Chapter Three

Five Graphs Showing How Fed Cycles Can Create Six Times The Real Estate Profits

By Daniel R. Amerman, CFA

Real estate prices have behaved in a way over the last 20 or so years that has been almost completely outside of historic averages. Single family residences used to be a remarkably stable market that was insulated from the sharp gyrations of the stock and bond markets, never moving more than about 10% above or below long term inflation-adjusted average home prices, and always returning to average if prices moved too far away.

In the modern era, the long-term historic patterns and metrics that used to govern residential real estate pricing have completely shattered and have been replaced by something new. Real estate prices have broken out of their prior historical range, with profits sometimes reaching 6X as high relative to their former inflation-adjusted range limitations. However, housing losses can also now move at lightning speed, and are a multiple of the old norms.

As explored in the five graphs below, the fundamentals governing real estate valuation have changed, and understanding how prices work in the modern era requires taking new factors into account. National average home prices no longer exist in isolation, but are now much more tightly governed by such factors as changes in Federal Reserve monetary policy and cyclical changes in yield curve spreads.

When we understand why the recent past has been so different from long term averages, then we can also understand why some of the largest real estate losses and profits in history may still be ahead of us - but what will govern those losses and profits are factors that few real estate investors are taking into account today.

This analysis is the third chapter in a free book, an overview of the rest of the book is linked here.

Quick Recap Of Supporting Analyses

While this analysis can be read and understood on its own, it is supported by four other analyses that go into much more detail on some of issues and opportunities that are discussed.

#1) The graph above was developed in the analysis "Is Traditional Financial Planning Blind To The New Sources Of Profits?" (linked here), which compared housing prices before and after the collapse of the tech stock bubble and the resulting recession. As can be readily seen above in the golden area of the graph, real estate prices and the volatility of real estate price changes have radically changed when compared to the prior decades, in a manner that is inconsistent with some of the foundations of traditional financial planning.

#2) The analysis "Will The Federal Reserve Create Two Major Investment Arbitrage Cycles?" (linked here) examined how the more extreme market interventions by the Fed in the last almost 20 years are creating potentially major arbitrage opportunities, where the Fed's pursuit of unconventional monetary policy is creating cycles of large investment price swings in multiple asset categories that are not part of a "random walk", but are rather part of a strategy that is operating within constraints and which can be at least partially understood in advance by investors.

#3) The analysis "A Remarkably Accurate Warning Indicator For Economic & Market Peril" (linked here) developed the graph above. That analysis explored what yield curve inversions are, how they are cyclically created by Federal Reserve policies, the perfect track record in recent decades of yield curve inversions being followed by economic recessions, and some fundamental reasons why that predictive power has been based on rational causality rather than just mere correlation.

#4) The analysis "A Model That Better Fits The Data" (linked here), explores how both conventional investment theory and "gloom & doom" investing have experienced multiple model failures over the last almost 20 years, being unable to explain many or most of the data points of what investors have experienced in practice. It explores how a model which explicitly incorporates cycles of crisis and central banking interventions to contain crisis has been a much better fit with the data points of actual investment performance in the 21st century to date.

Graph 1: Inflation-Adjusted Home Prices

The first of our five graphs is shown above. As developed in the real estate prices analysis (#1 above), the left part of the graphic shows inflation adjusted single family residence home prices for the United States on an average annual basis between 1975 and 2000. For that entire time period, annual house prices moved up and down around an average price of $155,668 (in 2017 dollars), with above average housing prices being shown in green, and below average housing prices being shown in blue.

The band was fairly tight, no more than approximately +/- 10% relative to the mean, and whenever the average home price reached the outer boundaries of that range - the classic strategy of investing for a "reversion to the mean" would have been successful, with the trend reversing, and housing prices reliably returning back to average (and beyond) in the next phase of the cycle.

A core underlying assumption to most investing is that through studying the past we can at least approximately identify likely risks and returns for different asset categories such as stocks and real estate. Based on this study of the past, we can in theory then form reasonable expectations for future performance over a long enough holding period. And clearly, studying the patterns of the latter 20th century, single family houses were a reasonably stable investment that maintained value quite well in inflation-adjusted terms, albeit without any sizzling returns or devastating losses.

