As much as I hate to see it, I love to see it. Because this is the same thing that happened in 2008. Obviously there are differences yeah, the banks aren't holding so much junk, they're better capitalized, etc. etc . But let's take a look at some similarities:
- Things started cracking prior to the '08 crisis during a hiking cycle. The teaser rate mortgages adjusted up and investors took a lot of losses on subprime MBS. House prices went down making the situation even worse.
- We're actually very close to the federal funds highs of 2005-2007 (5.25%) – https://fred.stlouisfed.org/series/FEDFUNDS
- This was all preceded by an easing cycle, which had encouraged investors and institutions to use leverage in order to up their returns. Bad loans were made, also, since servicing and refinancing them was easy. Liquidity was ample.
- Hiking was going on in order to combat inflation. It was not optional.
- There was a sense that “real estate always goes up”, leading to bad bets there, and subsequent losses. The same could be said for the stock market today, or the notion that treasuries are a safe asset (they are, but they can still lose value).
- 2008 was a crisis of panic. The market could not determine who was swimming naked, liquidity dried up. Today there is growing concern of not only who is exposed to SIVB, but to a larger extent who is exposed to interest rate risk.
Look, I ain't saying “THIS IS IT BOYS”, because I don't know. I'm not a doomer. But economies and financial markets are complex adaptive systems, and they have tipping points. Think of it like Jurassic Park. Yeah, it seems like everything is under control, but an engineer decides to go rogue, cut the power, and all hell breaks loose. You can't control everything. You couldn't have predicted this. One small event can lead to a cascade that brings the whole thing down. For a real life example, 2008 is one of them, as is the First World War (the assassination of Archduke Franz Ferdinand).
What is the lesson then? Be prepared. It was irresponsible to be running rates that low for so long and then hiking massively afterwards. If the economy was to be stimulated, there are better options, like fiscal policy or directing QE towards productive industries. Unfortunately, this is the framework the Fed and central banks have adopted, and there's an argument to be made that all we have succeeded in doing with all of this is pump asset values and create distortions in markets.
Finally, this is /r/stocks, so as far as stocks go, I'm not saying to pull your money out. I'm saying to be aware of what's going on right now, and to take that into consideration next time to you decide to buy an asset. As long as things are going smoothly, stocks will continue their eternal march upward, thus negating the need to look at valuation or margin of safety. However, if we do reach one of these “tipping points”, there's a very real risk that things will start to come down and stay down. You do not want to be caught with your pants down. Do note, also, that modern investors are used the Fed sweeping in to save them. With inflation looking the way it is, that may not be as guaranteed as it once was, and certainly not as welcome at a time when we need to get prices down. Anyway, this is just my 2 cents and not expert advice.
For a more academic discussion, I encourage you to read William White's article from the BIS in 2006, “Is price stability enough?” Mr. White predicted that prolonged easing would lead to the predicament that we are seeing now:
“This implies a delicate balancing act for the monetary authorities, in which tightening must be slow enough to avoid destabilising financial markets, but fast enough not to destabilise inflationary expectations. “
https://www.bis.org/publ/work205.pdf
For other examples of “people swimming naked” and the delicate balancing act of central banks right now, see UK pension funds and the Korean bond market last year:
https://www.japantimes.co.jp/news/2022/10/29/business/south-korea-economic-trauma/
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