• Housing market demand continues to decline as mortgage rates soar
• Current inflation rates don’t reflect the drop in housing prices due to a lag in data
• The Federal Reserve is highly unlikely to pivot on rate increases and help real estate

 

Interest Rates Cause Drop in Housing Demand

The once booming housing market continues to deflate. The housing industry is seeing a slowdown in sales. Mortgage applications to purchase a home were down 41% from the same week a year ago. They have been decreasing week over week for the past few months. And it looks like it is only going to get worse as interest rates continue to climb.¹

Brian Moynihan is CEO of Bank of America. He said there are tough times ahead for the housing market. Mortgage rates are skyrocketing due to interest rate hikes. “This is the toughest thing. You have to slow down the economy. You have to slow down inflation. And the way you do that is raising interest rates,” Moynihan said. “The intended outcome of [the Fed’s] policies doesn’t feel good when you are trying to buy a home.” He says it is almost impossible for many younger Americans to buy a first home. He foresees two years of pain in the housing market before activity returns to normal. ²

Jeremy Siegel is a Professor at Wharton. He predicts the housing market will see negative growth in 2023 due to interest rate hikes. The average rate for a 30-year fixed mortgage has more than doubled this year. As a result, Siegel forecasts housing prices to fall 10-15%. The median home price would fall from $440,000 to $375,000.

Siegel joins other economists in saying that the Fed acted too late on inflation. The problem now is that they are basing their decisions on trailing data. There is a lag between hikes and results. The Fed is not capturing the effects their rate hikes are having. The data they are using doesn’t reflect the real state of the economy.

Housing makes up 50% of the core inflation rate. The price lag is therefore distorting the true rate of inflation. October inflation data showed Shelter climbed .8% after climbing .7% in September. But housing prices are going down, so the real rate of inflation is lower. The Fed should be easing up on rate hikes, not increasing them.

Siegel says a recession is ‘virtually 100%’ assured if the Fed keeps raising rates into next year.
He joins other analysts in thinking the Fed will pivot once they see inflation beginning to relent. Data last week showed a seventh consecutive month of declining money supply. That is the biggest drop since World War 2. The longer the Fed delays a pivot, the deeper the recession will be.

Fed Unlikely to Pivot on Rate Hikes

Siegel shouldn’t count on that pivot. John Williams and James Bullard are two of the Fed’s regional presidents. They warned that the inflation threat hasn’t faded. The US central bank may have to lift rates higher and keep them there throughout next year to curb soaring prices. Williams said, “My baseline view is that we’re going to need to raise rates further from where we are today. I do think we’re going to need to keep restrictive policy in place for some time. I would expect that to continue at least through next year.”³

The Fed has already raised rates by 75 points four consecutive times. Even if December’s hike is lower, it will still be the most aggressive tightening since the 1980s. The housing market will continue to contract, along with the rest of the economy. A home has long been a traditional store of wealth that people relied on to help fund their retirement. As the market collapses, safer assets should be sought. Our Gold IRA can preserve your wealth during this economic downturn. Contact us today to learn more.

Notes:
1. https://www.cnbc.com/2022/11/30/mortgage-rates-fall-for-the-third-straight-week-but-demand-still-drops-further.html
2. https://www.cnn.com/2022/11/29/economy/bank-of-america-brian-moynihan/index.html
3. https://www.foxbusiness.com/economy/inflation-fight-could-last-until-2024-fed-official-warns

• While retail industry groups predict record sales, consumer surveys say otherwise
• Holiday spending habits are reminiscent of those seen during the 2009 Great Recession
• Stocks show an inverse relationship between Black Friday sales and end of year performance

 

Black Friday – Boom or Bust?

The day after Thanksgiving is another American tradition – Black Friday. The ‘Black’ normally refers to retailers trying sell enough goods, so their income statements are in the ‘black,’ or profitable, for the year. This year the color may refer more to consumer’s moods.

Retail industry groups are predicting another record year of sales. The National Retail Federation forecasts a 6-8% jump over the $890 billion people spent last holiday season.¹ However, according to surveys, consumers are going to reel in their spending this winter.