Then we hit the pattern identified with the red number "1" - and the patterns of the past completely shattered. The golden area identifies price outliers, inflation adjusted prices that are entirely outside the 1975-2000 period - and what is outside the historical range becomes the dominant color.

Beginning in 2001, home prices moved entirely outside the previous range. This process accelerated in 2002, and by 2006, average annual home prices peaked at $250,939 (in 2017 dollars). Even in inflation-adjusted terms, this was a 61% increase from the 1975-2000 average, meaning it was about 6X greater than the about +/- 10% range that history told us should constrain prices.

Graph 2: Federal Funds Interest Rates

The second graph above uses the same color scheme to show changes in the Federal Funds rate over the same years. The average Fed Funds rate between 1975 and 2000 was 7.42%, and rates higher than that are shown in green, while lower rates are shown in blue. As can be readily seen - interest rates were far less stable than housing prices.

As the tech bubble popped and the Federal Reserve tried to escape the recession of 2001, they did something that has had a powerful influence on the real estate and other investment markets ever since - as shown in the area by the red numeral "1", they swung a "hammer" at interest rates, and smashed the Fed Funds rate down from 6.40% in December of 2000 to 0.98% in December of 2003.

That was the lowest Fed Funds rate since 1954, and it was a complete outlier for the modern markets. When real estate prices were moving into outlier territory for prices on the upside, this was being enabled by an outlier lowering of interest rates (shown in the golden area) to the downside - which is entirely logical, as lower interest rates means lower payments to buy things such as houses.

In the "Arbitrage Cycles" analysis (#2 above), we explored something quite counterintuitive for most people, which is how a prominent economist could in good faith look past the "technicalities" of triggering an expected $9+ trillion in future stock and commercial real estate losses, as well as a likely future recession, in order to get to what really matters - the ability to sharply lower interest rates when needed to escape a recession that he believes to be on the way anyway.

What is shown by the red number 1 above is what it looked like in practice. There is nothing subtle about it, and in this case the "hammer blow" was a 5.42% reduction in interest rates, which is about 80% more powerful than Martin Feldstein's prescription for raising the Fed Funds rate to at least 4% in the coming years, in order to be able to rapidly lower rates by at least 3% when needed to reboot economic growth.

Graph 3: Yield Curve Spreads & Inversions

This core cycle - which has taken on an amplified importance in the last 20 or so years relative to the previous decades - can also be seen in the third graph above, from the #3 analysis of yield curve inversions. The sequence was:

a) The Fed raised interest rates by 1.75% between June of 1999 and June of 2000 (this is equal to total current increases above the prior 0% floor through June of 2018);

b) This and other factors led to short term interest rates (the 2 year Treasury in this case) climbing above long term interest rates for the period between February and December of 2000, creating the golden area of the "inversion" above; and

c) A recession arrived by early 2001, as shown in the red area, and as predicted by what has been the completely accurate warning indicator record of the three inversions in recent decades.

In this case however, we are focused on the blue area as identified by the red numeral "1". Seeing the warning signals flashing in the economy, in December of 2000 the Fed began smashing down on short term interest rates - so hard they would eventually create a modern era "outlier".

In December of 2000, the monthly average 2 year Treasury yield was 5.60%, the monthly average 10 year Treasury yield was 5.24%, and subtracting the 2 year yield from the 10 year yield produced a negative 0.36% yield curve differential, which meant the yield curve was inverted, and the area on the graph was golden.

By November of 2001 as the recession was ending, the Federal Reserve rapidly forcing Fed Funds rates down had reduced the 2 year Treasury yield to 2.78%, while the longer term 10 year Treasury yield had only fallen to 4.65%. Subtracting the 2 year yield from the 10 year yield produce a positive 1.87% yield curve differential, which meant the yield curve was normal (positive), and a rapidly increasing blue area had been produced on the graph by the rapidly growing positive yield curve spread.

