Fastest Rate Increase Since 1981!
The Fed has engineered the fastest increase in mortgage rates since 1981 – as rates have nearly doubled over the last several months.
And, interestingly, housing continues to appreciate for the usual reasons we cite often: (1) inventory remains at record low levels primarily due to a lack of building, not demand, since 2008; (2) demand remains stronger than ever primarily as a result of demographics or millennials hitting homebuying age; and (3) affordability has not been affected as much as people think because incomes have risen with inflation.
Will The Coming Recession Lower Rates?
It now seems all but certain that a recession is coming our way for a variety of reasons, including:
- higher prices will dampen demand and slow down economic activity;
- we keep seeing inverted yield curves – where short-term yields are higher than long-term yields – and such curves correlate to recessions almost every time;
- we likely have inventory buildups that have just not made it to retailers yet, but once everyone figures that out new orders will plummet;
- we are at peak employment and per Barry Habib that usually portends a recession; and
- forward orders for many major commodities are way down.
A recession is defined as several months or more of declining GDP, employment, incomes and overall economic activity in general. This recent Forward Guidance podcast includes a great discussion of many of the current recession indicators.
Recessions usually result in lower rates because the Fed tends to lower rates in response to recessions; and because there is less demand for money, goods and borrowing in general.
Recessions Don’t Always Come With Low Rates – See 1970s
But, recessions don’t always result in lower rates – something we saw in the 1970s and early 1980s when we had “stagflation” – with high inflation, high rates and very slow economic growth.
And the likes of Luke Gromen, Chris MacIntosh, and Lyn Alden seem to think we are in an environment similar to the 1970s – where supply constraints and inflation are so set in with higher labor, energy and other input costs that prices will continue to rise no matter what – and that interest rates will remain higher as a result. Huge trade and government deficits and the eroding of the U.S. dollar as the world’s reserve currency only make these risks worse.
But – enter Jeff Snider and Jim Rickards … again.
In this recent YouTube interview with Stansberry’s Daniela Cambone, Rickards explains why we will soon hit peak inflation: (1) government stimulus for COVID spurred demand temporarily and that stimulus has dried up; (2) the money supply has not grown as much as people think; (3) supply chains will get fixed; and (4) THE VELOCITY OF MONEY, or how fast it turns over in the economy, has slowed drastically and that is why we are so different from the 1970s.
Rickards is a famous author who has been on the front lines of finance since the 1980s too, so he holds much clout.
In this FASCINATING and recent Eurodollar University podcast, Snider explains how our recent surge in inflation was entirely driven by a surge in demand (caused by government stimulus and post-COVID demand surges) and by supply shocks that were largely fostered by COVID shutdowns and excess demand.
He makes the case that not only will supply chains repair themselves and catch up with demand, but that we could soon see an OVER SUPPLY at many retailers and manufacturers because so many overbought in “panic” when they thought supplies would be too limited.
Snider also agrees with Rickards – that the money supply has not grown as much as people think, as velocity and bank lending (the biggest source of monetary growth) are way down.
In the coming years, we will see who is right – and whoever is right will be held forth as the king of finance (and we will all learn more than ever before in the history of finance).
But, for now, it is a crapshoot. I am, however, putting my money on Rickards and Snider because they seem to do deeper and more data-oriented dives than the other pundits with respect to ALL of the causes of inflation and interest rate movements.
So – what does this mean for us?
I think borrowers can expect lower rates by 2023 and I also think borrowers should not pay points to buy down their rates because doing so could well end up being a total waste of money.
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