From the Archives: Until Something Breaks...
It's just taking longer than usual
The 10-year Treasury yield briefly touched 4.6% yesterday. That translates into 7% mortgages and higher rates on a whole range of other loans.
Meanwhile, the major stock market indexes have risen dramatically in the past couple of months. This seems incongruous, but historically it’s both normal and ominous.
Here’s a post from mid-2023 putting today’s action in context:
Until Something Breaks...
Originally published June 29, 2023
When stock prices and interest rates rise together, they eventually fall together
There’s a sense among some investors — or at least among some commenters on finance-oriented podcasts — that the current equities bull market will never end because [fill in your preferred variation on “the Powers That Be won’t let it end”].
This conclusion is understandable. A thing that shouldn’t happen has been happening for such a long time that it’s easy to envision a powerful “they” at work and in control.
So it might help to know that the previous two cycles behaved just like this one, with interest rates rising but stocks rising even faster, in an improbable but seemingly inexorable dance. A dance that ended catastrophically for stocks.
The dot-com bubble
Let’s start with the dot-com bubble of the 1990s. In the following chart, the blue line is the NASDAQ index of tech stocks and the green line is the US 10-year Treasury note yield. In late 1998, interest rates (the green line) plunged, and stocks took off. Then stocks and rates rose in tandem for a while — during which time a big part of the investing community concluded that the Powers That Be would keep the bull market going forever, thus justifying literally any price for the hottest dot-coms.
But in 2000, rising interest rates choked off the liquidity that fueled the bubble, and stocks tanked. The NASDAQ fell from 5000 to 1200 between early 2000 and mid-2002, with many dot-coms plunging to zero.
The housing bubble
In the 2000s housing bubble, interest rates (green line) plunged in late 2003 and stocks (blue line) took off, leading many to conclude that the Establishment wanted house prices to rise forever, so the bank and homebuilder stocks were infinitely valuable. Stock prices and interest rates then proceeded to rise in tandem until late 2007, when money became tight enough to burst the subprime housing bubble. The S&P 500 was cut in half by late 2009.
And now the everything bubble
Fast-forward to the current bubble, and note how the first part of the pattern has repeated almost perfectly. Interest rates (green) plunged in 2020 and stocks (blue) took off, leading many to conclude that Big Tech is a bargain at any price. Interest rates also rose, slowly at first and then dramatically.
Today, in short, looks like the terminal phase of the dot-com and housing bubbles, with a disorderly end rapidly approaching. It’s not clear what sector will play the tech stock/subprime mortgage role in the coming bust, but there are so many potential candidates (housing, commercial real estate, Big Tech, local/regional banks, pension funds) that it almost doesn’t matter. This is the everything bubble.
With the Fed announcing yesterday that rates will have to rise further and for longer than the markets seem to expect, the story of the coming year will probably read like those of 2000 and 2008: disastrously for the “buy the dip” thesis.
John, All of this makes sense in terms of markets and timing. There is one thing that I think is missing from many writers and pontificators on various platforms (I'm assuming there must be someone making this point - I just havent seen it more vigorously and widely highlighted as I believe it should be).
Most folks tend to gravitate to the play-by-play. "What is the government going to do?" or "They are trapped now!" or "The fed made a tragic error" or "We are spending like drunken sailors or shore leave" or various other subjective and even technical descriptions of bond market gyrations, inflation impacts, or economic figures.
What is missing is the common result of all of these possibilities. That common result is that most - the vast majority of people I would suggest - are going to have to lower their living standards significantly. I think this needs to be reported more widely - not necessarily the technical comparisons with, for instance, the Great Depression but also through the lens of the common man/woman/family. If the government defaults or inflates (the two widely accepted options - after kicking-the-can stops working) there will be massive job losses. The "Safety Net" of benefits will not be able to compensate for such a drastic and wide-spread event. The inevitable stimmy checks won't make it all better.
The more the masses begin to understand this fact, which should be obvious, the sooner and better policy makers will respond to the extent that they can respond at all.
The people need writers and pontificators to explain this to them more widely and in terms they can relate to. They need to know and understand that no matter what policy is implemented or discussed today, there is a piece of corrugated tin in a Hooverville on the outskirts of town waiting for them and their family if things go the way that is clearly possible. Short of that, I think the majority of folks will simply continue to tune out, and this is not a great time to be tuning out.
I am old enough to remember when 7% mortgages were reasonable compared to what came before them.