New Risk: Self-Fulfilling Recession Calls

keeps going higher and higher, doesn't it. According to the latest data out this week, the consumer price index climbed nine point one percent in June, the most in almost forty one years, and not markets are pricing in an even more aggressive response from the Federal Reserve to team surging prices with interest rate hikes. But is triggering a

recession the only way the Fed contained inflation? What we'll get into it with a very well known economist who, by the way, the don is from my hometown of Westchester, p A. I'm very excited, but I thought I also had to ask you. Um, I keep reading about these problems with airlines and and everyone's flight being delayed. I think it's all your fault. I was about to say, you're about to blame me. Every week you're off to another exotic location. I did go to Florida last week.

Did you clog up the airlines? No? I flew from the Trenton Airport, the Trenton Trenton, New Jersey. It really shouldn't be publicizing this because I want to keep it a secret. It was so easy to get in and it literally took two minutes to get off the plane, Like no, there were no people there. It was the easiest process in the world from the Trenton, New Jersey airport, which I know well from my days in Trenton. Did they serve like pork roll on the on the flight, No,

that's that actually would be mustard part of them. No, But it's like my parents lived really close to it. I went with my parents to Florida. It was the easiest, easiest process in the best flight, Like so so easy, you can not be advertising it. But possibly our guest, who actually I think lives close by to Trenton as well, he might be utilizing this airport, not them, talked it up so so much. But I want to welcome Mark Sandy. He's the chief economist for Moody's Analytics and he's the

host of the Inside Economics podcast. Thank you so much for joining us. It's good to be with you. I had no idea you could fly from Trenton where in Flori. Did you fly to so you can fly to I flew to Fort Lauderdale. I hung out with our old colleague Sarah Ponzac actually Mike and who who she lives in Fort Lauderdale now, um, and it was just the easiest process. It was, honestly like, I'm never going to

New York again. I was gonna say, you can only fly from Trenton to Camden is the Yeah, that's it, But but you can. It's it's very smooth flying. Yeah, it was. It was really Yeah to check that out. I have a home and vera Vera which is just up the coast from Fort Lauderdale, so oh, you gotta do it. It was, yeah, check that out. And sticks were okay priced. Oh they were so cheap. I don't even don't want to tell you. Yea very good. I'm really talking this up. You're gonna go and have a

bad experience. Mike, I should ask you what high school did you go to? West Bishop Shanahan High School? When I was still in the borough Westchester. Now they well, yeah, you try, I try. You know tall. Did you play basketball? My reputation precedes me. I did indeed play best j V j V well, you know basketball. Yeah, and we had a good squad back then. We were state champions in I did not play on the stage. He wasn't on that. He was on the team in like the

thirties or something. Yeah, I can make fun of Mike, but it sounds like she's abuse of me. I feel like, yeah, we've reached our limit on that. Yeah, No, I think there's more to go. So Mark, I want to start with the CPI print, which we got this week, and then I saw you actually tweet about it. You said it was predictably ugly, and then it might take eighteen to twenty four months for us to get back down to Another thing you said was that rent growth will

be an impediment. There's a shortage of affordable homes. So can you can you talk to us about what we got this week and what you're forecasting? Yeah? Right, Uh, nine point one percent. You're over your CPI inflation through the month of June. Uh. Just here's a good here's an interesting fact, toy. I mean, I think it strikes

the point home. The average or the typical American household who makes about this sixt k year, they need to spend almost five dollars more a month to buy the same goods and services that they were purchasing a year ago. So just think about that for a second. That's pretty painful. And you know there's no way around the high inflation. I mean you took at gasoline prices. I mean you gotta go to work, you gotta go grocery shopping, you

gotta go to school, So no way around that. Rents are up a lot, uh, given the affordable housing shortage. Food prices are up. A lot of that goes back to energy because of diesel prices, you know, getting the things for the food from the the from the farm to the store. Sheelf. But everything's up a lot, very few in fact, is you know, I was looking through the report for things that had fallen in price, and

