BREAKING: The FED Pauses Rates, Housing Declines, Recession Cancelled

What's up, Graham? It's guys here, and well, everything is going to... After falling stock prices, brand new recession warnings, and mortgages reaching their highest level in 23 years, the Federal Reserve has once again decided to pause the rate hikes for the month of November. Except this time, it's different.

After all, it's now believed that the Federal Reserve is quickly losing control. The stock market has recently had the worst days of the entire year after the NASDAQ fell into correction. To top it all off, 99% of the housing market is unaffordable to the average American. So, given these recent updates and the brand new decisions as of today, let's talk about exactly what's happening, what the Federal Reserve just said, the implications that are about to be felt throughout the entire market, and then finally what all of this means for you.

Because I have to say, there's a lot going on that many people are not talking about. Although, before we start, as usual, if you appreciate all the information and me trying to get these videos out on the same day, it would mean a lot to me if you hit the like button or subscribe. That's all I ask; it helps out the channel tremendously. And as a thank you for doing that, I will do my best to respond to as many comments as I can.

So, thank you guys so much, and also big thank you to Surfshark VPN for sponsoring today's video, but more on that later.

All right, so to start, a lot of this mess begins with one simple term: treasuries. For those unaware, these are loans made to the US government, and in exchange for you giving them your money, you get paid back a fixed amount of interest depending on the term. For example, treasuries are paying 5.2% on a six-month term and 4.9% on a 10-year term.

Now, even though this sounds like a great thing and it can be, the problem is that this serves as the baseline for what an investor could expect to earn. And the higher treasuries pay, the higher everything else has to pay in order to compete. Like, just take this for an example: since 2000, the S&P 500 has returned 7% with dividends reinvested.

So, if your option today is either to invest in the stock market at an assumed 7% rate of return with the risk of losing money or get a guaranteed 5% rate of return with treasuries, all of a sudden those treasuries are starting to look like the better option. And that's becoming a tipping point for investors.

This is also what's called the risk premium, which is basically the difference between how much you would expect to make taking a risk versus the amount you're guaranteed to make in something like a treasury. Historically, the risk premium like this generally hovered around 3.1%, which basically means if treasuries are paying 5%, you should expect to make 8.1% in the stock market for taking on extra risk. But today, that risk premium is the lowest it's been since 2009 at just 1%.

And as Josh Peck would say, the math just ain't mathing. In this case, it's suggested that in order for the risk premium to return to its normal level, stocks either need to fall or earnings need to go up by a lot. Alternatively, the 10-year treasury yield could also fall, but given some of the recent comments by Jerome Powell, this is unlikely to happen anytime soon.

Perhaps this could be the reason why Warren Buffett is holding on to one of his largest cash positions of all time.

On a broader scale, here's where things get really interesting in terms of the stock market. I subscribed to this newsletter called Market Sentiment, which I'll link down below in the description. Every week, they come up with a really detailed analysis of various market trends and statistics.

But this week's article happens to be on the future expected returns of the stock markets, and I have to say it's quite unsettling. See, here in the United States, we have this belief that over the long term, stocks go up. Statistically, this is proven to be true going all the way back to 1872. So, on the surface, it seems to be really reasonable advice, except there's a slight problem.

Throughout most of the world, there are a variety of instances where a 20-year holding period has actually lost money, with the most notable being Japan. Their economic downfall began in 1986 when the Bank of Japan lowered interest rates and issued stimulus as a way to help overcome a recession. However, that proved to be so effective that both real estate and stock prices skyrocketed to higher and higher highs.

Obviously, this was becoming a bit of a problem. So by 1987, the Bank of Japan signaled the possibility of starting to lower interest rates, but they decided to hold off after the economic uncertainty related to Black Monday of 1987 in the United States.

In hindsight, this delay proved to be a huge mistake because with interest rates remaining low, stock and real estate prices soared to unimaginable levels that would later lead to a complete economic disaster. For example, the Nikkei increased from 10,000 to 40,000 in just four years. Housing prices increased by 167% from all the expansion, and assets got so expensive that the government had to take abrupt action to raise interest rates and halt the pace of inflation.

