Oil, gold, houses, and cars
Houses and cars are PROSPERITY ISN’T IT? what made the 20th Century an American century, at least from the standpoint of urban welfare and personal consumption, symbolically. It started in the early 1920s right after the mild 1921 recession, and Chrysler was the name of the game at that point against Ford and its aging Tin Lizzie. Then the 1929 depression hit. The first American mortgage shattered and ended in personal disasters. The new versions fared better. The new American mortgage after the advent of the New Deal that lasted until mid-1970s had a maturity of 30 years and, 8-cyclender American cars were everywhere in the US, Canada and Australia the 1950s, a wave that lasted until the 1973 Oil Shock. Turkey was (is) –allegedly- nothing but ‘Little America’, and Tansu Çiller, Premier after Demirel became president in 1993, promised in 1991 two keys –a house and a car- reminiscent of the Golden Age of American capitalism. Well, the idea stands. Housing and automotive are –or at least were until recently- still key in Turkish electoral politics, and they are also among the main pillars of the economy. So, people have developed the habit of looking at the car and house markets, and make inferences from there. We may add dollars and gold to the list.
AS HOMES AND CARS GO, SO GOES THE ECONOMY
Home mortgages have loomed continually larger in the financial well-being of American households. In 1949, mortgage debt was equal to 20 % of total household income, a ratio that was to be surpassed in 1979 by a wide margin: it had risen to 46% of income. By 2001, 73% of income was destined to be paid for mortgage debt. Similarly, mortgage debt was a mere 15% of household assets in 1949, but rose to 28% by 1979 only to further escalate to 41% by 2001. Prior to the Great Depression, the American mortgage was a short-term (5-to-10 years), adjustable rate, and low loan-to-value (LTV ) ratio credit with bullet payments at the end of the period. Before the 1930s, homeowners typically renegotiated their loans every year. Even in 1985 half of mortgages were adjustable rate, whereas today only 21% are so. In retrospect, the 1950s arrangement of deposit mortgage funding in the United States came apart on two dimensions. Primo, people stopped saving solely in bank accounts and instead, with the liberalization of capital markets, increasingly used mutual funds, pension funds and the like as savings vehicles. In fact, given the growth in the mortgage market, depositories today have insufficient funds to back the entire demand for mortgages. Secondo, borrowers want long-term fixed-rate mortgages. The fixed rates protect them against rising interest rates and the ability to refinance protects them against falling interest rates. The previous savings and loan crisis made clear the dangers of funding short-term liabilities with long-term assets in markets with volatile interest rates. Depositories can only hold long-term fixed-rate mortgages when nominal interest rates are low and stable, as they were in the 1950s and 1960s. With securitization, long-term assets can be funded through accessing capital markets, which are increasingly global in scale, sometimes unfortunately so. At some point, given that the population is some 85 million + refugees, the mortgage market will have to resemble the US market, just as the composition of Turkish GDP does.
CARS AND COMRADES
Cars have also been strategic goods in the past. Apparently the Turkish government still thinks having a car like TOGG will make people feel confident. In the popular imagination, cars matter as they mattered in the past. The story of the Soviet car for instance is now well-documented. In the 1930s, the automotive industry was thought to be key along with iron & steel. By 1929, Ford had already built plants from scratch in 19 countries. In Moscow, cars were scarce, strategically important, and politically distributed goods. Stalin directly intervened in the allocation of cars. The endeavour wasn’t a complete failure since the GAZ factory – Nijni-Novgorod, Gor’kovskii Plant- was able to secure 140.000 trucks and cars by the mid1930s, 6 times larger than the famous ZIS factory. The whole sector could be linked to
aviation as well, also to tank production. But the Soviet jet engines were never on a par with the Japanese, Mitsubishi Zero being the arch-example. In the end, problems of scale and distribution, and the constant supply of spare parts, prevented the Soviets from producing on a mass scale. That could only come after the 1970 deal with FIAT, producing the “Soviet car” –Lada- for the people at large on a mass scale at the Togliatti Facility. This is on a par with the Turkish deal with FIAT producing Murat-124 at about the same time. Today, I reckon that the automotive sector is no longer a strategic sector, a sector conducive to total factor productivity growth. It remains important only because it is a critical consumption good, a good whose ownership is still aspired by the large chunks of the population. This is why car sales are an indicator. But that’s about it. Obviously the electric car has also become the symbol of the anti-climate change policy, but it is still in its infancy I think, at least for most developing countries.
OIL
NBER research provided by James Hamilton, one major oil shock expert and a top-rated econometrician, as well as fine macroeconomists and great names like Olivier Blanchard, Robert Barsky, Jordi Gali have suggested the following theses as regards oil price hikes. First, the price elasticity of oil is notoriously low. Second, strong and growing demand from China and other newly industrialized economies peaked after 2004. Third, global production failed to increase in tandem. This was the story ten years ago. Although OPEC could hardly be seen as a traditional –and powerful- cartel, and although oil is difficult to be characterized as a purely depletable resource as in Hotelling, supply could not match demand and was disrupted repeatedly. Hence, scarcity rents and commodity speculation could only be added to these three and almost all time valid supply-demand characteristics.
GOLD
Why do gold prices move the way they move? This is a meaningful question because from time to time gold prices present us a curiosum. It is not a puzzle in the sense that the equity premium is a puzzle since there is no theory predicting gold prices would trace a path that is radically different from what it does. The historical data supports the views that as oil prices soar and as the USD depreciates, gold prices steam ahead. None of these two factors is present now; yet gold performs. How does it perform though? Nonetheless, there are historical data tracks that delineate a lead-and-lag structure, which would claim gold prices might remain subdued. They may indeed fall in 2020. Consider the Lehman period. Gold prices had come full cycle. On March 6, 2008, the gold price was at 977 USD and on March 6, 2009, it was around 940 USD. A year-on-year investment would have delivered negative returns. However, gold surely paid off after July 2008, as the world was hit by the unfolding of MBSs for the first time. However, long-term gold investors were handsomely rewarded for 6 months only. The long journey that started back in the first quarter of 2003 looked to have ended. It depended on the USD outlook since USD assets remained the only safe haven for a while back then. Then, it started anew. The return is like 5.3 times in twenty years. It looks though as if gold prices have peaked again. The relationships between gold and the USD, and even oil, were reportedly broken in 2018; then, it got normalized a bit. Things change. Gold and oil are different indicators. But in general as homes and cars go, so goes the economy.