As shown in the Fed Funds outlier graph, the golden area of Fed Funds rates bottomed out in 2003, and looking at the Yield Curve graph, that was the same year the blue positive yield curve spiked in August of 2003 at 2.58%, which was its peak for that particular cycle. So the lowest Federal Funds rates were correlated with the highest yield curve spread between short term and long term interest rates.

In  general terms, the part of the cycle where the Fed increases interest rates can (but doesn't always) create the golden yield curve inversions. In the modern era, when golden yield inversions do occur, they have invariably been cyclically followed by the red zone of recessions. The aggressive Federal Reserve interventions to recover from recession during and on the back side of recessions then create the next stage of the cycle where short term interest rates are unusually low relative to long term interest rates, as shown by the height of the tall blue spikes, and with the red numeral "1" above highlighting the spreads in the aftermath of the 2001 recession.

Graph 4: Mortgage Rates

What is shown in the fourth graph above is the direct impact on mortgage rates of the extraordinarily powerful Federal Reserve interventions that were used to contain the damage from the tech stock bubble collapsing as well as the recession. As shown in the area by the red numeral "1", the Federal Reserve hammering down Fed Funds rates created another "outlier" in mortgage rates beginning in 2002.

More specifically, mortgage rates essentially equaled their previous historic low in 2001, even as inflation-adjusted home prices first moved outside their historical range. Mortgage rates then moved entirely outside the historical range in 2002, then again in 2003, and then stayed almost flat through 2005. Each one of those years, housing prices were quite quickly moving outside their prior historical range - with those prices being supported by the lowest mortgage payments in the modern era, relative to the price being paid.

Indeed, mortgage rates have been continuously in the outlier zone since that time, entirely outside the range that was experienced between 1975 and 2000, even as home prices have almost continuously stayed in their own outlier zone to the upside - and that is no coincidence.

The movement in rates is not as initially dramatic as with Fed Funds rates - but that is because 30 year mortgages generally price at a spread above the 10 year Treasury rate, meaning they are long term.

When the "blue spikes" of rapidly increasing positive yield spreads appear on the Yield Curve graph, they absorb much of the strength of the Federal Reserve hammer blows of the fast reduction of short term interest rates, and these decreases are therefore not fully passed through to the longer term mortgage interest rates, which means they are not fully passed through to affordability for home purchasers or income property investors.

Visually, if we look at the red numeral "1" on the Fed Funds graph, we see a plunge in interest rates as a result of Federal Reserve policies that greatly exceeds the reduction in interest rates that are near the red numeral "1" in the Mortgage Rate graph. The largest source of the difference is the explosion upwards of the blue positive yield curve spread that can be seen by the red numeral "1" in the Yield Curve graph.

Both interest rates go deep into the golden zone of historical outliers - as a result of the exogenous factor of Federal Reserve interventions and with critical implications for real estate prices then, now and in the future. But the patterns are quite different, and the logical reason for the difference can be found in the cyclical changes in the yield curve that are also the result of the exogenous factor of Federal Reserve interventions.

Numerically, the Fed Funds rate fell from 6.24% in 2000 to 1.13% in 2003, which was a reduction of 5.11%. Thirty year fixed rate mortgage rates fell from 8.05% in 2000 to 5.83% in 2003, which was a much smaller reduction of 2.22%. Most of the difference can be explained by the yield curve spread moving from an inverted -0.23% in 2000, to a highly positive 2.36% in 2003.

(The above are annual averages, and will differ from comparisons of monthly averages. It should be noted that the spread that the market demands for fixed mortgage rates above 10 year Treasuries is variable, as is the yield curve spread between the overnight Fed Funds rate and 2 year Treasuries, and these together account for the rest of the difference between Fed Funds and mortgage rates.)

When it comes to real estate prices, however, it is arguably the flip side of yield curve changes - the narrowing and eventual inversion of the yield curve - that is of the greatest importance to investors and homeowners.

