Juggling Dynamite

The four Ds drive real estate listings: death, divorce, default, and discretionary. The first three tend to trigger regardless of market conditions. ‘Discretionary’ and default listings tend to rise with interest rates– both are escalating now.

Ted Oakley discusses real estate with property market expert Ivy Zelman.  Here is a direct video link.

For those who think that interest rates are not high enough to cause significant strain, context is critical. It is the rate of change that matters most. The move from less than 1 percent to more than 5 percent over 16 months is by far the most severe of any previous tightening cycle in at least the last 50 years (chart of the US 10-year yield change in log scale below since 1977 courtesy of Francois Trahan). Moreover, this rate shock hit when all levels of the economy were at record levels of indebtedness—# thisisabigdealfolks.

US lubricant consumption has fallen to the lowest level in at least 42 years, according to Bloomberg Opinion calculations based on data from the Energy Information Administration and reflects a cyclical slowdown globally. See The Lube that Greases the World Economy Says Beware 2024:

Wherever one looks, from Europe to the US to China to India, the message is uniform: The machines that power economic growth aren’t running as fast as they did in previous years. That echoes other indicators of industrial activity. JPMorgan Chase % Co.’s global manufacturing index has notched 14 consecutive months below the 50 level, which indicates a contraction. Diesel consumption has also weakened in many countries, another sign of factories slowing down.

Also, despite an ongoing war in the Middle East and an extension of Saudi/Russian production cuts, oil has fallen from $95 at the end of September to $76 this morning see Oil slips below $80 amid economic concerns, sufficient supply. US gasoline consumption per capita is also weakening (shown below since 1990).

This discussion offers insight into the origins of QE and what follows as fund flows reverse (QT).

Richard Werner, Professor of Banking and Economics at the University of Oxford, regarded as the “Father of Quantitative Easing”, discusses the future of monetary policy. Here is a direct video link.

Of course, it is not just quantitative tapering reversing cash out of the global financial system today. Central banks have also tightened overnight interest rates the most abruptly in decades.

The chart below (courtesy of Barcharts) plots the historical percentage change in the S&P 500 (left axis) from the first Fed rate cut to the market low with the duration in days (bottom axis). Here, we can see that the average stock market decline after the Fed started cutting its policy rate has been 23.5% over 195 days. Moreover, when stock valuations started the cutting cycle near historic highs (like now, 1974, 2001, 2007 and 2020), the stock market declines were in the 30 to 55% range while the Fed was aggressively easing.