In late 2007 I started counting the For Sale signs on the 20 minute drive to work through the neighborhoods of Weston and Westport, CT. I’m not exactly sure why it made my risk antenna start quivering in the first place … honestly, I just like to count things – anything – when I’m doing a repetitive task. Coming into 2008 there were a mid-teen number of For Sale signs on my regular route, up from high single-digits in 2007. By May of 2008 there were 35+ For Sale signs.

If there’s a better real-world signal of financial system distress than everyone who takes Metro North from Westport to Grand Central trying to sell their homes all at the same time and finding no buyers … I don’t know what that signal is. The insane amount of housing supply in Wall Street bedroom communities in early 2008 was a crucial datapoint in my figuring out the systemic risks and market ramifications of the Great Financial Crisis.

Last week, for the first time in years, I made the old drive to count the number of For Sale signs. Know how many there were?

Zero.

And then on Friday I saw this article from the NY Times – Where Have All the Houses Gone? – with these two graphics:

I mean … my god.

Here’s where I am right now as I try to piece together what the Opposite of 2008 means for markets and real-world.

1) Home price appreciation will not show up in official inflation stats. In fact, given that a) rents are flat to declining, and b) the Fed uses “rent equivalents” as their modeled proxy for housing inputs to cost of living calculations, it’s entirely possible that soaring home prices will end up being a negative contribution to official inflation statistics. This is, of course, absolutely insane, but it’s why we will continue to hear Jay Powell talk about “transitory” inflation that the Fed “just doesn’t see”.

2) Cash-out mortgage refis and HELOCs are going to explode. On Friday, I saw that Rocket Mortgage (RKT) reported on their quarterly call that refi applications were coming in at their fastest rate ever. As the kids would say, I’m old enough to remember the tailwind that home equity withdrawals provided for … everything … in 2005-2007. This will also “surprise” the Fed.

3) Middle class (ie, home-owning) blue collar labor mobility is dead. If you need to move to find a new job, you’re a renter. You’re not going to be able to buy a home in your new metro area. That really doesn’t matter for white collar labor mobility, because you can work remotely. You don’t have to move to find a new job if you’re a white collar worker. Or if you want to put this in terms of demographics rather than class, this is great for boomers and awful for millennials and Gen Z’ers who want to buy a house and start a family.

4) As for markets … I think it is impossible for the Fed NOT to fall way behind the curve here. I think it is impossible for the Fed NOT to be caught flat-footed here. I think it is impossible for the Fed NOT to underreact for months and then find themselves in a position where they must overreact just to avoid a serious melt-up in real-world prices and pockets of market-world. Could a COVID variant surge tap the deflationary brakes on all this? Absolutely. But let’s hope that doesn’t happen! And even if it does happen, that’s only going to constrict housing supply still more, which is the real driver of these inflationary pressures.

Bottom line …

I am increasingly thinking that both a COVID-recovery world AND a perma-COVID world are inflationary worlds, the former from a demand shock and the latter from a supply shock to the biggest and most important single asset market in the world – the US housing market.

It’s just like 2008, except … the opposite.

In 2008, the US housing market – together with a Fed that thought the subprime crisis was “contained” – delivered the mother of all deflationary shocks to the global economy.

In 2021, the US housing market – together with a Fed that thinks inflationary pressures are “transitory” – risks delivering the mother of all inflationary shocks.

It’s the only question that long-term investors MUST get right. You don’t have to get it right immediately. You don’t have to track and turn with every small movement of its path. But you MUST get this question roughly right: Am I in an inflationary world or a deflationary world?

And yes, there’s an ET note on this. Because the Fourth Horseman is inflation.

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From that note, here’s what I think preparing your portfolio for an intrinsically inflationary world requires:

• Your long-dated government bonds will no longer be an effective diversifier, and should be a tactical rather than a core holding. They’ll just be a drag. I bet they’re a big portion of your portfolio today.

• Highly abstracted market securities will be very disappointing. Even somewhat abstracted securities (ETFs) won’t work nearly as well as they have. You’ll need to get closer to real-world cash flows, and that goes against every bit of financial “innovation” over the past ten years.

• Real assets will matter a lot, but in a modern context. Meaning that I’d rather have a fractional ownership share in intellectual property with powerful licensing potential than farm land.

• The top three considerations of fundamental analysis in an inflationary world: pricing power, pricing power, and pricing power. I could keep writing that for the top ten considerations. No one analyzes companies for pricing power any more.

• When everyone has nominal revenue growth, business models based on profitless revenue growth won’t get the same valuation multiple. At all. More generally, every business model that looks so enticing in a world of nominal growth scarcity will suddenly look like poop.

• Part and parcel of a global inflation regime change will be social policies like Universal Basic Income. I have no idea how policies like that will impact the investment world. But they will.

• God help us, but there’s an argument for Bitcoin here. Everyone thinks I hate Bitcoin (BITCOMP). Pfft. What I hate is the way Bitcoin has been neutered to be just another game in the Wall Street casino. But it’s a decent game.

• Most importantly, the Narrative of Central Bank Omnipotence will be shaken … maybe broken. Central Banks will still be the most powerful force in markets, able to unleash trillions of dollars in purchases. But the common knowledge will change. The ability to jawbone markets will diminish. We will miss that. Because the alternative is a market world where NO ONE is in charge, where NO ONE is in control. And that will be scary as hell after 10+ years of total dependence.

That’s what I wrote in 2018, and I still believe all that today. But here’s the thing …

Just as in 2008, a lot of the ramifications of this insane shift in available housing supply will only reveal themselves over time. We won’t be able to predict all of the market-world and real-world shocks, we will only be able to expect them. We will only be able to observe and respond to them.

There is no predicting what will happen in markets. There is no closed-form solution for figuring out an investment strategy that will thrive in a transition from a deflationary world to an inflationary world. There is only observation and response. Sorry.