I can count them on one hand. Really, like smartphones are down, and that's because of improvement in technological change and technology. Men's pants, believe it or not, they're selling for less today than a year ago. I you know, I'm in my short right now. Somebody's gonna say sweatpants are sweatpants now they think about it. How many pairs of pants have I bought in the last year? I can't. I can't tell you anyway. So prices are up a

lot and it's really hurting. Um, I will, I'll just tease it and I'll stop, but I you know, I do think that will be the worst of it. I say that with intrepidation because I said that before in the last few months, because you know, pegging the peak and inflation is intrepid because it depends on oil prices and gasoline prices, which goes back the Russian invasion of Ukraine and sanctions and the timing and sanctions. Hard to get that right. But it feels like we're moving on

the right side of the inflation picture. Now. A long way to get back, because I said eighteen twenty four months to something we all feel comfortable with. But I think we're on our way and it fingers crossed. You know. The one weird thing I've noticed mark with people trying to call the peak and inflation is that it's such a moving target as far as what's driving it. I mean,

obviously energy, oil, gasoline prices, um. But you know last year everyone was looking at lumber when lumber prices peaked, they thought, oh, that's it, that's the sign that inflation is peaked. Now I have to wonder about rent owners

equivalent rent in the CPI report UM. And I talked to Rob Barnett of a few months ago of Research Affiliates, and he was sort of very hawkish about inflation because he said, look, home prices have risen something like thirty some percent since the end of two thousand and nineteen, and and his in his thinking, that has to trickle into the owner's equivalent rent or the other shelter components of c p I. UM. So, even if energy comes off the boil, how how big of a deal is

rent going to be going forward? Do you think? I mean, is there still some of that? How home price appreciation as are not predicts that that has to trickle into the rent UH component of CPI. Yeah. The reason well, I mean, just give give a set of numbers to make a concrete I mean, let's say inflation inflation we know now is nine point one. If oil prices simply go flat, and that means gasoline prices we'll start will come down a bit, diesel prices will come in a bit.

Jet fuel because we've been paying a lot more for air fare, except if you fly from Trent and apparently, you know, you can pay more for air fare. Airfares,

they'll take about half the inflation away. So you go from nine to you know, four and a half five, you know, something like that, and that getting from five to two and a half, which is kind of the upper end of the Vetch target for CPI inflation, that's going to be much more difficult because that goes to some supply chain, some product services, excuse me, products that have been disrupted by supply chain issues like the vehicle prices.

But the big chunk of that is, in fact the higher rent rents that were now paying and they're in the very strong rent growth, which is actually the market rents have been rising now for more than a year double digit, but it's only now getting into the because of measurement methodologies by the er of labor statistics, only now getting into the c p I for rent in

in in a full fulsome way. In a full way, I will say, though, uh that it feels like market rents growth is has topped out, that it is starting to roll over. And that goes to the fact I think a couple of things. One is, renters just can't afford these rents, you know, they're balking, and they're just they're gonna double up, the triple up, go back to their parents house. You're not gonna see households formed because you know, kids can't afford in households can't afford these rents.

So that that's starting to I think, uh affect the ability of landlords to increase the rent growth and more supplies coming uh. You know, we're actually putting up a lot of multi family units by historical standards, and a lot more is in train. In fact, there's a record number of of units multi family units in the pipeline going towards completion. They've been delayed because of the pandemic and the supply chain issues, which have got back to

your point about lumber. You know, it's disrupted all kinds of building materials and it's affected labor markets. So construction workers have been been they've been builders have been having troll finding construction workers in some parts of the country. But is that that gets ironed out, I think rent growth will roll over even further. It will remain high, you know, kind of high mid high single digit your over your growth, but it's gonna start to come in.

And once that does, by this time next year, rank rint growth will become less additive to inflation. That will become still add but less additive. And I think it will allow inflation broadly to moderate back down close to the Fed Reserve's target. But but again, it's gonna take a while to get there. What about all the other pieces of inflation besides housing, Because you know you have this projection about the next eighteen to twenty four months. What else is going to be happening over the next

eighteen to twenty four months. I know you have downgraded your GDP outlook for this year and next, right, I have, uh, still no recession. Obviously, recession risks or high and we could talk about that. I mean, clearly when inflation is so high and the Fed is on de con one and really rightfully focus on getting that inflation down by jacking up interest rates and and and sentiment is miserable, right, I mean I talked to CEO CFOs investors, you know, friends, family,

