A few of my best calls . . .
From February 2000 Words from WesCorp
While stock traders see no end to the tech miracle, I’m more interested in the inversion of the yield curve. I looked back at previous inversion cycles, and if this cycle plays out as the others have, we are headed for some big changes. Timing is everything of course, but looking at history if rates are peaking, as I believe they are, the Fed will ultimately have to ease. I believe this will result in a fed funds rate down to at least 2.50%, perhaps sooner than anyone thinks. (The market consensus was that the Fed would raise the funds rate to 7% by September 2000. The Fed began to ease from 6.50% in January 2001, leading to a 2.50% rate in October 2001.)
From May 2005 Longer-term Commentary
We still hold the view that the economy is not heading for a cliff. The only thing the yield curve is telling us is that there are fears of a financial meltdown; at the same time, traditional leveraged trades are still all the rage in the bond market. We expect that the Fed will continue to tighten as the economy grows and inflation remains sticky. If we are right, market rates should be higher by the end of the year. We will finally get a long overdue spike in interest rates.
The economy is where it is because of low rates. Housing price escalation and surging investor speculation on home prices are because of low rates. Consumer spending has far outpaced income growth because of low rates. The huge leveraged trading plays in the long-end of the market are because of low rates. Excess speculation in a number of products and markets is because of low rates. Fed officials are expressing a lot of worry these days about these situations they helped create. The only way to end this is for rates to move higher, perhaps painfully so. If the Fed pulls back this early in the game, they will only perpetuate the very conditions which they now find so troubling. (The market consensus was that the Fed would ease to 3.50% by the end of 2005. The Fed tightened from 4.00% in May 2005 to 5.25% in June 2006.)
From January 2006 Longer-term Commentary
- Economic statistics, especially Nonfarm Payrolls, will be surprisingly strong in the first few months of 2006. Housing will continue to be a bit on the weak side but be more than offset by other positive developments. (Nonfarm Payrolls averaged 255k per month in the first quarter of 2006, the highest quarterly average since the first quarter of 2000.)
- Positive economic reports, plus some slightly worse inflation news will push longer-term rates higher in the first half of 2006. (The 10-year note rose from 4.35% at the beginning of year to a peak of 5.25% in June 2006.)
- In the second half of 2006, the evolution should begin. A sharper decline in housing activity during the peak summer season will accelerate concerns about the housing market. (Housing starts peaked in mid-2006 at over 2000k annualized units and fell to 1382k annualized by January 2007.)
From January 2007 Longer-term Commentary
These lesser-known stats tell us that the surge in delinquency notices and foreclosures we’ve recently seen is only the first warning of a larger wave of notices to come. As more homes hit the market in March and beyond, many of those sellers will have to be very aggressive in cutting prices. This will ripple through the housing market.
- The housing data, in particular, might give us a false sense of security in the beginning of 2007. But for the second and third quarters, we’ll be seeing much worse data and a broadening slowdown in all economic numbers.
- The consumer will finally retrench in 2007. I say that with much trepidation. It rarely pays to sell the consumer short. But I believe the combination of accumulated debts, falling home prices having a negative wealth effect, and job concerns will result in more conservative consumers.
- While longer-term yields will drop somewhat for most of 2007, I expect that spreads of other products will widen. This will mostly impact the mortgage market. I believe that a “credit event” in the mortgage securities market will reduce global demand for that product.
From February 2007 Longer-term Commentary
Any major change in the economic landscape takes a while to play out. This is especially true for a shift in the housing market. The full impact is never evident near the beginning. Macro-economic numbers tend to disguise evolving conditions. Lagging reporting is only part of the problem. The tentacles of the housing market spread deep into the economy, especially given that the most of the economic and employment growth from 2002-2006 was directly attributable to housing. It was only last summer that Wall Street and Main Street acknowledged that a housing slowdown was in the works. Is it logical to expect it’s over already? Despite the urgings of Bernanke and Wall Street, we say no.
From August 2007 Longer-term Commentary
Despite the endless protestations otherwise by Wall Street (and the Fed), the housing market has not bottomed, subprime was a big deal, the credit bubble was an even bigger threat, problems in subprime mortgages were not contained, and there is a contagion of sorts in all credit markets. The next big story will be to watch how all this plays out in the economy. I believe the consumer is already in retreat, home prices have much further to fall, and payrolls will shrink.
From January 2008 Longer-term Commentary
- Nonfarm Payroll growth will be either negative for 2008 or unchanged. A lot of what happens with the official numbers depends on the BLS adjustment factors. I believe the Unemployment Rate will be pushing 6% by the end of the year. (At the end of 2007, the Unemployment Rate was 5.0%. It hit 6.1% in August of 2008. The Bloomberg Economists Consensus was for a 5% Unemployment Rate for all of 2008.)
- Consumer spending will finally contract sharply in 2008. Consumer loan demand will slump, as consumers start trying to repair their balance sheets. Banks will be in the same position of balance sheet repair. (September Retail Sales fell on a year-over-year basis for the first time since 1991.)
From June 2008 Longer-term Commentary
The most positive news on the inflation front is something that hasn’t happened yet. When looking at the longer-term charts of oil and other commodities, they have all formed classic bubble patterns. You can lay the 10-year charts on oil, gold, wheat, and corn side-by-side with the NIKKEI in the 1980’s and the NADAQ in the 1990’s and you can’t tell any difference whatsoever. The commodity bulls say this time is different. But where have you heard that one before? From NASDAQ and housing bulls perhaps? There is no doubt in my mind at all that commodities are in a bubble, but the question is from what level does that bubble burst? (Commodities peaked in June of 2008 and then plummeted over the next few months. The price of oil went from $147 to $68, and the broad commodities index fell from a June peak of 474 to 257.)
From July 2008 Longer-term Commentary
While Fannie and Freddie could still survive intact as private companies, the deck is being stacked against them. Remember that Bear Stearns was a “liquidity problem” too. The government will not allow them to go under and default on their debt. They are more vital than ever to the mortgage market at the most critical time in our economic history. But there is no reason they have to continue as private companies. The government could easily step in and take on Fannie and Freddie as “true” government agencies. They would cease to exist as private companies. For decades these companies have thrived on the “implied” government guarantee for which they paid nothing. It appears the bill is now coming due. (In September 2008 the government seized control of Fannie and Freddie.)
From March 2009 Longer-term Commentary
Given that most of the activity has been in foreclosures, there is no danger of a quick rebound in home prices. But I believe (hope) a realistic and sustainable price level for homes in distressed areas is being established. As long as this level of activity is maintained, I believe the bottoming in home prices has begun. (The Case-Shiller Home Price Index bottomed in April 2009.)