“IF A RECESSION IS COMING, HOW DO YOU EXPLAIN THE STRONG JOBS REPORT?”
That was an email I received this morning from the most prominent voice/blogger in the mortgage industry.
He is very successful, a great guy, and much more knowledgeable than I am overall, but it is interesting to see how even he follows the mainstream line of thinking regarding employment data, the Fed, etc.
This is an extremely important topic because it impacts interest rates so much, and interest rates significantly impact the housing market – as we all witnessed last year.
Here is one headline from today: Astonishingly Strong Jobs Report Sends Stocks Wavering. Per the report, 517,000 jobs were created in January, or about 400,000 more than expected.
In response bond yields (interest rates) shot up, and stocks fell. Rates went up because strong economic reports give the Fed more justification to keep short-term rates high or to raise them more. And, humorously, stocks fell in response to this “good news,” because the stock market is hoping for a Fed Pivot and very low rates again, as investors believe very low rates will always result in a rising stock market like we saw in 2021 (a belief Jeff Snider puts to rest in his most recent podcast).
But, Barry Habib threw water all over the “good news” today in his daily update. He pointed out two things: (1) Bureau of Labor Statistics changed its methodology for reporting jobs data and that was the main reason the number climbed so much. There would have been a massive DECLINE in jobs if the methodology had not changed. And (2) many of the new jobs were just part-time, indicating the job market is not as robust.
Barry mentioned that the market is figuring this out too, as rates would have shot up far higher if they believed the report entirely. Rates probably climbed more in response to an increase in wages (also reported today) – given how inflationary climbing wage rates can be.
More interesting though were the comments on yesterday’s Wealthion podcast – with Jim Rickards. Rickards, a famous author and macro pundit, points out how employment data is a LAGGING INDICATOR; that job numbers don’t fall until AFTER the recession sets in; and that the Fed gets it wrong every time because they do not understand this.
This is the exact same point that Jeff Snider makes over and over and over. Rickards also points out how unemployment data is skewed because labor force participation rates are so low! If all of the discouraged workers sitting on the sidelines were accounted for like we did in decades past, unemployment rates would be closer to 9% – or at a near depression level.
And, once again, Jeff Snider has been making similar points for months in his Eurodollar podcast. Snider digs into forward economic indicators like the inverted yield curve (short-term rates higher than long-term rates), durable goods orders, inventory builds, and manufacturing orders. And terrifyingly, he points out how many of those indicators are worse than where they were in 2000 prior to the dotcom crash and in 2007, prior to the meltdown.
Last but not least, Alf Peccatiello was on the Wealthion podcast the day before Rickards, making a similar case for a pending recession, predicting a 20% stock market correction once investors stop “deluding themselves.”
ALL of the guys mentioned above are “deep data” guys, who trust data over narratives, and they all focus on the “Eurodollar Market” or the market for offshore dollars (largely created by offshore bank lending) – which dwarfs the U.S. money supply and is completely outside of U.S. control.
TLDR: (1) These data/Eurodollar guys have been proven correct time and again, while the Fed has been wrong time and again; (2) these guys are all predicting a recession; (3) recessions almost always result in a sharp drop in rates; and, (4) housing normally does quite well in recessions in response to falling rates, as 2008 was the lone exception.
So, yes, a recession is coming soon, and yes, borrowers who are concerned about today’s interest rates can expect to refinance.
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