EDIT: Thank you all for generously sharing your time in writing up such thoughtful answers.
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Would love to hear more on your perspective / insight.
This is all intentional, right? My understanding is that the fed is leaning into this particularly hard in order to dislodge the stubborn housing bubble.
For an individual (someone who isn't a current business owner), does this basically mean we should continue stockpiling savings, and avoid moving (rent) / avoid buying house / buying a car?
Any ideas how long this could last / what the bottom looks like?
> My understanding is that the fed is leaning into this particularly hard in order to dislodge the stubborn housing bubble.
They are trying to reduce inflation. The housing bubble certainly played a part, but inflation was hitting nearly everything. A big concern here, is that many smart people think a fair bit of that inflation was due to COVID related supply chain disruptions (which still persist, see China and COVID). So while raising interest rates will help, it may not be the right tool for the job (but it is the only tool that the Fed has, so here we are).
> For an individual (someone who isn't a current business owner), does this basically mean we should continue stockpiling savings, and avoid moving (rent) / avoid buying house / buying a car?
Definitely build up your savings. The other three are more complicated. Rents appear to be finally going down in some marquee markets. So moving might actually save you money. Buying a house now feels like a bad idea, seems like the market is still carrying on from the fumes of the bubble, but interest rates are definitely having an impact. Based on historical examples, the full impacts will probably take a few years to shake out as housing tends to move pretty slowly. And buying a car, well that is complicated. If you need one, buy one. If not, probably best to avoid it.
If you do have savings, might make sense to start looking at CDs, treasuries, and municipal bonds. Interest rates are up and if you have a chunk of cash sitting around those are good ways to put it to use.
> Any ideas how long this could last / what the bottom looks like?
Watching the Fed is the key here. And the Fed is watching inflation. So as long as inflation stubbornly persists the Fed is likely to keep raising rates, and that is going to impact the economy. I read somewhere that the "market" is expecting inflation to normalize in the summer of 2023. But personally that feels optimistic. I think we still need to shake off the COVID induced supply chain disruptions before things get back to normal, and that still feels like another year or so away.
2022 was the worst performing year ever for bonds and among the worst-10 for stocks -- we've never been this deep in the "negative returns across sectors" quadrant as we are right now, and there's no clear indication or catalyst to suggest we're recovering yet either.
Wow. Take the maximum of both axis, which represent the ceiling of what you can earn with a conservative stock or bond portfolio, and it blows the rest out of the water. Really enjoy the way they distilled this down.
With China dropping its zero-covid policy, I think we're realistically on the way out. However there's no avoiding that we need to pay for 2-3 years of lost global productivity.
I mean picture yourself stopping work for 2-3y with zero planning, living on debt and pretending like nothing happened. At some point the bills come due.
I am not sure what to think about China. Dropping the zero-covid policy feels like just the start. They still might go through a couple of waves of covid before things get back to normal. Or things could snap back fairly quick, hard to predict.
Another factor working its way through the system is the "reshoring" of manufacturing. A lot of companies gave up on China and are moving their manufacturing to other countries or closer to home. This probably creates inflationary pressures as the development of the manufacturing facilities create s a fair bit of demand, but also staffing the facility creates more demand for the local workforce. So if this trend continues I could seeing this being a long term inflationary pressure.
I think at least the China situation or lack of manufacturing capacity will resolve itself by the end of the year. Reshoring will change things but I think over the next 2-3y, making it so that overall the big turbulence we live now goes down slowly until the end of the year and then stabilizes at a higher inflation rate than expected (3-4-5% out of my magic hat), but not as wild as now.
2008 lasted nearly 17 months. The hard part is deciding when the recession actually started. The media and government is in denial, so they'd tell you we aren't even in a recession yet. But the rule of thumb is typically two negative quarters of GDP growth, which we hit this summer.
If you run a VC backed business my suggestion is 24-30 months of runway is a good starting point.
As far as individuals go, it's not a bad idea to mirror this advice. Have essentially 2 to 2.5 years of income saved in the event that you get laid off and can't find a job for a long time. Hopefully it never comes to that, but it never hurts to be prepared.
It’s also hard to figure out when the recession ends.
The q1/q2 numbers were more than made up by the q3 gdp growth. The numbers for q4 aren’t out yet but the consensus thinks they’ll be slightly positive making 2022 a positive year. That’s after 2021 which was a barn burner.
The GDP curve is already nothing like 2008 so it’s hard to use it as a guide.
"The media and government is in denial, so they'd tell you we aren't even in a recession yet."
There are costant headlines about layoffs. Also you said that a recession has a defintion, if that hasn't happened how is the media and government in denial?
Like I said in my comment, it did happen. This summer we hit 2 quarters of negative GDP growth. At the time, and even now, the media is suddenly moving the goal posts and trying to redefine what a recession is.
Falling stock prices are really a reflection of real-world problems - while it obviously feels in the US like everything is fine (judging from the many comments saying this here on this thread), everything is not fine, companies looking at their P/L and laying off staff are not fine, and the Fed is deliberately going to cause a recession and cause unemployment to stop inflation, which is a very brutal and indirect tool to do so.
The Jeremy Grantham interview you cite to for him "correctly" calling a bubble in 2021 was posted on May 28, 2021. S&P was at $420.04. S&P closed today at $395.52. The S&P continued to climb from May 28, 2021 until January 2022.
I would not label this "correctly" calling a bubble when he is off by over 6 months and equities remain within 10% of when he gave his interview.
The peak came after he spoke, in late 2021, and it’s not over yet, bear markets often have rallies. The nasdaq in comparison to s&p has larger losses from peak as it was the epicentre of the bubble this time, hence the layoffs there, but every sector is going to suffer.
This is all about inflation, not housing. Housing is just going to get caught in the crossfire.
If you have a low mortgage, hang onto that! Otherwise standard advice applies, try to keep at least 6 months expenses in cash or cash equivalents. Don’t make big purchases.
>"God I wish we could just do a Land Value Tax and be done with it."
Can you say what this is and how it would address the housing situation?
The housing bubble certainly is a slow moving one at this point. It seems like there's still not a lot of inventory and prices are still at historic highs. Prices haven't come down although price growth has slowed. It's really quite bizarre. We're a mobile a society though, eventually people have to move for various reasons. Maybe people are going to hold on their mortgage and rent the house instead of selling? It's hard to see how all this plays out.
--
Would love to hear more on your perspective / insight.
This is all intentional, right? My understanding is that the fed is leaning into this particularly hard in order to dislodge the stubborn housing bubble.
For an individual (someone who isn't a current business owner), does this basically mean we should continue stockpiling savings, and avoid moving (rent) / avoid buying house / buying a car?
Any ideas how long this could last / what the bottom looks like?