When we look at the Fed Funds graph after 2003, there is a movement upwards in 2004, and then a very sharp increase in the next two years, as the Federal Reserve went through a cycle of interest rate increases, and took interest rates well out of the historical outlier range.

The motivations driving the interest rates increases were not a "random walk", they had nothing directly to do with real estate, and for reasons that also have nothing whatsoever to do with real estate, increasing interest rate cycles produce decreasing yield curve spreads, in a way that is also not a "random walk".

So the blue area of yield curve spreads collapsed between 2003 and 2005 on the Yield Curve graph, and turned golden (negative) by 2006.

These exogenous factors created a rational and potentially cyclical trap for real estate investors at the height of the bubble as an incidental byproduct of Federal Reserve actions - and they may be doing so again, right now.

When the Fed forced interest rates up, rapidly narrowing and then inverting the yield curve, we all entered the most dangerous part of the entire cycle, with our modern era perfect record of warning of a recession soon to follow. That can be risky, when it comes to owning real estate at bubble prices.

Yet, the rapid narrowing of the yield curve means that real estate investors were being sheltered from the worst of the increasing interest rates. The fast moving spike upwards in Fed Funds rates was being offset by the plunge downward in yield curve spreads. So, while Fed Funds exited the outlier range, mortgage rates continuously stayed in the outlier range - the lowest rates in the modern era, continuing to support what were by far the highest housing prices in the modern era.

The year 2006 is fascinating when it comes to comparing real estate prices with yield curve changes. The very base of the steep plunge downwards in yield curve spreads - the year of the inversion - exactly corresponded to the very peak of the steep spike upwards in real estate prices.

So, the very peak distortion of yield curve spreads in the cycle, created the least expensive mortgage interest rates in the cycle when compared to short term interest rates, which supported the very peak asset prices in the cycle. But at the very same time, the fundamental factors that created the yield curve inversion and the peak support for real estate prices relative to other assets, carried within themselves the "poisonous seed" that would lead to near term economic recession and financial crisis in the next stage of the cycle, which would lead to the quick annihilation of those peak housing prices.

As the Fed continues with its increasing interest rate cycle for its own reasons (analysis #2 above), and we potentially near a new yield curve inversion (analysis #3 above), even while real estate prices continue to soar ever higher into the outlier range (analysis #1 above), then it is well worth considering whether a new trap is indeed being set, and whether there is a new poisonous seed to be found in the current relationship between yield curve spreads, mortgage rates and real estate prices.

Graph 5: Inflation-Adjusted Mortgage Payments

When we combine mortgage interest rates with inflation-adjusted housing prices, then we get the inflation-adjusted average mortgage payments in the fifth graph above, which uses the same blue / green / gold color scheme as most of the preceding graphs.

The great majority of home buyers do not pay cash, but use mortgages to cover most of the cost of their purchase. It is the price of the house and the mortgage rate in combination that determine the mortgage payment, how much cash has to be paid out each month, and whether that is affordable relative to the cash coming in each month.

When we look at the red numeral "1" during the time that the damage from the tech stock bubble collapse and the resulting recession were being contained - we do not seen an outlier golden area, but there is nonetheless a great deal of information value there. In the 2001 to 2004 time period when we look at the Home Prices graph we see the largest housing price gains on record at that time, with inflation adjusted prices growing to 45% above the long-term 1975-2000 mean - but for the average person, they never saw the financial disadvantage of the higher prices.

The golden outlier of mortgage rates on the Mortgage Rates graph that were entirely outside the historical range was so financially powerful that they more than offset the towering golden spike of outlier housing prices in the Home Prices graph. As shown in the blue area of the inflation-adjusted Mortgage Payments graph above, payments remained below average the entire time that home prices were surging 4.5X above their previous upper limit.

Yes, there were numerous bad decisions and policies that helped create the housing bubble of the 2001 to 2006 era, and its subsequent catastrophic failure. I have written about some of them extensively in the past, and as a former investment banker who used to structure the early generation mortgage derivative securities in the form of CMO/REMICs in the 1980s, and who literally "wrote the book" for McGraw-Hill in the form of a reference book on mortgage derivatives in the mid 1990s, I was frequently and loudly warning readers of the dangers before 2008 and right through the crisis.

