Posted about 7 hours ago

A Sudden Economic Stop?

Welcome to my weekly article on BP!

The Skeptical Investor: A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

The Weekly 3 in News:

- Rocket Companies to buy real estate firm Redfin in $1.75 billion deal. Why? Do you use RedFin or Zillow? (CNBC)
- Market turbulence, Tariffs, DOGE, federal spending, tech valuations, AI / Chip Demand, China…investor Brad Gerstner thinks we are in a choppy bull market with a light at the end of the tunnel ().
- Over the past 32 months, homebuyers have gained leverage in many parts of Texas—especially in areas that were red-hot during the Pandemic Housing Boom and have high levels of homebuilding (Lambert).

Today’s Interest Rate: 6.79%

(☝️.09% from this time last week, 30-yr mortgage)

Today, we’re talkin’ the state of the economy, market cycles, and why owning assets, like real estate, is so important when folks are panicking.

And with trade wars and tariffs heating up, it’s worth a hard look. Canada’s already dumping U.S. Treasury bonds like a hot potato in retaliation. Is a sudden economic stop possible?

Buckle up. Let’s get into it.

A peculiar thing happened last Friday (and really for the last week+): consumers, traders, agents, friends, long lost family members looking for financial advice, and definitely the news media all… turned supremely negative.

The stock market opened down 1.5% Monday and promptly careened off a cliff. Today we opened up big, then slammed back down again.

What gives?

I’ve been following markets, real estate, the economy etc…. for nearly 2 decades and outside of the Great Financial Crisis or maybe COVID I can’t remember the last time I saw this type of negativity whiplash and political finger-pointing punditry.

Case in point, on Thursday last week the A went from forecasting 2.3% GDP growth to - 2.8% in one week?

Really?

Atlanta Fed, what’s your thought process here? My DMs are open.

What Gives?

What occurred to get folks in such a funk?

Tariffs? I don’t buy it. Nothing has actually happened.

Potential government “shutdown?” Nah, that’s salacious headlines. Nobody cares.

Trade war got you down? Hmm…. I have some thoughts.

Was this skittishness already under the surface at the end of last year? Perhaps. But economic indicators have been steamrolling, and today’s inflation reading at 2.8% was better than expected.

Frankly, this smells a little bit political to me - which I uber-hate blaming things on. That’s an easy out. But the Atlanta Fed thinks we are currently experiencing a recession.

Really? That’s hard to wrap your head around.

But let me try and steelman this.

Markets run in cycles and with momentum.

And the thing about both bull and bear markets is, they are self-fulfilling flywheels.

Negativity can rapidly set in, even if it’s not warranted. Remember, 2/3 of GDP is consumer spending. If the consumer starts to get pessimistic, that matters. After all, one household’s spending is another household’s income.

We have been in quite the bull market for quite a while. Too good, in fact, without a correction. The worry has been the opposite of recession, an overheating economy and price inflation, which has been the case for 2+years. Just a few weeks ago this was all the news media was talking about.

So is the economy actually shrinking? Are we in a recession?

Gov Spending’s Role

I think the market, especially the bond market, is reacting to economic signals on disinflation, confusing messaging / uncertainty from the White House on trade and DOGE spending cuts, and lower than projected federal spending. Far less than was projected even just a few weeks ago before the Administration started canceling spending contracts at a rapid pace. IMO, as we start to close the government spending spigot, market participants are having a taper tantrum, (especially in the reactionary stock market). And I have the receipts…keep reading.

Additionally, the foundation may be cracking on a fugazy economy. The time may have come to atone for the $10 trillion in government over-spending during COVID. And as inflation finally comes down to earth, and spending slows, it is revealing a market distorted.

Could this then slow GDP?

Perhaps, yes.

A better question/thought: perhaps we should question whether government spending should even be included in GDP calculations? We already some of gov spending as “transfer payments” from GDP because nothing gets produced (ex: a welfare or social security check). But maybe we should exempt all gov spending from GDP calculations since they are a form of wealth transfer, IMO. To me, it artificially warps growth measurements. Maybe the true US GDP (ie a measurement of what we do and produce) is not slowing? Seems like it to me.

Fun fact, currently the government is “responsible” for ~30% of GDP.

What we need to know today is: where are we in the economic cycle?

How economic cycles work

Want to better understand the economy and its cycles? Famed investor Ray Dalio made a fantastic animated video on this a few years back. It runs through market cycles and even highlights why owning assets, like real estate, is so important.

