The key macro/market charts for navigating risk vs opportunity this year...
Great charts. From my experience, we need to consider the actual benefit COVID did for the US Economy after COVID. My view is that 90% of economist failed to realize that COVID provided the cleansing of excessive inventory build and expansion as most firms remained cautious. As a result, the benefit COVID gave is that most companies were inadvertently prepared for the Fed tightening except banks and the housing sector. Most banks bought the story from Wall Street economists that it would take 5 years (KKR’s forecast at a conference in 2020) before yields had any material risk to the upside. As a result of this consensus view, most banks extend the durations of their investment portfolios, and at least FRC made many long term fixed rate loans to increase interest margins during ZIRP. This aggressive move has caused FRC and SVB to fail and to cause depositors to move out of many banks to reduce the risk of having an uninsured deposit at a non SIFI bank. The housing sector should be in a typical housing recession but instead it is being propped up artificially by the lack of sellers due to the fact that the ones who don’t want to sell have 3% mortgages that they don’t want to give up. This has had the perverse benefit of propping up housing prices, which has mitigated the normal paper loss of wealth that homeowners are faced with like in 2008 from declining home prices. If you take all of this into account then it explains why we are not in the predicted recession and why we are nit likely to experience one if the Fed only raises one or two more times. This cycle is markedly different from all others that we have been looking at for hints at what is to come.
I have own homes since 1973 and have seen it all.
This illustrates my point that home prices should be down 20% on average based on the cost/value indicators. However, by the Fed’s own doing, the 3% mortgages that were executed during COVID are artificially propping up home prices because there are not enough seller. If home prices were down 20% or more then there is a high probability that the US would be close to recession right now due to the adverse impact of the paper loss of home equity wealth on retail sales. Thanks
I don’t read much but I read this and beats anything I ever found in FT, very helpful and honest appraisal of macro and impacts on outcomes in markets. Thanks.
Very good work, as always Callum. Have a good weekend.
great update! thank you very much. Greetings from Argentina.