GDP:

Hence, all the increase in the money supply over and above GDP growth went into asset price bubbles. And this is better reflected in the Buffet Indicator, which indicates that sharemarkets are currently valued at precisely where they were at the height of the tech/dotcom bubble:

We saw above that money supply (more broadly defined as M2) equivalently translates into govt debt, which relative to GDP is currently astronomical:

A lot of this debt is owed to the US citizen, but internationally it is owed to Japan, China and the UK:

The US will have a hard time getting on top of this debt problem without war and a massive amount of good fortune. The US needs war.

Luckily, Australia is a much saner country. We only participated in this unbridled money supply growth (quantitative easing) in covid:

But we need to get control back over things. This will happen naturally as the govt bonds the RBA holds mature over time (3-5 yrs mostly) and as the RBA engages in quantitative tightening when it is prudent to do so. But the RBA also need to hold its nerve and not re-engage in quantitative easing, and Australia as a nation needs to reverse going down the neoliberal experiment curve - we need to reverse our "neoliberal demise by 1000 cuts".

Thank you for taking the time to write that analysis. Very sober and interesting reading!
No crystal ball, but if there was a war to break out with China, given its history and now military strength, I don't think they would just roll over?? Would not nuclear war be on the cards, which really no one could win, even the neo liberals in USA and elsewhere would have nothing but death and destruction.
Throw Russia Ukraine into mix, and North Korea. Dam interesting times.

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sypkan Sunday, 9 Oct 2022 at 2:36pm

war should never be an option

ever

and most definitely not a nuclear one...

yet here we are... where 'the rhetoric' is basically all about the inevitably of war...

sad times... i have a better idea, the pig headed 'globalists', and the treasonous billionaires, swallow their pride, and stop investing in such dodgyness...

and actually withdraw their investments!

(not likely, with the likes of apple recently making significant investment in the chinese peasant factory)

this withdrawal is kind of happening already though ...begrudgingly... belatedly....forcedly...

both in terms of russia and china, but it seems the pig headedness pervails...

'the world' needs to enable a new china, be it india, vietnam, thailand, or whatever ...again, this is kind of happening, but oh so slowly...

the billiinaires are driving this bus, empowered by decades of academic dogma...

pride needs to be swallowed, and the process expediated - turbo charged!

been interesting watching the UN respond to the russia ukraine situation, the recent uygher report, and before that, even corona...

with many commenters lamenting how impotent the UN is, ...basically powerless, as russia and china have the power to veto everything

seems the UN has had its day, its basically now a bureaucratic parasite, returning very little on the the public's 'investment'

dudes at the top need to align their ducks real quick, a lot of pride to be swallowed, changes to be made, and dogma to be thrown out... quick...

not seeing it though, institutions flailing and failing at every level

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sypkan Sunday, 9 Oct 2022 at 2:38pm

gonna take some time to turn this tanker of entrenched dogma

https://www.spiked-online.com/2022/08/30/where-have-all-the-leaders-gone/

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gsco Sunday, 9 Oct 2022 at 7:59pm
sypkan wrote:

excellent work gsco, I hope you have a real (more important) job to do to maximise all this knowledge over educating the swellnet plebs

or, perhaps educating the swellnet plebs is the most important you'll ever do...

either way, thanks

now, Im going to need to read all that about 5 times to even remotely get it, but i do have a quick question or two...

"A lot of this debt is owed to the US citizen, but internationally it is owed to Japan, China and the UK"

I don't quite get how the US can be so indebted to japan, china, and UK, when their economies are basket cases too and also heavily in debt...

shouldn't someone (something) be holding all the cash?

who... (what)? ...or is that too impolite a question?

I'm guessing, all that debt is distributed amongst these country's populations peoples through a complicated web of iou's and bond markets etc.?

much like you suggest... ""A lot of this debt is owed to the US citizen..."

am I on the right path?

and if so... this must be an incredibly complicated web... (much like the sub prime mortgage one) ...where it's almost impossible to know who actually owes / owns what?

and therefore, by extension, pretty much impossible to know the true wealth and value of anything in such inflated bubbles...

excuse my ignorance - and feel free to ignore my blatherings if Im way off track

Gday Syp, glad you got something out of it. fyi none of it is my original thoughts, just stuff I've read recently in trading reports mostly for work purposes.

Re your question, yes you pretty well have things correct.

