Housing on Fire – Again
Posted on Saturday, May 19th, 2018
The housing market is absolutely on fire of late. We are hearing tales of bidding wars again. What short memories we have. We had an interesting conversation with some in the core housing supply chains. Their tales are more of woes surrounding supply rationing and trucker shortages. Inflation here we come. The real story is about interest rates and their effect on markets at home and abroad. We have long surmised that it was absurdly low interest rates that were holding back the economy. Our thought process is that with 0% interest rates there is no rush to go out and buy that house, that car or build that factory. Rates are low and will be for some time. Well, now the rush is on to make moves before interest rates run even higher and inflation is entering from stage left. The ironic part is that if the Federal Reserve raises rates further it may push the economy further into overdrive.
If one oversteps the bounds of moderation, the greatest pleasures cease to please. – Epictetus
For a more in depth analysis of where rates may be headed check out this blog post from our friends over at Global Macro Monitor.
As I said, it is all about interest rates. Here is what David Tepper, hedge fund legend and now owner of the Carolina Panthers (who bought the team for a mere $2.2 billion) had to say on about interest rates and the stock market earlier this month.
… a lot of it has to do with interest rates. We’re right on the cusp of breaking out on interest rates at this level around 3%. (the 10 Year closed the week at 3.06%)…But a lot of people don’t think they’re going to break higher – most people are only saying they’re only going to 3.25%. And I think if they only go to 3.25% for the rest of the year then stocks might be up. But too many people are saying that. And when too many people are saying one thing that’s when I start to get worried. So if we break above that, then stocks might have a problem.- David Tepper Appaloosa Management
Now we must deal with the unintended consequences of zero percent interest rates and the unwinding of QE. Because interest rates are headed higher so is the US Dollar. That is having a chilling effect on emerging markets. The iShares Emerging Market ETF is now trading below its 200 DMA and looks like it may be headed for a fall. I remember 1997 and the Asian Crisis very clearly. It was and still is the only time that US stock markets closed early due to trading curbs and the Dow Jones’ 550 point loss that day. We were on the floor that day and it was particularly eerie. The Asian Financial Crisis began in Thailand with the collapse of the Thai Baht and its effects were felt around the globe. Keep an eye on emerging markets like Argentina, Brazil, Turkey and South Africa. Turkey may merit extra attention as inflation in that country just hit 11% and its dictatorial leader is demanding rate cuts!? The economic textbooks would tell you to do the opposite.
Keep an eye on Bitcoin. The crypto currency market seems to be shaping up as a temperature gauge for risk. Bitcoin just made a lower high and there seems to be pressure in the space. As goes bitcoin so goes the market? It is trading at about $8300 as we write. It is very important that the support at $6700 remain steady otherwise bitcoin could see a $2000 fall quite quickly. The S&P closed the week at 2713 or about 50 points above our fulcrum of 2666. It has been 5 full months since we first hit 2666. Remember, we thought that we could spend 9-18 months here. The S&P keeps swinging back and forth between the 100 day moving average and the 200 day. Those lines are sloping upward and so is the market. The bulls have some work to do.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.