Tuesday, March 25, 2008

You can never go home....

They say you can never go home. Now, Macro Man doesn't really know if that's true or not, but he gave it the old college try over Easter weekend, visiting a city that, if not "home", at least provided a relatively happy residence for a few years earlier in the decade.

It's nice to know that some things never change; the weather in Dublin is still "bracing", to put it euphemistically, and the traffic laws appear to more suggestions than hard and fast rules.

For the most part, however, Macro Man and Mrs Macro were flabbergasted at the change in the city that they left little more than four years ago. For one thing, it appeared to be less of the Irish capital than Cracow-on-the-Liffey. While there's certainly been a huge influx of Eastern European labour into the UK, to a degree the scale of it has been dwarfed by the sheer size of Greater London. Dublin is a city a little more than a million souls, so the sudden emergence of Polish food shops on every street corner is pretty noticeable.

Even more noticeable, however, was the massive increase in the price of...well...everything. For starters, Macro Man's old house would now go for roughly twice what h sold it for in December 2003- and that's with the assumption that prices have started to roll over. Beyond that, Dublin (and, more likely, Ireland as a whole) provides a useful rejoinder to those who seem to think that monetary inflation is extinct.

Pizzas at the old neighbourhood eatery, which cost roughly eight euros four and a half years ago, now go for 14.95. A simple cab ride from Ballsbridge to O'Connell Street cost 15 euros with tip- it's probably a mile and a half as the crow flies! On the plus side, however, at least the water is still free (and there's not many places these days that have that going for them.)

Still, it was really striking to see what an extended period of too-low interest rates can do do prices, and provided some comfort to Macro Man's view that the ultimate outcome of the Fed's policy action will be inflation. There wasn't really a trade that emerged from the long weekend (indeed, Macro Man is struggling at the moment to grasp onto any macro trades), but that's not to say that it wasn't educational. Far from it!

He learned that you can go back home....you just can't afford to stay for very long.


Anonymous said...

in case you or somebody is interested in more general evidence about what sustained low interest rates have done to house prices, I have a nice chart (figure 8) in the OECD working paper linked below.


(Sorry for the self-promotion, but the site didn't allow me to simply paste in the chart).


Macro Man said...

Thanks Rudiger. I think the Euro area is a really fascinating study, or should be, to academic economists. Observe the wildly different fortunes in the housing markets of, say, Ireland and Germany, despite the two countries having identical monetary policy over the past few years.

One wonders if the different Eurozone economies are not on irrevocably divergent paths, caused at least in part by the one-size-fits-all monetary policy of the ECB.

Anonymous said...


Thanks for the snippet.

Considering that you're likely to be correct in saying that the effects of present Fed policies will be inflationary in scope, then gold as a macro trend is just beginning its ascent, isn't it?


Charles Longfellow said...

Also, when thinking gold, does the gold/silver ratio provide clues to short term buy/sell signals? I have noticed a casual relationship, but probably only safe when riding the longer term trend, (clearly UP).
My blog has a new link to Bullionvault.

Anonymous said...

Charles Longfellow,

Recently, (within the last couple of weeks), I was reading something on the current runup in precious metals (gold and silver, in particular), and mention was made of a "historic" ratio, of 16:1, if I recall correctly. The author's thesis was that, of the two, silver represented a better current value, as its being lagging gold.


Mencius Moldbug said...

The historical S/G ratio is not particularly relevant, or constant for that matter.

16:1 is a pretty typical 18th-century ratio, and also pretty close to the relative abundance in the Earth's crust. So probably about right for a monetary system on a bimetallic standard. But that bimetallic standard only existed because China and India were on silver, IMHO, and in the late 19th century it collapsed for what were more or less natural causes. OTOH, in classical times the S/G ratio was even lower, down to 5:1 I think.

It may be a technical indicator - anything may be a technical indicator - but I don't think it means much today. By weight, here is less aboveground monetary silver than monetary gold today, which makes the price tend to fluctuate wildly based on demand from goldbugs who are bothered by the idea that their entire end-times hoard is in just one element.

Because of this small stockpile, a little bit of monetary demand does crazy things to the silver price. On the other hand, there's a reason the stockpile is small, which is that the return of silver as a monetary metal is very unlikely. Whatever you think the chance of a new gold standard is, divide by 100 for silver. For example, the world no longer needs a "small-change" metal - even on a 100%-reserve standard, flakes of gold in Lucite would do just fine.

On the other hand, silver is also an important industrial metal, and the present price is probably not too far out of whack for industrial purposes. For a long time the old monetary stockpiles were still shrinking. It takes a long time to turn a money supply into turquoise jewelry. Now the world's silver pile is probably growing again, but slowly. So this gives you a bit of a put option, perhaps - as opposed to gold, where monetary demand is pretty much the only game in town.

Anonymous said...

india has sold so much rice to mexico that they dont know what to do with all that silver. they even consume it in the form of a leaf of silver put on a dish thats baked in the owen. true wealth comes in the form of, but is not limited to, freedom, love, happiness, health, children, a good nights sleep and such. it is true that all the best things in life are for free.

and tally man, "it never rains in the pub"...

Anonymous said...

When are you going to start trading for your new boss? I sincerely miss your day by day P/L... Always a pleasure reading your posts, anyway!


Macro Man said...

I'll start trading whenever I have a good idea and the conviction to back it. Right now I feel like I am on an intellectual slip road, trying to get back up to speed before merging in with market traffic.

Sadly a number of the options in the old P/L have been lost with the change in login, and right now I just don't have the time or energy to re-create them....