Focusing On The Wrong Pandemic?

There is no more concerning trend in the United States than the increasing rate of depression, anxiety and mental illness in young people.

This received a lot of attention during the Covid lockdowns but this trend had been underway for most of the decade before we ever confronted the pandemic.

To provide some perspective on the dimensions of the problem, consider the death rates for those age 15-24 from Covid-19, drug overdoses and suicides for the year ending March 31, 2022.

Almost 16 times the number of young people died of suicides and drug overdoses in that one year period as died from Covid!

The Covid lockdowns did nothing to help the mental health situation of young people. It exacerbated the trend that was already in place.

For example, this is a graph that shows depression scores for 12th graders from 2005 to 2018.

Levels of depression for 12th graders began to increase rather dramatically in the early 2010's.

This applied to both males and females and those with both liberals and conservative political outlooks.

However, as has been seen in most studies, there is a higher level of depression/mental health issues with women than men and with liberals compared to conservatives.

Source: https://www.sciencedirect.com/science/article/pii/S2666560321000438

You can see the same trend in 12th graders in their  "self-derogation" scores. This is when someone answers "they don't have much to be proud of" or believe "they can't do anything right".

Again, this trend began in 2010-2011.

Credit: https://twitter.com/monitoringbias/status/1634218771643506688

You can see the male/female and liberal/ conservative differences in mental health in the broader data set for the population at large below.

The data is rather striking.

The more liberal you are the greater chance there is a mental health issue. The more conservative you are, the less likely that is the case.

Credit: https://twitter.com/monitoringbias/status/1630954493759090691

What is going on here?

Why the rise in mental health issues in the young?

A number of observers believe the increased use of social media and the rollout of the iPhone is responsible in some way. It is even argued that children with liberal parents were more likely to be early adopters and provided iPhones to their teenagers earlier than conservative parents. This would explain why the increasing effects of depression began earlier with liberal teens.

It is an interesting theory. We do know that being isolated and feeling disconnected from others leads to depression. A life centered around a phone, apps and texts and devoid of human interactions is not the best prescription for sound mental health.

The chart below is also very interesting.

Pew Research asked the question whether a doctor or healthcare had EVER told you that you had a mental health condition.

You would think, just based on age alone, it would be much more likely that older people would answer this in the affirmative than young people. After all, they have been around much longer and faced many more challenges and problems in their lives.

However, the exact opposite was true.

The younger you were the more likely you were to have a mental health condition at some point in your life.

This was true of men, women, liberals and conservatives.

Credit: https://twitter.com/monitoringbias/status/1634194897875116032

However, we again see the divide on the issue between men and women and liberals and conservatives, particularly in the 18-29 age cohort.

It is almost behind comprehension that over 50% of young, liberal women say they have been told they have a mental health condition.

This is the group we are relying on to birth and nurture the future generations of Americans?

This is also a large demographic that is voting overwhelmingly for liberal Democrats. 

God help us! 

I wish I had a good answer for why there seems to be more mental health issues with those who identify as liberals than there are with conservatives.

Is it simply because liberals are more honest and transparent? Possibly.

Could it be due to a victimization mindset that has become even more amplified in the social media age we live in today?

Jill Filopovic wrote this in a recent Substack that might provide some perspective on this point.

Just about everything researchers understand about resilience and mental well-being suggests that people who feel like they are the chief architects of their own life — to mix metaphors, that they captain their own ship, not that they are simply being tossed around by an uncontrollable ocean — are vastly better off than people whose default position is victimization, hurt, and a sense that life simply happens to them and they have no control over their response. 

Depression, anxiety and many others mental health conditions result when one feels overwhelmed and becomes unduly pessimistic about the possibility of anything changing in their life.

At the core, they do not believe change is possible or within their control.

Instead of being the architect of their own life and changing the things they can change individually, they focus and dwell on victimhood or any number of external issues.

The problem today is that there are plenty of things social media and the mainstream media do to fuel these thoughts.

"The world is going to end in 10 years due to climate change."

"White privilege".

"Male privilege".

"Systemic racism".

The list could go on and on.

