DarthTrader
Diamond Member
- Mar 29, 2022
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Dow tumbles nearly 1,000 points as Federal Reserve signals sharper interest rate hike
Fed Chair Jerome Powell acknowledged that policy makers must move fast to stem rising inflation.
www.cbsnews.com
It's not hidden news - there's one of many articles that the markets took a hit right now because of FED policy missteps. But, that's actually not the meat and potatoes I want to talk about. I didn't want a discussion limited to the "Stock Market" forum because it doesn't have a broad enough audience for a great discussion.
My main points would be this:
- In 1929, unemployment was at 3.2%
- Housing prices were at an all time high (peaking in 3rd quarter 1929)
- Equities were (by historical analysis) not in a bubble, but fairly priced. If I can dredge up the research I'll point to how and why this was the case.
- FEDs began a hiking cycle because they worried about inflation (in reality there was not ENOUGH money).
- This is also true today. We have supply driven inflation combined with helicopter money drops from COVID stimulus. But arguably most of that money was appropriately used because there was a corresponding furlough of workers. So...it's hard to evaluate if we have enough money or not in the system or if inflation is simply a supply/logistics problem.
- Real Estate Bond Issuance as part of total Bonds issued reached 25%+
- Real Estate Prices During the Roaring Twenties and the Great Depression - Article - Faculty & Research - Harvard Business School
- This is crucially important because even 2008 housing bubble got no where close to that.
- I'll let you guess where it is today. 38%.
- Pieced together from this info:
- This is crucially important because even 2008 housing bubble got no where close to that.
- Real Estate Prices During the Roaring Twenties and the Great Depression - Article - Faculty & Research - Harvard Business School
- Also, Corporate earnings were at their best just a few quarters before the market collapse in 1929. It wasn't until the quarter before the collapse that corporate earnings started to show something was wrong.
- Today this is also true, it wasn't until Q1-2022 that we started to see weaker corporate earnings in the biggest companies. Q2-2022 is looking even worse.
My argument isn't that we have same conditions therefore same results. My argument is that the same causes have created the same conditions.
1929 was largely created by a credit glut. Yields were at their lowest in decades and that money was driven into - principally - real estate, not the stock market. The stock market is just more vulnerable to changes, but it's the fixed-income securities that's the problem. Since 2008, the housing market is sicker than a dog. Worse than 2006.
The problem is that the housing prices today are driven by collateralizing mortgages and exotic mortgages with the rising asset price of previous mortgages. Several large home buyers such as the spin-off from Black Rock, Invitation Homes (INVH) are doing this. And they take out large exotic loans at less interest rate than an individual/family can gain access to. They monetize these exotic loans, buy the house in cash through straw buyers, then fold the loan into a basket of mortgages.
Investment Firms Aren’t Buying All the Houses. But They Are Buying the Most Important Ones.
Invitation Homes bought 90 percent of the homes for sale in some ZIP codes in Atlanta in the early 2010s.
None of this by itself is a problem. The problem is what happens (as 1929 proves, as well as 2007) when the FEDs cause interest rates to go higher. When mortgage rates go higher, the foundation of the housing market in particular, is unable to sustain the prices.
Lower prices means lost collateral means defaults on mortgage backed securities, again....
Today we have all the symptoms of the same sickness that struck in 1929.
Last 2 days of market sell off were 6x more magnitude than the sell off in January 2022. I don't think that sell off will be sustained, but it's showing how severely liquidity is drying up. The FEDs ran into the exact same problems in 1929, their rate hikes caused major liquidity issue.
2007 saw the same, there were 14 rate hikes before the yield curve inverted, a recession's severity can be measured by how many rate hikes followed the inversion.
In 2007 there were 3x 25 basis point hikes after the inversion.
Today we are looking at 3x 25 basis point hikes starting May, since May will be a 50 bp hike. If they follow through with another 50 or 75bp hike in June, then we will be in uncharted territory, with an economy as weak as the one that entered the Great Depression.
In the Great Depression we had trade wars and beggar thy neighbor type inflation problems leading up to 1929. That didn't exist in 2007. But it exists again today for the first time since the 1970s.
