Dow losing almost -1000 Friday .. when will it end? Do we get a V recovery?

[Magus]

I don't see interest rates getting anywhere near the 12% to 15% level.

Think about home prices now. The median home price in the USA now is $375,000.

The median income in the USA is $31,000. Call it $62,000 for a household.

Save up 20% down, and finance the rest at 15% interest. That is $45,000 a year in interest on a $300,000 loan. For a income of $62,000.

There is just no way the USA can function with the current house prices, current wage level, and those interest rates.

It is almost revolution numbers.

Very unlikely we see 12-15% interest rates. The federal gov and most state governments simply couldn't afford the interest rates. $32T at 15% is $4.8T/yr in interest, roughly equal to our entire taxes collected today of all types combined. But it wouldn't be impactful to the housing market as you would think for the same reason it wasn't in the early 80s (in fact prices kept rising after mortgages went from 6% to 18%) - there are a lot of feedback loops that would go in the other direction. Here are a few

1) Wages go up in a rising inflationary environment that can support higher prices
2) Most people stay put in their current home longer, which limits inventory
3) Builders cut back massively on building which limits inventory
4) Investors step in and buy all cash
5) Rents go up a lot, making the next best alternative - buying - more attractive
6) People cut back on discretionary spending rather than lodging
7) People re-direct money in CDs, bonds and stocks to pay off their mortgage more quickly or save more for down-payment
8) People switch to ARMs to save interest and hope it resets down

That said, my personal guess is mortgage rates don't go above 6% and the fed backs off sooner than they would prefer, but time will tell.

 

[daylatedollarshort]

I don't see interest rates getting anywhere near the 12% to 15% level.

Think about home prices now. The median home price in the USA now is $375,000.

The median income in the USA is $31,000. Call it $62,000 for a household.

Save up 20% down, and finance the rest at 15% interest. That is $45,000 a year in interest on a $300,000 loan. For a income of $62,000.

There is just no way the USA can function with the current house prices, current wage level, and those interest rates.

It is almost revolution numbers.

House prices don't have to stay the same. We could easily have another recession and housing bust.

 

[cyber888]

Treasury rates have gone down today due to China's lockdown.
Gas prices have cooled off with the multi-city China lockdown. Gas is below $100 a barrel.

I agree - Feds will not let mortgage rates go beyond 6%.
By the way, in case, you did not notice, 30 Year Mortgage Rate is now 5.25%

That said, my personal guess is mortgage rates don't go above 6% and the fed backs off sooner than they would prefer, but time will tell.

 

[cyber888]

And we don't know if 4 -5% will be enough to bring down inflation.

Even if the Feds raise it to 8%-9%, it would not bring down inflation in the short term, because it's not a demand side problem, it's a supply chain problem.

 

[skipro33]

There's potential in everything. If the market drops 50%,then I'm positioned to roll funds to a Roth at half the tax I would have paid. If it stagnanates, then I've locked in the past 2 years skyrocket growth. If it bounces back and continues to grow, then that is just icing on an already good past couple years.
I don't need to access my investments with the pension and SS we both draw and I'm 90% equity in a S&P style fund. I'm 65 and won't need to worry about what my investments total until 75 if the rumors of pushing out RMD hold true.

 

[Montecfo]

The idea that the government "cannot afford" higher rates is a bit of a red herring. Most US government debt is fixed, but variable.

So a rate hike affects new debt issuance, not old. A spike is thus not out of the question.

But no way we will need double digits to cool the economy.

And the inflation is not exclusively due to the supply chain. It is also due to demand which spiked due to government largesse (off the charts deficit spending) and money printing. In short we did everything you can do to create inflation risk.

So all of these things matter. Reducing spending, increasing rates and reducing the supply of money all matter.

But they are also powerful tools. Careful what you wish for.

Don't fear a market drop. Just don't own garbage. Strong healthy companies will be fine and there will be chances to buy cheaper of we get a recession, which seems fairly likely.

 

[Fermion]

The real problem is the government will not allow demand destruction which would nip inflation right in the bud. You get demand destruction when people stop buying luxury items. People were able to buy luxury items because money was being handed out like candy, mortgage rates were absurdly low, and companies were paid extra to keep people on payroll.

Everyone just had to have a new addition to their home or a fancy Peleton bike during what should have been a belt tightening pandemic recession. Now we get to pay the price.

 

[pb4uski]

The idea that the government "cannot afford" higher rates is a bit of a red herring. Most US government debt is fixed, but variable.

So a rate hike affects new debt issuance, not old. ....

