While the internet is buzzing about former President Donald Trump’s continued legal woes…
Here are the stories you haven’t been hearing about:
- The US stock market enters a new bull market. Is this sign of good things to come? Or a “bull trap” that signals the final hoorah before the “most anticipated recession ever?”
- What’s really going on with the affordable housing crisis in America?
Let’s get into it,
-Equifund Publishing
Bull Market or Bull Trap?
I tend to stay away from covering the public stock markets…
But for Private Capital Insiders who are thinking “Should I diversify away from the public markets?”… well, I guess we should talk about what’s going on right now.
Even though the mainstream media will try to tell you “there are no alternatives” and nowhere to hide…
I’m here to remind you there most certainly is an alternative to the public stock market.
But as part of the “Top Down” approach we take here when considering investment opportunities, let’s talk about the two competing macroeconomic narratives running across the mainstream financial media.
- The Bull Case: The stock market has officially entered into a bull market after a 20% uptick
- The Bull Trap Case: This bull market is a trap, and is just the beginning of some major pain to come
I am most certainly in the latter camp. Here’s why
On the surface, it looks like the stock market is rebounding and going in the “up and to the right” direction…
But when you look under the hood, barely half of the companies listed in the S&P 500 Index closed above their 200-day moving average (as of June 6) – and if not for the most recent rally in late 2022 / early 2023, would likely be far lower.
What’s actually driving this rally? AI Hype/FOMO and Big Tech!
In previous iterations of this exact same setup, with the same top ~10 stocks driving basically the entire Index – we had clever acronyms (like FANGMAN and MANAMANA) to describe it.
In this year’s version, substantially ALL of the gains come from eight massive companies, currently being called the “MegaCap-8” – which currently make up ~30% of the entire S&P 500!
These stocks are absolutely crushing smaller cap stocks; their largest outperformance since at least 2002.
This “flight to quality” – in my opinion – will only continue to prop up “Big Tech,” while starving everyone else of capital.
Hedge funds and other speculative investors have built up a big bet that the S&P 500 will decline, marking their most bearish positioning since 2007.
At the same time, they are preparing for a rally in the technology-focused Nasdaq-100, with net bullish wagers in recent weeks approaching the highest levels since late last year.
I guess the AI Hype/FOMO train is too juicy to resist, even in the face of the pending liquidity issues.
The Debt Ceiling Increase Will Likely Drain MORE Liquidity From The Stock Market
Treasury bonds have been at the heart of the debt ceiling drama, as well as the culprit behind the most recent bank blow ups.
Why? For the previous decade of near-zero interest rates, the only way to generate any real yield was to take risk.
Traditionally, this means buying stocks.
But now that the risk-free rate provided by short-term treasuries is nearing 6%, a sizable swath of investors have been more than happy to move out of “risk assets” (like stocks) and into “safe assets” (like bonds).
So what happens when the U.S. Treasury puts out $850m in even higher-yielding short-term treasuries?
That giant sucking sound you hear is more money rotating out of stocks and into bonds, putting even more pressure on the already dwindling liquidity in equities.
JPMorgan estimated a broad measure of liquidity fell by $1.1 trillion, from about $25 trillion at the start of 2023.
“This is a very big liquidity drain. We have rarely seen something like that. It’s only in severe crashes like the Lehman crisis where you see something like that contraction.”
According to Ulrich Urbahn, Berenberg’s head of multi-asset strategy.
“We think there will be a grinding lower in stocks and no volatility explosion because of the liquidity drain. We have bad market internals, negative leading indicators, and a drop in liquidity, which is all not supportive for stock markets.”
High net worth investors hold record amounts of cash, move to fixed income
According to the CNBC Millionaire Survey, more than a third of millionaire investors, 34%, report keeping more of their money in cash, according to the survey, which polls households with $1 million or more in investable assets.
They have 24% of their portfolio in cash, up substantially from the 14% one year ago.