Another fact in all of this is that white liberals are much more likely to live in an echo chamber than white conservatives despite the popular narrative being the opposite.

Credit: https://twitter.com/monitoringbias/status/1631042799788335110

When all you hear is one point of view and it is a pessimistic one at that, you are probably not going to be in the best mental state.

The default answer for many liberals is to rely on government to fix their problem.

However, as we know, it is not really in the interests of the politicians they vote for to fix the problem, even if it is possible.

A big factor in positive mental health is having a strong self-identity, Understanding who you are and being proud of what you are and what you can be.

Another interesting data point on this is that White Liberals are the only group to think more highly of other racial groups than their own.

They may think this is virtuous but you have to wonder whether this is a sign of a healthy mental state?

Finally, we have the interesting change we have seen in recent years in the percentage of those who identify as LBGT.

How do we explain this?

1.7% of those born before 1946 identify as LBGT and 2.7% of Baby Boomers but 20% of Gen Z so identify?

Has something been introduced into the environment?

Did the hard wiring of our genetics change in the span of a decade or two?

Is it something else?

Why is this important in evaluating these mental health issues?

Source: https://adaa.org/find-help/by-demographics/lgbtq

If you consider that 20% of Gen Z identifies as LBGT, and that group alone is six times more likely to experience depression, this issue by itself goes a long way to explaining the overall trend changes we are seeing in the mental health status of young people.

Do we have a big problem with mental health in the United States?

How much was spent on preventing Covid in this age group?

How much focus is going to prevent the root causes of this mental health pandemic?

It appears that our priorities might be misplaced. 

What Happened To Silicon Valley Bank?

I would wager that very few Americans had heard of Silicon Valley Bank before last week.

That changed as the 16th largest bank in the United States was declared insolvent and taken over by the FDIC on Friday.

It became the second largest bank to ever fail in the United States (after Washington Mutual in 2008).

What happened?

The same thing that happens to all banks who fail in a fractional banking system.

What happened to SVB was no different than what happened to the Bailey Building and Loan in the movie "It's a Wonderful Life".

George Bailey (Jimmy Stewart) tries to calm anxious and angry depositors 
"It's A Wonderful Life" (1946)

Bank depositors lose confidence in the safety of their deposits in the bank and seek withdrawals. The bank only has a fraction of the deposits available in current liquidity to meet the withdrawal requests.

George Bailey was able to halt the run on his bank because he and his new bride Mary used their  honeymoon money to meet some of the demands and convince the remaining depositors to keep their deposits with the bank.

Mary Bailey (Donna Reed) offers the Bailey Honeymoon funds to stop the bank run
"It's A Wonderful Life" (1946)

Silicon Valley Bank attempted to raise additional equity to boost its balance sheet and depositor confidence but it failed.

The bank's failure was clearly a surprise to Forbes.

It had recently named Silicon Valley Bank one of America's Best Banks.

Here is SVB promoting that recognition in a tweet four days before it went under.

Banks have historically failed because they made too many bad loans. 

However, banks also put money into investment securities. The 2008 banking crisis was precipitated not only by bad mortgage loans but investments in mortgage backed securities that went bad.

A popular alternative is for banks to invest in treasury securities. It is supposedly a safe investment in which it can earn a spread between what the treasury bill or note yields and the interest the bank has to pay  its depositors.

That strategy works well when the yield on the treasury security is stable or falling while the bank is paying almost no interest to its depositors. It does not work well when treasury rates begin to rise.

As interest rates rise, the value of the underlying treasury security falls. It is like having a bad loan.

In addition, as treasury yields rise there is more and more incentive for a depositor to withdraw their funds from the bank (if it does not increase bank deposit rates) and put their money into treasuries.

Two years ago the yield on a 2-year Treasury was 0.14%. It was 5.05% right before SVB failed.

The yield almost immediately dropped to 4.60% on Friday as demand surged in a flight to safety as depositors in other banks undoubtedly moved money to Treasuries.

Simply stated, SVB failed because of the rapid increase in interest rates on treasury securities.

The higher yields created losses in its investment portfolio reducing its equity base.

