In my 20 years in the real estate business and the real estate finance industry, I saw a few bubbles, both local, and national. And I’ve seen a few busts, both as a market participant and as a market analyst.
I know a housing bubble when I see one, and I’ve spotted a giant one that you’re definitely not looking at right now – but it’s poised to destroy you.
So let me tell you a story.
The demand for Treasuries picked up a bit this month. But that bit wasn’t enough to send yields lower.
Part of the problem is that dealers have been mispositioned and have not been buying as many Treasuries as usual. A similar process occurred in 2008 when the dealers were positioned wrong. Their mispositioning either caused or exacerbated the financial crisis.
Foreigners have also cut back. As they converted dollars from their sales of Treasuries back to euros and other currencies, their central banks recycled those dollars back to the US. Despite that cash being recycled back into the Treasury market, yields still rose. Other investors were rotating out of bonds and into stocks.
Except for the early February crash, declining effective investment demand has yet to be felt in stock prices. As the Fed continues to drain funds from the system and demand is thereby weakened, we will see more downdrafts in stocks.
Watching the Treasury market, the 3% level on the 10 year yield is obviously critical. It may take a while to clear that level, but once it’s broken, the pressure on stocks should grow.