Now, in the very beginning of all of this, the higher interest rates were seen as a blessing. It was said that housing was considered to become too expensive for ordinary citizens, so stopping the housing price from skyrocketing was considered to be a good thing. But within a year of that, everything screeched to a halt and prices began to fall.

That created a vicious cycle where the more prices fell, the more cash investors held, which caused prices to fall even further, which caused investors to hold on to even more cash, and it was a never-ending cycle.

Now, in defense of the United States, even though the Nikkei fell 80% as Japan's entire economy got completely turned upside down, their bubble was way bigger than anything that we've experienced here. Share prices also increased three times faster than corporate profits. By 1990, the total Japanese property market was valued at over 2,000 trillion yen, which is roughly four times the real estate value of the entire United States.

And the most shocking from all of this was that in 1989, the PE ratio on the Nikkei was 60 times trailing 12-month earnings. If we apply those exact same metrics to our stock market, the S&P 500 would currently be trading at over 10,000.

So that should give you a good understanding as to why the Japanese market still has not recovered after 40 years. However, Japan's situation also isn't necessarily unique, because when you take a look throughout the world, there are plenty of developed countries that have lost money over a long period of time.

And that, of course, leads us to wonder, what are the chances of that happening here? Well, according to the Market Sentiment blog, since 1890, once you add inflation into the mix, there's only a 1.2% chance of losing buying power over a 30-year horizon. Although this doesn't really take into consideration that we only have 130 years' worth of data to pick from, and the United States could be suffering from survivorship bias, where we only look at it because so far it's worked.

That's why when we zoom out to a global market, according to this research, there is a 9% chance that a Japan-like event could happen here in the United States at some point in the future. And this is precisely why it's important to be diversified across asset classes, countries, and investments to make sure that you're protected.

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And now, with that said, let's get back to the video.

All right, so before talking about the latest statements from the Federal Reserve, there is one more topic that's worth discussing, and that would be housing. As of last week, mortgage rates have hit the elusive 8% mark, which is a level that we haven't seen since 2000.

This means that monthly mortgage payments are now 70% higher today than they were two years ago when mortgages were at 3%. Despite housing prices continuing to go higher, this combination has now led to 99% of the United States being unaffordable to the average American who makes $71,000 a year. And the price-to-income ratio is the worst it's been since 1984.

In terms of where this might go over the next year, Zillow just released their updated forecast, and in it, they believe that home prices will see another 2.1% increase through September of 2024. Their reasoning is that the higher interest rates go, the less likely people are to sell their homes since the majority of homeowners are locked in with rates under 4%.

This suggests that we'll continue to see very little inventory, and from what does come on the market, there's still enough buyer demand to keep the price high. In addition to that, Morgan Stanley revised their forecast, and they now believe that home prices could rise another 5% year-over-year given how many sellers are reluctant to give up their existing mortgage.

A managing director of Goldman Sachs also went on record to say that absent any negative shocks to the broader economy that would either boost excess supply of homes in the market or fuel an uptick in unemployment, we continue to expect home prices to rise at a slow pace, with his estimate that we'll see a 3.5% increase by the end of 2024.

However, if you do need to move, it does seem as though home builders are the ones offering the biggest incentives. For example, DR Horton is buying down loans by 1%. Some are adding additional upgrades for free or they're offering to pay all closing costs if you take ownership by a certain date.

But on the flip side, transaction volume is the lowest that we've seen since the Great Financial Crisis. So perhaps builders are just getting really desperate to let go of inventory before prices potentially fall.

So in terms of what Jerome Powell just said about the latest decision and what this means for you, here is what you came for. So, like I mentioned earlier, the Federal Reserve has once again decided to pause the rate hike for the month of November so that way they could reassess another month of inflation data to be able to determine if future adjustments are needed, especially during a time where our economy is rather fragile.