Those factors are beyond the scope of this particular analysis - but for most part, they could not have happened in isolation. When we look at things like subprime lending with zero down, "liar's loans", flipping houses as the new investment mania, and the explosive growth of subprime and other mortgage derivatives even as underwriting and rating standards were rapidly deteriorating (in practice) - like bacteria in a Petri dish, they all needed a fertile environment in which to grow.

The most fertile environment for financial excesses and mistakes is to be inside of an asset bubble while it is rapidly inflating. It is almost hard to do wrong in that very forgiving environment - so long as one is betting on the upside. Prices will continue to rapidly rise, most mistakes in beliefs or execution will be covered over by the overall rising market, and everyone can feel like a financial genius, even as ever more money and ever more investors are drawn in from the sidelines.

Fundamentally, what created that fertile "Petri dish", and what enabled the greatest real estate price gains and profits that we had experienced in the modern era - was an outside intervention, what was referred to in the previous analysis as "deus ex machina". An extraordinarily powerful outside agency - the Federal Reserve - for its own macroeconomic and monetary reasons and as part of a quite deliberate strategy that had nothing to do with the random walk of conventional investment theory or the real estate market specifically - forcibly intervened and smashed short term interest rates down to almost 50 year lows, creating the wide golden outlier area seen in the Fed Funds graph.

Even after adjusting for the extraordinarily fast expansion of yield curve spreads at that stage in the cycle (as seen in the Yield Curve graph), another form of golden outlier was formed, one which persists to this day, which is the lowest mortgage rates in the modern era, as seen in the Mortgage Rates graph.

What the mortgage rates historic outlier enabled is what could be called a variant of "free money". The previous constraint of rising mortgage payments cutting off the increases in home prices was gone. Instead, as home prices equaled their historic highs above the mean, then reached 2X that historic boundary, then 3X the historic boundary, and then 4X the previous outer boundary and beyond - it didn't matter. No matter how high the prices climbed, the inflation-adjusted mortgage payments were always in the blue area of historically below average, as shown in the Mortgage Payment graph.

For economic reasons and as part of a cycle, the Federal Reserve began rapidly increasing interest rates in the summer of 2004, and these increases continued through 2005 and into 2006. As this was happening, it is worth taking another look at the Yield Curve graph and the sheer steepness of the plunge in yield curve spreads in 2004 and 2005. This cyclical lowering of the spread between long term interest rates and short term interest rates was so powerful that it kept mortgage rates almost flat and at a near historic low through 2004 and 2005 (on an annual average basis), right through the midst of what would be a 3%+ increase in Fed Funds rates by the end of 2005.

However, by 2005 average inflation-adjusted home prices had reached $244,890 (in 2017 dollars), which was 57% above the 1975-2000 mean. In other words, prices reached a place where they were about 5.7X higher than the previous cyclical upper boundary, and this price outlier was so high that inflation-adjusted mortgage payments finally exceeded average, as can be seen in the Mortgage Payments graph. The average mortgage payment of $1,448 was only about 5% greater than the 1975-2000 average payment of $1,386, which was still a bargain for supporting prices that were 57% above average, but the "free money" era was over.

The year 2006 was the peak for real estate prices, but the average price of $250,939 represented only a minor increase over 2005, most of the gains had already occurred. However, even with the yield curve cyclically inverting in 2006 as a result of 10 year Treasury yields becoming lower than 2 year Treasury yields, changes in yield curve spreads were no longer sufficient to overcome what would then be a full 4.25% cyclical increase in Fed Funds rates (from 1% to 5.25%), and average annual mortgage rates would climb to 6.41% that year. The increases in prices and mortgage rates would together produce the moderate spike seen in the Mortgage Payment graph, with a payment that was 13% above average.

