July 19th, 2023 2:34 PM by Andrew Walter May CEO
What's really going on with the housing, stock, and bond markets worldwide? We know housing is cyclical - but stocks and bonds move much faster (variability). I get asked all the time my thoughts on what's really going on. Yesterday I realized, or at least theorized, that the geo-political landscape is really driving FED decisions. Here's some data to wet your appetite: 1. From Q2-22 to Q3-22 USA Stocks down $9+ Trillion (just the change, not the base); 2. Russian GDP (the entire country's total goods produced and sold) is about $1.5 Trillion per year (a little envy there as the USA GDP is $20 Trillion per yr). 3. Russian per capita income per year is $11k (China is $9k) and USA is $60k. Income distribution favors the few - but suffice is to say many in the USA are making many multiples of the average workers in communist countries above. Enough data - what's it mean. My thinking is that if the USA wants to stop the Russian invasion and potential WW3 scenario the best way to do that is to: 1. Bring oil prices back to $50 a barrel; 2. Lower raw materials and natural resource prices; 3. Continue to send arms to Ukraine and expose Russian weaknesses so the Russian's don't attempt to take over another several Russian speaking countries (Russia has about 140M people and shrinking). No one is taking Russian speaking classes, and they're in danger of shrinking a lot further (not a winning hand). Enter the Fed. 1. Raise the value of the dollar (Done! Ex: The British Pound is down 20% and almost at parity with the dollar). 2. Increase interest rates to crater worldwide asset values and cause depression in Russia. This is, in my opinion, a great way to end the war in Ukraine (and potentially all of Europe). The pain is on all of us. But our sons and daughters aren't fighting and this proxy war should end once the Russian depression unfolds due to lower prices in raw materials (26% of Russian GDP). 1. Russia's GDP is 26% Oil/Mining (majority of their exports); 68% Services (McDonald's and others are closing up shop); 6% Agriculture. Can the Russian population hang on making $8k per year instead of $10k when the income concentration is at the top percentile? What should you do in this market? 1. Housing takes time to feel the pain - and you need a place to live. If you want to wait 5 years to find out you can. Or I'll tell you the answer now. Housing costs are up (to build) and housing isn't going to appreciate at 25% a year for a while. But is it going to decline? Probably not. It's a good place to store wealth so I'd continue to invest in housing. 2. Stocks? They react very quickly and with the FED ending Quantitative Easing and selling $10T in balance sheet assets (on the USA Bal Sh), I'm thinking now is a good time to be 50%+ in cash. Yes, inflation is bad. But so is losing your principal. 3. Bonds? They are starting to look good for the first time since 2013. I'd stay very cautious and stay in cash or housing and wait out the war.