Rates have shot up almost 1/2 percent since late June – taking a particular beating over the last week (largely in response to strong employment data).
We are back to levels we have not seen since early March and late May, and only slightly below the peaks we saw in October and November of last year.
To say this is a surprise is an understatement, as much of the finance world and especially Barry Habib expected rates to be much lower by now.
I Got A “Neener Neener” Email Today
There were many, however, who believed all the Fed commentary about sustained high rates all along and were very skeptical about rates falling.
And – I got a “neener-neener-you-were-wrong” email from one of those skeptics today (I love to receive emails like that btw, so I encourage all readers to send them).
And boy was I wrong… about the timing, as I remain confident that rates will still plummet.
Below is my response to the “neener-neener guy.”
“I still think this is all just a timing issue, much like pre-2008 – when Fed members were telling us we’d be fine all the way into August, and when Michael Burry (the Big Short Guy) had to cover his short positions at a cost of $7 or $8 million in 2007 because his timing was off too.
I just don’t see how we avoid a massive recession and sharply falling rates at some point with:
- China clearly tanking;
- Germany in a recession;
- more banking crises looming;
- manufacturing numbers down everywhere;
- a commercial real estate crisis looming;
- declining GDI numbers;
- falling PPI numbers;
- zombie companies everywhere; and
- excess leverage and malinvestment like we have never seen before.
And most significantly, yield curves have been and remain massively inverted (where short-term rates are higher than long-term rates), something that has never failed to predict a recession, with maybe one marginal exception in the 1960s.
Also – employment is a lagging indicator (it only drops after we are in a recession), so the Fed’s and the market’s focus on employment confuses me (particularly with so much more “labor hoarding” taking place nowadays).
I blogged about this in May even – “Dude, Where’s the Recession?” TLDR: All the wage increases and stimulus are keeping the economy afloat longer than everyone anticipated, as this is an “income-driven” economy in contrast to pre-2008’s “credit-driven” economy (when cash-out loans drove a lot of spending, for example).
So, I still don’t know when rates will drop (Jeff Snider keeps implying September, similar to 2008 when Lehman collapsed), but I’d bet dollars to donuts we will still see them drop and by a lot.”
NOTE #1: Michael Burry of The Big Short Fame of course stuck to his guns despite all the derision and ended up making almost $1 billion for himself and his investors.
NOTE #2: The Fed’s obsession with a strong labor market is utterly perplexing because, as Jeff Snider points out often, employment always lags recessions. This is because employers cling to all of their well-trained employees until the last second when they KNOW for sure the economy is too slow to allow them to sustain overhead. Snider calls this “labor hoarding.”
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