A market correction is coming!

In an environment where we have been spoiled by 20+% returns, and the shoe shine boy is giving investing advice. Many people believe that the economy will continue to soar. However, inflation rates, selloffs by the rich and hedge funds en masse, and past experience seem to say otherwise. I would like to summarize a market crash hypothesis here and perhaps shed some light on recent events.

As we see people like Elon Musk, Michael Burry (who predicted the 2008 recession), and Jeff Bezos sell off large portions of their assets we are faced with the question of why? With real estate and stock prices at all time highs I think it is the one answer that nobody wants to hear, and that is we are about to enter a period of lesser financial prosperity. I am not here to predict the next crash as nobody can predict the future, I am here to provide the facts as I see them so that you can make a more educated decision for your financial future.

First, we must ask ourselves. Why are housing prices so inflated? Many people are saying that it is a very simple solution. That the value of portions of the housing market are simply rising. However, what we are seeing is not some natural form of inflation but rather a parabolic rise of the prices. This is unnatural. I am going to provide a different view of the housing market through evaluation of a more macroeconomic market approach. I am of the belief that wall street is accumulating positions in the housing market for a larger scale market manipulation. But in order to understand this, we will need to first understand some other basic financial concepts.

What makes the stock market go up and down? While there are millions of guides out there detailing the newest and hottest technical analysis strategy that will make you millions it is more founded in reality that the answer is with the people who run the economy, the federal reserve. When the federal reserve raises interest rates it generally has a large effect on the market due to the increased difficulty for companies to borrow money.

If interest rates go up the amount of return required on money in order to remain profitable also increases. It is easiest to imagine that if a company can borrow an amount of money at 2% then it can hire an employee that makes 3 % and make a 1% return on the borrowed capital. However, if the interest rate is raised to 3% then that employee will no longer be profitable and likely be let go. This shows how interest rates not only affect a companies’ ability to make profit with higher interest rates but also how it affects the job market. And remember for later, if a company makes a higher profit then their stock goes up, generally speaking.

Now, what makes the federal reserve heighten interest rates? Well, there are many things that can make this occur the most common of which is to curb large inflation numbers. Over the past year, the government has been relentlessly printing money in order to keep the US economy afloat amid the pandemic. In doing so, they have caused significant inflation and price rices throughout the economy, including the stock market. We would expect this to result in a significant inflation metric right? Well, the federal reserve reported an inflation rate of approximately 6.8% which sounds low considering the money printing, right? With house prices rising more than 100% in some areas we would expect inflation to have a significantly larger value, now why would it be that this is not the case?

To discover the answer to this question we will need information on CPI or the Consumer Price Index which is used as a measure of inflation.

Theᅠ**Consumer Price Index (CPI)**ᅠis a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.

When reading this, you will notice that the Consumer Price Index does not take into account a very important economic indicator, Real Estate.

Based on this information, I would like to hypothesize something. Is it possible that Wall Street is purposely parking excess money in the Real Estate Market and thus inflating the value in order to keep inflation numbers low so that stocks will continue to rise due to low interest rates? And our politicians are allowing this to happen because they have skin in the game? If inflation rates, which do not include housing prices, continue to be reported lower than what is seen in reality interest rates will also remain low which means prosperous businesses and high stock returns as we’ve seen in 2021. Now, at the end of 2021 we’ve seen many people in the 1% liquidating portions of their large portfolio and now with the federal reserve showing interest in increasing interest rates after they’ve caught significant flak over their reports perhaps the rich are just seeing the writing on the wall, where real estate prices will become less artificially inflated as wall street begins to liquidate their large positions due to rising interest rates? I leave the answer up to the future, but hopefully given this information you can make a more informed decision for yourself my dear reader.

Leave a Reply

Your email address will not be published. Required fields are marked *