I Love ZIRP!
My love for ZIRP cannot be overstated.
Every morning, I zirp up my pants, go to 7-Eleven and order an extra large Zirpee, and listen to my favorite song – Zirpity-Doo-Dah.
For those of you who don’t obsess with macroeconomics (and who are missing all the fun), ZIRP is an acronym for Zero Interest Rate Policy.
In short, ZIRP refers to central banks reducing their official short-term lending rates (Fed Funds Rate here in the U.S.) to 0% in an effort to stimulate their respective economies.
ZIRP has been tried numerous times, starting with Japan, since the 1990s – and it never works. But – central banks will keep trying it because they have to “do something” or at least appear to be “doing something” to revive weak economies.
Why Bring Up ZIRP?
I am bringing ZIRP up because famous macro analyst and former $20 billion fund manager, Alf Peccatiello, was recently on this Wealthion podcast telling us in no uncertain terms that the Fed will soon be forced to return to ZIRP.
Here is a direct quote from Alf: “The Fed will be cutting rates to 0%, not 2, not 3, not 3 and a half%, but 0% once the recession hits.”
Alf is another analyst I really respect because he was in the trading trenches for so long; because he does his own deep dives into data like Jeff Snider does; and because he too has been very accurate with his predictions.
He makes a very strong case that today’s economy is very similar to 2007’s economy – just prior to 2008’s Great Financial Crisis (GFC).
Like Snider, Alf says the Fed’s focus on the labor markets is wrongheaded because unemployment always bottoms out just prior to bad recessions.
He further illuminates all the cracks in the labor market that Barry Habib and Jeff Snider address too – such as cutbacks in hours, fewer job ads, and the laying off of temporary workers.
He points out too how the Fed was telling us in 2007 that there would be no recession at all, and then how the Fed was telling us the recession would be mild well into 2008.
Wealthion’s host then reminded us of a previous guest that shared newspaper headlines going all the way back to 1973 that continually predicted “soft landings” (no recessions in response to rate hikes) just prior to horrible recessions over and over.
In other words, the Fed is almost always wrong, but for some reason everyone continues to believe them.
Alf also explained that stocks will likely go up after the Fed declares a “pause” to its rate hiking in May – as investors often return to stocks when hikes pause as they see that as a return to “stability” and a reason to take on riskier investments such as stocks.
But – those stock market rises often precede crashes under those economic conditions, and this year will be no exception.
Alf says that Powell might try to keep rates at their current levels all through the summer just to maintain credibility, but he won’t be able to keep rates up indefinitely because a bad recession is on its way.
What Happens to Housing and Mortgages Under ZIRP?
Alf mentioned that housing prices go up when rates get extremely low because buyers simply realize they can buy much more – and they do.
We saw this take place in 2020 after COVID hit – even though the economy was on its knees.
NOTE: ZIRP only means a 0% Fed Funds Rate; it does not mean 0% mortgage rates. With a 0% Fed Funds Rate and a very weak economy, mortgage rates will probably be in the 3% range, like we saw in 2020.
The only thing that could prevent housing from surging is a recession that is so bad that unemployment gets out of control, with ripple effects across housing and many other asset classes.
We won’t see a repeat of 2008 though because of the inventory issues I address all the time, e.g. there were 4 million listings in 2007, and there are fewer than 600,000 listings now.
As for mortgages, we will be slammed with both purchases and refis – and I strongly suspect that is why a lot of large mortgage banks are still aggressively recruiting loan officers and branches despite the losses the entire industry continues to face now.
Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
