Once again, I love quoting Barry because he has been one of the most accurate prognosticators in the vast realm of economic punditry.
Also, his 20-minute interview is not behind a paywall, so I highly recommend watching it to hear everything he has to say about the markets in general.
Barry reminds us all of what he got right including Fed rate hikes, a stock market correction, continued strong housing appreciation, and rate increases (although rates have increased about 1% more than he predicted, something he readily admits – which is another reason I like Barry).
But, the biggest takeaway is that he is predicting a recession for three reasons:
- Oil prices have sharply increased – something that has fostered recessions in the past because oil prices affect all other prices so much.
- The Yield Curve is “flat” and/or inverting, meaning that 2 Year Treasury yields are very close to 10 Year Treasury yields – something that often happens when the Fed pushes up short-term rates; we say recessions follow almost every yield curve inversion.
- Unemployment is bottoming out, paradoxically; when unemployment is this low it is very likely that things can only get worse, per Barry – meaning job losses and the resulting steep fall off in demand are very likely too (which will also result in a much weaker economy).
Barry then points out that recessions almost always result in lower rates, as the Fed tries to push rates down to stimulate the economy and as investors move from stocks to bonds – if they perceive stocks to be a poor investment when a recession looms.
Will Rates Fall & Is Barry Right?
The entire mortgage world is banking on it, and I personally think there is about a 60% chance. This will likely happen sometime next year (2023) too – which should give some comfort to those who think rates are too high right now.
What could make Barry wrong?
- Inflation. If inflation continues to run out of control, investors will demand higher yields no matter what happens.
- The Fed/Balance Sheet Run Off. Barry thinks the Fed will likely “chicken out” after they see the stock market correct and the economy soften – and then back off on the rate increases and its balance sheet runoff (stopping QE or bond buying – and even selling bonds). Keep in mind though the Fed is still buying $70 billion per month of mortgage-backed securities – and if they stop doing so and actually start selling mortgage-backed securities – mortgage interest rates will shoot up. Again, please watch the interview I link to above for Barry’s full explanation, as my summary is not doing it justice.
- Unprecedented Times. I repeat this often, but we are in totally unprecedented times with conditions (massive private sector debt loads, very low rates, massive central bank intervention, massive government deficits, shifting world order, etc.) – so nobody really has a clue what will happen.
Recessions And Housing
Barry also reminds us that housing often does quite well during recessions in the U.S. – with the sole exception of 2008 (when inventories peaked and homebuying demographics bottomed). That is comforting news for all of our clients who are concerned about what a recession might do to home prices.
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