Historic Bubbles, Rates Improve, Home Appreciation

Bubbles – NPR’s Planet Money is doing a series on bubbles & this one took place in Kuwait during the late 1970’s. A massive influx of oil money had recently changed the city from minimal infrastructure (no running water/minimal electricity) to a bustling metropolis. With a highly regulated market and stable political climate became a magnet for money in the region.

Because the market was so tightly regulated on who could invest, an unofficial stock market was started right across the street in a parking garage called “Souk al-Manakh.” The government wanted to keep it separate and didn’t allow banks to lend to people investing on this market so traders developed their own credit system with checks that were post-dated by a year anticipating that stocks would go up. Naturally people began treating these checks like cash and passing them on to other traders and the Kuwati stock market sky-rocketed, becoming the third largest in the world (bigger than London).

As stocks started to decline people quickly realized banks wouldn’t be able to cover the checks and the government was not going to bail people out. The country went into recession, only 1 bank remained solvent, and the total loss was near $250 billion which was 5 times the size of Kuwait’s economy at the time. If this were to happen in the US it would be a $100 trillion loss.

Rates – improved slightly this week as the 10 Year US Treasury declined slightly. While maintaining its upward trading pattern it is approaching an important level of 1.78. If it breaks below that level we could see additional rate improvement.

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Jobs – the spike in number of people filing for unemployment for the first time at the beginning of December appears to be an anomaly or seasonally related as claims have leveled off. Jobless claims are an important indicator to follow as a bottoming out and increase in jobless claims correlates to economic recession.

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Case-Shiller Home Price Index – Measures appreciation on Individual Homes Over Time.

Appreciation – in October home values were up 3.3% year-over-year nationwide a 0.1% increase from September. The 20 city index increased at the same clip up to 2.2% annual increase. Phoenix, Tampa, & Charlotte are the current top 3 metro areas in terms of appreciation.

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