The higher yields created an incentive for depositors to withdraw money to benefit from the higher rates as SVB did not adjust depositor rates accordingly.

SVB lost on both dimensions. It was caught in a squeeze.

Of course, SVB got into this position by having a disproportionate amount of its assets in investments rather than in loans.

57% of SVB's assets were investments. Only 35% were in loans. By comparison, San Francisco-based First Republic Bank, which is comparable in size to SVB, has 78% of its assets in loans and only 15% in investments. 

SVB also apparently did a poor job of anticipating these rate hikes and hedging that exposure.

The big question now is what will the fallout be from this?

The shareholders of SVB will most likely lose everything.

This is a stock that carried a market cap value of about $9 billion a month ago.

The depositors will most likely get access to all of their money depending on how the FDIC puts together a salvation plan for the bank. That goes without saying for deposits with less than $250,000 in bank deposits. 

However, 97% of SVB's deposits are above the FDIC's $250,000 insurance limit.

There are a lot of Silicon Valley tech names who use SVB as their primary bank.

Crypto company Circle has $3.3 billion on deposit with SVB.

Roku has almost $500 million.

Unless there is a quick resolution how do these companies meet payroll, pay vendors and continue as going concerns themselves?

There are a lot of concerning after-effects to any bank failure.

That is why it is easy to criticize actions by the FDIC, the Treasury Department or the Federal Reserve to bail out these banks. However, the reality is that it is the little guy that quickly gets hurt in the after-effects of these failures.

In this situation you also have to realize that it is tech companies in California that have the most to lose in the SVB failure. 

Is there a more influential group for the Democrats in power in Washington?

There is a lot of money and votes provided to Democrats from tech companies in California.

It is hard to see where they are not going to protect them in the end.

(Update-After I finished writing this blog post, as I predicted, the FDIC, Treasury Department and Federal Reserve, announced that it was going to insure that all depositors, both insured and uninsured, would be paid in full currently. It also extended the same protections to depositors of Signature Bank in New York which was taken over by state regulators over the weekend. 

Banks in California and New York are bailed out that cater to tech and crypto companies. However, if the same thing happened to a bank in Wyoming that had mostly farmers as depositors, would they receive the same treatment?

The question that also hangs over the market and the economy is whether other banks have the same type of exposure?

There is no question that there are a lot of banks that have the same problem.

For example, this graph shows the unrealized gains (losses) of banks holding investment securities at the end fo 2022.

As has often been said, "what goes up eventually comes down".

This is a graphic representation of that principle.

Credit: https://twitter.com/balajis/status/1634543503958212610

However, SVB seemed to have much more exposure in its investment portfolio than other banks.

For example, Bank of America has less than half of the exposure that SVB had to unrealized investment losses as a percent of equity.

SVB's losses were equal to its entire equity.

Credit: https://twitter.com/Mayhem4Markets/status/1634347023003529216

One thing is clear.

Banks in general are going to have to raise the interest rate on their deposits to compete with treasury rates or we will see more bank outflows. Money will always go where it is treated best.

Of course, this will reduce banks margins which is something the bankers do not want to do. That is especially true when they are looking at losses on their investment portfolio. However, they really don't have a choice.

Finally, what does all this mean for the Federal Reserve?

Do they continue raising interest rates now that something has broken due to its policy decisions?

The market is already betting that the Fed is going to back off.

Last week market futures were forecasting there was an 80% chance the Fed would raise rates another .50% at its March meeting. Those odds have now dropped to 40%.

You should now have a better idea of what happened to Silicon Valley Bank.

The big question now is what happens next?

We could be in for a very interesting week in the financial markets.

Fasten your seat belts if the contagion spreads.

What is most troubling is the same people who got us into this problem (ultra low interest rates, money printing and excess government spending which led to inflation which the same people said was transitory) are now telling us they have the solutions.

Fasten your seatbelts, indeed!

This and That---March 6, 2023 Edition

A few random observations, charts and factoids to provide some context on what is going on in the world.