People are concerned about high prices, rising borrowing costs and a recession. A recent survey showed 62% of consumers are worried about job security. And 35% said they are worried about their financial situation.²

Researchers have noticed several behaviors last seen in 2009 during the Great Recession. People are spending less. They plan on spending 20% less this holiday season compared to the last 3 seasons. The main reason given is inflation. And when they do spend, they are buying gifts for fewer people or less expensive items.

Impulse buying is being avoided. Consumers are planning their purchases. They are searching for the best deals and prioritizing necessities. Cash is being used as a primary form of payment. Fewer people are using buy-now-pay-later options as they try to avoid debt.

Finally, shoppers are much more sensitive to price. 90% of those surveyed said price is the major factor in holiday shopping. People are choosing value brands with decent quality over premium brands.³

Black Friday and the Stock Market

Who will be right this Black Friday – the retail industry or the researchers? Will it be a boom or a bust? When it comes to the stock market, the impact isn’t what you might expect.

Analysts looked at the post-Thanksgiving behavior of the S&P Retail Select Industry Index SPSIRE. The index shows that if stocks fell on weak holiday sales, they would then rise through to the end of the year. Just the opposite tended to happen when initial reports show stronger-than-expected sales. This was the case in 73% of the years since the index was created in 1999. The direction of that initial two-day post-Thanksgiving window was the opposite of its direction from then until the end of the year.⁴

Researchers believe this inverse correlation is caused by investors overemphasizing Black Friday sales reports. When sales go well, investors overreact and conclude that happy days are here again. When reality sinks in over the next few weeks, as it almost always does, the market corrects itself. Investment analysts concluded that the best advice is to pay no attention to Black Friday sales reports and enjoy your Thanksgiving weekend.

What economists are concerned about is people behaving like the recession is already here. This could become a self-fulfilling prophecy. Reduced spending leads to reduced sales. Which, in turn, reduces business earnings, lowers stock prices and tax receipts. Businesses then slow production and lay people off. With less money to spend, consumers continue to fuel the downward spiral. This economic uncertainty calls for stable safe haven assets. A Gold IRA can give you the gift of peace of mind this holiday season. Contact us today to learn more.

Notes:
1. https://theconversation.com/retailers-may-see-more-red-after-black-friday-as-consumers-say-they-plan-to-pull-back-on-spending-acting-as-if-the-us-were-already-in-a-recession-194978
2. https://theconversation.com/retailers-may-see-more-red-after-black-friday-as-consumers-say-they-plan-to-pull-back-on-spending-acting-as-if-the-us-were-already-in-a-recession-194978
3. https://theconversation.com/retailers-may-see-more-red-after-black-friday-as-consumers-say-they-plan-to-pull-back-on-spending-acting-as-if-the-us-were-already-in-a-recession-194978
4. https://www.marketwatch.com/story/what-retailers-black-friday-and-cyber-monday-sales-tell-you-about-retail-stocks-recession-and-the-economy-11669105931?mod=home-page

• Jeff Bezos told Americans to prepare for a recession by cutting their spending
• Economists now see a recession as inevitable
• Some Fed members consider a recession necessary to tame record inflation

 

Prepare for a Recession

Amazon Executive Chairman and 4th richest person in the world, Jeff Bezos told people to prepare for a recession. He advised Americans to hold off on big purchases. They should save their cash for a rainy day. Good advice, especially if you are one of the 10,000 Amazon employees he is about to layoff. Bezos didn’t say how long he thinks the downturn will last. But he believes the US will be in recession soon, if it isn’t already.

