We got a lot of comments on my recent article on the collapse of Silicon Valley Bank. Most of which were positive. But I think it’s worth responding to the negative comments as it is really important to understand the points I was trying to make.

One of the big complaints is that I didn’t blame Silicon Valley Bank for the collapse. And, frankly, in most bank collapses, the bank IS the problem. Banks make bad loans and go under – and sometimes those loans were made for illegal and corrupt reasons. This wasn’t the issue with Silicon Valley Bank. Their loans were good.

Scary? Yes. A big problem for banks and stocks? No, in part because the Fed can easily bail out Silicon Valley Bank, the bank that just went under. How? The Fed can offer to buy Silicon Valley Bank’s Treasury bonds for par value. No discount. That way the depositors can get all their cash back whether they are insured or not insured by the FDIC.

In the first part of our look ahead at 2023 which we published on January 29, we focused entirely on interest rates. That’s for good reason: Interest rates have been, and will continue to be, the dominant factor affecting the stock market. But it’s certainly not the only factor. The threat of a recession and a possible debt ceiling crisis in July will also have an effect on the stock market.

The Fed will continue to raise overnight interest rates at its February 1 meeting and likely at its March 22 meeting, as well. However, it will likely only be a rate increase of 0.25% as opposed to the 0.5% rate hike in December. That will bring the overnight interest rate to 4.5 to 4.75%

Raising the overnight interest rate is never good for the stock and bond markets because it can push up long term interest rates, which are very important to the markets. Strangely though, in the last two months, just the opposite has happened, which has been a big source of support for both markets.

In last week’s Alert, we discussed current threats to the real estate market due to the Federal Reserve raising interest rates and put today’s higher mortgage rates in the broader context of how we got here (Stage One) and where we are today (Stage Two).

Now it’s time to delve into what is likely ahead for the evolving real estate market, both in the near term (Stage Three) and the longer-term future (Stage Four) – and more importantly, what to do about it.

What a difference a few months make. In January, the average 30-year fixed-rate mortgage was just above 3%. Now – after multiple interest rate hikes by the Federal Reserve – mortgage rates have not just moved up, they’ve more than doubled to 7.3%

In practical terms that means if you get a 30-year-fixed mortgage to buy a $400,000 home, your monthly payment will now be roughly $1,000 higher than if you bought the same home last January. Ouch!

Despite my sounding a bit bearish in my past articles, I am not -- AFTER the Fed gives up on its nonsensical and guaranteed to fail attempt to raise interest rates.

The core inflation rate was expected to decline when announced on Thursday October 13. Core inflation is more important than the regular inflation rate because it reflects inflation without energy and food. The reason it’s important is that it indicates to some extent how much inflation has become embedded in the broader economy.

As we have mentioned many times before, you can’t raise interest rates in a bubble economy. All of our asset prices, stocks, real estate and bonds, have been re-priced to a much higher level due to low interest rates. Raise those rates and the asset values have to fall, which, in a bubble economy, can eventually precipitate a price collapse.

The most powerful driver of the stock market this year is not the economy, it’s not earnings, it isn’t even Fed announcements of new interest rate hikes. No, the driver of this year’s stock market is the yield on the 10-year Treasury bond.

As the S&P 500 has been struggling with its first bear market since 2008, it’s been interesting to watch various pundits and money managers talk about when the market will bounce.

Please read the article in MarketWatch at the link at the end of this article. We completely agree with their assessment that US government I-bonds are a good place to keep some cash. The interest rate on I-bonds moves with inflation as measured by the Consumer Price Index. So, they are currently paying 9.6%.

The Fed started playing with fire on Thursday, April 21, when Fed Chairman Jerome Powell described his plans to raise interest rates a half percent at the May 4 Fed meeting. Afterward, the market slowly but surely melted down for the rest of the week. The Dow closed almost 1600 points lower than where it was before Mr. Powell spoke.

It’s hard to imagine a simpler or more elegant solution. Plus, it works!

Theoretically, the Federal Reserve can control inflation. To do so, it simply decreases the money supply by selling its enormous stockpile of bonds rather than buying them. That’s not just theory, that’s how it actually works.

And no one dares to mention it.

A notable exception in this global vow of silence is Mark Hulbert, one of the best writers at MarketWatch (article link below), who recently pointed out a very uncomfortable truth:

It’s hard to beat the S&P.

Despite the Fed's wishful thinking that it's only temporary, rising inflation is the biggest threat to the stock and bond markets -- not only according to our many books predicting the coming big bubble pop, but also according to billionaire hedge fund manager Paul Tudor Jones, who correctly called the 1987 stock market crash.

The Wall Street Journal wrote an interesting article on China's huge property conglomerate, Evergrande, which is in deep trouble (the link to the article is at the end of this post). Evergrande’s problems reflect a much broader future problem for the Chinese economy.

Wouldn’t it be great if the talking heads on TV explained what’s really driving the markets?

For example, two weeks ago the market had a big drop due to the release of a transcript of a recent federal Reserve meeting where the members talked about reducing money printing later this year. In addition, there was growing fears of the Delta Covid variant starting to hurt the world’s economy, and evidence that the US economy was slowing faster than expected after the last round of stimulus.