States hardest hit by financial crisis have mortgage balances far below prior peaks, while others have long surpassed them
Senior economics reporter
A decade later, echoes of the financial crisis still linger in mortgage debt data, according to research released by the New York Fed on Tuesday.
The report found that states hit hardest by the Great Recession continue to have subdued mortgage balances relative to other states that avoided the turmoil.
Some states, like Texas, North Dakota and Delaware, have mortgage balances more than 10% above their previous peak. There are eight states with balances at least 10% below their earlier peak, including Florida, Arizona, Nevada and California, all severely affected during the Great Recession.
“The regional differences clearly show that the echoes of the financial crisis still linger,” said Donghoon Lee, research officer at the New York Fed.
The willingness for consumers to take on debt is seen as a sign of consumer confidence. Household debt is now 17.9% above the trough at the end of the Great Recession.
Overall mortgage debt increased $139 billion last quarter, the largest increase since the first quarter. It now stands at $8.9 trillion.
Mortgage debt remains 4.4% below the previous peak reached in the third quarter of 2008. Mortgages make up two-thirds of overall household debt.
In contrast, total household debt totaled a record $13.2 trillion in the fourth quarter, up 1.5% from the prior quarter. The data is not adjusted for inflation.
The data show that debt was growing faster in Republican states that voted for Donald Trump.
As of the end of the year, 4.7% of outstanding debt was in some stage of delinquency. Credit card delinquency has been increasing notably from last year and auto loan delinquency has risen slowly since 2012.
Only 1.3% of mortgage balances 90 or more days delinquent last quarter, the report said.
Student debt stood at $1.38 trillion at the end of the quarter. About 11% of student loans are delinquent or in default.
The New York Fed’s quarterly report is based on data from Equifax.
A few hundred Wall Streeters met in the Cayman Islands last week as the market was melting down.
No one could stop talking about the newest feature in global markets — fear of the unknown.
The market is morphing into a more volatile creature. Some investors will get it, and some will be winnowed out.
Last week, a few hundred terrified Wall Streeters met in paradise as the market weighed (and howled at) the prospect of a swiftly changing global economy.
“The world has not ended. The market will be back. Stay true,” Caryle Group cofounder Daniel D’Aniello said as he wrapped up his talk to shell-shocked money managers at the Cayman Alternative Investment Summit in the Cayman Islands.
Of course, D’Aniello was right — but his comment was beside the point. No one in that room of professionals was afraid because they felt the market had gone away. Instead, their great fear was and is that the market that will come to exist in the aftermath of last week’s violence will be unrecognizable to them.
In the last 10 years, the “wolves of Wall Street” have become much more like passive house cats, living easy lives going long the market and watching money grow in a friendly bull market world created for them by central banks in the wake of the financial crisis. They have forgotten that their nature was once to roam in the wild, to hunt and kill.
But that all has to change, now that volatility has come back to the markets and the future of the economy is more uncertain.
And what dominated conversations between beach cocktails at the Kimpton Seafire and one-on-one sessions with Will Smith, Danica Patrick, and Sophia the Robot was the existential Wall Street question — am I cut out for this?
“Certainly managers have done well with the volatility and some haven’t,” Elise Rosenberg, a director of capital solutions at Barclays, said on a panel on “100 years of hedge funds.” That comment elicited some weak laughter, and she continued.
“You just have to be prepared.”
Nothing better illustrates this changing of the guard than the first line of an investor letter that floated around Wall Street last week. The letter was written by Paul Tudor Jones, an embattled but legendary macro trader.
In the last few years of market placidity, men like Jones who cut their teeth on the wild market swings of the 1970s and 1980s have been neutered — forced to lower their fees and return money to investors as the lack of commotion made it harder for them to generate returns.
“I feel like I’m in my 20s again,” Jones wrote.
That is to say, what’s old is new again. In the letter, he warned that policymakers are making the same mistakes he saw their counterparts make in the 1980s. The Federal Reserve, he said, is putting too much emphasis on stoking inflation and ignoring dangers arising in household and corporate debt, fueled by low rates.
And then there’s the Trump administration. Jones blames the weak dollar on its complete and total lack of fiscal responsibility, which is further stoking inflation fears.
From the letter:
“‘And just as I promised the American people from this podium eleven months ago, we enacted the biggest tax cuts and reforms in American history.’ – Donald Trump, State of the Union Address 2018
“This statement probably brought the loudest cheer of the night this week as all the Republicans jumped to their feet and offered a chorus of huzzahs. No doubt the tax cut has had a profound impact on the economy in the short-term and that will continue. But I wonder if they would have remained cheering if President Trump had followed with, ‘By the way, Treasury auctions will increase this year from the current projection of $583 billion to almost $1 trillion. Relative to recent auction sizes, Treasury auctions will be higher by $500 billion next year and by $545 billion in 2020.
