Michael Gracie

The market news piece of the day is that the S&P 500 has (YTD) outperformed the once explosive BRICs (Brazil, Russia, India and China). Folks everywhere are saying “See, it’s not so bad” and touting the fact that the U.S. is the “least loser” etc. etc. I don’t think that is the real story here.

As the Washington Post notes, the Olympics may be fantastically well choreographed, but it doesn’t really matter if nobody shows up:

Two weeks after announcing they had sold every one of the record 6.8 million tickets offered for the Games, Olympics officials expressed dismay at the large numbers of empty seats at nearly every event and the lack of pedestrian traffic throughout the park, the 2,800-acre centerpiece of the competition.

The Chinese organizing contingent is “baffled” by this? They’ve got to be kidding - look at their stock market…

Chart compliments of Bloomberg

Just a few months ago, the Chinese were trying to stem the bleeding by promoting more equity market speculation. From the looks of the chart, that didn’t get them very far.

Clue: When equity markets tumble, people lose money. When they lose money, they stay in. And (I guess) order Chinese food.

The open question is why?

The consistent sound bite seems to be “the housing boom that began in 2001…as a result of subprime mortgages”. Even today, Paul Krugman gives cover to Fannie Mae and Freddie Mac while trying to pin the problem on sub-prime post-millenia. It’s hogwash. As the chart below shows, the boom really began in 1995 (click chart for larger view):

I initially graphed homeownership against the S&P 500 for shits and giggles, but it does depict how liquidity rolls. What happened in 1995 to set off the explosion?

The 30-year fixed mortgage rate dropped significantly during the early ’90s, but was accompanied by little corresponding uptick in homeownship. Rates rose just over one percentage point in 1994, but soon corrected themselves.

Yet beginning in 1995 homeownership skyrocketed. Earnings followed, and so did stocks. The 2001 recession, triggered by the internet stock plunge and exacerbated by the the 9/11 terrorist attacks, took a swipe at the S&P. The Fed began hammering short-term rates to save people’s IRA accounts, and the byproduct was a continued run-up in housing on the back of more exotic mortgages combined with increasingly lackadaisical lending standards.

The juggernaut was long since in motion. But why?

UPDATE: I dug this up, which seems to claim affirmative action was partially to blame. While the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 did provide for certain low-income mandates and give additional oversight powers over the GSEs to HUD, it seems the actual amount of loans purchased by the GSEs nary broke 1% of their total in any given year since. So while the GSEs touch almost half the overall mortgage market, it’s difficult to see how affirmative action could have gotten such a big ball rolling.

Sticking to hard data, this morning’s Fed Funds rate cut of 75 basis points was the deepest on record. Who’s record? The Feds own record, dating back to 1971.

Note that there are several occasions where the Fed raised rates (either the discount or fed funds) by 3/4 of one percent: the summer of ‘73, September of 1980, and November of ‘94. But they never lowered it so significantly in one kick.

The Dow recovered roughly 2/3rds of its opening losses, ending the day down 128.11. I can’t remember such a harsh reaction on the part of equities to a rate CUT. It was hardly graceful.