So in addition to the "poisonous seed" identified in the previous section, where the yield curve inversion that has been such an accurate warning indicator of coming recessions was occurring simultaneously with peak asset prices, we have the same set of factors combining to produce another important change in state of a different kind.

The Fed Funds increasing interest rate cycle finally overpowered the plunging yield curve spread cycle, and even in time of inversion, was sufficient to move mortgage payments materially above historical averages, and thereby replace the "free money" of below average mortgage payments that had enabled the historic spike in housing prices, with increasing affordability issues.

This decrease in affordability could not have come at a worse time for homeowners and real estate investors - but this timing was not the result of "Murphy's Law" or some unrelated coincidence as part of the "random walk" of conventional investment theory. Instead, it was baked right in and created by the same cyclical series of exogenous interventions by the Federal Reserve, the same deliberate and understandable economic and monetary strategy, that produced the greatest real estate price increases of our lifetimes.

Real estate prices would begin their fall in 2007, and the financial crisis of 2008 would arrive in two years.

A Model That Better Fits The Data

This has been one of my most ambitious analyses to date, and it is my hope that the reader will better understand what has driven U.S. real estate prices in the 21st century, and why it is quite different from what we saw in the 1975-2000 period.

Real estate prices were a complete historic outlier in the 2001 to 2006 period, they worked in an entirely different way than they had previously. By themselves - the prices just broke the rules and made no sense at all.

However, a logical and self-consistent explanation appears when we combine 1) the Home Price graph with its outliers; 2) the Fed Funds rate graph with its cycles and outliers; 3) the Yield Curve graph with its cycles; 4) the Mortgage Rates graph with its outliers; and 5) the Mortgage Payments graph.

When we look at the extraordinary intervention by the Federal Reserve in smashing short term interest rates down to near 50 year lows, combine that with the related yield curve spread cycle, look at impact on mortgage rates, and then what happens to mortgage payments - the surge in housing prices makes sense, the peak in housing prices makes sense, and the setting of the stage for the next part of the cycle makes sense as well.

The reason for studying these relationships is not just history, but the current second golden spike above, identified with the red numeral "3". The world has not returned to the blue and green normality of the 1975-2000 period, but rather far from it. Instead, all five of the factors covered in the five graphs are in motion again, as the Fed continues to raise interest rates even while the yield curve nears another potential inversion.

Understanding the relationships between cyclical central banking monetary policy changes, cyclical yield curve changes, and how they impact mortgage rates and inflation-adjusted mortgage payments is not how most people approach evaluating real estate prices - but perhaps in this day and age of unprecedented "deus ex machina" Federal Reserve interventions, they need to be a core part of the process. Whether your interest is that of a homeowner, income property owner or REIT investor, I hope that you have found fresh perspectives and useful information in this analysis.

Seeing Opportunities In Unexpected Places

My other main goal was to examine in great detail a real world example of something that is counter-intuitive to most people: how the future containment of crisis can create some of the greatest wealth creation opportunities of our lifetimes.

Yes, I know - that sounds completely upside down. Crisis is a bad thing. The "containment of crisis" (whatever that is) sounds very bleak and pessimistic as well. Believing that the future could include cycles of some of the highest investment prices in history seems like an act of almost pure optimism, and common sense would seem to say that it should be the direct opposite of what those cynics and pessimists who talk about future recessions and crises would believe in.

But, yet... this entire analysis was about the containment of crisis. And how it ended up producing an almost miraculous (albeit temporary) increase in real estate wealth for a nation.

What started the explosive growth in real estate prices was a market crisis - the collapse of the tech stock bubble, with the associated catastrophic investment losses for millions of investors. That was a pretty awful event.

The massive market losses precipitated a recession with surging unemployment and a shrinking economy. Again, this is some very bleak stuff, and it could have lasted for years if something hadn't been done about it. So, those were two downright terrible events in combination, particularly for those who first lost their life savings - and then lost their jobs.

In that terribly bad set of circumstances, the Fed used its ultimate weapon, and to a degree that not been seen in many decades. In the effort to escape the recession that had been precipitated by the asset bubble collapse, the Federal Reserve swiftly knocked interest rates down to almost fifty year lows.