“‘And, secondly, the Congressional Budget Office’s long-term projection for our debt/GDP will eclipse that of Japan at its peak, possibly making us the most indebted country in the world by 2033.’ For those of you not old enough to remember, one of the most popular phrases of the 1970s and 1980s was ‘crowding out.’ Get used to it as it describes the detrimental effects excessive public sector borrowing has on the economy, which will become more popular as time progresses. This is all simply breathtaking. It is incredible that at full employment we have passed a tax cut that will push our deficit to 5% of GDP. Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing.”
Right now, thanks to the return of inflation, the market is weighing a new set of possibilities, some of which include complete and total chaos and an economic downturn prompted by rising interest rates. This risk calculation is a process — one that Jones doesn’t think is over. No one in the crowd of endowment heads and allocators in the Cayman Islands did either.
“The bottom line is that the upside risks to US rates are significant as a result of higher US inflation and likely weaker demand for US Treasuries. I now have clients asking me what the probability is that US 10-year rates will hit 4%,” Deutsche Bank analyst Torsten Slok said in a note to clients as the market pacified on Monday. “Watch carefully how equities and credit spreads perform as we get more evidence of higher inflation and evidence of weaker demand at US Treasury auctions.”
Winners and losers
And it’s not just talk — there are already winners and losers emerging from our new, more uncertain world.
Over the next few weeks you’ll see a particularly Wall Street genre of stories in the press — the “they saw it coming” stories of investors who made perfect bets on this violent market move. Here’s one about some guys in Denver making a killing betting against a popular short-volatility trade that blew up in last week’s market chaos.
Kudos to them, they’re in an exclusive group — most people didn’t catch this falling knife. Take the California Public Employees’ Retirement System (CalPERS), for example.
From Yves Smith over at Naked Capitalism:
“CalPERS under its chief investment officer Ted Eliopoulos has been too clever, in a bad way, over the last eighteen months. It cuts its allocation to US stocks just before Trump took office, getting less benefit from that rally than it could have. CalPERS has had a 50% allocation to foreign stocks for years, betting on a weak dollar environment when the dollar has been strong. It cut its foreign investment targets, and if my recollection is right, not long before the dollar started to weaken.”
Even the great Ray Dalio of Bridgewater Associates was blindsided. He told attendees at the World Economic Forum in Davos on January 23 that: “If you’re holding cash, you’re going to feel very stupid.”
Life comes at you fast.
SEE ALSO:The stock market is not the economy — but the wild ride of the past 3 days is telling us something really important
Something seems about to break in the American markets. Sure, yesterday’s US Labor Department jobs report painted a rosy picture: 200,000 jobs were created last month, unemployment is at 4.1% and, in the big surprise of the day, hourly earnings finally grew, by 2.9% over the prior January. While we’re on good news, the Atlanta Federal Reserve thinks US GDP is growing at 5.4%.
Yet, as Allison Schrager explains, Americans are saving at their lowest rate since 2007. And when Americans reduce their rate of savings, it usually means there’s a recession in the offing. “The economy may be booming now,” she writes, “but there are plenty of reasons to be skeptical it will last. Productivity numbers don’t justify the headline growth figures. Many people think the stock market is overvalued and due for a correction.”
“It has been eight and a half years since the last recession,” Schrager continues, “and the natural oscillation of the business cycle suggests we may be due for another one soon.”
Indeed, yesterday the stock market had its worst day in two years. As Dave Edwards and Helen Edwards wrote earlier this week, “Anyone looking at any of the standard models will tell you that the US stock market is overvalued.”
They go on to write that there may yet be a “melt-up” in the stock market—a rise in prices that makes these good times feel even more euphoric, for a little while longer. After that though, it’s up to human psychology, bears versus bulls, central bank interest rates, liquidity, debt, and all the other usual suspects, to determine if the market ends up in a crash, and the US ends up in a recession. A recession that will be hard for many ordinary people to weather, given that wages have only just begun to rise, and savings rates have dropped.
And recessions, like stock market panics and the flu, have a nasty tendency to spread across borders, countries, and continents with ease.
This was published in the weekend edition of the Quartz Daily Brief, our news summary that’s tailored for morning delivery in Asia, Europe and Africa, or the Americas. Sign up for it here.
