| | | Hi Jerome,
You just answered your own question.
Had the Fed not flooded the World banking system with free money that they were required to hold and get paid by the fed when held - it assured a small return to the banks.
It also assured a reset of low interest rates - a rate that was below what is called the nominal interest rate - the rate at which inflation does not diminish the return on money.
That took bank interest rates to sub normal market based rates.
That was a gift to those who had debt - it made it easier to pay off the debt - remember HARP programs.
The vast majority of those mortgages were bought and insured through GSE's (non government entities called) Government Secured Entities Fannie Mae and Freddy Mac - they both became insolvent when the many crappy loans made by mortgage originators who were very fraudulent in their loan applications gamed the system (which was errantly passed by the Dems during Clinton's presidency). It was called "The Multicultural Reinvestment Act 1996".
It loosened credit requirements so that those with low income could experience part of the GREAT AMERICAN DREAM - house ownership. These loans were later morphed to be OK to make to people with no down,no credit and worse bad credit, and finally no income.
That opened the flood gates of mortgage money being given to a class of people who historically were hi risk debtors and appropriately so - renters.
When trillions of money chase after the lower priced housing in the USA - what happens - housing prices escalate up. This ushered in the concept of flipping homes.
When banks did not participate in these high risk loans they got fined for redlining communities - not making loans to people that they knew would be in default with the next economic recession.
The investment banks created securitization which packaged the loans and made it impossible to foreclose on the defaults.
All the politicians Dems and Repubs blamed the evil bankers - who were responding to the BS laws the politicians had passed.
Well that money flooding into risky mortgages ended up hurting the low income people the most - first to fall.
In its totality, it hurt everyone who owned real estate with equity draw downs. If you were a corporate employee and told to relocate - you got hurt and probably made every payment on time!
So the correct long term finish to this failed law was long term banking standards must be adhered to - in an effort to strengthen the housing market and real estate values in general.
Nice sounding wll meaning laws have unintentional consequences especially when it is based on social engineering.
Market priced business practices are far more secure and long term beneficial to all.
Sadly the politicians through so much dirt throwing on the investment banks who dreamt up RMBS Real estate mortgage backed securities never took the blame for their crappy laws.
The dumbasses are once again trying to get favors for their constituencies in housing.
No one has a right to own a house.
You save up 20% down so you are living on your skin in the game (yet 3% down loans happen all the time still) and you pay your bills and develop good credit proof of your standings on debt.
That's what caused the credit crisis of 2008.
The answer was flooding banks with cheap Fed created money that recapitalised the banking system. The government now buys up 94% of all the mortgages.
With rates down,housing collapsed,treasuries paying nothing (1TO 2 percent), those conservative savers took their hard earned money and went to the only game in town left - a collapseD stock market that had solid companies with assets and products that people desired in the course of living along with a solid balance sheet that never participated in the socialist experiment brought To us by the government. All IN ALL A VERY STABLE INVESTMENT
Yes, buy a depressed stock that pays a dividend - the result of solid financials and conservative management and the stock market benefitted with the flows of money chasing yields found by participatinig with in the stock markets.
Many say it is a bubble caused by free money chasing valuations.
SAD really - it just shows how so few really understood what actually happened.
You see we've all been programmed to think that stocks are high risk financial instruments - its part of the fear necessary to continue the market makers ability to repurchase stock cheap and sell it higher to a retail buyer.
Stocks are a way of buying into a company's future cash flows. Some have a lot of debt and a questionable product and negative cash flow those are speculative. ie Tesla today.
Some have no debt, a moat protecting their future products from competition, and pay a solid dividend year after year after year. semi equipments and pharmas are good examples.
Searching for that slow accumulation of wealth with solid companies and fortress like balance sheets is the essence of investing not the ilk of speculating.
When you can get 4.5 to - 6.5 % in a dividend from a company that has a long and solid future in the products they offer the public, that what helps set the bar for what the real interest rate a saver should receive.
Now some will say that is high risk - it certainly is for many stocks.
I suggest that some companies are lead by well educated CEO's, who treat that company's checking account just as preciously as they they treat their personal family's checking account.
The paradigm shift for smart investors is that those companies are not high risk - they are in fact more secure than the government, and all its errant laws that create unintended consequences which can often lead to meltdowns every once in a while.
Rally's make it faster and bear markets make it a longer investment. Some try to time it to accelerate the wealth accumulation on both directions.
Our wonderful capitalistic system makes available to all rich and poor - the opportunity to try your hand at wealth accumulation.
The degree to which you want risk and or faster accumulation, is what each investor must learn about themselves.
The interest rate that Powell is striving for is an interest rate that is at least nominal - one that keeps up with inflation. That is thought to be at least 3 - 31/2 percent at today's current inflation pace.
As long as we are below that, large money flows will continue to go to the stock market - chasing yield assures it.
When nominal interest rates are achieved there will be a reallocation of at least some money to secure items with a guarantee provided by sovereign countries.
I think 3 1/2 to 4% with little inflation will be attractive.
The Fed's attempt to increment the fed funds rate up by 1 /4 point last mid june failed. 10 year treasuries were yielding 3.13% before the increase. After raising the rate by a quarter point the 10 year today is yielding 2.820ish.
The 800 pound gorilla that needs to be absorbed is the 4.5 trillion that the fed flooded our banks/market with.
Quantatative tightening must be accomplished before the nominal rate goes up.
The fed does not lead rates - they follow rates.
Powell wants a higher rate ,but he's learned that quantatative tightening must be accomplished first before the fed is able to boost the fed funds rate and make it stick.
It will be a long and slow road.
In between US Corporations are making great money and the stock market is far from over enjoying this low interest rate supportive Rally.
The bears have claimed that all that money has pushed valuation to bubble heights - that's quite true.
It is hard to fathom what 4.5 trillion does.
One thing for sure it will take a long time to absorb it and as it is absorbed the fed will be able to move rate to nominal .
I'll keep my money in great little companies that have growth faster than the average and have fortress like balance sheets with great products that are desired regardless of the economy or the government.
The boogey man is the level of inflation.
At one time it was no special deal to get 7% on a 30 year treasury - only trouble was inflation was rocking along at 14 %. Stagflation is the other tough economic situation to overcome. It is the opposite of what we have now. High inflationary expectations vs today's low inflationary expectations.
Both take a long time to set in and both take a long time to eliminate .
Where we stand right now means we have a long time for this rally to carry on.
Rant over.
Bob |
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