Inflation is eating away at American’s savings. We are now tapping into our credit reserves. New data showed that household debt surged to $16.5 trillion last quarter. The number of mortgages and car loans is on the decline due to higher interest rates. But credit card debt is swelling quickly. It is rising at its fastest pace since 2008. Personal savings swelled during the pandemic. Today, those savings have plunged in half.¹

Most economists see a recession as inevitable. A Bloomberg economic forecast projected the probability of recession by October 2023 at 100%. The risk of recession is increasing alongside rising interest rates meant to combat inflation. The US economy did meet the informal definition of recession by contracting for two straight quarters in 2022.²

There was growth in the third quarter. But economists said that it was more accounting than actual growth. “If this constitutes improvement, we’ve set a very low bar,” said Bankrate chief financial analyst Greg McBride. He added the “pervasiveness” of inflation “remains problematic,” particularly since shelter, food and energy prices “are still seeing large and consistent increases.”³

The latest Bank of America survey of fund managers found that 77% see a global recession occurring over the next year. Recession in the US will pale compared to elsewhere in the world. 92% of those surveyed predicted the economy will be marked by stagflation. High inflation coupled with negative growth is considered the worst-case scenario for markets. Stagflation would require the Fed to shock the economy with even more drastic rate hikes.⁴

The Federal Reserve May Require a Recession

One Fed official said that it won’t be possible to reduce inflation without a recession. Esther George is president of the Federal Reserve Bank of Kansas City. She said, “I’m looking at a labor market that is so tight, I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there.” And in response to other Fed member’s hope for a ‘soft landing’, she replied, “I would love if there was that path, and I’ve seen people paint that path. I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn’t get some painful outcomes.”⁵

Ms. George advocates slowing the pace of rate increases. But not stopping them. There is consensus among Fed members that stopping rate hikes prematurely could let inflation return. They feel that situation is worse than a recession. Ms. George and others don’t want to repeat the mistakes of the 1970s and ’80s.

She warns investors not to expect a pivot anytime soon. Inflation is here and recession is coming. Now is the time to reduce risk and find safe haven assets. Our Gold IRA is designed to protect your wealth through a downturn. Contact us today to learn more.

Notes:
1. https://www.dailymail.co.uk/news/article-11434349/Billionaire-Bezos-says-people-prepare-recession-holding-buying-TVs-cars.html
2. https://www.dailymail.co.uk/news/article-11434349/Billionaire-Bezos-says-people-prepare-recession-holding-buying-TVs-cars.html
3. https://www.forbes.com/sites/jonathanponciano/2022/11/15/recession-fears-hit-new-high-even-as-inflation-slows-heres-what-fund-managers-predict-for-2023/?sh=4dab2aeb7f4b
4. https://www.forbes.com/sites/jonathanponciano/2022/11/15/recession-fears-hit-new-high-even-as-inflation-slows-heres-what-fund-managers-predict-for-2023/?sh=4dab2aeb7f4b
5. https://www.wsj.com/articles/bringing-inflation-down-without-a-recession-might-not-be-feasible-fed-official-says-11668571133

• The latest Consumer Price Index report showed inflation is at 7.7%
• Continued high inflation will fuel the Fed’s aggressive interest rate hikes
• Stock market volatility increased as investors fear a major crash

New Inflation Data Released

The US Consumer Price Index was released today. Inflation is now at 7.7%. That is down from 8.2% previously. Elevated inflation has proven to be persistent. It has been running at 40-year highs for more than 8 months now. The previous CPI report indicated the largest increase since June. Much to the frustration of the Fed, not to mention people exhausted by sky high prices, there seems to be no end sight.¹

This report is squashing any hopes of a pivot away from continued aggressive interest rate hikes. The core inflation index is still three times higher than the Fed’s 2% goal. Economist fear that inflation is becoming more and more entrenched. Unless it takes a downward trajectory soon, constantly rising inflation could become a permanent fixture of the economy. The long-term damage caused would be irreparable.

Rising inflation means a fifth-straight 75 basis point interest rate hike is a possibility. We are in the middle of the most aggressive interest rate hike campaign since the 1980s. Some traders are gambling that the Fed will only do a 50 point raise. A number once dreaded is now desired. But smart money is betting on the 75 point increase.²

Higher interest rates mean more expensive debt. The bottom lines of highly leveraged companies will get worse. And stock prices will drop. This one CPI report can make the difference between a rally, a bear market or a total crash.

