Mortgage and interest rate shock, never in history have rates risen so quickly – Mish Talk

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Percentage change in interest and mortgage rates vs. St. Louis Fed, Mish chart

The Fed is advancing at an unprecedented pace. Mortgage rates followed the 10-year rate.

The shorter the duration, the faster the movement.

Percentage change in interest rates over 2 years and 3 months

Percentage change in interest rates vs. St. Louis Fed, Mish chart

Percentage change in interest rates vs. St. Louis Fed, Mish chart

Percentage change from previous year Synopsis

  • 3-month Treasury bill: 7,725%
  • 2-year cash: 1,501%
  • 5-year cash: 328%
  • 10-year cash: 156%
  • 30-year mortgage rate: 111%

Consequences

A Tweet thread about the implications by Andreas Steno Larsen inspired this post.

Shares and Housing

Unemployment

Talking points

  • I generally agree with Larsen’s ideas regarding the ISM, equities, housing.
  • However, I think his stock market estimate is too optimistic and that housing could take more than a year to drop 20%. Too many people won’t sell.
  • Unless prices crash, housing will remain weak for years. (A 20% not enough to boost housing at 7+% mortgages).
  • I consider that real (inflation-adjusted) interest rates relative to the CPI are still deeply negative. Factoring in house prices as opposed to OER (Owner’s Equivalent Rent) would send positive real rates as soon as house prices drop significantly.
  • My only substantive disagreement concerns unemployment. Millions of baby boomer retirees coupled with millions of openings will prevent a massive increase in unemployment.

Expect a long period of weak growth, whether or not it qualifies as a recession

Add it all up and you have the makings of a long, but shallow (from an unemployment rate perspective), period of slow growth.

This will be the reward for long periods of massive and unfounded QE.

To discuss this, please see Expect a long period of weak growth, whether or not it qualifies as a recession

It’s time to collect three consecutive bubbles. Expect a long period of low growth no matter how labeled.

This time there will be no bailout. The Fed will also not quickly reverse its interest rate policy for fear of further stimulating inflation and unwanted demand.

Unless real estate asset prices collapse, the housing sector will remain weak for a long time, with the Fed unable or unwilling to offer much help.

Housing tends to trigger and end recessions. But where does housing go if prices remain high with mortgage rates over 5%? [Edit: Now 7+ percent]

What about jobs?

  • The Covid recession was very short, two months, not even a full quarter of declining growth. The pandemic has also been accompanied by the biggest job losses in history.
  • I expect the opposite of the Covid recession: a long period of weak growth accompanied by relatively high unemployment figures.

Employment levels in retirement age groups

Chart by Mish from BLS statistics

Chart by Mish from BLS statistics

60 years and over Employment

  • In 2022: 22.09 million
  • In 2008: 13.46 million
  • In 1999: 8.22 million
  • In 1981: 7.21 million

As of January 1, 2022, more than 22 million people aged 60 or over were still working. We’ve never seen anything like this before, so don’t expect previous recessions to be a model for this one..

Millions of these people will retire.

Employment could drop significantly when these baby boomers and Gen X employees retire, but falling employment and rising unemployment are not the same thing.

Scroll to continue

Increase in the unemployment rate

Chart by Mish from BLS statistics

Chart by Mish from BLS statistics

Unemployment rate rising Key points

  • During the 12 previous recessions, the smallest increase in unemployment occurred in 1990 and 2001, 1.1% each.
  • The highest jump was 8.2% in 2020 and that was undoubtedly underestimated.

Given the upcoming retirement levels and the incomplete job recovery from the 2020 recession, I expect this to be a very weak recession in terms of rising unemployment.

The greatest QE experiment in history backfires

In June 2021, I commented The Fed will foolishly continue its QE purchases in search of higher inflation

Indeed, the Fed maintained QE until March 2022. Inflation exploded.

My June 26, 2021 comments

Either the Fed has no idea that inflation is roaring if you accurately include house prices, or it just doesn’t care. My view is that the Fed is fundamentally clueless.

Going forward, Q4 and 2022 GDP will be much weaker than expected.

The irony in the Fed’s actions is that they do raise inflation, but only in the most unproductive, yet uncounted way. There is a lot of inflation now, but not as they measure it.

And when the bubbles burst, expect another painful wave of asset deflation, likely accompanied by the price deflation they fear.

No white hats

There will be no Fed group to the rescue this time. For four decades, the Fed has had the disinflationary wind of globalization at its back. He could easily press the gas without triggering an inflation spiral.

That changed in 2020. The Fed now has inflationary winds of deglobalization and wars blowing in its face. Labor pressures also remain inflationary.

The Fed knows it made a mistake and will be very reluctant to repeat it.

The biggest rate hike experiment in history

The first chart shows that this is the largest rate hike experiment by the Fed in history.

It follows the greatest QE experiment in history.

Fed policy operates with a lag. Still, the Fed has a cushion (and an excuse) to keep rising if my unemployment rate thesis is correct.

Even if unemployment is modest, it will be unbalanced.

Given that housing rates will be low for a long time (and consumer durables with it), don’t expect earnings to come back strong.

De-globalization and decarbonization also come into play. These are inflationary headwinds and profit headwinds too.

We have energy shocks, wage pressures, earnings estimates that remain ridiculously high, and a Fed that is likely to overshoot.

Despite the declines, stocks are still priced perfectly.

This post originated at MishTalk.Com.

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