The Goal Of British Columbia’s PEAK To PEAK Gondola Ride by Danielle DiMartino Booth, The Liscio Report

As long as you don’t look down, it really is a lovely ride. But then, that is the stated goal of British Columbia’s PEAK to PEAK Gondola ride, the longest and highest lift in the world connecting Whistler and Blackcomb Mountains. Make no mistake, there’s no hype on that ‘world record’ claim. At nearly two miles, the ride crosses the longest unsupported (which one definitely senses) span that also boasts being the highest, some 1,427 feet above the valley floor. For suspended suspense of a different kind, I highly recommend taking this 11-minute journey in June. That way, you can see two seasons in one – elegant, be-downed skiers at the very top of the mountains and, if you dare peer below towards terra firma, mountain bikers in summer garb bounding down the mountain. Luckily, 56-millimeter-thick cables allowed me to live to tell the tale of the surreal sight of witnessing live performances of both winter and summer Olympic sports in tandem.

The occasion for my trip to the pristine northwest was a Vancouver speaking engagement hosted by an international group of foresters. Their one query, back in 2012: when would American homebuilders recapture the 2005 glory year pace of annual construction of over two million new homes? (Spoiler alert: they’re still waiting) In fact, there’s a solid chance the mill owners and loggers will be forced to play the waiting game for another generation. Such is the case when demand is pulled forward causing an unnatural rise in prices culminating in a burst bubble, which has to then be unwound in painstakingly slow order. Of course, I refer to home prices rising at an unsustainable rate due, in part, to loose monetary policy facilitating bad behavior, basically all around.

Today, policymakers find themselves staring down the barrel of another bubble that’s burst. This year’s International Monetary Fund’s annual meeting concluded with the world’s greatest minds in policy and economics agreeing that there will be no easy solutions to the problems facing emerging markets in coming years thanks to the bursting of the commodities bubble, which has also pulled forward demand on a global scale.

In an October 11 speech at the IMF confab, Fed Vice Chair and Reining Godfather of Central Bankers, Stanley Fischer, nodded to the dilemma facing U.S. monetary authorities. It is unwise to devise policy in a domestic vacuum given the, “increasing influence of foreign economic developments on the United States economy, both through imports and exports, and through capital account developments.” Beyond the slowdown in U.S. job growth, “the possibility that shifting expectations concerning U.S. interest rates could lead to more volatility in financial markets and the value of the dollar, intensifying spillovers to other economies, including the emerging markets.” At a mere word count of four, Fischer’s speech was relatively judicious in citing the ‘dollar’ by name as a concern. Contrast that to the September Fed meeting minutes wherein references to the strength of the ‘dollar’ made a record 19 appearances.

The bursting of the housing bubble, which to this day remains a thorn in the lumber industry’s side, and today’s commodities bubble, currently plaguing the global economy, are two bubbles bound by a troubling ‘flation’ paradox. The reaction to the PEAKing in home price inflation led to the PEAKing in commodities inflation. Meanwhile, boom/bust cycles, which stretch back in history as far as black tulip mania and characterize the current era of policymaking will inevitably usher in deflation scares that emanate from bursting bubbles. The debt Band-Aids applied provide an easier path than the restructuring of economies that would make them more productive over the long haul. The absence of such structural reforms leaves countries reliant on re-igniting their sputtering export engines. The only catch is, not everyone can play the same game at once.

Where in today’s boom/bust cycle does the U.S. find itself? According to the latest WSJ headlines, “Worry Over Low Inflation Kept Fed at Bay.” And yet, eight days earlier, another headline, this one from the Dallas Morning News angsted over, “Area Apartment Rents Rising at a Record Rate.” Well, which is it? According to two of the brightest minds in investing, Van Hoisington and Jim Grant, the answer is BOTH.

At a recent conference, fixed income investing legend Van Hoisington explained why the Fed cannot technically “print” money, at least when gauged by true M2, which is cash, checking and savings deposits and money market mutual funds. Recall that at its simplest, inflation is too much money chasing too few goods. Buying up all manner of debt with the hopes of inducing inflation only works if what the Fed spends circulates back into the economy in the form of M2 chasing goods. But that hasn’t happened. Rather, Fed purchases have been deposited right back at the Fed where they now sit fallow generating a pittance of income that sadly beats the negative rates they’d get otherwise. In Hoisington’s words, these reserves are simply not ‘transactable.” Hence the conundrum: M2 was growing at about six percent in 2008 where the rate remains today despite $2.5 trillion in Fed purchases. When money growth stagnates, the economy won’t slip into gear, which is just what we’ve seen for over six years now. (True money printing involves depositing money directly into checking accounts and happens to be illegal for those of you wondering.)

Jim Grant of Interest Rate Observer fame concedes that while we have seen little in the way of inflation of goods in recent years, we remain real time witnesses to the effect of the extraordinary amount of credit chasing asset prices from stocks, bonds and commercial real estate to the mountain PEAKs and beyond. Rising asset prices have no place in traditional inflation metrics as they are viewed as misleading economic growth signals. Or, as Grant  “The distortion of prices puts us in a Hall of Mirrors.” It is thus an illusion of prosperity via the prism of asset bubbles that deludes us into believing anything of economic value has been produced.

But back to those paradoxical inflation/deflation headlines. The two gentlemen above, along with some acknowledged defects within the Fed’s preferred inflation measure, help solve the riddle. The creation of debt in debt-laden economies accomplishes a whole lot of economic nothing, hence incomes grow at no faster pace than the rest of the economy. That’s what happens when debt levels cross a line in the sand of the whole of a given country’s economic output. (Look no further than Japan’s debt to GDP of 670 percent to understand why that country is flirting with recession yet again.)

At the same time, credit has been chasing high-end apartment construction and prices to what is hoped are PEAK levels. Dallas, with its influx of jobs, may be the economic exception given the ease with which companies can actually conduct business there, but seven percent over the past few years will quickly extinguish a defining attraction of the area – that of reasonable housing costs. At a national level, apartment data miners find that rents are rising at something more along the lines of a five-plus percent pace. The core consumer price index (CPI), which excludes

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