Getting Whacked

Looming recession, zombie enterprises, real estate woes and inverted yield curves...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

Labor Market Adds 236,000 Jobs In March—Lowest Since 2020—As Economists Worry Recession May Be ‘Underway Now’

As waves of layoffs ripple through the long-booming labor market, the Labor Department's jobs report on Friday showed a continued slowdown in employment—adding to a slew of signs this week that the economy may be cooling more quickly than believed, potentially risking the hard landing Federal Reserve officials have long tried to avoid.

Really? What are they ‘worried’ about?

Ask almost anyone; they will tell you that a ‘recession’ is a bad thing. Lower stock prices are also bad. And higher interest rates are bad too.

They must assume investors, speculators and entrepreneurs never make mistakes…that everyone is a stock seller, and not a buyer…and that high interest rates are some form of curse – like the plague – and not just a way of making the supply of available funds meet the demand for it.

Out of Whack

‘Things that are out of whack have a way of getting back into whack.’ This is just another way of saying that there is a ‘normal’ state of affairs…and that when they go too far afield, it’s a fairly good bet that they will soon be headed home. Economists call it ‘regression to the mean;” it’s one of the most powerful forces in finance.

And now, the US economy needs to back up…it needs to go ‘back into whack.’  The Fed’s negative (below inflation) rates affected almost every financial transaction in the whole economy. Low mortgage rates caused a bubble in housing…and commercial real estate. They also caused a huge boom in borrowing – household, corporate, and government. They financed businesses that never should have been started…and allowed zombie enterprises to squander billions in real capital. They helped the feds fund programs that never should have made it to the drawing board…much less to the launching pad…made it possible for them to give pensions, grants, loans, and stimmies that they couldn’t afford…and imagine that they could right wrongs from more than 150 years ago (reparations) as well as those committed on the other side of the planet (wars in Iraq, Afghanistan and the Ukraine).

A recession is badly needed. It’s how an honest economy gets itself back into whack.  

And what ho! Here it comes. In addition to the fall off in the job market, let’s look at the housing market. Prices hit an all-time high last year. Since then, there have been seven consecutive months of decline, for a total loss of 5% – the largest 7-month decline in more than 10 years.  

Five percent isn’t much. House prices are still nearly 40% higher than they were 3 years ago. They’ve got a lot further to go before they get back into whack. But here again, why is cheaper housing such a bad thing? Back in 1971, it took the average American about 36 hours of labor each month to pay an average mortgage on an average house. Now, the figure is 110 hours – or 3 times as much. A recession in the housing market would make it a lot easier for people to keep a roof over their heads.

Back Into Whack

Commercial property may be facing an even more treacherous correction. USA Today:

Commercial real estate is headed for a crisis worse than 2008, Morgan Stanley analysts say

...a PIMCO-owned office landlord defaulted on an adjustable rate mortgage on seven office buildings in California, New York and New Jersey when monthly payments rose due to high interest rates. 

Brookfield, the largest office owner in downtown Los Angeles, that month chose to default on loans on two buildings rather than refinance the debt due to weak demand for office space.

They are a bellwether for what is likely to come, as more than half of the $2.9 trillion in commercial mortgages will be up for refinancing in the next couple of years, according to Morgan Stanley. 

“Even if current rates stay where they are, new lending rates are likely to be 3.5 to 4.5 percentage points higher than they are for many of CRE’s existing mortgages,” wrote Morgan Stanley Chief Investment Officer Lisa Shalett, in a recent report.

And there’s more good news. Bank lending is also getting back into whack.  Bloomberg: 

US Bank Lending Slumps by Most on Record in Final Weeks of March

US bank lending contracted by the most on record in the last two weeks of March, indicating a tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy.

The most recession indicator comes from interest rates themselves. One of the surest precursors of a recession is an “inverted yield curve,” or when rates are higher for short-term loans than for long-term.

Cometh Recession?

Risks increase with time. So, normally, the interest rate you pay when you borrow for a long time is higher than for a short-term loan. And when the two are reversed, it is a signal that something is out-of-whack. Here’s Reuters:

NEW YORK, March 7- Hawkish comments by Federal Reserve Chairman Jerome Powell helped push a closely watched part of the U.S. Treasury yield curve to its deepest inversion since 1981 on Tuesday, once again putting a spotlight on what many investors consider a time-honored recession signal.

…they believe that higher borrowing costs will eventually hurt the economy, forcing the Fed to later ease monetary policy.he phenomenon is closely watched by investors as it has preceded past recessions.

For the last six recessions, a recession on average began six to 36 months after the curve inverted, [Anu Gaggar] said.

How will the inversion be corrected? How will the housing bubble get popped?  How will money-wasting corporations get liquidated…bad loans get written off…and discipline be returned to the financial world?

A recession will help.

Regards,

Bill Bonner