Curve inversion. Mortgage rates at an 11-year high. Bond yields double the pain point Wall Street started screaming about last year . . . and only a heartbeat away from a post-2008 peak.
It feels like the Fed’s rate environment is choking us. But is it?
Start with bond yields. The last time 10-year rates got above 2.9% was back in late 2018, right after Apple (AAPL) fumbled an iPhone update and it felt like the world was ending.
The NASDAQ dropped to the edge of the 20% bear market zone. And the Fed suddenly decided that the cycle of rising interest rates was practically over.
Overnight rates barely got 0.25 percentage point higher before they started to come down again. Longer-term rates responded.
Since then, despite all the turmoil, inflation, pandemic and noise, the S&P 500 has soared 65% . . . led by Big Tech stocks. If you think Big Tech can’t survive in a world where long yields nudge up around 3%, history wants a word with you.
The secret, of course, is that the Fed is always watching. We’ve seen them become a lot more responsive since the days when Alan Greenspan invited the dot-com crash or Ben Bernanke let Lehman Brothers fail.
The Fed we have today will flinch at the first whiff of a real bear market. We saw it in 2018. We saw it again in 2020.
The same people are running policy now. We know their character and we know their real priorities, no matter how their rhetoric shifts.
As long as Jay Powell is running the show, fighting inflation will take a back seat to keeping Americans employed and the banks solvent. That’s the Fed’s real mission now.
Of course the Fed won’t loosen until the job market shows signs of crumbling. But in the meantime, they’ll keep raising interest rates as fast as they can.
That’s practically a covenant with investors. Once unemployment starts rising, rates will stop rising.
Again, this is nothing esoteric or arcane. The Fed has told us this and followed up with action. They aren’t a passive force of nature. They’re alert and will shift course if they see something truly bad coming over the horizon.
The deeper question, naturally, is whether that flexibility is ultimately good for America and the global economy in the long term. Personally, I think a little more discipline in the good years would be a better way to go.
But here we are. And mortgage rates were tracking well above 6% back in 2007 . . . the boom was on its last legs then, but here around 5% the housing bulls still have room to run.
Back then, long-term Treasury yields had reached 4.6% and lenders were capturing about 1.5 percentage points in additional interest on their mortgages. Americans paid it without complaint.
Today, lenders are capturing about 2.0 percentage points in pure profit. News flash: if they see a downturn in applications, they’ll cut rates to keep the business coming.
And if they see a decline in credit quality, they’ll raise rates to compensate themselves. That’s not what’s going on here. This is all about the Fed and gaming the yield curve.
Consumers signal this too. While higher rates are a pain, incomes are more or less keeping up with inflation in the long term at least.
I went back a few decades to before the dot-com boom, which was the last time we saw wage inflation driving this much economic heat. Prices have more than doubled since 1992.
Wages have gone up closer to 150%. Not everyone has done so well, of course, but this year we seem to be tracking neck and neck between prices and wages as a nation.
As long as that’s true, households can pay their bills and avoid defaulting on their debt. That means they can handle interest rates.
Again, it’s not fun. But it’s a long way to the end of the world. And if conditions change, we can pivot.
Buy the stocks that are right for the economic environment. Chase the jobs that pay the most. People aren’t robots.
We vote with our money in the direction of our best perceived interest. And I have to say, if housing cools off even a little, money will move into stocks.
Housing is an asset class. Asset classes compete against each other. A lot of the Fed’s free money went into the COVID housing boom. As that money recedes, we’ll see investors make different decisions.