Stock Market Takes a Wild Swing

Traders expect major stock volatility from the sustained inflation. Stocks have previously fallen more than 1,200 points after a high CPI announcement. The data may be setting the stage for a total market crash in the next few days. Investors know it will empower the Fed to tighten the economy even faster. Traders are growing more uncertain. Market volatility has been escalating with every monetary announcement. Last week, the S&P 500 dropped more than 2% after Fed Chair Powell announced an expected 75 basis-point hike.³

The Fed’s forecast for peak inflation has increased after these past two CPI reports. They maintain that inflation will fall slowly due to the tight labor market. Powell said to stop inflation, the job market must soften. But that isn’t happening. A recent report showed the US added more jobs than expected in October. Earnings increased but they didn’t keep pace with inflation. Labor costs keep increasing, which businesses are passing on as higher prices. Workers are basically funding their own demise according to Fed economists.

“If the labor market is surprising us with strength and resilience, then we shouldn’t anticipate a different outcome with consumer prices,” said Carl Riccadonna, chief US economist at BNP Paribas. “One is going to follow the other. Labor is slow to turn, and the same goes for inflation.”⁴

Actual declines in prices will take a while to be reflected in the CPI. There is a lag between rate hikes and the results of those hikes. For this reason, everyone from CEOs to the IMF fear the Fed will overtighten the economy and drive us into recession.

Brutal inflation, market volatility and recession are the standing order of the day. The time to protect your wealth before things continue to get worse is now. Contact us today to learn how a Gold IRA can preserve your nest egg during this turbulent time. Who knows how damaging the next financial report will be?

Notes:
1. https://www.bloomberg.com/news/articles/2022-11-09/us-inflation-to-cool-only-slightly-keeping-big-fed-hike-in-play
2. https://www.bloomberg.com/news/articles/2022-11-09/us-inflation-to-cool-only-slightly-keeping-big-fed-hike-in-play
3. https://www.wsj.com/livecoverage/stock-market-news-today-09-13-2022
4. https://www.bloomberg.com/news/articles/2022-11-09/us-inflation-to-cool-only-slightly-keeping-big-fed-hike-in-play

• The Federal Reserve raised interest rate 75 basis points for the 4th consecutive time
• Stocks dropped when Fed Chair said not to expect a pivot on rate hikes
• Economists believe a recession is inevitable

Fed Chair’s Comments Send Stocks Sliding

Any hopes that the Federal Reserve would pivot on interest rates dissolved today. The Fed raised interest rates 75 basis points. That is the fourth straight increase at that record level. The rate target range is now 3.75%-4%. The rate range hasn’t been this high since January 2008. The Federal Reserve is applying its most aggressive monetary policy since the early 1980s. Stocks dropped sharply in response to Chairman Powell’s comments about future increases. The Dow fell more than 400 points. The S&P 500 dropped 2.1% and the Nasdaq was 2.9% lower.¹

Stocks dropped after Powell said, “we still have some ways to go” and that “it is very premature to be thinking about pausing.” He also stated, “the ultimate level of interest rates will be higher than expected.” He continued that the question of when to slow the pace of increases is now much less important than the question of how high to raise rates and how long to keep them at those levels.²

The increases are part of the Fed’s fight against inflation. Prices remain near 40-year highs. Even after a series of steep hikes, the cost of living rose 6.2% in September from a year ago. The Fed blames an extremely tight labor market for pushing up wages and fueling inflation. Rate hikes are adding to the pain of inflation. They are raising the cost of credit cards, mortgages, and car loans. Meanwhile, businesses are scaling back investment and laying off workers as capital becomes more expensive. ³

Heading Towards Recession

Many now believe a recession is inevitable. Some economists were hoping the Fed was beginning a ‘step down’ policy of smaller and smaller rate increases. They believe the Fed is overcorrecting since there is lag between raising rates and seeing their effects. An overcorrection is thought to lead to recession.

