The Opposite of 2008

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?


And then on Friday I saw this article from the NY TimesWhere 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 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.

Things Fall Apart – Markets

The Fed, China and Italy are the Three Horsemen of the Investment Semi-Apocalypse. They’re major market risks, but you’ll survive.

There’s a Fourth Horseman. And it will change EVERYTHING about investing

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.
  • 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.

This is the Three-Body Problem.

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.

And there’s no way that any one of us – no matter how open and aware we are to the changes that may be coming down the pike – can observe and respond to everything that is important to observe and respond to. But together? Aided by new tools and technologies that we call the Narrative Machine? Yeah, I think that can work.

I think that the Epsilon Theory Pack can work together to collect information on what’s really happening in both real-world and market-world, and then figure out effective strategies to deal with it.

I don’t want to crowd-source an investment strategy for a shift from a deflationary world to an inflationary world. I want to Pack-source it. 

Over the past two months, we’ve set up an online platform for paid Epsilon Theory subscribers that we call the ET Forum. It’s like Clubhouse, except that it’s, you know, actually our clubhouse, a safe space for thousands of ET-subscribing, full-hearted citizens and investors to share their efforts to see the world in a more clear-eyed way.

The ground rule for the ET Forum is the golden rule – treat everyone as you would wish to be treated. You are welcome to talk about markets, but please don’t be a raccoon. You are welcome to talk about politics, but please don’t be a rhinoceros. Anonymity is fine, although we hope (and believe) that you will make some strong friendships here. I know that I have!

As I write this note, there are hundreds of Pack members on the ET Forum actively researching how to observe and respond to a shift from a deflationary to an inflationary world, ranging from lawyers looking at changing trends in personal bankruptcy filings to realtors looking at changing trends in real estate transactions to investment analysts researching everything from gold miner capital allocation decisions to construction equipment rental utilization rates. Actually, that last one is mine, and if anyone has data on JLG aerial lift platform backlogs (i.e., is the McConnellsburg, PA parking lot filled with scissor lifts or totally empty, and what color are they painted?) I am all ears.

We call ourselves the Epsilon Theory Pack, because The Long Now is going to get a lot worse before it gets any better, and there is strength in numbers. Watch from a distance if you like, but when you’re ready … join us

Clear eyes, full hearts, can’t lose.

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. Fun note, hit me in a few places:

    • Already looking forward to a day when we will build a digital city named Epsilonville or something and it will be one of the places I live.
    • Always love a Third Body Problem reference, frankly I get nostalgic because above all other ET notes it changed me because it was one of those rare unforeseen intellectual convergences of things I care deeply care about (in this case physics and markets).
    • Last but not least as much as I'm an ET fanboy...I remain uncertain on one of the key principles! Namely, what is the water in which we swim?? Is it the shift to inflationary expectations via extraordinary monetary/fiscal policy as Ben argues in ET or is it the similarly massive and hard to appreciate deflationary forces (Empty Planet demographics, technology/Replicator Scenario, conversion of physical economy/experiences to digital economy/experiences, etc)? I believe all these forces are certainly huge drivers just don't know which will win....and I cannot help but be fascinated by trying to naively predict outcomes even with the wisdom of 3rd body problem front of my mind!
  2. No idea where this is going either, but here is my recent personal experience with housing. Due to a death of my father-in-law in Dec 2020 and the fact that our kids weren’t truly meshing with FL we made the decision to move back to IL to be closer to my wife’s mother and our older out-of-the-house kids. Our resident 8th graders (triplets) were also consulted and very enthusiastic about a return move. I am fortunate to be home office and my wife can the business she created last year up North. So, on Christmas Eve 2020 we decided to build back in our old neighborhood where a new phase had just opened and with the help of our friends in said neighborhood (also enthusiastic about our return, which felt great) we picked a lot and a model to build. Contracts were executed via Docusign on 12/28/2020.

    Next, we consulted our RE Agent who helped us to find our FL house. She and her husband work as a team and stopped out to review our home, assess features/upgrades/etc., and gave us an initial estimated target for a listing price. This was January 16th 2021. A month later they called to say they thought we could now ask at least 10% more that what they told us a month earlier because with our type of home the demand was off the charts and the inventory nearly non-existent.

    Now it is March 2nd 2021 and I just finished reading Ben’s note above. I then checked with the builder of our new home back in IL and confirmed that the base price of the home we have only been under contract for build since 12/28/20 is now > 10% higher, starting to approach what our total cost of build will be with our lot + elevation + upgrade choices.

