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More Slices of Pizza Please

More Slices of Pizza Please

Update: 2021-04-271
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You’ve no doubt heard the old joke about the guy who calls a pizza place to order a pizza over the phone. He orders a medium sized pizza with mushrooms and sliced tomatoes. The person taking the order asks whether they would like the pizza cut into 8 slices or 10, to which our trusty guy ordering the pizza says. Oh yes, cut it in 10, I’m hungry today. Yes, it’s an old joke, and not all that funny really. But, I’m guessing the guy who ordered the pizza must work for the Federal reserve.


In a world of finite resources, of finite primary wealth, and of finite pizza, issuing more currency, or making smaller slices doesn’t create more pizza. It simply dilutes the value of each slice of pizza.


OK. So we know governments are printing money like never before. According to modern monetary theory, we’re being told printing money will not be inflationary as long as it’s being done the right way.


What will cause the next downturn in real estate?


The world is filled with counter party risk. Quite simply, counter party risk is the result of an asset on one balance sheet appearing as a liability on someone else’s balance sheet. When the chain of financial dependence becomes too deep and too unstable, then you have a chain of dominos. Once one domino falls, then all of the dominos in the chain fall over.


So the question is, where is the instability in the system? Where is the house of cards?


Some have argued that the government is simply printing too much money and that’s the cause of the instability.


If you’ve been listening to this podcast for a while, you’ll remember me saying that printing money works, until it doesn’t. When it doesn’t work, there’s no turning back. It’s a slippery slope, a runaway train.


The only way back from that kind of slippery slope is a complete reset of the financial system. Some countries have tried cosmetic resets to the financial system. Venezuela’s recent attempt was to lop off five zero’s from their bank notes. In the end, that didn’t work, because they didn’t fix the underlying issue. It takes a commitment to stop printing money.


We also see inflation when we look at asset prices.


Stocks are trading at peak valuations; the average Price/Earnings ratio in the S&P 500, for example, is now 42, roughly 3x the historic average. It has only been higher two other times– just before the 2000 crash, and just before the 2008 crash.


Bonds are so expensive that more than $13 trillion worth trade at negative yields.


So let’s imagine that one day, stock traders wake up and realize that the prices being offered in the stock market for these companies don’t make sense. This has happened from time to time throughout history. We saw it on October 19, 1987. We saw it in 2001 after the dot com bubble burst. We saw it again in 2008 when it became clear that the US banking system was over-leveraged.


A precipitous drop in stock market prices could cause a cascade effect on assets across the board.


One of the warning signs is the amount of debt in the stock market. You might be wondering what I’m talking about. The stock market is an equity market. I’m talking about the margin accounts at all the major brokerage houses. When traders have high margin accounts and market prices fall, then traders need to sell assets in a hurry to cover their margin shortfall. That puts more downward pressure on the market.


Let’s imagine that you are sitting on a lot of cash. Let’s imagine that you’re worried about inflation. That means your cash is going to be worth less a year from now, or two years from now, of five years from now than it’s worth today.


Would you be willing to lend money for a long time at a low fixed interest rate? Or would you prefer to put your money into an asset that provides a more effective hedge against inflation?

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More Slices of Pizza Please

More Slices of Pizza Please

Victor Menasce