Mortgage Rates

30-year mortgage rates are now about 7%

Two years ago, when Joe Biden took office, they were below 3%.

It has been over 20 years since we last saw a 7% mortgage rate.

In fact, 99% of all borrowers have mortgage rates below current market rates.

Over 70% have mortgage rates below 4%.

The reality is that very few current homeowners are going to want to abandon a 3%-4%mortgage by selling their home to buy another at a 7% rate.

My concern is that the real estate market may lock up.

Those wanting to buy a new home are also priced out of the market with the higher rates.

Those thinking about moving up to another home will stay put.

How many are willing to take this on?

Real estate looks like it is headed for a rough stretch.

As long as employment levels hold up it will be manageable. Low inventory levels will allow housing values to not fall dramatically.

However, if people start losing the ability to pay their mortgages, it will be a different story

Covid-19 Hospitalizations

It still continues to amaze me that hospital admissions with Covid-19 among the age 70+ age group (the most vulnerable and the most vaccinated age group--93%+ fully vaccinated, 67%+ boosted) are higher today (9.2/100,000)  than they were at the same time last year. (8.7/100,000).

Of course, this is something that you never hear on the news.

This is the case despite the fact that hospitals are less likely to report admissions with Covid in 2023 (an incidental Covid positive test when admitted for something else) than they were in 2022.

The fact that other age groups are down slightly may be evidence of that.

Covid admissions in 2023 are much more likely to be for Covid.

How Strong is the Economy for Workers?

Joe Biden has been complaining for the last several several months that the economy is growing and employment is strong but he is not getting credit for it.

Source: https://thehill.com/business/3845925-biden-wants-credit-for-a-strong-economy-americans-arent-buying-it/

Perhaps the reason that Biden is not getting any credit is that since he has been in office any wage growth has been obliterated by inflation.

This graphic shows how bad it has been for private sector workers.

Credit: https://twitter.com/LHSummers/status/1630619332999888897

Tooth Fairy

If the cost squeeze is not bad enough on American workers, consider the payout that the Tooth Fairy is making these days.

$6.23 per tooth!

I was thinking that $2 would be a lot.

Boy, am I out of touch. 

Credit: https://twitter.com/HoneyBeeGeek/status/1631461211551469569

Different Views on Threats to Public Health

How can political attitudes cause such differing views when the data is the data?

For example, there were 107,477 drug overdose deaths in the 12 months ending August, 2022 in the United States.

Over the same period, there were 44,000 Americans killed by guns but more than half of that total were suicides.

280,000 deaths are attributed to obesity each year.

There are over 500,000 cancer deaths each year.

Democrats believe that guns are a much greater threat to public health than opioids, obesity or cancer when deaths and hospitalizations are a mere fraction of the other risks?

Credit: https://twitter.com/SouthernKeeks/status/1628780046243569664

Better To Be A Rioter Than A Business Owner

Speaking of public health, Black Lives Matter rioters in New York City in 2020 are going to get a payment of up to $6 million because some NYC police officers did not wear face masks as they attempted to stop the looting, vandalization and destruction of property that accompanied the protests that summer.

Each of the "protestors" is eligible for a $21,500 payment.

Source: https://www.frontpagemag.com/blm-rioters-get-6m-because-cops-didnt-wear-face-masks/

Of course, the owners of the small businesses that were looted and ransacked in the riots were only provided with a maximum payment from the city of $10,000.

Credit: https://www.wsj.com/articles/hundreds-of-new-york-city-businesses-were-damaged-looted-in-recent-unrest-11591993138

Is there a better example that we have lost all common sense?

Seeking An American Identity

We hear a lot about racism and race relations today.

You hear some say that it has never been worse.

Is that true? 

Many people apparently believe it.

That group obviously includes younger people who did not see what I did in the 1950's and 1960's.

For example, consider this Gallup survey on race relations.

It does suggest that both White and Black people say race relations have deteriorated over the last decade.

Is there any factual basis that racism has never been worse?

Look at what the liberal Brookings Institution has written about on this subject in an article "Black Progress: How far we've come and how far we have to go".

That article begins this way.

. 

Let's start with a few contrasting numbers.

