April 11, 2022
Three themes have underpinned most of the ideas here, and all three of them have experienced pretty major upheaval over the past two weeks. Arguably, the most important is interest rates. This is followed by debt levels and finally equity markets.
Interest rates have soared yet again over the past three weeks. At the time of my last post, the US 10 year treasury rate was ~2.25%. Today it is at 2.80% and appears to have room to run higher. This has translated to mortgage rates (30 year fixed) in the US rising to about 4.9% (April 11, 2022). The last time rates were this high was at the end of 2018, and house prices were much lower.
Debt Markets are facing a multitude of threats, including Chinese real estate bonds going into default, Russian government bonds going into default and the Federal Reserve has announced that they are going to start shrinking their balance sheet by selling $95 billion per month of the securities that they purchased during quantitative easing. Put another way, some of the excess liquidity is being sucked back out of the system.
All of that seems to be reinforcing the idea that equity markets may be over priced and money is leaving the market. Equities bounced nicely after the initial decline and have now started to come back down again. Reality may be setting in, however the downside is hard to calculate because so many things are untethered from a ‘normal’ economic cycle.
There is still no way to predict what will happen next, or how long a market will go up or down, but there is a pretty good chance that there will be a better time to buy equities in the future. No one has called this a rout yet, but taking some money off the table before someone ‘yells fire in the theatre’ and the rush to the exits begins could save a lot of turmoil, a lot of angst.