In fact, just a few days ago, Jerome Powell stated that financial conditions have tightened significantly in recent months. We remain attentive to these developments because persistent changes in financial conditions could have implications for the path of monetary policy.

For example, with rates of national debt as high as they are, the Federal Reserve has openly admitted that we know we're on an unsustainable path fiscally. That's because as of recently, the United States has started spending more money in interest to cover the national debt than they are on defense.

So, it's probably in everyone's best interest for inflation to subside and rates to eventually come back down. But in terms of where we go from here, Jerome Powell once again reiterated that they're taking a wait-and-see approach to future rate hikes and they're willing to adjust as needed.

Not to mention, there's also very much a lag effect to interest rates, where the full effects won't be felt for 6 to 18 months. Like, it's not as though they could raise interest rates, and the next day we see immediate changes. Instead, historically, the average delay is 11 months, meaning we're probably not going to feel the full effects of today until sometime next year.

Or basically to summarize everything you need to know: the Federal Reserve has to keep up the appearance of being very tough on inflation so that way it doesn't reappear. That's why we're never going to hear them say that we're done with rate hikes or we'll start cutting rates pretty soon. Because as soon as they do, they're going to weaken their stance.

On the other hand, if they say something like, "We're going to hike rates if needed, we're going to continue to make adjustments, and we're going to be data dependent," it leaves the door open for potential changes, both up or down, without making the situation worse.

Like with the recession, even though a few months ago the idea of a soft landing was looking more and more likely, today analysts are pointed to trends that might call for a rolling recession in which only some industries shrink while the broader economy remains above water. Others are even calling it a "richcession."

It's really hard to say. A "richcession" is basically where all the job cuts and pay cuts are being concentrated among high-paid tech and finance workers, and these are less likely to sink the overall economy.

Why do they call it "richcession"? It's hard to say. Anyway, it's said that most of the affected employees are well educated and likely to find new jobs relatively quickly, helping keep unemployment down despite the layoffs.

And if that's not optimistic enough, other people are saying that there's not going to be a recession at all because the economy doesn't face the same types of dangerous imbalances or events that ignited some previous recessions, such as the stock market bubble in 2001 or the housing bubble in 2008.

But regardless of what the analysts believe, Bank of America's Consumer Checkpoint survey found that high-income households are becoming more pessimistic about the economy. The same group also appears more cautious about spending because of soft wage growth and slowing job creation for high earners.

On top of that, the US GDP recently grew to a 4.9% annual pace, signaling that despite what's happening with the economy and higher interest rates, people are still spending a lot of money. In fact, this is the largest GDP increase since the fourth quarter of 2021.

This bodes really well for the belief that no, our economy is not shrinking despite what some of the headlines say. But to me, the real question becomes, is this actually going to last?

As far as my own thoughts about all of this, in terms of the stock market, I do think it's important to keep in mind that as of right now, only seven stocks are holding up the index. And that would be Apple, Google, Amazon, Microsoft, Meta, Nvidia, and Tesla.

In fact, an equity strategist at Bank of America calculated these seven companies as currently making up 30% of the S&P 500's total market cap. The last time this happened was at the 2021 peak of the market before everything started falling.

Of course, critics to this say that the reason these seven companies are trading so high is because they have large cash balances and low corporate debt. So they're perfectly positioned to weather a potential storm. But I'll leave this one up to you to decide.

As far as everything else goes though, I wouldn't be surprised if the Federal Reserve plays it extremely cautious over these next few months, especially because we have to wait to get a few more months of inflation data to really get an idea of what's going on.

It's just too early to tell. Because of that, I think it's more important than ever right now to keep your expenses low, save as much money as you can, and ensure that you're going to have a steady income over these next one to two years.

And no matter what, subscribe and hit the like button if you haven't done that already. So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget that you could get some free stocks worth all the way up to a few thousand with a paid affiliate link down below in the description when you make a deposit. Enjoy! Let me know which stocks you get. Thank you so much, and until next time.