But the higher rates will impact quicker than you might think since the average maturity of US government debt is less than 6 years and as debt matues it will be reissued at the new higher rates.

... The average maturity of the Treasury's public debt portfolio dropped significantly last year as the Trump administration relied extensively on short-term Treasury bill issuance to finance emergency measures to support the economy. The weighted average maturity (WAM) dropped from around 70 months just before the pandemic to less that 65 months - or just over five years - at the end of 2020 according to a recent Treasury presentation here.

In response to a question from Representative Andy Barr, who asked whether the Federal Reserve or Treasury intended “to lengthen the maturity of government debt before interest rates rise,” Yellen said: “Treasury has been looking at this question and has no current plans to do that.” ...

 

[Magus]

Even if the Feds raise it to 8%-9%, it would not bring down inflation in the short term, because it's not a demand side problem, it's a supply chain problem.

This is true for some items (eg: vehicles) but not all (eg most commodities which were all rising quickly well before Ukraine/Russia). It's a combination of a significant increase in the money supply in the last 25 months, supply chain shortages and significant increased demand coming out of a global shutdown. Significantly higher interest rates and QT would decrease the money supply and reduce aggregate demand. The supply chain issue has been a bit overplayed by some pols. It's an issue but probably not even the dominant one this point outside of a few select items.

 

[Magus]

The idea that the government "cannot afford" higher rates is a bit of a red herring. Most US government debt is fixed, but variable.

As - pb4uski has stated - 1) we have a huge turnover on existing debt every year
2) we're issuing massive quantities of new debt every year with politicians on both sides wanting to spend even more, just disagreeing with what to spend it on (eg: military vs climate). We've basically doubled our national debt every 8 years for as long as everyone on this site has been alive (with the brief exception in the late 90s with a surprisingly successful Clinton + Republican congress despite the fact they hated each other, worked together very well except the impeachment)
3) As interest rates go up, the interest on the interest compounds much, much more quickly than at ZIRP, causing even more debt.

All of three of these mean it would impact the US governments spending levels much more quickly than you would think - and in a few years - would be massively impactful.

 

[Montecfo]

As - pb4uski has stated - 1) we have a huge turnover on existing debt every year
2) we're issuing massive quantities of new debt every year with politicians on both sides wanting to spend even more, just disagreeing with what to spend it on (eg: military vs climate). We've basically doubled our national debt every 8 years for as long as everyone on this site has been alive (with the brief exception in the late 90s with a surprisingly successful Clinton + Republican congress despite the fact they hated each other, worked together very well except the impeachment)
3) As interest rates go up, the interest on the interest compounds much, much more quickly than at ZIRP, causing even more debt.

All of three of these mean it would impact the US governments spending levels much more quickly than you would think - and in a few years - would be massively impactful.

Well I think it would affect it at the rate debt rolls. Not $32T all at once.

And if you notice the long bond is not at a high rate, suggesting the market believes as I do that inflation will be tamed rather quickly.

But if Fed needs to raise rates a lot and quickly to tame inflation, it can.

And if we have learned anything over the past 2 years it is that lack of money to pay interest, while a problem for you and me, is not a major hurdle for government. Unfortunately.

 

[Mr._Graybeard]

The real problem is the government will not allow demand destruction which would nip inflation right in the bud. You get demand destruction when people stop buying luxury items. People were able to buy luxury items because money was being handed out like candy, mortgage rates were absurdly low, and companies were paid extra to keep people on payroll.

Everyone just had to have a new addition to their home or a fancy Peleton bike during what should have been a belt tightening pandemic recession. Now we get to pay the price.

Here's an interesting graph on median household income in the United States: https://fred.stlouisfed.org/series/MEHOINUSA672N

Pandemic giveaways have had their effect, but what caused that jump from 2016 to 2019? The bounce from 2014 to 2016 could reflect a return to the "norm" of 2007 (which was itself inflated, arguably), but I saw nothing in the nation's fundamental economy that justified the latter increase.

Where did it come from? GDP for the period looks relatively flat, maybe 2.3% on average. Whom did it benefit? I think I got my share, but I'm not sure it was healthy for the nation as a whole.

 

[ownyourfuture]

The real problem is the government will not allow demand destruction which would nip inflation right in the bud. You get demand destruction when people stop buying luxury items. People were able to buy luxury items because money was being handed out like candy, mortgage rates were absurdly low, and companies were paid extra to keep people on payroll.

Everyone just had to have a new addition to their home or a fancy Peleton bike during what should have been a belt tightening pandemic recession. Now we get to pay the price.