The results echo a recent survey by Capgemini that found global high-net-worth investors had a record 34% of their portfolios in cash or cash equivalents, such as money markets, CDs, and other vehicles.
We can also see this trend across billionaire family offices as well, at ~9-12% allocation to cash (which, relatively speaking to their wealth, is significant).
Not surprisingly, the wealthy are more concerned with wealth preservation right now than they are growth.
Overall, that doesn’t bode well for public equities.
The Problem With Affordable Housing
Last week, we talked about the capitulation by real estate investors, as investor home purchases dropped by a record 49%, year over year.
But there’s more to that story I didn’t cover: the impact real estate investors have in the affordable housing market.
According to Redfin: “Low-priced homes made up nearly half (48.7%) of investor purchases in the first quarter, the highest share in two years.”
Not only that, a record 41.1% of investor purchases in the first quarter were starter homes— homes with 1,400 or fewer square feet—up from 37.2% a year earlier.
To put this into context, the US housing market is missing about 320,000 home listings under $256,000 – the affordable price range for buyers who earn as much as $75,000
The inventory shortage in the U.S. has been building for years, and was exacerbated by the pandemic-fueled real estate frenzy.
With mortgage rates elevated and prices still high, many would-be buyers are stuck on the sidelines, especially as homeowners who are locked into lower borrowing costs are reluctant to move.
To make things weirder, check out this article from Bloomberg…
The Federal Home Loan Bank System (FHLB) is a consortium of 11 regional banks across the U.S.
Unlike the other government-sponsored enterprises, Fannie Mae and Freddie Mac, FHLBs do not guarantee or insure mortgage loans.
Instead, FHLBs act as a “bank to banks,” by providing long- and short-term loans, known as “advances,” to their members
They also provide specialized grants and loans aimed at increasing affordable housing and economic development.
However, this 90-year-old FHLB system – which has ballooned to more than $1.5 trillion – has been playing a growing role as a backstop for all kinds of stupid risk taken by regional banks.
Namely, the ones that recently collapsed.
The FHLB of San Francisco, for example, more than doubled its assets last year as Silicon Valley Bank, First Republic and others embarked on their borrowing binges.
Its chief executive officer, Teresa Bazemore, was awarded $2.4 million — much of it in bonuses — during 2022, her first full year atop the institution. SVB and First Republic now rank as the second- and third-largest bank failures in US history.
What does any of this have to do with the affordable housing crisis in America?
As it turns out, more than we realize; By the end of last year, the $1.5 trillion FHLB system contributed a mere $355 million – a shockingly low .023% (not a typo) – to a program supporting housing affordability.
The rabbit hole of the FHLB goes pretty deep, and I definitely recommend reading the full Bloomberg article to learn more about how this program works.
But here’s the story you haven’t heard about the affordable housing crisis in America…
On the surface, the solution to the U.S. housing crisis may seem obvious – just build more affordable housing. However, this solution isn’t as practical as it may seem.
Here’s why…
The United States is not experiencing a shortage of available housing stock; there’s plenty of inventory around the country.
There are 44.1 million renter households and 46.0 million rental units with complete kitchen and plumbing. For every 100 extremely low-income renter households, there are only 33 affordable and available rental homes; Source: NLIHC
The real problem is the economics of affordable housing in desirable places to live. There’s simply no economic way to “build” affordable housing, when the cost to build and operate new homes exceeds what low-income renters can afford…
Except for manufactured housing!
The idea that manufactured housing could become a large-scale solution to America’s affordable housing crisis is not just a fantasy, it’s an approach Gray first advanced in an essay entitled “Reclaiming ‘Redneck’ Urbanism: What Urban Planners can Learn from Trailer Parks.”
However, a third of the country’s manufactured housing communities were constructed between the 1950s through 1990s, and since 2002, fewer than 400 new manufactured housing communities have been constructed in the US.
This market dynamic of increasing demand, coupled with constrained supply, creates an attractive setup for investors.