60 and 2.2. 

In 1940, 60 percent of employed black women worked as domestic servants; today the number is down to 2.2 percent, while 60 percent hold white- collar jobs.

44 and 1.  

In 1958, 44 percent of whites said they would move if a black family became their next door neighbor; today the figure is 1 percent.

18 and 86.

In 1964, the year the great Civil Rights Act was passed, only 18 percent of whites claimed to have a friend who was black; today 86 percent say they do, while 87 percent of blacks assert they have white friends.

Progress is the largely suppressed story of race and race relations over the past half-century. And thus it’s news that more than 40 percent of African Americans now consider themselves members of the middle class. Forty-two percent own their own homes, a figure that rises to 75 percent if we look just at black married couples. Black two-parent families earn only 13 percent less than those who are white. Almost a third of the black population lives in suburbia.

It might surprise you to learn that those words were written in 1998. Since that time we have also elected an African American President of the United States twice. An African American led the U.S. Justice Department for eight years under President Obama. African Americans have increasingly been elected to leadership roles in many of the nation's urban areas and they also are in charge of a number of the police departments in major U.S. cities.

For example, an African American is Mayor in all of the four largest American cities.

New York City

Chicago

Los Angeles

Houston

Is it just a coincidence that both Whites and Blacks began to believe that race relations were poor at the same time that major media outlets repeated the message more and more?

Source: https://twitter.com/TheRabbitHole84/status/1629797419616698369/photo/1

Is it just a coincidence that shift began in 2013 during the second term of an African American President who was elected using a unifying message but who more often than not governed by highlighting divisions?

In the last decade we have heard how white privilege is responsible for so many problems in the country.

We have heard that white supremacy is the underlying principle behind almost every Republican party policy.

However, considering those narratives, I found this data interesting on how racial groups rate each other.

Credit: https://twitter.com/monitoringbias/status/1629553795242835970

This study suggests that Whites are the least racist group in America.

The study also shows that Whites rate each other lower than any other racial group rates their cohorts---BY FAR.

Whites rate other Whites higher than other racial groups but the difference is miniscule compared to what we see with other racial groups.

It is understandable that Whites would be rated lower by all other minority racial groups since it is the majority race in the United States. All minority groups have undoubtedly experienced some form of racism at some point in their lives. 

However, when you see the next data point is it not logical to wonder if some racism that is perceived by minorities is related to the fact that each minority racial group sees their race or ethnicity as much more central to their identity compared to Whites?

This is particularly true for African Americans.

When a person's identity is tied this strongly to their race or ethnicity it is going to be much more difficult to not see every slight, snub or failure as being the result of racism when that might not be the case at all.

" I didn't get the job because I am Hispanic."

" I got a poor score on the SAT because I am Black."

"That guy would not date me because I am Asian".

As an example, look no further than the comments of Chicago Mayor Lori Lightfoot after she was defeated in her reelection bid this week.

Source: https://www.nationalreview.com/news/im-a-black-woman-in-america-chicago-mayor-lori-lightfoot-blames-election-loss-on-racism-sexism/

Lightfoot seems incapable of accepting that she was rejected by the voters not because she was a Black woman but because crime is out of control in Chicago and she has done a poor job in managing the city.

Do not think that Whites cannot or have not been deeply committed to ethnicity identity as well.

The Italians, the Irish, the Poles, the Jews and Catholics have all been there before as well. They all were subjected to various forms of discrimination at different times as did many others.

It seems to emanate from the tribal nature that dominated much of human life for centuries and still does in many places around the world.

Our Founders set out "to form a more perfect union" when the nation was conceived. It was not perfect then. It was not perfect in the Civil War era or a hundred years after that. It is not perfect now. However, part of the American experience has been to continue to strive and work everyday to form an even more perfect union.

An objective look at our history suggests that much progress has been made toward a more perfect union over the years.

We might never get to "perfect" but if we can make it more so with each passing generation we will have accomplished more than any other nation in the world has.

When will American become the central identifier of everyone? 