to the person, they think we're going into recession. I've never seen anything like it. I mean, I you know, you can look at my hairline. I've seen a lot of business cycles now and no one predicts recessions. Uh. You know, but in this one, everyone is predicting a recession. So when sentiment is so fragile, it's not gonna take

a whole lot to push us in. You know, I think with a little bit of luck, we can talk about what that means, and some reasonably good policy making by the FED, and we can talk about what that means, we're gonna be able to avoid recession. But I don't say that with a lot of confidence. I think that's you know, recession risks are are very high, but I don't think we need a recession to get you know, inflation back in. You know, all prices are gonna roll over.

Natural gas prices are gonna fall. We're gonna see vehicle prices come down as supply chain issues airing themselves out, we get more vehicle production, UM, commodity prices, more goods prices, more broad they are going to come in. UM. So you know, I think, uh, again, with a little bit of luck and some reasonably deft policymaking by the FED, we should be able to navigate through. But you know,

obviously it's gonna be a close call. Well It's it's funny, Mark, because there's once again, there's this debate about what exactly is the definition of a recession. You know, if you boil it down to the most simplest form, people tend to say, well, two quarters of negative GDP growth, which we might actually get for the first half of this year.

But then everyone else says, well, now, the the National Bureau of Economic Researchers, Uh, they're the ones who decide if it's a recession, but they have a long list of other items. Are you pretty comfortable um in sort of wrapping your head around what it takes for the m b e R to declare recession or is there some wiggle room there? Is there some sort of qualitative elements with that that would allow them to say, yeah, this one doesn't count, you know, especially you know, especially Mark,

when you think of this job market. We still have eleven million job openings in this country. You know, is it you know, two quarters of negative growth? Uh? Yeah, yeah, I mean it's worked in the past. It correlates very well with the decisions by the academics sitting on the Business Cycle Dating Committee of the National dar of Economic Research.

But you know, GDP is like one thing they look at and I only even think at the top of the list of things that they look at, I mean, it's employment, it's income less transfer payments, it's manufacturing and trade sales. There's a lot, a lot of different indicators that they gave. They look at the gauge. What you know, whether this feels like saying, by the way, the way

they define a recession, I think it's right now. I'm gonna paraphrase, so I don't got I don't know the wording exactly right, but don't get the get the gist of it. It's a broad based, persistent decline in economic activity. Lots of wiggle room there in that definition. No, I don't what we experienced the first half of the years that is not a recession. I mean, can't create were creating what we created four or five a dozen jobs on average per month in the first half the year.

And I think the if you look at layoffs, you know, as measured by a claims round employment insurance, I think that's at a record law in the first half of the year. I mean, it's just that's not a recession. And I don't think they'll call not that, you know, a recession isn't dead ahead that you know, obviously there's a lot of risk, but that what we've experienced so far, that's a non recession. And here's a here's an intrepid forecast for you. You have to ask me back, you know,

five years from now. But once we get all the GDP revisions in and GDP gets revised, you know, it's an imprecise representation of reality like most data. But once it gets you know, revised with all of the data that comes available, my guess is, uh, these declines could get completely Q one. That decline may not get completely borrowsed away, but Q two, if we get a small decline, I'm guessing that gets revised away. I just don't think

it's it's accurately representing what's going on. And there's a lot of reasons to suspect that, given that the pandemic has created havoc with you know, all the different economic statistics that we look at. Yeah, I also wonder, Mark, does it really matter whether Recession Dating Committee says yes, it's a recession, No it's not. You know what, what difference does it really make? Well, obviously makes a political difference that I mean, besides that, I'm just trying to

think because there's some bond covenant somewhere that's triggered. You know, anything like that. I'm at a loss for you know, if whether there's a material distinction between well it feels like a recession and someone you know, rubber stamping and saying, yes,

this is technically a recession. You know what I mean? Yeah, I mean policy probably, you know, policy probably if they come out if the business cycle dating committees that came out and said recession started in January, Uh, you know, that might uh light of fire under policy makers and they say, oh, maybe we need to do X, Y and z, so it might have some impact there. There are some interesting line up that you bring it up. There's efforts uh to codify where we are in the