Wall Street just suffered the worst day of the Trump presidency.
The Dow closed down 666 points, or 2.5%, its biggest percentage decline since the Brexit turmoil in June 2016 and steepest point decline since the 2008 financial crisis.
A strong jobs report showed wage growth is finally starting to pick up. That’s great news for workers, but it reinforced investors’ concern about inflation and the bond market.
“It’s all about rates. Asset prices and the economy have become addicted to low rates,” said Peter Boockvar, chief investment officer at the Bleakley Financial Group. “Sentiment got euphoric. There is more froth that needs to be taken off.”
The sell-off knocked the Dow well below 26,000. Both the Dow and S&P 500 suffered their biggest weekly drops since early 2016 — roughly 4% each.
Political turmoil is adding to the uncertainty. Market analysts pointed to the clash between the Trump administration and the FBI as another concern.
“There looks like a breakdown of the institutions in our country,” said Ian Winer, head of equities at Wedbush Securities. “No matter what side you’re on, that’s not good.”
While the point decline on the Dow was large, it paled in comparison with the scary days of the financial crisis. Friday’s decline was 2.6%. The Dow plummeted nearly 8% on a single day in October 2008.
The stock market is much calmer these days, thanks to a strong economy, record corporate profits and the huge business tax cut enacted by President Trump and Republicans in Congress.
Even with this week’s slump, the S&P 500 is just 3.5% below its all-time high.
But the tranquility that has defined Wall Street’s stunning rally since the election has been punctured. The VIX, a measure of market volatility, has soared 50% this week.
January’s jobs report didn’t settle the market down. The economy added 200,000 jobs in January, and wages grew at the fastest pace in eight years.
But if wages grow too fast, they could eat into Corporate America’s record profit margins.
The other concern: Wage growth could be a sign that inflation, which has been mysteriously low for years, may heat up. That would force the Federal Reserve to raise interest rates faster than investors may be comfortable with.
Those worries are showing up in the bond market. The 10-year Treasury yield reached a four-year high of 2.84% on Friday. It was at about 2.4% at the start of the year.
Some investors are worried rates could climb high enough to slow the economy by raising borrowing costs. They also worry that higher returns on bonds will make stocks look less attractive by comparison.
“Those rising rates are making it harder to say there is no alternative to stocks,” said David Kelly, chief global strategist at JPMorgan Funds.
Former Fed Chairman Alan Greenspan said this week that both stocks and bonds are in a “bubble.”
Of course, this week’s slide does little to dent the overall gains the market has achieved since President Trump’s victory. The Dow and the Nasdaq have climbed more than 40% apiece since the 2016 election. The S&P 500 has advanced for 10 consecutive months. That hasn’t happened since 1959.
Even stock market bulls have long said that a pause — or even a dip — would help prevent the market from overheating.
“We’ve just gone too far, too fast,” said Art Hogan, chief market strategist at B. Riley FBR.“We had this perfection of 2% higher every week — and that really is just not reality.”
Some market analysts said the political controversy over the release of the disputed GOP memo is rattling Wall Street.
“You’ve got trouble in the Department of Justice and the FBI at the senior level,” said Jeffrey Saut, chief investment strategist at Raymond James.
“It all hit when the market was ready to go down anyway. It just accelerated it,” Saut said.
Wedbush’s Winer said the biggest risk is that Robert Mueller, the special counsel investigating Russian interference in the election, is fired.
“If Bob Mueller is challenged in a firing, or a prelude to a firing, then you’re going to have a problem,” he said.
Other market analysts think Friday’s drop has little to do with Washington.
“We’re not drawing a connection between the political headlines and the market. Valuations for stocks are high, and we were due for a pullback,” said Luke Tilley, chief economist for Wilmington Trust.
The latest corporate earnings, which typically drive stock prices, left the markets unimpressed.
Shares of Google parent Alphabet slumped 5% even after the tech behemoth posted its first $100 billion sales year. Disappointing iPhone sales left Apple down 4%. ExxonMobil was the biggest loser on the Dow on Friday, sinking 7% after its results widely missed expectations.
“You’ve had a stock market that’s gone absolutely crazy based on tax reform juicing earnings,” said Winer. “And numbers are coming in that are OK, but not blowing the doors off.”
The question now is whether this market turmoil will persist into next week, or whether investors have been waiting on the sidelines come in to buy after the dip.
Tilley said his team expects there will finally be a full-blown correction — a 10% pullback from the recent highs.