Lawmakers and the United Nations have called on the Fed to stop raising rates. They fear it could ignite a global recession. A CNN poll showed 75% of Americans think the economy is currently in recession. Even Powell conceded that the chances of a “soft landing” for the economy are low. He added that it’s proven to be more difficult than expected for the Fed to get a handle on inflation. GDP has declined in both the first and second quarter. That meets a common definition of a recession. The housing market shows we are in an economic downturn. Housing demand has plunged as mortgage rates climbed over 7% for the first time in more than two decades. ⁴

There is no indication that hikes will end any time soon. The best that people are hoping for is that the huge hikes come at a slower pace. Investors see a 50% chance that rate will go above a whopping 5% by next March. A falling stock market shows Wall Street’s crisis in confidence in this economy. Stubborn inflation, soaring interest rates and crippling recession are the order of the day. All you can do is preserve the value of your assets before things get worse. Contact us today to learn how a Gold IRA can protect your wealth.

Notes:
1. https://www.wsj.com/articles/fed-approves-fourth-0-75-point-rate-rise-hints-at-smaller-hikes-11667412242
2. https://opoyi.com/business/us-stocks-fall-after-fed-chair-jerome-powells-comments-789883/
3. https://www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html
4. https://www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html

• Gross Domestic Product appears to have grown in the third quarter
• The bump in GDP is deceptive, experts believe a recession is still on its way
• Numerous other indicators are pointing to a long-term economic downturn

The GDP’s Deceptive Increase

Major banks, the International Monetary Fund, leading CEOs and hedge fund billionaires all predict a recession in 2023. After two quarters of declining growth, some say we are already in one. So, a positive third quarter GDP report should be good news, right? Not so fast.

Gross domestic product is a general measure of the country’s economic output. Analysts estimate it grew 2.4% between July and September. On the surface, that looks great after shrinking for six months. But with that decline, stubborn high inflation and rapidly swelling interest rates, most forecasters predict a long economic downturn. Economists see this one quarter as just a speed bump on the road to recession.¹

The bump in GDP may be more economic sleight of hand than an actual increase in production. The GDP is likely to have increased due to a narrowing gap between imports and exports. With money getting tighter, consumers are buying less. As a result, the US is importing fewer goods. American individuals and businesses are spending less. With consumption being nearly 70% of our GDP, that’s taking the gas out of our economy.

Other Recession Indicators

There are other recession signals flashing. Mortgage rates have more than doubled since last year. This is causing the housing market to come to a standstill. An overpowered dollar is cutting US exports and overseas profits for US companies. Stocks are dropping along with corporate earnings. And a shrinking federal budget deficit reveals less government investment in the economy.

The Chief Global Strategist at JP Morgan said, “there is little reason to expect booming growth at any time over the next few years.”²

The GDP is also being propped up by an increase in retailer’s inventory level. Instead of reflecting actual growth, the increase is most likely a result of unsnarling supply chains.

If anything, this is the canary in the recession coal mine. Inflation-adjusted GDP reflected healthy gains around the onset of four out of the last six downturns according to Joseph LaVorgna, chief economist at SMBC Nikko Securities America and former Trump White House economic adviser.

The state of the economy is no secret to everyday Americans. Consumer confidence has fallen to its lowest level since July. The index dropped 30 points since February 2020. “Dismal” is how the report described most people’s view of the economy. Rising gas and food prices are the main reasons for the poor outlook. People shouldn’t expect it to get better anytime soon. The CEOs of Kraft Heinz and Coca Cola both issued statements that their prices will continue to increase well into next year.³

There is another reason not to get fooled by this GDP bump. A major recession indicator is going off right now. Short- and long-term bond yields have inverted. This means short term bonds are paying better than long term ones. In other words, bond traders are not hopeful about the future. The spread between the three-month Treasury bill and the benchmark 10-year note has inverted several times this week. Inversions have preceded every US recession since 1950. If history is any guide, then we’ll be in full recession within 4 quarters.

At first glance, a headline touting GDP growth looks like good news. But upon closer examination, the data is revealed to be a small bounce before falling over the edge. A recession is all but guaranteed. The best thing you can do is move your wealth into safe haven assets before we feel the full brunt of the decline. Contact us today to learn how our Gold IRA can protect your savings from the dangers of recession.

Notes:
1. https://www.cnn.com/2022/10/26/investing/premarket-stocks-trading/index.html
2. https://www.cnn.com/2022/10/26/investing/premarket-stocks-trading/index.html
3. https://www.cnn.com/2022/10/26/investing/premarket-stocks-trading/index.html