business cycle for different types of economic policy. So you know, for example, of unemployment rises by a certain amount over a certain period of time, then you automatically trigger you know, supplemental unemployment ssurance benefits or some other form of benefit. You know, we have these automatic whether we call automatic stabilizers in the federal budget, things that help the economy

out when it's not doing well. But you could you could reinforce those out of automatic stabilizers by you know, pegging two recession dates or something like that. But that's not the case now. But you're right. I mean, you're right whether the recession began in March or April or May, you're right. I don't, I don't. It matters a whole lot to the in the grand scheme of things. So Mark, when you downgraded your GDP growth outlook, I think you

said odds remain that the economic expansion will continue. And I wanted to ask you what specifically you were thinking there. Was it the jobs figures we were just talking about, or what goes into that thought? Well, bunch of stuff, But I'll name one thing. The thing that that that I take the most soulless in is that, in my mind, the firewall between a continuing growing economy and a recession

is the American consumer. American consumer hanks tough, just do their part, you know, spend like they've always been spending, will avoid a recession. And by the way, if the American consumers hanks tough, they'll they'll keep the global economy moving forward as well. You know, some parts of the global economy will go in but you know, the US consumers kind of driving the train, right now. And if you look at the American consumer and pretty good chick.

I mean, obviously they're getting hammered by the high inflation right now, but you know they've got a lot of excess saving they built up during the pandemic, and just cross all income groups. For the typical American household, by my calculation, they as of June had seven eight thousand dollars and excess savings. So if I'm paying five more a month for the for the higher inflation, and I have seven eight thousand dollars in nextless saving, you can

do the arithmetic. That buys me a little bit of time, right, I can use that excess saving to supplement my income to compensate to offset the ill effects of the high inflation. That is low, That service burdens are about as low as they've ever been. That services, what share people's income is going to servicing their debt, interest payments, principal payments. That's pretty close to a record low. People have locked in the previously low record interest rates through refinancing way,

so they're very insulated from the higher rates. The stock prices are down, but house prices are up. People are wealthier today, particularly middle American households are more wealthy today than they were a year ago, and a lot more wealthy than they were three or five, ten years ago.

So I can go on. But that just gives me a sense that the consumers are gonna they're gonna hang tough, uh, and they're gonna continue and just not They're not gonna They're not gonna spend with abandoned they haven't been doing that. But if they just simply spend at a rate that they have consistently done in recent history pre pandemic, uh and up and through the pandemic, I think we should be able to get through this without you know, going into a full blown recession. So number that's at the

very top of the tippity top of reasons. Why you know, I'm still saying when I say that with intrepidation, I don't want to sound Pollyannish. Obviously, my recession odds are pretty high, uncomfortably high. But but nonetheless, I you know, that gives me some confidence that you know, again, with a little bit of luck on the pandemic and the Russian invasion and some death policymaking, we come make we

can make our way through without an actual recession. Yeah, I think you're from the note I read, your recession probability is like in the next twelve months, in the next twenty four months. You know, if you look at like a recession probability index that is that's alarmingly high. You know, they get that. I mean, I'm very and I again I go back to the sentiment, it's just very very dark consumers. You saw the small business UH

survey from the National feuure at Fish Independent Business. I think that did that hit a kind of all time lower, pretty close lower than even the teeth of the pandemic. Yeah, it's very low. I don't know if it hit the record, but yeah, yeah, it's say, are you guys feeling it's well, let's say the the vibes recession? I think I like that. Have you heard that vibes recently? Mark? I wanted to

get back to that. You know, you you touched on the home price that this amazing acceleration in home prices we've seen over the last uh two years. Um. Obviously, everyone I've talked to UH says, well, housing cool off. The financial systems on much better footing than it was in the days of subprime liar loans and whatnot, and and this you know, structured finance that got out of control in the in the mortgage market. But I can't help but wonder if we are in for a pretty

nasty cooling off of the housing market. Um. And given its importance to your point to sort of household net worth, to the labor market, when you're talking about uh, new home construction, to the retail market, when you're talking about people buying and selling homes and and doing uh home improvement projects, it should such an important component of the economy. What what does housing look like to you in the next year too, um? And sort of what are the