“But don’t expect a bear market unless there’s an actual downturn in the economy,” Tilley added.
With Gaza in Financial Crisis, Fears That ‘an Explosion’s Coming’
GAZA CITY — The payday line at a downtown A.T.M. here in Gaza City was dozens deep with government clerks and pensioners, waiting to get what cash they could.
Muhammad Abu Shaaban, 45, forced into retirement two months ago, stood six hours to withdraw a $285 monthly check — a steep reduction from his $1,320 salary as a member of the Palestinian Authority’s presidential guard.
“Life has become completely different,” Mr. Abu Shaaban said, his eyes welling up. He has stopped paying a son’s college tuition. He buys his wife vegetables to cook for their six children, not meat.
And the pay he had just collected was almost entirely spoken for to pay off last month’s grocery bills. “At most, I’ll have no money left in five days,” he said.
Across Gaza, the densely populated enclave of two million Palestinians sandwiched between Israel and Egypt, daily life, long a struggle, is unraveling before people’s eyes.
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At the heart of the crisis — and its most immediate cause — is a crushing financial squeeze, the result of a tense standoff between Hamas, the militant Islamist group that rules Gaza, and Fatah, the secular party entrenched on the West Bank. Fatah controls the Palestinian Authority but was driven out of Gaza by Hamas in 2007.
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At grocery stores, beggars jostle with middle-class shoppers, who sheepishly ask to put their purchases on credit. The newly destitute scrounge for spoiled produce they can get for little or nothing.
“We are dead, but we have breath,” said Zakia Abu Ajwa, 57, who now cooks greens normally fed to donkeys for her three small grandchildren.
The jails are filling with shopkeepers arrested for unpaid debts; the talk on the streets is of homes being burglarized. The boys who skip school to hawk fresh mint or wipe car windshields face brutal competition. At open-air markets, shelves remain mostly full, but vendors sit around reading the Quran.
There are no buyers, the sellers say. There is no money.
United Nations officials warn that Gaza is nearing total collapse, with medical supplies dwindling, clinics closing and 12-hour power outages threatening hospitals. The water is almost entirely undrinkable, and raw sewage is befouling beaches and fishing grounds. Israeli officials and aid workers are bracing for a cholera outbreak any day.
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Israel has blockaded Gaza for more than a decade, with severe restrictions on the flow of goods into the territory and people out of it, hoping to contain Hamas and also, perhaps, to pressure Gazans to eventually oust the group from power.
For years, Hamas sidestepped the Israeli siege and generated revenue by taxing goods smuggled in through tunnels from Sinai. But President Abdel Fattah el-Sisi of Egypt, after taking power in 2013, choked off Hamas — an offshoot of the Muslim Brotherhood, which Mr. Sisi sees as a threat — by shutting the main border crossing at Rafah for long stretches. Egypt, which has no interest in becoming Gaza’s de facto administrator, used that pressure to force Hamas to close the Sinai tunnels.
For Hamas, the deteriorating situation is leaving it with few options. The one it has resorted to three times — going to war with Israel, in hopes of generating international sympathy and relief in the aftermath — suddenly seems least attractive.
Hamas can count on little aid now from the Arab world, let alone beyond. And Israel, in an underground-barrier project with a nearly $1 billion price tag, is steadily sealing its border to the attack tunnels into Israel that Gaza militants spent years digging.
The collapsing tunnel enterprise, in a way, neatly captures where Hamas finds itself: with no good way out.
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Hopes Raised, Then Dashed
Last year, the Palestinian Authority’s president, Mahmoud Abbas, ratcheted up the pressure on Hamas, stopping its payments for fuel for Gaza’s power station and to Israel for electrical transmission into the Gaza Strip. It slashed the salaries of thousands of its workers who remained on its payroll in Gaza, even though they no longer had jobs to do after Hamas took power. Those measures forced Hamas into reconciliation talks that kindled new hopes, reaching their peak in a much-heralded October agreement in Cairo.
Hamas, eager to rid itself of the burdens of governing — though unwilling to disarm its military wing — showed flexibility at the talks, quickly ceding control over border crossings like the one with Israel at Kerem Shalom, and the tax collections there that had provided it with some $20 million a month.
But a series of missed deadlines for handing over governance to the Palestinian Authority, and the removal last month of the Egyptian intelligence chief who had brokered the reconciliation talks, have dashed hopes and left the two factions squabbling, the rapprochement slowly bleeding out.
Hamas now refuses to relinquish its collection of taxes inside Gaza until the Palestinian Authority starts paying the salaries of public employees. But the authority is refusing to do that until Hamas hands over the internal revenue stream.
