This weeks word scramble continues. Thankfully its Friday. Or going with the current state of the market... Tankfully its Friday.
I'm very interested. There's really no other version of those three words that works. At least in proper English. What is proper English these days anyway? I don't even know the answer to that question. I thought there were two spaces after a period. I'm told that rule has been cut in half. Only one space? Sounds deflationary..... Interested I'm very.
Well... here we are.
I have mused on the topic many many many many times over the years.
Interest rates.
Hello!
The FED funds rate has been in a down trend since 1981!!!
40 YEARS!!!!
How has the stock market done the last 40 years?
Correlation?
Is it safe to say the FED funds rate is at least slightly correlated to stock and asset prices in general?
Wait that's not all.
How about that money supply. And I bring this up all the time. If the amount of US Dollars in circulation were 50% less than it is today, what would that do to asset prices?
The value of the US Dollar in theory would go up, meaning it would take less dollars to buy asset prices. Less dollars in circulation, same assets in circulation = less $ per asset = less $ value per asset.
Great tweet last night about the money supply.
US Money Supply has increased 40% over the last 2 years, the largest 2-year increase ever.
Annual changes in M2 since 1959... pic.twitter.com/Kjz9gEP9rE
— Charlie Bilello (@charliebilello) December 16, 2021
Look at the money supply since 1980
Is it really that simple? Growing money supply + low interest rates = higher stock and asset prices.
And yet here were. Another rate hike, stimulus withdrawal scare.
IF we see interest rates do much more than the 3 or 4 .25% hikes the FED is looking at in 2022, I think there is reason for concern.
And who knows perhaps its the 1% move higher in rates... as small as it sounds, that makes the market roll over finally.
Why? Housing. We have houses today financed at 2.75% to 3.25%. Great rates for home buyers.
But what it has done is taken housing prices to a new level.
Even a 1% move in the 30 year mortgage will have pretty severe consequences for the housing market.
Think about it. a 1% move in mortgage rates in theory would give you 15-20% less buying power for a house in monthly payment terms.
So unless everyone is buying houses with cash, those looking to finance at 1% higher interest rates would effectively be able to afford a home that's worth 15-20% less than today.
Anyone remember in 2007? Homeowners going underwater on their houses? Owing more on their mortgage than their house was worth?
A sharp move higher in mortgage rates will effectively bring us back to some form of 2007.
If I am writing this - clearly the FED knows this... and they do. Housing is key to the economy.
Which is why I still don't think we are going to see a dramatic rise in interest rates. The new normal is here. Get used to it.
My thoughts going forward. This now general consensus that inflation is here it stay, I think its misguided. The run up in prices has way more to do with COVID supply issues than anything else.
The market will catch up, supply will catch up. And at some point, likely far sooner than anyone thinks, prices will FALL.
DEFLATION!
oh my!
The FED fears deflation far more than they fear Inflation.
The brakes on any rate hike cycle will be depressed.
Cheap money will continue to rule the day.
And stock market bears will be berating the FED once again.
I'm very interested to see how far in the rate hike cycle we get.
With this new variant exploding on the scene, any hint of slowing growth may stop rate hike plans in its tracks.
What will the pundits be saying when CPI PPI starts to plunge?
We had huge #'s to the upside because they were being compared to the COVID shutdown.
We are now going to have numbers being compared to this, supply chain train wreck, surge in prices.
Headline #'s are going to look outright deflationary. It sounds crazy now. About as crazy as asset prices rocketing higher during an recession. I said that was going to happen during the next recession in 2016. Sure enough it did in 2020. Maybe I'll be wrong this time around.... maybe not.. either way Interested I'm Very.
And what will the FED do in the face of LOWER prices?
They'll do what they do best....
Have a great weekend!
.... wait for it......
--negative interest rates anyone?
Yep. 1.5% 30 year mortgage? hmmm crazy talk. Check back in a few years 🙂