The following blog is from my friend Jay Vorhees at JVM Lending. I’ve contributed some of my own insight at the very bottom. Enjoy!
I am always hesitant to predict rate-increases because they so often do not come about. But, because rates have increased over 1/2% over the last few months and because Barry Habib of MBS Highway predicted that increase with amazing accuracy, I listen when Habib predicts additional increases. And that is what he did in his recent commentary and in an interview with economist, David Rosenberg.
BAD NEWS = INFLATION
Credit: The Paratto Team
Both Habib and Rosenberg believe inflation numbers will spike up over the next few months. They focus on Consumer Price Index (CPI) numbers, and point out that the CPI is a moving average of the last twelve months of inflation reports.
Hence, we won’t see inflation spike until April, May and June when the price increases we have seen in recent months start to get factored into the average. CPI numbers were in fact released today, showing a 1.7% increase over the last 12 months.
Habib and Rosenberg believe, however, that CPI numbers will be 1% to 2% higher by June, and that will no doubt spook the bond markets and push rates significantly higher. This is because no bond investor wants to be stuck with a 1.6% yield if inflation rates are at 3%.
GOOD NEWS = INFLATION IS SHORT-LIVED
Habib and Rosenberg also both believe that the inflation we will see will be short-lived. This is because they both think the price increases we are seeing now are primarily a result of supply chains being broken because of COVID.
They remind that the same vaccines and potential herd immunity that are freeing up spending and potentially spurring inflation are also the same vaccines that are also opening up supply chains.
They think the benefits of opened supply chains will outweigh upward pressures on prices brought on by increased spending, and we will see tamer inflation numbers later in the year. Rosenberg also points out that all of the government borrowing taking place now is also deflationary.
NO MELTDOWN; PRAGMATIC; ANYTHING COULD HAPPEN
Credit: Fox Business
What I most enjoy about old salts like Mr. Rosenberg is how pragmatic and relaxed they are. The blogosphere is filled with “doom and gloomers” who insist “the end is near” because of our government’s unprecedented and massive monetary and fiscal intervention.
Rosenberg, however, believes those fears are overstated, pointing out how the Japanese central bank and government have been far more activist over the last twenty years without suffering any major consequences.
Rosenberg is finally quick to point out that there is still no certainty with any prediction in today’s volatile world, and he is particularly adamant about not trying to time predictions.
CONCLUSION
Rates will very likely continue to rise over the next few months b/c of inflation concerns. They could also fall again, but there is no guarantee.
Kristin’s two cents:
I also listened to a Barry Habib Zoom call in early February. One of the other things he noted is as debt increases, interest rates decline. What stood out is the current U.S. debt is around $28 trillion. If you decreased it by $1 million a day, it would take about 2,700 years to fully pay it off. The current administration is currently looking a more debt with their infrastructure bill. The good news is if rates go back down and you are just getting into a loan, you can always refinance down the road.
One last thought: The Wall Street Journal just reported that there are more real estate agents in the United States than houses on the market, but that will be a blog for another day!
