21 Sept 2021
MREITs
Harvey Bassman has written a nice short tutorial on how mortgage REITs work. You can read it here (pdf). He focusses on the non-linear response of the value of the security to interest rates. These things are pretty high risk, but if you think that short term interest rates are going to be pinned to zero, they might be worth a look. This article argues that income-focussed investors should steer well clear. Arguably, if you think $NLY is an interesting security because you have a firm view about steepening or flattening, you’d be better off getting direct exposure via the futures markets in US treasuries or Eurodollars.
Wrap
As seems inevitable, the market bought the dip, and we had a roaring risk-on day again today, although equity prices faded towards the end of the trading day. Forex was quiet (except something happened in Brazil, I’m guessing). DXY was dead flat. Bonds were quiet, as were most commodities. Maybe this is the calm before the storm.
Labour markets
There are a lot of stories in the UK about staff shortages. Things are not delivered, including food and post. Things are not collected, including rubbish. To me, this is a wonderful thing to behold. For a long time, we’ve had dismal wage increases, but now at long last the year on year rate is pushing 9%. Not only will this cheer up workers enormously, it will – I hope – trigger some modest inflation, which will mean that monetary conditions can get slightly looser.
That is, unless the UK government crank up taxes, especially taxes on labour, which will drain spending power out of the economy. I guess this is all about fetishizing ‘sound money’ and failing to ask what exactly is being achieved by diverting private incomes to reward government creditors.
Labour costs and commodity prices have been very quiescent for decades. We should just do the experiment and see what happens. We have discovered that monetary polices have been fairly powerless to ignite sustained inflation, but we have never tried to do it with fiscal policy. Volker showed that monetary policy could be very powerful in combating inflation, and Geoffrey Howe showed that fiscal policy could be too.
We had a catastrophic time in the 1920’s because Norman Montague persuaded Churchill that the pound should go back on the gold standard at the pre-war parity. Do we need to see the modern equivalent of the Jarrow marches and the National Strike to discover again that a soggy exchange rate is a wonderful tonic for the real economy, even if it is not very popular in the City. Oh, these days they probably don’t care. Hedging is cheap and easy.
Image of the day
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