E Fed Choice: Destroy Stocks Or Destroy Housing

If we are to believe reports regarding stocks and the housing market, the Fed could be in a box. It could destroy stocks, or destroy the housing market depending on which way interest rates go.

The recovery in stocks has been driven by financials. The reflation/inflation trade was all the rage when Donald Trump took office. But it is starting to look like this was just another bond tantrum that kind of came and went. Lots of people staked their reputations on this inflation trade.

JP Morgan has warned that a decline in rates could severely impact the stock market. It wants some inflation at this late date. But the Fed is not cooperating, as Tim Duy has said that inflation and unemployment are too low and are preventing the Fed from reaching its goals.

Tim Duy by Permission


And it looks like we are seeing some problems on the demand side. Retail is hurting and so is the food industry. According to Peter Schiff, online buying is not offsetting the retail/food service slide.

A fundamental weakness appears to be forming. Capital is winning and labor is losing. Demand is withering. We have the added pressure of oil inflation as a possibility and housing inflation.

So, the Fed could still be looking to raise interest rates by 75 basis points, which could severely hurt housing, while giving financials a boost. The only way that the Fed could raise rates and continue housing demand would be to come up with down payment assistance on a very wide scale and loosen credit restrictions. That has not worked out so well in the past. But easy money 3 percent loans are being launched by Bank of America. 

I have mentioned before that interest rates are not a leading indicator, but it depends on what you are trying to watch. If it is GDP, interest rates have proven to not be a leading indicator. If it is financial stocks and housing, it appears that interest rates could be a leading indicator of potential demand for either sector.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. I have no financial interest in any company listed in this ...

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Moon Kil Woong 3 years ago Contributor's comment

Of the two, pick housing. Stocks and companies generate revenue, cash flow, and jobs. Housing generates asset inflation, pinches disposable income, and eats credit. Although people feel it is good for the economy, which it is somewhat if it generates more home building and creates asset wealth that leads to more spending. However, as we know from Asia for all those who gain wealth with higher prices it sucks wealth and disposable income from those buying housing leading to Japan style economic malaise as people realize, if it goes too far that no amount of income will afford more housing and you must hoard what you have and feel lucky.

This leads to economic malaise, especially if then housing crashes and new buyers go bankrupt regularly.

Gary Anderson 3 years ago Author's comment

I agree, Moon, but the Fed is afraid of negative rates, and wants to get off the floor. Yet housing has become a commodity, manipulated by Wall Street. Housing stock is too tight, and getting tighter. So, even if there was more access to credit, it pushes up against Wall Street speculators. This is becoming a very big problem in closed access cities, and rents are increasing massively in open access cities.