In October 2006, the prices of new homes in the United States began to fall. The U.S. Department of Commerce issued a report that the median new home prices fell by 10% compared with September 2005.

Author: WeChat official account ~ Lao Meng's investment analysis circle

Last time I talked about the formation of the US real estate bubble , everyone still felt that everything was beautiful; but in fact, the crisis was knocking on the door gently. In October 2006, the prices of new homes in the United States began to fall. The U.S. Department of Commerce issued a report that the median new home prices fell by 10% compared with September 2005. But everyone is not interested in this. They think that it is normal for small to pull back to , but they just accumulate strength for the continued rise. Because at this time, housing prices are not generally falling, and some places are still continuing to rise, so the data is different from everyone's perception.

In fact, in the whole year of 2006, housing sales in the United States began to fall sharply, but the price reaction was not obvious. In the first half of 2007, housing prices continued to stabilize and slightly increased, which also made everyone feel that everything was still on the original road. At this time, the first domino had begun to fall into decline. In April 2007, New Century Financial Company went bankrupt. With the increase in default, it had issued too many subprime mortgage loans, , which could no longer hold on, because when the lender defaulted and could not repay the loan, it had to repurchase the loans from the bank, but it had no money on its own and could only apply for bankruptcy. According to its own disclosure, among the loans issued, 2.5% of the people could not even pay the first monthly payment. This shows how crazy it was at that time. Even those who had no money dared to take the loan to buy a house with . The key is that they can really get a loan.

Of course, this is still a matter of God's perspective afterwards. At that time, people did not pay attention to this incident and just thought it was a small problem. At this time, the chairman of the Federal Reserve had been replaced by Bernanke, who proposed to "spread money in a helicopter", and also believed that the impact of the subprime mortgage issue on the economic market can be controlled. It can be seen that the most powerful person in the world cannot fully predict the occurrence and future impact of the black swan event , and can only take one step at a time. By June-July 2006, bigger problems began to occur. There was a problem with the famous investment bank Bear Stearn . The two hedge funds under its management, which had a total assets of more than US$20 billion, suffered billions of dollars in losses. This impact can no longer be ignored. At this time, what Dalio is most worried about is the degree of leverage and the intensity of monetary tightening; and the "bond king" Gross at the time also warned that "this case is not an isolated incident, the crisis of defaulting on the secondary mortgage will spread, and the US economy will be severely dragged down."

At this time, the market interest rate of began to rise, and the yield of US Treasury reached 5.3%, the highest point since 2002, which puts severe pressure on the prices of other assets. Lao Meng explained here that there is a consensus in the investment field, which is to regard the US 10-year Treasury bond interest rate as a global benchmark for risk-free returns. This was the case more than ten years ago, and it is still the case now, because in a global comparison, the security of US Treasury bonds is still irreplaceable for the time being; its interest rate increase will increase the attractiveness of risk-free returns investments, and reduce the attractiveness of other risk-type investments, and funds will pour into US Treasury bonds in large quantities, resulting in a serious shortage of funds for other assets. As a result, market liquidity has dropped significantly, and bond market prices have also fallen sharply, and even the AAA rating bond fell by 5%.

In August 2007, BNP Paribas directly frozen funds worth US$2.2 billion, giving the reason that liquidity evaporated and the value of certain assets could not be evaluated. This statement has made the US housing market even more tense. Now everyone has seen risks, but the worst thing is that due to the layers of assets, it is impossible to determine who holds these risks and how large the total amount of risks is. This kind of uncertainty is the most terrifying thing. This is the "Sword of Damocles" hanging above the head. No one knows when it will fall, nor who it will pierce on. Here, Lao Meng adds to the perception of many people in China at that time. They were watching the show with a melon-eating mentality, thinking that this was a farce of Lao Wang's family next door, and it was separated from him by the far-reaching Pacific ; but in the environment of economic globalization , this crisis has long implicated everyone.

In fact, crisis is not that scary for economy and investment. What is scary is the uncertainty and unknown. It’s like you can feel the pain after being stabbed by a knife, and then you know how to bandage and treat it. Everyone can endure it and pass it. But if you feel that there are beasts around you approaching you in the dark, and you can still hear the sound of getting closer from time to time, but you just don’t know how far away you are, don’t know whether it’s a wolf, a tiger or a little mouse, your inner fear is often greater than the harm you suffer. Therefore, in many cases, when investing, you are not scared away by negative events, but by your own fear.

Faced with the market panic, the Federal Reserve stood up at a critical moment, saying that it would provide the necessary reserves for the financial system, thereby giving the market full confidence. Then in August, the Federal Reserve suddenly lowered the discount rate by 0.5 percentage points. But on August 10, Dalio wrote a letter to his clients saying that this would be a major crisis; and said that the scale of the crisis would not be smaller than in 1998, because their depression indicators had been warned. At this time, they had begun to raise risk prevention to strategic heights in investment and had begun to actively reduce their positions, but the clients of Bridgewater Fund were very dissatisfied and even urged them to increase their positions. But Dalio still said firmly that they must think of extreme situations and cannot be too optimistic about the future, especially when everyone is very optimistic.

By September 2007, the Federal Reserve and the Bush administration began to make a collective statement, just to tell everyone not to worry about the economy, the subprime mortgage problem is still controllable, but in fact it is to soothe people's hearts. At this time, American investors and home buyers were also just like domestic investors, and they were also stupid and sweet. They felt that if the government came forward, the stock market and the real estate market would not fall, and the stock market performance was still pretty good at this time. But the credit market can no longer withstand it, and banks are already saving themselves. When the economy was good, banks combined bonds and sold them to investors, and they didn’t have to worry about selling them at all; but now the economy is not good, so they can’t sell them anymore. There was no way, so they split the bonds and sold them into super safe, risky, junk bonds, and even those that could not be rated at all; anyway, they were as much as they could be sold. The last thing that cannot be rated in

is a failure and can only be included in the loss; therefore, major banks have experienced huge losses in the third quarter, mainly reducing the losses. Some major banks have also begun to raise $100 billion in fund to purchase non-performing loans; by this time, the subprime mortgage crisis is about to break out. To put it in detail, the biggest problem here is that banks have too much risk exposure, and using normal calculation methods to analyze the risks are controllable; but an extraordinary fluctuation in special periods will cause the collapse of the iron chain, so investors, banks, and rating agency are misled.

At the end of 2007, the volume and price of the US real estate market fell by , but the stock market rebounded. On October 9, 2007, the US stock market still hit a record high, so investors think it's okay, maybe not that bad; Lao Meng guessed that a large number of customers of Bridgewater Fund might also be complaining about Dalio's position reduction behavior in the past few months. But since then, the stock market started a long road of decline and did not recover until 2013. By December 2007, the Federal Reserve began to continuously cut rates on , but the stock market was still falling. This actually began to lose confidence, and no longer responded to the positive news, because everyone began to feel pessimistic. At this point, the harm of the subprime mortgage crisis has just begun to emerge, and it has not made everyone feel desperate and fearful, but the various super "thunder bombs" immediately turned on the button, which directly made the Federal Reserve confused. Then what's going on? Let's talk about this next time. Pay attention to Lao Meng’s study courtyard and understand the internal skills and mental methods of investment.