“The most hard-line people in the P.A. believe they need full capitulation from Hamas, including the dismantling of its military,” said Nathan Thrall, an analyst for International Crisis Group who closely monitors Gaza. “The vast majority of Palestinians see that as wholly unrealistic. But the P.A. thinks that strategy is working. So they think the pressure should continue, and they’ll get even more.”
The longer the stalemate lasts, the more Hamas hemorrhages funds and Gaza’s economy suffocates. While thousands of Palestinian Authority workers in Gaza like Mr. Abu Shaaban were forced into early retirement, and those who remained saw their pay cut 40 percent, some 40,000 Hamas workers — many of them police officers — have not been paid in months, officials say.
As Gaza’s buying power plummets, imports through Kerem Shalom are falling — from a monthly average of 9,720 truckloads last year to just 7,855 in January — which will only cut Hamas’s revenue more.
“Abu Mazen has punished all of us, not only Hamas,” Fawzi Barhoum, the chief Hamas spokesman in Gaza, said in an interview, using Mr. Abbas’s nickname.
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From Israel, a Conflicted View
A debate raged in Israel this past week, which sees the possibility of war both to its north and south, between military leaders warning about the looming crisis in Gaza and politicians questioning just how much and how soon the situation there would threaten national security.
Such a conflicted view has characterized Israeli policy ever since the blockade was imposed, analysts say, as the country sought to protect itself by cordoning off the strip.
But that meant keeping an enormous degree of control over the flow of people, cargo, energy and international aid across the border — and as it clamps down, the resulting social harm in Gaza can blow back against Israel.
Nowhere is that more palpable than just across the border in Israel, where soldiers patrol close enough to wave at the Hamas militants eyeing them from watchtowers, and commanders talk of Gaza’s unemployment and poverty rates as fluently as of their battle preparations.
Brig. Gen. Yehuda Fox, who leads the army’s Gaza division, recently showed Hamas and Islamic Jihad tunnels discovered and destroyed in the past few months. The tunnels were supplied with air, electricity and water, and dug by an estimated 100 men working in shifts.
The showpiece of the army tour, though, was not the tunnels, but the construction of a concrete-and-electronic barrier, dug deep into the earth, that General Fox said will eventually detect other tunnels and stop more from being built.
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About three miles of the barrier is finished, with about 38 miles to go. It is an impressive display of ingenuity, but comes at an enormous cost: Five concrete plants have been set up, supplying 20 digging sites, at a cost of nearly $1 billion. Enough concrete is being poured into the desert sand, the general said, to “build Manhattan.”
But he also acknowledged that the underground-barrier project had increased the pressure on Hamas to use its existing tunnels soon, or risk losing them forever — heightening their dangers to Israel.
As moribund as the reconciliation process has become, General Fox said, Hamas and the Palestinian Authority were keeping it alive because “no one wants to be blamed for destroying it.” If it does fail, Hamas will likely deflect Gazans’ anger: “They’ll say Israel is the problem — ‘Let’s go to jihad and start a war.’”
Climbing back into an armored vehicle, the general drove past an Iron Dome antimissile battery to a park where hundreds of picnickers and mountain bikers — Jews and Arabs alike — had flocked to see meadows blooming with scarlet anemones. Israel calls this February festival “Red South.”
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It was well within mortar range of the border.
“It’s their decision what to do,” the general said of Hamas. “Three times in the past 10 years they’ve chosen war. They wasted many lives and a lot of money and destroyed Gaza. And they can try to do it a fourth time.”
Then again, he said, “Everybody learns.”
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Eyeing the Fence
Israel recently called on donor countries to fund some $1 billion in water and energy improvements in Gaza, measures that would take time. But there is more it could do to alleviate the crisis quickly, according to the Israeli advocacy group Gisha — like easing the way for cancer patients to travel for treatment, or renewing exit permits for traders, which Israel slashed to just 551 at the end of 2017 from about 3,600 two years earlier.
The United States has done the opposite, withholding $65 million from the United Nations Relief and Works Agency, which supports Palestinian refugees, including some 1.2 million in Gaza, many of whom rely on its regular handouts of flour, cooking oil and other staples.
Hamas itself has few ways to alleviate the crisis, according to Mr. Thrall and other Gaza experts.
