Regional banks are getting clobbered again…
You may have been following the unfolding drama in the news.
On Monday, JPMorgan Chase stepped in to rescue failing regional bank First Republic Bank.
The government-brokered deal was meant to reassure investors. But that’s not what’s happened…
The KBW Regional Bank Index tracks a basket of American regional banks. Yesterday, it slid 5%.
That’s the worst drop since the crisis at Silicon Valley Bank (“SVB”) in March. And it leaves the regional banking sector down 26% for the year.
These are dramatic events. And there are lots of hot takes going around about why we’re on the verge of a 2008-style financial crisis. But when everyone agrees on what’s coming next… that’s usually when something else happens.
So, today, we’re featuring insights from the newest member of the Legacy Research team and top forecaster, Phil Anderson.
We’ve teamed up with Phil because of his remarkable track record of predicting market turning points. And he has a completely different take on what’s going on.
Instead of seeing doom and gloom ahead, Phil has been pounding the table on why now is a great time to be in stocks.
It’s easy to see why so many people are bearish right now…
As I flagged in March, the Fed’s crusade to quash inflation by jacking up rates comes with costs.
And so far, regional banks have borne the brunt of this brutal rate hike cycle.
Higher interest rates lead to higher yields on bonds and money market funds. This lures deposits away from banks and into these higher yielding alternatives.
Higher rates also hammer the prices of the bonds banks hold on their books. Depositors then get nervous about balance sheet issues, leading to further deposit flight.
And as the collapses of SVB and First Republic Bank can attest to… that combination can be fatal.
But these failures are due to the way these banks have mismanaged their interest rate risk. It isn’t a real estate-led downturn and banking crisis like we got in 2007–2008.
And as Phil has been showing his readers, that means this crisis… as bad as it seems… won’t trigger a wider economic crash.
It’s all down to a recurring cycle Phil has been shining a light on…
He bases his forecasts on the observation that history isn’t random. Instead, it moves in predictable cycles.
If you understand these cycles, you can forecast – often with remarkable accuracy – what markets will do next.
I know that sounds bizarre. It did to me, too, when I first heard about Phil’s cycles research. So last month, I flew to the Legacy Research HQ in Florida to meet with Phil and find out more.
And I got a chance to talk to him about the main cycle he focuses on – the 18.6-year Real Estate Cycle – and how he uses it to forecast turning points in the stock market.
Sometimes it’s a shorter cycle. Sometimes it’s longer. But this is the average time it takes for the real estate market to go through a boom-bust cycle.
Over to Phil for more…
Historically in Western economies, the real estate cycle has, on average, been marked by 14 years of rising prices, followed by four down years.
This doesn’t tell us how big the boom. But the higher real estate prices rise, the worse the bust will be. This cycle has been going on for at least 200 years. There’s no reason why it won’t continue for hundreds of years to come.
What does this real estate cycle have to do with stocks?
It’s one of the questions I had for Phil.
Classical economists say there are two factors of production – labor and capital. But early in his career, Phil realized you can’t know anything about economic cycles without grasping the role of the real estate market.
And that makes intuitive sense…
Every business relies on real estate in some shape or form. Retailers need mall space. E-commerce firms need warehouses and logistic centers. Drug companies need manufacturing facilities. And tech companies need to lease data centers for their cloud computing services.
The more expensive this real estate is to buy and lease, the more it acts as a drag on corporate profits.
Also, people are likely to spend more when their home prices are rising versus when they’re falling. This also influences profits.
So, knowing what point we’re at in the Real Estate Cycle helps you understand where we are in the stock market cycle. Phil…
At the bottom of the 18.6-year cycle the stock market leads the way into the next upcycle. The bottoming of the bear market in stocks in March 2009, for instance, was a clue that the real estate cycle had bottomed, and we were in a new boom phase.
And at the top of the cycle, it’s the real estate market that peaks first. So, if you’re a stock investor, watch for a real estate crash. That’s a sure sign to get out of stocks.
So, if we go back to the 2007 peak, the homebuilders and the land developers peaked in 2005. That was a hint for stock market investors to start to get more defensive with their portfolios.
Today, there is no real estate crash in sight…
Sure, regional banks are being squeezed as the Fed pushes interest rates higher. This hurts their shareholders. It also causes tighter lending conditions.
But that doesn’t mean the boom part of the cycle is over. As Phil’s research shows, that happens only after a significant fall in real estate prices. And we’re not there yet…
In 2007 and 2008, folks all over the country stopped paying their mortgages en masse. But today, mortgage delinquencies are close to a 20-year low.
Meantime, housing inventories are low. In other words, the supply side of the housing market is quite fixed.
That’s partly because owners aren’t rushing to sell. They locked in low interest rates before the Fed started raising them and are holding on to those cheap mortgages.
And if he’s right, then we’re not at the end of the bull market in stocks, either. In fact, Phil says we’re in the most bullish part of the cycle.
I know that’s a hard claim to believe…
There’s trouble in the banking system. And today, the Fed piled on the pressure by raising its target interest rate by a quarter point.
So we’ll dive back into Phil’s contrarian call in tomorrow’s issue.
And we’ll look at more reasons why a crash is a lot further off than you may think.
Regards,
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Chris Lowe
Editor, The Daily Cut