For once, this time is actually DIFFERENT. Here’s why… [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
We’re thrilled to share with you another useful investing insight in today’s “The Independent Investor.”
Every Wednesday, we publish articles about investing tips and tricks to help you strategically think about your financial decisions and achieve true wealth in the long run.
In this article, we’ll talk about the current status of the U.S. economic market.
Continue reading to know why today’s financial market is VERY different from what we had in the Great Recession of 2008.
The Independent Investor
John Templeton, the founder of the Templeton Growth Fund, once said:
“The four most dangerous words in the English language are, ‘This time, it’s different.’”
Why did Templeton say this?
It’s because in the world of investing, what’s currently happening in the financial markets isn’t actually that different from what has happened in the past.
For example: In times of crises or geopolitical events, investors tend to think the stock market will have a different reaction; hence, they panic.
However, when they analyze the patterns, they’ll realize that the stock market’s reaction is the same in every disruptive event that has happened:
It will take a temporary dip, then after a few weeks or months, it will recover once again.
That’s why investors shouldn’t worry too much about their portfolios during times of crises. Time and time again, history has shown that the best thing to do in such situations is to stay the course.
… but wait! Allow us to tell you something new today.
This article will be an exemption from that discourse. In fact, we’re here to tell you that for once, this time is ACTUALLY DIFFERENT…
In a coaching comment Robert Spivey delivered to the workforce at Valens Research in March 2023, he said that with banks blowing up and investors panicking, it’s hard to not think back on what happened in the Great Recession of 2008.
After all, the banking industry was at the heart of that financial crisis. That’s why it’s no surprise that at present, many are drawing comparisons between what happened back then and what’s happening now.
According to Spivey, one particular term that keeps getting thrown around to discuss the recent collapses of banking companies Silvergate Capital (SI) and Silicon Valley Bank (SVB) is mortgage-backed securities (MBS).
In case you’re not familiar with the term, MBS is a type of investment that is secured by a mortgage or a collection of mortgages bought by the banks that issued them. This security is usually bought and sold on the secondary market.
Many people credit MBS for the Great Recession. Because of that, they think they should follow the same playbook that got them through 2008 and 2009.
However, Spivey says that’s the exact wrong way to look at the current situation. The recent collapses of SI and SVB are nothing like what happened in the Great Recession… and people shouldn’t expect the same outcome in the financial markets too.
Let’s take a look at the key differences between 2008 and 2023…
In 2008, banks had a non-performing loan problem. They were fast and loose with their lending standards and extended loans to homebuyers and other consumers who couldn’t afford such amounts.
One of the banks’ weapons of choice was the adjustable-rate mortgage (ARM). With ARM, borrowers could lock in a low rate for a set period of time. After that, the mortgage would adjust up to market rates.
Investment banks like Bear Stearns took all those loans and bundled them together. Then, the firms chopped that bucket of loans up into securities, selling them as MBS.
Everything was great. At low introductory rates, borrowers could afford the mortgages for a few years. However, when rates suddenly snapped up, these borrowers couldn’t afford to pay for their homes anymore. This led to waves of home foreclosures.
As these loans stopped performing, banks had to write them off and stop making new loans altogether. The fewer loans the banks made, the less capital they’d need to protect against loans defaulting.
What happened next?
When investors became aware of what was going on, they started to panic… and that’s what brought the entire system close to collapsing in September 2008.
Today, the 2023 MBS issue is a VERY DIFFERENT one.
Spivey says there isn’t an issue with homeowners mailing house keys back to the banks. In fact, people own more of their own homes now than at any time in the past 30 years!
… and there’s another key difference: Most of these homeowners have locked in their mortgages for 30 years at fixed rates of around 3%. This means there’s no looming reset that will make homes unaffordable anytime soon.
Additionally, the risk of defaults on residential MBS is far lower now than it was in 2008.
The Federal Reserve’s interest rate hikes are slowing down lending, and this is exactly what the Fed wants to help cool off the economy and slow inflation. This could also likely cause a recession.
Wait, a RECESSION?!
Okay… breathe in, breathe out. Don’t panic.
According to Spivey, just because that’s what the Fed is currently doing, that doesn’t mean the U.S. is about to live through another near-collapse of the financial system. So, you don’t need to batten down the hatches and stock up on canned goods.
The Fed’s actions today are actually similar to how it managed the economy in the 1940s. As a result, expect a choppy market for the next year or so, until the central bank feels confident it has a handle on inflation.
Keep these insights in mind to avoid panicking and comparing the present to the Great Recession in 2008!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
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