Watch this, it’s extremely well done.

What did you think? Where do you think we are in the credit cycle?

When the music stops: A sudden economic stop vs recession

What we always do want to be mindful of is a sudden economic stop, leading to a recession. This differs from a typical recession. IMO this is what we need to watch out for as we start messing with foreign trade wars and tariffs. Fun fact, Canada just started selling US treasury bonds as a retaliatory method…

Sudden Economic Stop - A sudden economic stop refers to an abrupt and severe disruption in a country’s access to external financing. Capital flows abruptly slow/stop, credit freezes, banks stop lending, no bueno. It occurs when [often foreign] investors or creditors suddenly withdraw or stop providing funds (again, e.g. loans, investments, or capital inflows) to a country, often due to a loss of confidence in its economy. This phenomenon is most commonly associated with emerging markets or developing economies that rely heavily on foreign capital to finance trade deficits, government spending, or debt repayments. But it can happen to us.

Key Features:
- - Triggered by external factors, like a shift in investor sentiment, geopolitical instability, or a currency crisis.
- - Leads to a sharp decline in capital inflows, forcing the country to quickly adjust its current account balance (e.g., reducing imports or devaluing its currency).
- - Often accompanied by a financial crisis, such as a banking collapse or currency devaluation. Ie the Great Financial Crisis of 2008.

Economic Recession - An economic recession, on the other hand, is a broader and more general term describing a significant decline in economic activity across an economy, lasting for an extended period (typically at least two consecutive quarters of negative GDP growth and longer). It’s not necessarily tied to external financing or capital flows but can result from a variety of internal or external factors.

Key Features:
- - Characterized by falling GDP, rising unemployment, declining consumer spending, and reduced business investment.
- - Can be caused by domestic issues (e.g., a housing bubble bursting) or external shocks (e.g., a global oil price spike).
- - Affects the entire economy, not just its external financial position.
- - Measured by indicators like GDP, industrial production, and employment rates.

Relationship Between the Two

A sudden economic stop can lead to a deep recession if the loss of financing causes a sharp contraction in economic activity (e.g., businesses fail due to lack of credit, or imports collapse, hurting supply chains). Think of a sudden stop as a car running out of gas on a highway because the fuel station suddenly shuts down. The car stops abruptly. A recession is more like the car gradually slowing down due to engine trouble or bad road conditions—it’s a broader, slower breakdown.

Is a sudden stop happening?

I don’t see this, yet. But it could. And we are in the early innings of this trade war fun. Regardless, we want to always remain vigilant and protect our downside.

After all, we are Skeptical Investors.

As Warren Buffett once said:

“You don’t find out who’s been swimming naked until the tide goes out”

Why we care: real estate in any market

No matter the way the winds are blowing, there is always an opportunity when you own assets (again, see the video above). Today, fear is driving a flight to safety and bond market buying, which lowers the cost of capital/interest rates.

Today the 10-yr treasury (which the mortgage rate tracks) is down to 4.31%, and is highly volatile.

The 10-yr could finally be giving us a strong signal about disinflation, market uncertainty and even a slower economy.

My thoughts:

- I think inflation has been successfully smashed, we have arrived at our 2% target. We will find this out in hindsight, once the data comes out.
- GDP could be lower today than the 2.3% we thought it was, but is it negative? I dont think so. Not yet.
- BUT, there is tremendous uncertainty with the trade war. Markets dont like this.

The silver-lining?

Real Estate gets more affordable and investors benefit from lower interest rates.

The good news, it is cheaper today than yesterday, and cheaper yesterday than a month ago, to buy a piece of property. Mortgage rates have been down every week since November and continue to tick lower. Remember, lowering interest rates is the current proclaimed mission of this US Treasury Dept. and they are following through on this plan, albeit with market tumult and "growing pains.”

In his words, Treasury Secretary Scott Bessent is trying actively to lower interest rates, saying: "The other thing that is important is that mortgage rates have come down and the spread between mortgages and Treasuries have come down since November—which I think is indicative of some of the things we're going to do in financial deregulation."

My Skeptical Take:

Investors gain when markets panic, if they are positioned to take advantage.

In my opinion, we will still hit 5.xx% interest rates in 2025......

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DM me for the rest of this article!

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Stay vigilant, folks. The market doesn’t care about your optimism.

Markets cycle. Keep calm. Invest accordingly.

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

Andreas Mueller