It could retake control of Kerem Shalom, regaining vital revenue but inviting blame, and retribution, for the demise of reconciliation. It could seek intervention by Muhammad Dahlan, a Fatah leader exiled and reviled by Mr. Abbas, in hopes that Mr. Dahlan’s patron, the United Arab Emirates, might pour money into Gaza. Or it could muddle along, perhaps hoping that an expected American peace initiative might entail quieting Gaza with aid.
For the moment, those with money in Gaza are trying to help those without. A few merchants have forgiven customers’ debts. The Gaza Chamber of Commerce paid $35,000 to get 107 indebted merchants temporarily released from jail. A donor gave 1,000 liters of fuel to a hospital for its generator.
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But the fuel quickly ran out. Gestures only help so much. And Gaza residents invariably say that war is coming.
Hamas is under no illusions that it would fare better in the next fight than it did after its 2014 battle with Israel, Mr. Thrall said.
“Hamas sees how isolated they are in the region, and how isolated the Palestinians are at large,” he said. “Before, in wars, they could hope to light up the Arab street and pressure Arab leaders. But in 2014, there was barely a peep, and now it’s even more so.”
Still, whether out of bluster or desperation, Gazans both in and out of power have begun talking openly about confronting Israel over its blockade in the kind of mass action that could easily lead to casualties and escalation.
A social-media activist, Ahmed Abu Artema, is promoting the idea of a “Great Return,” a peaceable encampment of 100,000 protesters along the Israel-Gaza border. Mr. Barhoum, the Hamas spokesman, envisioned a million or more Gazans taking part, though perhaps not so peacefully.
One way or the other, “an explosion’s coming,” said Mr. Abu Shaaban, the cash-strapped Palestinian Authority pensioner. “We have only Israel to explode against. Should we explode against each other?”
The crash itself was significant—Donald Trump’s favorite index, the Dow Jones Industrial (DJIA) fell 4.6 percent in one day. This is about four times the standard range of the index—and so according to conventional economics, it should almost never happen.
Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four percent fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much.
Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different. It’s like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be “up”?) had regarded Monday’s level and the previous day’s tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been.
There is only one time that it’s been higher: during the DotCom Bubble, when Robert Shiller’s “cyclically adjusted price to earnings” ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron).
The S&P500 fell more than 11 percent that day, so Monday’s fall is minor by comparison. And the market remains seriously overvalued: even if shares fell by 50 percent from today’s level, they’d still be twice as expensive as they have been, on average, for the last 140 years.
After the 2000 crash, standard market dynamics led to stocks falling by 50 percent over the following two years, until the rise of the Subprime Bubble pushed them up about 25 percent (from 22 times earnings to 28 times). Then the Subprime Bubble burst in 2007, and shares fell another 50 percent, from 28 times earnings to 14 times.
This was when central banks thought The End of the World Is Nigh, and that they’d be blamed for it. But in fact, when the market bottomed in early 2009, it was only just below the pre-1990 average of 14.5 times earnings.
That valuation level, before central banks (staffed and run by people with PhDs in mainstream economics) decided that they knew how to manage capitalism, is where the market really should be. It implies a dividend yield of about six percent in real terms, which is about twice what you used to get on a safe asset like government bonds—which are safe, not because the governments and the politicians and the bureaucrats that run them are saints, but because a government issuing bonds in its own currency can always pay whatever interest level it promises. There’s no risk that it can’t pay, and it can’t go bankrupt, whereas a company might not pay dividends, and it can go bankrupt.
Now shares are trading at a valuation that implies a three percent return, as if they’re as safe as government bonds issued by a government which owns the bank that pays interest on those bonds. That’s nonsense.
And it’s a nonsense for which, ironically, central banks are responsible. The smooth rise in stock market prices which led to the levels that preceded Monday’s crash began when central banks decided to rescue the economy by “Quantitative Easing (QE).” They promised to do “whatever it takes” to drive shares up from the entirely reasonable values they reached in late 2009, and did so by buying huge amounts of government bonds back from private banks and other financial institutions (pension funds, insurance companies, etc.). In the USA’s case, this amounted to $1 trillion per year—equal to about seven percent of America’s annual output of goods and services (GDP or “gross domestic product”). The Bank of England brought about £200 billion worth, which was an even larger percentage of GDP.
With central banks buying that volume of bonds, private financial institutions found themselves awash with money, and spent it buying other assets to get yields—which meant that QE drove up share prices as banks, pension funds and the like bought them with money created by QE.
So this is the first central bank-created stock market bubble in history, and central banks have just had the first stock market crash where the blame is entirely theirs.
Were this a standard, private hysteria and leverage driven bubble, we could well be facing a further 50 percent fall in the market—like what happened after the DotCom crash. This would bring shares back to the long-term average of 17 times earnings.