potential ripple effects of it? Uh, potentially cooling off on the rest of the economy. Oh no, it might gets cooling off. It's going into deep freeze pretty fast here. Uh. You know, mortgage rates at just north of or just south of six percent, almost double what they were a year ago at their all time low. And you you know, you just take that higher interest rate, you multiplied by the higher house price, and you look at the monthly payment that the first time homebuyers facing, it's you know,

five more now than it was a year ago. That's prohibitive. So first, some homebuyers are locked out of the market, and trade of buyers are kind of locked in, right, because the average rate on outstanding mortgage is given all the reefinancing I talked about earlier, is three and a half to four percent. So if you sell your home and buy another one and get a mortgage, you're going from three and a half four to six. That's a big increase in payment. So people just aren't going to

do that. Uh. So you're seeing home sales come down dramatically, you know already, and listings are starting to I mean I follow different markets across the country and I can you know, I get listings email to me, and I can just feel it. I can just see the list of if I go back, you know, six months ago there was nothing, no no inventory. But now the lot

the list is getting longer and longer and longer. And I expect house prices h to parts of the country to fall, and particularly the most the areas where prices have been duced the most. Uh you know, in the pandemic in the southeast in Florida. Um, you know, except my home in Verreau that should be problem. Um, it's always it's always Florida for some reason. The house it's always Florida. You know, the Mountain West. You can draw a line. I now know how to pronounce Boisey, Boisey,

wondering Boisey down to Phoenix. You can draw a line and go few hundred miles on either side. Um, so I expect some price to clients are nationwide. We might be able to sneak through with prices just essentially going flat here for a couple of three years and let household incomes and rents and construction costs kind of catch up. But there is no recession. If we get into recession, then I think that's gonna put real downward weight on house.

Person will see some national house persus claims. But but I'll but I'll say two other things about this one. This is by design, right, The Federals is raising interest rates to slow growth, and that happens through the most rate sensitive sectors of the economy. Housing is the single most interest rate sensitive sector of the economy. So this is not, you know, a big surprise, that's exactly what

you would expect. And second, I don't expect the prices to crash because the lending the mortgage lending that's been done since the financial crisis and the collapse in housing back over a decade ago has been fat I'm on the board of directors of I should disclose this of m g I C and nationwide publicly traded mortgage insurer, and UM on the chair of the Risk Committee. So I look underwriting very carefully, and you know, it's been pristine since the collapse. And the other thing is it's

all plain vanilla. You know, thirty year, fifteen year fixed rate pre paigal mortgage is nothing fancy, no no adjustable rate to your subprime. And just so, I just don't see the stresses here to result in a big sharp decline in prices. But you know, prices going flat nationwide and down in fair share markets. Yeah, I would. I would anticipate that, and I would say that's that's that's

that's exactly what the FED wants to see. Well, actually, Mark, I wanted to ask you to speak a little bit more about that, like which areas are the most at risk across the country. I know you had said recently that from coast to coast will be seeing housing prices coming down overall. What is the downside risk for housing.

How bad can things get and where specifically? Yeah, no more session Again, I think national prices HASH prices expectively go flat here over the next two, three, maybe four years. That means big parts of the country you're gonna experience meaningful price declines. So in the most uh juice markets where I expect the biggest price corrections because of affordability, primarily because of affordability, that would be in the southeast and in the West. So the poster child would probably be,

you know, like a Charlotte, North Carolina, a Tampa, Florida. Uh, you know, a Phoenix, Arizona, a Boise, Idaho. And it's there. You know, it fundamentally goes to affordability, right, because prices have risen so far, so fast in these markets, and you you add in these higher mortgage rates and you just simply people just simply can't afford to buy the home. Doesn't make you know, they just can't come up with a monthly payment that they need, and so that means

prices have to come in. Now, I will say it may take a bit of time for prices to come in because people have in their minds what they think their home is worth. You know, the in real estate at turning points like this, seller's and buyers go into kind of like a kabuki dance trying to figure out what real value is, and that takes a little bit

of time transaction stop. That's why I think home sales are gonna be getting crushed on while they're gonna be weak, But it takes a little bit of time for them to figure out value price transact and for that to show up in the data. So it may take you know, six, twelve, eighteen months before this all shows up. The other thing I throw into the mix is and some of these most juiced markets we have seen uh more flipping going on,

which is not surprising. Something meaning uh investors that come in and buy a property with the intent of selling it rapidly. You know, the ie buyer, for example, will be kind of an institutional flipper, and they have infected some markets like a Phoenix is the best example. That Raleigh, Charlotte, Atlanta, those Florida markets again and as a result, you know, they'll get wrong out and that means they'll you'll see bigger price declines in those in those parts of the country.