A+

 

[Closet_Gamer]

The government missed a historic chance to refinance its debt out to 30 years or even more. The chance is probably still in play.

30 year debt is still below 3%.
Six months ago it was 1.7%!

They should be rolling every bit of debt that matures into a 30 year bonds IMO.

 

[Beststash]

Where is the PPT (Plunge Protection Team)...this is getting serious. And the FED is just getting started. I wish I knew a little more about options.

 

[Magus]

Well I think it would affect it at the rate debt rolls. Not $32T all at once.

And if you notice the long bond is not at a high rate, suggesting the market believes as I do that inflation will be tamed rather quickly.

But if Fed needs to raise rates a lot and quickly to tame inflation, it can.

And if we have learned anything over the past 2 years it is that lack of money to pay interest, while a problem for you and me, is not a major hurdle for government. Unfortunately.

Of course it wouldn’t be at once but it would add up quickly. We already have a ginormous deficit. Even a 3% effective increase is an extra trillion a year.

And yes they can keep rates low by printing money and buying bonds but that’s one of the main reasons we are having the inflation the way it is - money supply goes up 40%, not surprising to see high inflation.

 

[Magus]

The government missed a historic chance to refinance its debt out to 30 years or even more. The chance is probably still in play.

30 year debt is still below 3%.
Six months ago it was 1.7%!

They should be rolling every bit of debt that matures into a 30 year bonds IMO.

If they were smart they absolutely would do 10, 20’and 30 year bonds and even introduce the perpetual bond

 

[Magus]

Here's an interesting graph on median household income in the United States: https://fred.stlouisfed.org/series/MEHOINUSA672N

Pandemic giveaways have had their effect, but what caused that jump from 2016 to 2019? The bounce from 2014 to 2016 could reflect a return to the "norm" of 2007 (which was itself inflated, arguably), but I saw nothing in the nation's fundamental economy that justified the latter increase.

Where did it come from? GDP for the period looks relatively flat, maybe 2.3% on average. Whom did it benefit? I think I got my share, but I'm not sure it was healthy for the nation as a whole.

Lower and middle income workers tend to get better wage increases late in an economy cycle when unemployment is low. Most economist expected a recession in 2016-2017 time period given how long in the tooth that cycle was. Not only did we not have a recession, but we had a bit of acceleration thru feb 2020 which drove large real wage increases in 2017-feb 2020 among the working classes.

 

[pb4uski]

The government missed a historic chance to refinance its debt out to 30 years or even more. The chance is probably still in play.

30 year debt is still below 3%.
Six months ago it was 1.7%!

They should be rolling every bit of debt that matures into a 30 year bonds IMO.

Yes. I don't understand why they went so short when interest rates were so low... it was a golden opportunity to lock in low rate financing. Perhaps there wasn't much demand for long dated issues and they didn't want to push long rates higher by flooding the market with longer debt?

 

[Magus]

Yes. I don't understand why they went so short when interest rates were so low... it was a golden opportunity to lock in low rate financing. Perhaps there wasn't much demand for long dated issues and they didn't want to push long rates higher by flooding the market with longer debt?

It’s possible but I think they saw negative bond yields in Germany, Japan and elsewhere and thought it was a decent chance rates went lower

 

[SecondCor521]

Soft landing? Or the beginning of the end?

(Summary: Q1 GDP down 1.4% annualized in report released at 8:30AM EDT; markets open higher an hour later)

https://finance.yahoo.com/news/q1-us-gdp-gross-domestic-product-economic-activity-190926750.html

 

[FREE866]

Report out today said that investor bearishness is at levels not seen since March 2009!


As John Templeton said : Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.




This isn't euphoria for sure!

 

[Montecfo]

Report out today said that investor bearishness is at levels not seen since March 2009!


As John Templeton said : Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.




This isn't euphoria for sure!

Investors bearish?

That's BULLISH!!

Great news.

 

[Montecfo]

Report out today said that investor bearishness is at levels not seen since March 2009!


As John Templeton said : Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.




This isn't euphoria for sure!

Investors bearish?

That's BULLISH!!

Great news.

Below 20 percent bullish for only the 35th time.since 1987.

It's the AAII Investor sentiment survey. Very credible.

 

[FREE866]

Investors bearish?

That's BULLISH!!

Great news.

Yeah. I'm not a trader and am an extremely disciplined long term investor, but I have a feeling market is gonna be much higher a year from now. The news and even on this board surprisingly the sentiment is really really dour. That usually bodes very well for stocks.