    Needless to say fairly shocking to me since I knew prices were rising but had no notion of how far and how fast it was happening. I have been working on my Renter Nation thesis and a portfolio of stocks for three years or so now and I have been slowly moving to include them in my portfolios, but with the crazy divergence happening now in rent vs home prices now I wonder what other ripple effects will be which means yes I am looking for thoughts which is why we are here after all.


  3. The lack of a closed-form solution to this shift is actually one of the main reasons I started reading ET years ago. Your point on owner-equivalent rent and its insufficiency as a proxy for housing costs in the CPI basket is spot-on. It quite conveniently let’s the Fed absolve itself of any responsibility for its financial bubble-blowing impacting consumer buying power on the 40% of the basket represented by housing.

    I look forward to spending some time on this subject in the forum. Thank you very much for creating it!

  4. Avatar for bhunt bhunt says:

    Amazing story, Jeff, and yet I’m hearing lots of similar experiences. Thank you for sharing this and good luck with the move back to Illinois!

  5. Avatar for bhunt bhunt says:

    Thanks for getting involved, Michael!

  6. South Carolina coast and western slope Colorado housing prices are rising to catch up with building costs. Check out lumber, cement, copper, pvc prices. Also immigration policy has hit labor force - framing crews, roofers all the manual jobs associated with the higher skilled trades. New build lead times to finish 1/1/2 to 2x longer than recent past.

  7. Hawaii real estate off the hook.

    Median price for a single family dwelling on Kauai over $1M.

    Homes in the medium to low end subdivision (for modern homes, not single wall plantation homes) in Kona that I live in are up 20 - 25% over a year ago, are sold in 3 to 5 days of being listed and generally are bid up from asking price. About 50% being bought site unseen.

  8. I wrote an article in 2012 titled “Invest in Purchasing Power”. I fully agree with Ben’s view. Inflationary booms kill bonds. In preparing the article I came across a book that consolidated a series of Barron’s articles from the 1920s. This is an excerpt.

    Consider this excerpt from a 1925 book titled Investing in Purchasing Power,
    written by Boston investment manager Kenneth Van Strum:

    What is a dollar worth?

    About twenty years ago a certain Boston business man, feeling that he had reached a
    discreet age for business retirement, sold his business and invested the proceeds in what
    he considered to be gilt edged bonds. The yield from these securities was ample for his
    needs and, he thought, would enable him to live for the rest of his life in the style to which
    he had been accustomed.

    Satisfied that he would be able to continue his old mode of living, he continued his daily
    life heedless of the encroachment that the rising cost of living was having upon his plans
    until one day it was brought forcibly to his attention. He was planning a trip abroad with
    his family and was surprised to discover that the increased cost of the thousand and one
    items used in daily life had so eaten into his reserves that it would be necessary for him to
    draw upon his principal in order to make the trip.

    By degrees he was forced to curb his standard of living until today the income from his
    bonds is downright inadequate to assure him the comforts and pleasures he had in the
    early years of his retirement. But what has happened to his investments? His bonds are
    as high grade today as they were twenty years ago and they command the same income
    in dollars. The answer is to be found in the increased cost of living and not in the fact that
    he received any smaller dollar income from his investments.

    There is an Investment Counsel in San Francisco by the name of Van Strum & Towne, founded in 1927.

    When I was a Trust Officer in the late 1970s I saw exactly the same outcome. The beneficiaries of old money trusts had to change their lifestyles, fire the captain then sell the yacht. The intergenerational fighting was fierce, Income beneficiaries needed more income, capital beneficiaries were desperate for growth. Investing for growth and income is a tough discipline.

  9. this may sound crazy - but isn’t this the best of all worlds, real-estate wise??
    Multiple more people own a home than want to buy one - so rising prices is a win.
    Most people who rent are poorer, and rents are falling - also a win.

    and as we know, once mortgage rates rise by 100bps - the housing boom will be over.

  10. If the implementation of UBI and similar things is sandbagged (delayed, reduced in size, etc.) enough, there may be an (engineered?) epidemic of defaults by individuals and small companies, putting more real assets in the hands of larger-scale players, putting them on better footing for inflation.
    There was a narrative going around about private equity snapping up defaulted properties in 2008, but I don’t know how significant that ended up being.

Continue the discussion at the Epsilon Theory Forum

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