Instead, what I believe will happen is that central banks, having recently announced that they intend to end QE, will restart it and try to drive shares back to what think are “normal” levels, but which are at least twice what they should be.
As I said in my last book ‘Can we avoid another financial crisis?’ QE was like Faust’s pact with the Devil: once you signed the contract, you could never get out of it. They’ll turn on their infinite money printing machine, buy bonds off financial institutions once more, and give them liquidity to pour back into the markets, pushing them once more to levels that they should never rightly have reached.
This, of course, will help to make the rich richer and the poor poorer by further increasing inequality. Which is arguably the biggest social problem of the modern era. So, as well as being incompetent economists these mainstreamers are today’s Marie Antoinette. Let them eat cake, indeed.
Everyone who’s asking “why did the stock market crash Monday?” is asking the wrong question. The real poser is “why did it take so long for this crash to happen?”
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.
Has anyone noticed how the stock market has been extremely volatile? And how nearly everyone is soothed when industry specialists scramble to prop up our failing economy? And it’s not only happening in America – all over the globe, markets have been up and down more than usual. The last time the system showed this much volatility, the crash of 2008 occurred.
I’m no financial expert, but there seems to be a collection of very, very bad signs. When markets slowly freefall and no one in the media is talking about it, that means it’s time to sit up, pay attention, and be prepared to take immediate actions.
Take these immediate steps if the market continues to fall.
I really cringe when people try to make economic predictions or pinpoint specific dates for impending financial disaster. So please realize I’m not making a prediction when I say this.
Watch the market right now. Carefully. Like it’s your job.
If it continues to fall, we could be in big trouble.
If the market continues to plummet, it’s time to take action immediately. None of these steps will have long-term consequences if things level out, but they could make your life a whole lot easier if things get worse.
Here’s what you need to do immediately in the event of a stock market crash.
Take your money out of the bank ASAP. If you still keep your money in the bank, go there and remove as much as you can while leaving in enough to pay your bills. Although it wasn’t a market collapse in Greece recently, the banks did close and limit ATM withdrawals. People went for quite some time without being able to access their money, but were able to have a sense of normalcy by transferring money online to pay bills or using their debit cards to make purchases. Get your cash out. You don’t want to be at the mercy of the banks.
After the crash, focus on information
Hopefully there’s no need to empty out your bank accounts, stock up on last minute supplies, or lock-and-load for home protection. However, if this is a crisis situation, an actual 1929/2008-style stock market crash, you need to take your preps to the next level.
Information is the key. It’s imperative that you learn everything you can so that you know what you need to add to your preps. Do these two things if it looks like the situation is more than a blip:
#1. Bookmark these preparedness websites. (Free)
The internet is a wonderful place, and best of all, this knowledge can be found for FREE! The more you know about crisis situations, the more ready you will be to face them. Some sites are friendlier to beginners than others, so if you stumble upon a forum where people seem less than enthusiastic about helping people who are just starting out, don’t let it get you down. Move on and find a site that makes you feel comfortable. Following are some of my favorites, and the link will take you to a good starting point on these sites. In no particular order:
Following are some of my favorites, and the link will take you to a good starting point on these sites. (Actually, it’s wise to begin increasing your knowledge even if we get a reprieve.) In no particular order:
#2. Build your library. (Small expense)
This is where some money could come into play. Most of the time, people in the preparedness world like to have hard copies of important information. This way, if the power goes out and you can’t access the internet or recharge your Kindle, you still have access to vital advice.
Some of these books are for just such an event, while others are guides to building your self-reliance skills. Commit to picking up a good book each pay period until you have a library to reference during any type of scenario.
Be sure to check out used bookstores, libraries, and garage sales, too. Look for books that teach self-reliant skills like sewing, gardening, animal husbandry, carpentry, repair manuals, scratch cooking, and plant identification. You can often pick these up for pennies, and older books don’t rely on expensive new technology or tools for doing these tasks.
Collapse is inevitable
Hopefully, this is a brief crash and the market recovers. That gives us more time to prepare, and nearly everyone could deal with a little more time.
However, it’s imperative that you be watchful. This might be the triggering event for our next Great Depression. Be prepared to take action.
This may just be a warning bell, but we all know that it’s only a matter of time until we’re all out of warnings.