The question that the American people need to answer is whether we believe that this is better achieved by tearing things down and casting blame on others or building on the positives, working cooperatively to fix the negatives and all of us spending more time looking inwards on what we can do to improve the lives of everyone.

Those things are not easily done nor is ignoring the media narratives that feed a lot of the divisions we see in our society today.

If we are to truly be "one nation under God, indivisible with liberty and justice for all" we must value those things that unite us and reject those who seek to divide us.

It is the only way forward.

The American Dream Is Still Alive

While a lot of people are hoping that Governor Ron DeSantis will seek the Republican nomination for President against Donald Trump, I have found it interesting that among the first to actually announce they are in the race are two Indian Americans.

Former Governor Nikki Haley of South Carolina announced a month ago.

Last week Vivek Ramaswamy, a 37 year-old Harvard and Yale educated entrepreneur, announced he was also running for President.

Both Haley and Ramaswamy are first-generation children of immigrants from India.

It should not be surprising that Indian Americans are challenging for the highest political office in the land since they have long been the ethnic group with the highest annual household income per the American Community Survey completed by the U.S. Census Bureau (2013-2015).

Indian Americans had median incomes that are 79% higher than the average American and 67% more than White Americans.

In the 2019 Survey (the most recent), Indian Americans had increased their median household income to $126,700 compared to the overall population median of $65,700%---93% more.

Source: https://usafacts.org/articles/the-diverse-demographics-of-asian-americans/

Why are Indian Americans doing so well in an American society that we are told is stacked against people of color and immigrants?

70% of Indian American adults are college graduates compared to 28% for the overall population.

Many of those degrees are in higher paying STEM fields.

Nikki Haley's father has a PhD and was a college professor. Her mother earned a law degree in India and a Master's in the United States and was a public school teacher and later owned a local clothing store.

Vivek's father was an engineer for General Electric and his mother was a geriatric psychiatrist in Cincinnati, Ohio where Vivek was born and raised.

Indian Americans are hard working and industrious.

Those who are not in professional positions are often found in entrepreneurial endeavors where these attributes are valued.

For example, 60% of the hotels and motels in the United States are owned by Indian Americans.

Indian Americans are also significant owners of convenience stores and gas stations in the United States.

In many respects, these immigrants personify the American Dream.

Their children are taking the next step in pursuing political power.

Most people have heard of Nikki Haley who was the former Governor of South Carolina and Ambassador to the U.N. in the Trump administration.

Very few have heard of Vivek Ramaswamy.

He is running as a self-described "anti-woke" candidate.

Here is an example of Vivek's positions on some major issues.

Both Haley and Ramaswamy would have to be described as long shots at this point.

However, they both could fill unique niches in the race.

Haley could very well end up being the only female seeking the nomination unless Kristi Noem or Kari Lake decide to enter the race.

My guess is that Haley is positioning herself for a possible VP slot with this run.

Vivek's youth could introduce an interesting contrast to the older candidates.

Could Vivek find a way to connect with the under-40 voter who have heavily voted Democrat for the last 30 years?

Of course, I don't think many people realize that Ron DeSantis is only seven years older than Vivek and he has already been a Governor for four years and a member of the U.S. House of Representatives for almost six years.

It appears to me that Vivek is running for President to enhance his personal brand and to better position himself for a future run for the Senate or Governor in Ohio.

Can Haley and Ramaswamy survive through the early debates and make it to the first primaries in 2024?

That is going to take money which might be difficult to raise running against Trump and DeSantis. Most of the traditional sources are going to be hard to tap.

However, the substantial wealth of the Indian American community (population of 4.5 million) may be able to sustain their efforts better than other candidates who face long odds in this race.

Of course, speaking of long odds, where else in the world would we see children of immigrants in the running to lead their nation?

I am happy to see both Haley and Ramaswamy in the race and how much it says in reaffirming that the American Dream is still very much alive today.

All About Interest Rates

In my lifetime, I have seen the dramatic impacts that interest rates have on investing and economic activity.

At one time, housing values, stock market prices and other asset values were driven primarily by more fundamental issues.

Stocks went up principally based on revenue growth and increases in earnings per share.