However, the world had changed greatly in fifty years, and this time the hammer blow landed in the modern era, a time when pervasive disintermediation and financialization had created new and powerful links between the housing, mortgage and overall investment markets that simply had not existed in the 1950s and before. 

The last time the Federal Reserve had knocked the Fed Funds rates down to 1%, the mortgages used to buy homes were primarily financed by the local savings & loans. The permanent funding for those mortgages came primarily from the local communities themselves in the form of the money that residents had deposited in their savings accounts, and the interest rates paid on those savings accounts was capped by Regulation Q as a matter of law (and pervasive financial repression). It was an insular world, where the money came from the local community, it stayed in the local community, and the local mortgage and housing markets were largely shielded from the fees and the external volatility of New York, Wall Street and the capital markets.

So when the Fed smashed rates down to near fifty year lows in 2001 to 2003, it wasn't a repeat of a very long fifty year cycle, but rather something entirely new and different, something the world had literally never seen before. This time the enormous, market distorting effects of the Fed's exogenous intervention hit a world of electronically linked instant global financing, where a bewildering array of uncontrolled multi-trillion dollar financial experiments were being run simultaneously with regard to derivative securities, underwriting standards, statistical correlations, insurance viability, interest rate plays and volatility plays.

When that happened, all five of the graphs examined herein went spinning into motion - and they haven't stopped to this day. With the exception of the Yield Curve graph, the right side looks vastly different from the left side on each of the other graphs.

We are in a new era for real estate prices and how they are determined - the old relationships are long gone.

And at the heart of this new era is how it started - a double calamity setting the five graphs in motion, and producing record real estate profits that were first 2X outside the boundaries of the historical constraints, and then 3X. 4X, 5X and 6X. With each of those fantastic new records being the logical byproducts of the bleak sounding "containment of crisis".

Integration With The Rest Of The Series

1) As further developed in the analysis "A Model That Better Fits The Data" (relinked here), what has been developed herein is a direct contradiction of Modern Portfolio Theory and the investment schools of thought that are based upon it, including most pension fund investments and traditional financial planning. The possibility of powerful exogenous actors such as the Federal Reserve intervening to transform markets is effectively excluded by definition, as is the possibility of a deliberate outside strategy creating a "state change" in how assets perform that completely invalidates the historical record.

2) As also developed in that analysis, what was examined herein is entirely outside the traditional alternative to mainstream investment analysis, which is "doom & gloom" investing. Really bad things are supposed to supposed to lead to currency collapse and asset price collapses - not record new prices for real estate, stocks and bonds. The mechanisms by which asset bubble collapses create not financial Armageddon but new asset bubbles is quite foreign to the traditional way in which many such investors view the world.

3) As developed in analysis "Will The Federal Reserve Create Two Major Investment Arbitrage Cycles?" (relinked here), and in direct contradiction to mainstream investment theory, real estate prices have not been determined by a "random walk". Instead a deliberate pursuit of monetary policies - which can be at least partially understood in advance - has created cycles of unprecedented interventions which have had market dominating effects in multiple investment asset categories, including not just real estate, but also stocks, bonds and precious metals.

While this does not equate to certainty, it does introduce a non-random skew that can strongly favor investment strategies that are aligned with the cycles of outside interventions, and thereby potentially produce substantially higher returns with lower risks than would be the case in a genuine "random walk" world.

4) In terms of the Red/Black matrix developed in previous analyses, this current analysis can be placed in cell "C4".

An explanatory analysis for the matrix is linked here.

It is the intersection of the "C" column, where Red Zone crisis is succeeded by the Black Zone containment of crisis, and one sector of row "4", which is that of the investment impact on the single family housing market. While this analysis focused purely on the 4th row, the same Red to Black cycle strongly impacted all of the rows, with the aggressive Federal Reserve interventions also changing stock, bond and precious metals prices in ways that were not part of normal historical patterns.


Workshops schedule & information.

Learn about the free book.

DVDs for distance learning overview page.