Introduction: From the Great Financial Crisis to the Pandemic
As the Trump administration settles into the White House, despite uncertainties and anxieties, there are plenty of optimistic economic forecasts for 2025.Will the year live up to expectations? To answer that question, let’s take a trip back in time, starting back in 2008.
During the Great Financial Crisis (GFC) that began in late 2008, it became clear that many home buyers had taken on mortgages that were too big for their britches.
Making the payments required second mortgages (a home equity line of credit, or HELOC), the equity of which was coming from increasing appraisal values. When homes stopped going up in value, foreclosures began piling up.
To mitigate the deleterious effects of a deep recession, the Federal Reserve began lowering interest rates toward zero. This had the effect of encouraging cheap debt, and both consumer spending and corporate investment soared.
The Pandemic Effect
The pandemic was so severe that waves of trillions of dollars—sourced from money in the form of stimulus checks, forgivable PPP loans, debt forbearance, and many other CARES Act goodies—replenished consumers’ savings accounts.
But stay-at-home orders meant money couldn’t be spent the traditional way. Online shopping surged, but so did online gambling in risky meme and tech stocks, as well as Bitcoin and crypto. Assets were all going up in value because the free trillions weren’t being consumed—and were mostly going into the hunt for asset parking places.
Riverboat Gambling
The clarion call for investors became “BUY THE DIP!”Any market corrections were quickly eliminated with the return of a bullish, albeit more and more risky approach to investing. So-called “risk-on” investments were buoyed even higher with increasing margin debt.
Margin debt is money borrowed to increase an investment in stocks. It usually uses the stock investments themselves as collateral. It’s risky business—more on that later.
Asset Inflation
That was then. This is now.S&P 500 stocks were up overall more than 26 percent in 2023 and 25 percent in 2024, representing the top performing asset class for the past 15 years, since exiting the GFC.
According to a recent report from Case-Schiller National Home Price Index, home prices in America have spiked by 47 percent since 2020.
However, house price increases are expected to be almost flat in 2025, in part attributable to the double whammy of these now high prices and mortgage rates that are much higher than just two years ago.
Some locations are already experiencing double-digit declines in home prices. Fourteen of the 50 largest markets, including metros in the West, are showing signs of a sharp decline, with home prices falling an average six percent or more from their 2022 peak highs.
One factor is rising unemployment. It continues to rise in big tech after two years of layoffs, is now hitting the government sector hard, and is expected to increase throughout the year.
Other factors include a shrinking boomer population and younger generations who come up short to qualify for mortgages. Also looming is the impact of possible deportations of illegal immigrants, including those who are a part of the construction workforce and the economy as a whole.
And have you shopped for cars lately? Phew!
Risky Investments Appear to Have Topped Out
Asset values are showing signs of peak weariness, and asset deflation will be welcome news to many, especially those who held off on buying expensive assets such as new cars and homes for the past five years.But those who were leveraging their high value assets to make risky investments such as in stocks related to technology, Gen AI and quantum computing, (and of course Bitcoin and other crypto), may now be in trouble.
Investing with the use of margin debt can also result in greater losses, because if a stock’s value declines, the investor may face a margin call and be unable to raise the cash to avoid the broker having to sell some shares to meet the call. High levels of margin debt are indicative of excessive speculation and potential market instability.
Forewarned Is Forearmed
We mentioned the rise in what was dirt-cheap debt—ever since the GFC and up until inflation hit more than two years ago. That debt requires servicing, both in interest and paying down the balances. That means less discretionary income to invest in assets such as stocks and crypto.Additionally, unemployment is showing signs of increasing.
Those without jobs will not be adding to our economic growth while unemployed. We may even see recession this year as the GDP growth forecast keeps coming down with each new release, now approaching zero or even negative growth, the very definition of recession if two consecutive quarters experience economic contraction.
At the beginning of this article, we spoke of how the housing bubble occurred in part because homeowners borrowed against ever-increasing home equity, even using that to make mortgage payments. Likewise, trading among inflated assets has fed a broader bubble across all asset categories, along with homes.
That is unlikely, and unsupported by economic trends thus far this year.
Consider protecting your upside and taking it to a safer place in 2025.
Think about moving some of your stock and crypto gains into money market accounts, certificates of deposit, and U.S. short-term Treasuries, where you can be guaranteed at least four percent today while protecting your principal and nest egg.