But you know, I know you're you're primarily focused on the US, so this might be a little bit of a curve ball. But now, Mike, I my remits you know, pretty wide, not that I you know, I'll give you my three cents about almost anything so far away, all right, good, good, well three euro cents, which is is parody's parody these days.

So but I you know, I can't help but think about temperatures getting cooler, and Europe and the Russia tension escalating, and the possibility of the gas getting turned off or at least threatened to be turned off. A lot of people are talking about that these days, I know, for for someone like you, who you know, is based in data and and history and all that, it's it's got to be tough to sort of all of a sudden incorporate of Vladimir Putin type of character into your you

know how you're thinking about the future. But um, how big of a risk is that some sort of you know, es relation of tensions between Russia and Europe that causes an even bigger energy crisis there? And and what is what are the sort of global spillover risks of that? I mean, obviously I'm guessing they're pretty bad. All around. But but how are you thinking about, um, sort of the fall and winter, uh, and Europe and and and this conflict really showing no signs of abating. Yeah, good point.

And by the way, just because you've made reference to this earlier, you know the reason why, in my view, economists got, including me, inflation wrong, because we got the pandemic wrong, and we got Russia wasn't even on the radar screen, you know, this time last year. Right. So and when I say the pandemic, we got the vaccines a little over a year ago. Remember President Biden say, go enjoy your families on July four. We thought the

pandemic was behind us. But delta was literally already a problem and create all kinds of havoc, and particularly in Asia with the supply chains. Again, so the surprise isn't inflation per se, a price was just the pandemic. And and of course what Putin has done in Russia, which has been you know, incredibly debilitating, you know, to the global economy and really a problem for Europe because they depend so much Europeans, uh, continental Europeans in particular on

Russian uh energy. Um, you know, there's a lot of other links agriculture and metals and and the technology and all kinds of things. But you know, the the energy has been very very secondvance, not just oil, but even more importantly is natural gas for some of these countries. And I think, I think, I think if I think like this, right, Germany gets its natural gas from from Russia, and they really rely on the natural gas for not

only home heating, but for their industry. And you know, for Germany that's less a locomotive for the EU economy, and they a lot of it is industry's it's a vehicle industry for example, that really relies on on uh, it really drives the train and and uh and you know Obvio really struggling with this. So I do worry about that. And there's a lot of script to be written here, right. I mean, the EU, the European Union

sanctioned Russian oil back in early June. By the way, that's why gas prices prices with skyward and gas prices at their record high in June. And that's what we're seeing in today in this week's CPI report, you know, this week's CPI report. Uh. But but I do worry that, uh, you know, going forward that they actually implement the sanctions and stop buying. Right now, they said they're gonna sanction, but they're still buying the oil. So it's oil still

getting into the marketplace. But what happens if they actually stopped buying or the Russians turn it off, all prices will go right back up again. And that, don't, you know, obviously create a lot of part or what are the Russians turn off that natural gas? You know that they don't just stop pumping the natural gassion shipping it through the pipelines to Germany, and that would send the European economy,

you know, deeply in recession. So yeah, I think that's a real Obviously Europe is if our recession risks are high, there's our I'd be surprised if they're able to avoid recession. It's gonna be very, very difficult, and that does reverb rate back on us. Now. Fortunately, the US economy remains uh quite uh insulated. You know, we're were we have globalized, uh but we when we do the arithmetic, we still are mostly a domestically driven economy, consumers and US businesses

driving growth. So we can navigate through to some degree. But you know, Europe and UM and emerging economies are in recession, and you know, the dollars going skyward, and our experts are weakening, and we're sucking in a lot of imports, which we've been doing. That makes it very difficult for us to avoid recession as well. Anything I just add to the mix. I don't know if I mentioned this, but you know, it's not only about oil