Some individual bond traders, managed/super funds (or their equivalent), and corporations in each country hold some of the US govt debt (bonds).

For example, you will likely hold money in superannuation funds that invest in US govt bonds, and there's heaps of ETFs you can buy that do.

But most of the US govt debt is held by the actual governments of the countries. Since the USD is the reserve currency, pretty well all governments hold USD cash and govt bonds.

btw China used to be the largest holder of US govt bonds, but since Xi Jinping took power China has been (intentionally) reducing its holdings (for various reasons):

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san Guine Sunday, 9 Oct 2022 at 8:32pm

Thanks for that gsco, I found this remark most troubling,

"The US will have a hard time getting on top of this debt problem without war and a massive amount of good fortune. The US needs war. "

Is this the market sentiment, your opinion or both?

So far in the Ukraine conflict, the US has benefited enormously strategically and financially, with no on-ground exposure.
How big a war does the US need?
Would a protracted conflict in the Ukraine suffice or is China the true end game?

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gsco Sunday, 9 Oct 2022 at 9:57pm
san Guine wrote:

Thanks for that gsco, I found this remark most troubling,

"The US will have a hard time getting on top of this debt problem without war and a massive amount of good fortune. The US needs war. "

Is this the market sentiment, your opinion or both?

So far in the Ukraine conflict, the US has benefited enormously strategically and financially, with no on-ground exposure.
How big a war does the US need?
Would a protracted conflict in the Ukraine suffice or is China the true end game?

Both my speculations and that of many people.

Biggest problem facing the global economy is the amount of accumulated govt debt that is owed due to the quantitative easing (QE) conducted post GFC, and how governments will pay it off.

Even as a result of central banks now raising interest rates to levels that are still historically very low, in order to fight inflation, we are already facing recession risks and financial stability risks to the point that the Bank of England had to intervene in the UK bond market - by doing QE again - bout a week ago.

Recessions and/or financial stability problems would require more QE. But govts are already basically at their limit of how much debt they can take on - they can't really take on any more.

There's also lots of speculation that China and Russia know that the US can't really take on more debt, so they're trying to tempt the US into war, which requires countries needing to take on massively more amounts of debt to finance the war. This Cato Institute article is discussing various things related to this.

And central banks are yet to undertake any substantial quantitative tightening (QT) to start reducing the size of their balance sheets. Central banks are possibly trapped into being unable to do much if any QT yet due to the risk of recession, financial stability risks, the risk of war, and high interest rates causing them to wear substantial losses if they started QT now - recall that our central bank the RBA is currently insolvent on paper and thus would not be able to do QT right now.

The planet has been in situations like this many times before - of high and unsustainable debt levels, fighting over resources and energy, the incumbent hegemon being challenged and declining in power and influence, etc.

Pretty well every episode like this led to war, and pretty well every war has been caused by relative combinations of these factors. This is basically the thesis of Ray Dalio's book.

In times of war, debts are restructured, countries disappear and new ones appear, new hegemons are established or incumbent reinforced, losing countries are typically required to pay repatriations to the winners, and in general basically the winners get to do whatever they want with the losing countries…and life resets and goes on...

A lot of people are speculating that they don't see how the US will be able to maintain its current financial and political trajectory. They're speculating about things like war, massive financial disruption and crises, IMF bailouts of countries like the US and UK, etc.

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sypkan Sunday, 9 Oct 2022 at 10:15pm

can't say i've read dalio's book, but one thing that struck me from his vid - aside from the very convincing argument that empires rise and fall due to he things you have been talking about - was the barely more than one sentence he devoted to saying that the US's trajectory isn't necessarily set in stone... and that he seemed to be making it a bit of a mission of his to put the warning out there - and possibly change this trajectory?

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donweather Monday, 10 Oct 2022 at 10:41am

A very good read and well articulated.

https://www.lynalden.com/october-2022-newsletter/

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gsco Monday, 10 Oct 2022 at 12:10pm

Thanks Don, yes she provides a very good newsletter.

Another person whose market commentary I find very useful (and who Lyn Alden references in her newsletters) is Charlie Bilello, particularly his This Week in Charts youtube commentaries:

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velocityjohnno Monday, 10 Oct 2022 at 1:36pm
bonza wrote:

Or why not apply what others have been arguing for when it comes to houses. ? Taxation overhaul.Removal of perverse incentives. ?Sustainable immigration?. Land banking developer handjobs to the wall. ?