About the Author
Please feel free to share any information from this site in part or in full, leaving all links intact, giving credit to the author and including a link to this website and the following bio. Daisy is a coffee-swigging, gun-toting, homeschooling blogger who writes about current events, preparedness, frugality, and the pursuit of liberty on her website, The Organic Prepper. Daisy is the publisher of The Cheapskate’s Guide to the Galaxy, a monthly frugality newsletter, and she curates all the most important news links on her aggregate site, PreppersDailyNews.com. She is the best-selling author of 4 books and lives in the mountains of Virginia with her two daughters and an ever-growing menagerie. You can find Daisy onFacebook, Pinterest, and Twitter.
A decade after the worst financial crisis of this century, workers, investors and pundits are trying to predict the next one. The World Economic Forum’s annual meeting was no exception, with several panels devoted to sussing out the world’s financial weak spots.
Regardless of when the next global crisis hits, though, one thing is likely: it will hit the United States worse than the rest of the world. That’s the conclusion based on research from Helene Rey, an economist at the London Business School.
That prediction stems from the difference between how the U.S. and the rest of the world invest their money, Rey said — and the fact that other countries tend to invest largely in U.S. dollars. Most of the time, that benefits the U.S. — so much so that when she first wrote about the phenomenon in 2005, Rey called it the U.S.’ “exorbitant privilege.”
The U.S.’ privilege in good times comes down to the fact that most investments the country makes abroad are in relatively risky assets, Rey said. She spoke with CBS News at the World Economic Forum annual meeting, which she attended as part of the European Research Council delegation.
“The type of investment that the U.S. [makes] in the rest of the world is unusually risky,” said Rey. On the other hand, other nations tend to invest in safe U.S. assets, in particular, the U.S. dollar. “These are safe, and they earn low yields.”
As a consequence, during a crisis — when most assets suffer a precipitous drop in value — the only assets that remain relatively stable are those in U.S. dollars. In this way, the U.S. acts as an insurer to the rest of the world, cushioning the blow.
“In that sense, the U.S. is doing worse than the rest of the world during the crisis,” Rey said. “However, at all the other times, the U.S. earns an extra return. Just like an insurer would get an insurance fee during normal times.”
Humboldt State President Lisa Rossbacher said the university is facing a looming financial crisis that has become worse over the past year. If the deficit is not addressed now, she said the school will face that crisis.
“Now, based on the Governor’s budget, enrollment projections, and other factors, HSU’s Budget Office estimates we are facing a $7 million deficit during 2018-19 that would grow to a $9 million deficit in 2019-20,” Rossbacher said in an email obtained by North Coast News. “To put this in perspective, our overall operating budget is about $134 million this year, and we currently have just over $6 million in operating reserves.”
According to Rossbacher, HSU’s budget situation has worsened over the course of this year because of ongoing deficit spending in some areas, unfunded increases in salary and benefits, a continued decline in enrollment, and projections based on the recent state budget for 2018-19 proposed by Gov. Jerry Brown.
“As we entered this year, we had reduced expenditures by about $1.5 million, and progress was being made on an additional $2.8 million in reductions,” Rossbacher said.
But Rossbacher said the reason behind the financial worries is “the changing higher education landscape, insufficient state funding, looming economic downturn, increasing mandatory costs, fluctuating enrollment, and deficit spending.”
A proposed budget is scheduled to be developed by Feb. 22 and the president is expected to approve the 2018-19 budget by March 29.
So, how does the university fix this problem?
Well, the president said the campus has held a series of open forum meetings to discuss how these factors have impacted the financial landscape on the campus. She has shared the following steps going forward:
• Implement a 5% reduction in current year operating expense budgets (non-personnel)
• No tenure-line faculty position requests for fall 2019
• Hiring chill: All staff and administrator hiring requests continue to be approved by Cabinet with the intent of reducing recruitments over the next 18 months
• Academic Programs and the Office of Institutional Effectiveness will assist the Colleges in building fall 2018 and spring 2019 class schedules that align available instructional resources with student course need
• All General Fund travel expenditures and other expenditures of $2,000 or more must be approved by the appropriate Vice President
Some short-term steps we will be taking:
• Cabinet will incorporate Phase II feedback into the February 22 reduction plan
• University Resources & Planning Committee (URPC) is developing a budget oversight policy
• Benchmark and recalibrate our spending by category (FIRMS codes) based on CSU system data
• Reduce an estimated 40-50 budgeted staff and administrator positions
• Reduce temporary faculty appointments in fall 2018
• Reorganize or consolidate units and functions
• Identify and implement process improvements
• Complete and implement Strategic Enrollment Management plan
• Rigorous review of all programs (administrative and academic) on campus
• Integrated assessment, planning, and budget process