Housing prices went up based on supply and demand in the geographic area and in relation to construction costs of new housing.

Interest rates have taken on an outsized importance in almost all asset prices, particularly in the last 20 years.

It seems market watchers pay more attention to Federal Reserve policy these days than they do to almost any other factor.

Many under the age of 40 do not know anything about living and investing in a world other than with ultra low interest rates,

Consider this chart of 6 month Treasury bills.

Source: https://www.cnbc.com/quotes/US6M

We have not seen a yield in excess of 5% on any Treasury debt instrument since 2007.

To put that rate in further perspective, last year at this time the yield on 6-month Treasuries was 0.66%.

It was easy for the value of stocks to increase when the alternative was putting money in an interest-bearing account or bond that was paying a very low interest rate.

As interest rates rise, stocks become less attractive to investors.

We are heading into a new world with much higher interest rates that will likely have wide ranging effects on asset prices and the economy at large.

Homeowners benefited tremendously as mortgage rates went lower and lower.

The median price of a house in the United States at the end of 2022 was $467,700.

It was $76,000 in 1982.

Higher mortgage rates are already starting to affect the housing market.

Single family home sales in January, 2023 were down 36.1% compared to last year.

Mortgage demand has collapsed.

Fewer people are buying and nobody is refinancing at these rates.

Why is this happening?

Simply stated, at these interest rates, fewer and fewer people can afford to buy a home.

The affordability index is worse now than it was in 2006 during the so-called "housing bubble" that preceded the Great Recession of 2008-2010. That recession was fueled by a drop in housing values in many parts of the country.

Source: https://twitter.com/nickgerli1/status/1628486988268462081

This graph shows the effect of higher interest rates on the amount of house someone can afford with a fixed $1,850/monthly payment.

At 2.7% rates, $1,850/month will get someone a $462,000 house.

At current rates (6.9%), that payment will only pay for a $284,000 house.

Source: https://twitter.com/GRomePow/status/1628469848740179968/photo/1

Are we reaching a point that something has to give in the housing market?

Interest rates don't affect cash buyers but they only make up 29% of all housing sales.

Source: https://cdn.nar.realtor/sites/default/files/documents/2023-01-realtors-confidence-index-02-21-2023.pdf

Note as well in the survey highlights above that last year 46% of all properties sold above the list price.

In January, 2023, only 16% sold above list.

This indicates that the housing market is quickly softening in the face of higher interest rates.

We are also seeing consumer loans outstanding increasing rapidly as more and more households feel the effect of inflation.

The cost squeeze on households is also apparent in looking at the plummeting personal savings rate.

Credit: https://twitter.com/WallStreetSilv/status/1627732511441707010

 

At the same time that credit card balances are exploding, the average interest rates on those credit cards have reached the highest levels ever.

Average rates on cards are 20%.

Source: https://finance.yahoo.com/news/troubling-signs-emerge-as-credit-card-debt-hits-record-high-160607906.html?ncid=twitter_yfsocialtw_l1gbd0noiom

At this point, the stock market and employment have held up reasonably well as interest rates have risen.

The S&P 500 is actually up by about 5% in 2023 thus far.

Can this continue in the face of the interest rate environment? 

Inflation has not come down as quickly as many economists believed it would.

In fact, the month to month increase in January of .5% was the highest it has been in the last seven months (tied with October).

Source: https://www.bls.gov/news.release/cpi.nr0.htm

The Federal Reserve has indicated that it will not stop increasing the Fed Funds rate until inflation looks like it is heading to the 2% policy target.

Most observers believed that we would not see any further 50 basis point increases by the Fed.  

That is no longer the case.

 

We are at a point that it is all about interest rates now.

How high will they go?

Can the economy withstand the shock of those increases in interest rates?

It is always the goal of the Fed that when things get overheated it is attempting to bring the economy and inflation down with a soft landing by increasing interest rates.

Bringing inflation down with a soft landing will not be easy.

A lot of easy money was made with low interest rates.

Everything gets much harder when they go the other way. 

The question is how hard will it get and how hard the landing is going to be?