Interest rate hikes are only hurting those at the bottom. Yet the sustained period of low interest rates only benefited the
wealthy.

Why is your only recommended tool so shit at doing what you want?

The tool is actually working quite well. Where most of the bubble is, has retraced somewhat. eg Nasdaq must be down about 31% or so, so far. This is the money of the top end of town, not the poor. If the bond market goes, especially USTs, after a bull run that began in the early 1980s, watch out.

When it comes to houses, it's beginning to work. I do not disagree with your other mentioned paths such as lessening from historically high - abnormally high - immigration rates. There's buckley's chance of doing the other policy changes you mention when parliament is long investment properties, and if the suspected developer collusion exists. Interest rates reverting to historical means is a lot easier - and the central banks are independent of the political machine, as gsco points out. And btw the retail variable rates are now 6%+ I think, that is historically about the average going rate.

The sustained period of low interest rates benefited many, many people with the illusion of wealth that was unearned. Asset prices rising across the board will tend to do that. It wasn't only for the rich. Fingers on the scales in everyone's favour, as the famous quote goes.

Interest rate hikes are only hurting the overleveraged. That can be those at the bottom, or a finance bro who borrowed hundreds of millions to buy bitcoin for his company, for eg, rather than be productive.

The Lyn Alden link was really good, will have to catch up on rest of thread.

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velocityjohnno Monday, 10 Oct 2022 at 2:08pm
DudeSweetDudeSweet wrote:
udo wrote:

https://www.abc.net.au/news/2022-10-05/housing-crisis-kununurra/101497366

$115K for 450sqm of lifeless red dirt in the endless lands of the Kimberly and they wonder why no one is interested. Lolol

How’s the greed factor. Developer buys it for fuck all as it’s featureless and near infinite in supply, gets it rezoned residential, runs a dozer over the entirety, splits it into micro blocks and charges the freakin Earth for them.

Blows you away when you see this stuff in person. Billions of kilometres of land you couldn’t give away, then they throw up a colourbond fence around 0.00000000001% of it and expect crew to suddenly get keen to mortgage their lives to get their hands on it.

Shitshow

I was thinking, if you had the ability to do a bit of digging, what's to stop you going all Coober Pedy and creating what you need with no comparable cost to above shitshow, and quietly 'being'? Radical isn't it?

Edit: I've mentioned before on this thread, why not young people just go and survey out a town somewhere there is nothing, and build their future without the cost. (My inspiration is seeing some empty Tassie 'townlets' some years ago, 6K asks, nothing there, all pegged out, maybe a town once, maybe a long forgotten mining boom) The way things are (many inputs got us here) have been unkind to young people, and they'd have everything on their side - working ability, demographics, low health costs initially, etc etc. Just pull the bird at what's on offer. And when you say 'There's no work!' surely there must be a way to, um, I dunno, combine work and the home. Work. Home. Work from home, hmmm.
And when you say 'but it's against the law', how's the laws working out for them now? Can they have a place early, have kids early? The Amish have it right. And that's before getting into the reintroduction of usury in the western Christian world, which was 1815 iirc... go check what the Bible says on usury... we argue interest rates, nobody arguing interest itself... Have been a peon working in the lower cogs of the bank machine, and seen how our 'currency' comes into being, but that is the biggest rant of all, and I'll spare you the horror of this knowledge. Anyway, radical stump speech off, back to navigating within the world we have.

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velocityjohnno Monday, 10 Oct 2022 at 2:17pm
groundswell wrote:

When i lived in Perth i saw large multi acre blocks in East hills or whatever areas basically well east of Perth metro, land going for $20 000 which i considered buying and starting a large superhot specialty chilli farm. Would have tried to take over bunnings chilli superhot clients as they dont know crap about chillies and often label strains the wrong strain somehow.Pissing off dedicated chilli fans.
Ive seen Habs mixed as carolina reapers, trinidad scorpions labeled as habs and all sorts of mess ups.
Wouldnt take much to make a mill or two after a few easy years.
Growing chillies is piss easy, money in the bank if on a large scale like that.

Hey Groundswell, recently saw blocks along Chapman Valley direction in the mid to high 30s, you can still do the Chilli dream, anything is possible. If I had ever to start again, that's the general region I'd go if I wanted to own my own property. Plus we've got lots of fam there lol

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velocityjohnno Monday, 10 Oct 2022 at 2:54pm

gsco thank you for the comprehensive write up above, that is a deal of time and effort and is appreciated.

