Recession, Depression, Soft Landing, High Rates, Low Rates – Who Do We Believe?
In late 2020, I was having lunch with several mortgage bankers who wanted to celebrate the success we were all having – as we were all enjoying unimaginable record profits.
I, however, was not in a celebratory mood, telling them that rates would likely approach 8% in the coming years and that we needed to streamline and get much more efficient.
They were shocked and even upset by my comments for a few reasons: (1) they wanted to celebrate and nothing more; and (2) they believed the Fed and all the mainstream media comments about inflation staying under control and rates remaining low for years to come.
I am obviously no genius, as I was just repeating what I had gleaned from listening to Jeff Snider, Barry Habib, Lyn Alden, and others.
None of those guys knew what the timing would look like, but they all knew higher rates were definitely coming our way.
Yesterday, mortgage rates fell even though the Fed raised rates.
This proves once again that the markets have more control over rates than the Fed – but yet, all too many observers continue to listen to the Fed.
So, the question is, who do we listen to, and why do people cling to Fed Speak?
Below are a few examples of all the disparate viewpoints I soak in every week to make sure I get a broad perspective and am not just wallowing in a “doom and gloom” echo chamber.
Last week, famed economist, Paul Krugman tweeted that recent GDP data indicated that there was no sign of recession on the horizon.
I enjoy Mr. Krugman’s tweets, but I give him little weight because he is so tribally aligned with the political left.
Peter Schiff, in sharp contrast, has been predicting a total economic meltdown every week for the last 15 years.
He too lacks credibility not just because he has been so wrong, so often, but also because he is too aligned with the political right.
Joseph Wang is a very prominent former Fed insider, and he was on Stansberry last week explaining that Wall Street is wrong, and that the Fed will be able to keep hiking rates. Mr. Wang is very sharp, but he does not have as much skin in the game as many other analysts, so I give him less weight.
Chris Whalen is an extremely prominent banking analyst who says that there is no way the Fed will be able to keep hiking rates and that they will have to cut rates sharply and very soon – to prevent the total destruction of the entire banking system.
This recent Business Insider article makes a strong case that the bond markets could be wrong and that we could well avoid a recession. But BI leans slightly left, so even that slight left tilt makes me suspicious.
This recent Bloomberg article tells us that numerous highly sophisticated hedge funds have bet tens of millions of dollars shorting bonds – betting yields/rates will rise (NOT fall) this summer!
This U.S. News article from January has the average 2023 rate predictions from numerous prominent organizations. Fannie Mae predicted 6.3%; The Mortgage Bankers Association and the National Association of Realtors predicted 5.7%; Realtor.com predicted 7.4%; and Redfin predicted 6.1%. But – large institutions make me nervous too for reasons I explain below.
So far, all of those predictions seem to be about right, assuming Jeff Snider, Alf Peccatiello, and Barry Habib are all wrong.
So – how do I decide whom to give the most weight to?
I look at the people who are not aligned with a party or a cause in any way, who have a strong track record, who have skin in the game (either cash or their reputations at stake), and who do very deep dives of their own into the data. I also avoid economists with large institutions like NAR, the MBA, Fannie Mae, and Redfin – as they all seem to play it safe and follow the “fed-speak-party-line.”
So, most readers know who I follow, and now everyone knows why. Snider and Habib did an excellent job of predicting this year’s rate environment, and they also just provide excellent insights in general. I also love Alf Peccatiello, Stephanie Pomboy, Lyn Alden, David Rosenberg, Brent Johnson. None of them are aligned in any way with a tribe (they disdain all politicians). And – all of them, with the possible exception of Brent Johnson (who likes to remind us that there are no certainties ever), believe that a recession and much lower rates are extremely likely.
So, while I want to make sure readers know that I am seeing the other side of the argument (inflation remains the problem, the Fed has more power than we think, the economy has more juice than we think, the labor markets remain very strong, rates will remain higher throughout the year), I remain strongly in the Snider and Habib camps because they have been the most correct over the last 5 years.
These guys do an excellent job of looking at historical trends and reactions, and explaining why today’s trends will have similar reactions. They also do an even better job of pointing out why the Fed is so wrong so often (so I have no idea why anyone listens to the Fed).
And finally, Snider and many of the analysts are now pointing out that the bond market last year predicted the current economic and banking problems we are facing now with amazing accuracy, so we might want to listen to the bond market now. And the bond market is screaming that rates will be much lower later this year. So – we’d be wise to believe the bond market.
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