Just out of interest the WW1 Thucydides' trap was UK and Imperial Germany, UK prevailed by calling on friends, but afterward, they devalued the silver in their currency (crowns, shillings, pence, etc) from 92.5% to 50%. The very interesting arbitrage developed where the UK had the same coins and coin weights as Australia, but the Australian coins were more valuable for they were still 92.5% pure. Australia devalued after ww2 to 50%, then lost it all at decimal currency - except for the round 50c coin, which was 1/3oz of silver iirc - and quickly bought up and smelted by the Japanese who saw a further arbitrage. If you find one, lucky you!

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gsco Monday, 10 Oct 2022 at 5:15pm

Classic VJ, didn’t know about that.

I’m currently reading a book Wealth, War & Wisdom by Barton Biggs.

If you hadn’t read it, it gives a broad overview the fate of the major asset classes - stocks, bonds, cash, gold, art, jewellery, property, etc - in the various countries involved in WWII.

It also tells some stories of ways the wealthy elite and governments of Europe, Japan etc tried to preserve, hide, conceal, smuggle, steal, plunder, destroy, etc, their and each other’s wealth during wartime, and which asset classes held up in the countries involved.

Of course some absolutely devastating stories of human nature and behaviour, particularly by the Germans and Russians, that are very hard to process even as a hardened mid-40s adult.

Makes me wonder about what is going on in Ukraine that we’re not privy to.

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bonza Monday, 10 Oct 2022 at 9:46pm
velocityjohnno wrote:
bonza wrote:

Or why not apply what others have been arguing for when it comes to houses. ? Taxation overhaul.Removal of perverse incentives. ?Sustainable immigration?. Land banking developer handjobs to the wall. ?

Interest rate hikes are only hurting those at the bottom. Yet the sustained period of low interest rates only benefited the
wealthy.

Why is your only recommended tool so shit at doing what you want?

The tool is actually working quite well. Where most of the bubble is, has retraced somewhat. eg Nasdaq must be down about 31% or so, so far. This is the money of the top end of town, not the poor. If the bond market goes, especially USTs, after a bull run that began in the early 1980s, watch out.

When it comes to houses, it's beginning to work. I do not disagree with your other mentioned paths such as lessening from historically high - abnormally high - immigration rates. There's buckley's chance of doing the other policy changes you mention when parliament is long investment properties, and if the suspected developer collusion exists. Interest rates reverting to historical means is a lot easier - and the central banks are independent of the political machine, as gsco points out. And btw the retail variable rates are now 6%+ I think, that is historically about the average going rate.

The sustained period of low interest rates benefited many, many people with the illusion of wealth that was unearned. Asset prices rising across the board will tend to do that. It wasn't only for the rich. Fingers on the scales in everyone's favour, as the famous quote goes.

Interest rate hikes are only hurting the overleveraged. That can be those at the bottom, or a finance bro who borrowed hundreds of millions to buy bitcoin for his company, for eg, rather than be productive.

The Lyn Alden link was really good, will have to catch up on rest of thread.

I think you are wrong. I think your definition of wealthy is disconnected from the current realty of what wealthy is.: that is some one who owns / mortgages bricks and mortar vs some one who does not.

I think your summation of wealth is also wrong. Houses have doubled in value in many cases in less than 2 years. Many 'regular joes' have cashed in on that equity for hard coin for toys or houses.. well within their means. they are wealthy.

I also think both you and gsco ( I agree gsco recent posts have been very good as are yours VJ - keep them coming) are wrong on the RBA responsibility in how things have played out. Firstly they told everyone to buy big. Secondly the Government of the day employs them. Thirdly the board all sing from the same neoliberal playbook. Fourthly how can rising interest rates control stagflation while at the same time depreciate house prices in Australia with any significance? Lastly and most insulting to recent home buyers who sprinted to catch the last train from "rentscumtown" to "fuckphilsaiditwillbeokville" are pretty pissed wondering why they are left carrying the can. why the rba lied to them.

Suggested policy alternatives to raising interest rates to mitigate house prices may be a pipe dream for now but are you seriously suggesting a better alternative is a dressed up pop up shop of blocks of disused dirt in an opal / copper mine as the saviour to housing prices?

when this pending recession or whatever it is is over, there will be no winners from the current rentier losers. only current winners less winning.... until they start winning again.
rentiers gotta rent yo