and natural gas. You know, it's about refining capacity and gasoline and diesel and jet fuel, and refining capacity is paper thin. We just don't have. We're running out a hundred percent. So if anything that disrupts that, you know, all prices may not go up, but gas prices, jet fuel prices, diesel prices may and now that will do this, that will do the same damage to our economy. So something else to worry about. Oh good, something else to worry about. I did ask. We haven't even got through

a hurricane season, so there's there's that to worry about. Three. Finding capacity I have. I have one more question about the housing market for you, because you focus on that quite a bit. I wanted to ask you how how you think rates can go. Well, I think we're seeing the high point in rates right now. Uh, in a well functioning economy in the When I said that, an economy that is it full employment, inflation at target, uh,

growing at its potential. Fixed mortgage rates thirty year loan should be five and a half percent that you know, give or take. That's where we are today, five and a half percent. So I think we kind of race will go up and down and all around, depending on recession concerns, inflation worries, what the FETE is doing. But I think we're going to settle in about where we

are today, give or take. And so I think the adjustment in the mortgage market in terms of rates has has happened very very quickly, and uh, you know obviously that's why the market's kind of seizing up here, is trying to adjust to these higher rates that came out of nowhere and rose very rapidly. But I think five and a half percent it's kind of i'd say, my kind of rule of some of where rates should be long run, and that's where we're going to settle in here.

Going park again, it could go higher, you know, for lots of different reasons. It can go lower if we go into recession. But five and a half is roughly where we're going to settle in. Speaking of interest rates, smart, let me squeeze one more in before we get to to crazy things. But obviously the Bann and I and uh, honestly most of us here at Bloomberger obviously market nerds, as you know. And one thing everyone's fixated on these

days is the yield curve inversion. We have rates on two year treasuries uh today on Wednesday, as we're recording something like twenty basis points higher than ten year rates. Um, many believe, uh that is sort of a slam dunk precursor of a recession. Do you pay much attention to the yield curve and it's predictive value as an economist, I didn't. I put a lot of weight on it. So you know, it's twenty basis points today in four or five days that ten two year has been inverted.

That's not enough if that's the end of the story to signal to me that the economy signaling definitely, economy is gonna slow, but it's you know, and really kind of stall come to stall speed at some point over the next year, six twelve months. But I don't I don't think it's signaling yet that we're going into recession before. If we stay down twenty basis points in twenty I thirty, and we stay there for a few weeks a month,

then uh yeah, my forecast will probably change. I'll probably adopt a recession forecast from the baseline because I think that is a very prescient indicator of future economic downturns. It's it does a very good job of kind of pegging things. There's a lot of situation behind it which we can go into. But it's you know, it's it's not just a statistical result. There is there is there is actual intuition behind why that is such a good

predictor of future future. Yeah, quickly, let's let's get into that real quickly. The sort of cause and effect of it. Is it just a tightening in credit conditions when you know the near term rates are higher than long term rates. Yeah, I mean that's the that's one way of thinking about it. I mean, the credit is the mother's milk of economic activity. Too much credit, you've got a problem. You get the financial crisis. Not enough credit you sees up kind of

the period after the financial crisis. You need a you know, a steady flow of credit to businesses and households to keep the kind I mean moving forward. And if they curve inverts, that means the financial system can't make money or hard to make money. Right, because banks and other financial institutions fund themselves with short term money. They take that, they lend it long and get that higher interest rate they work. They benefit from that that net interest margin

or that spread. So when the curve inverts, they can't do that. Their margin is gone, and therefore they're less likely to extend credit and that causes the economy, businesses, households to kind of slow up their activity and lays the foundation for recession. Is more of a signaling intuition,

and that is just bond investors, right. So bond investors they see they have a view of what the Fed's gonna do, and in this environment, the Fed has been crystal clear what it's gonna do, so no no ambiguity. That is reflected in the two year yield. And right now they're saying I'm gonna jack up interest rates very aggressively. You can see that in the higher two year yield, and then the bond investors say, oh, well, that's definitely

going to slow the economy. Put just intercession, bring inflation down. Therefore, I think I'm going to do well buying a longer term bond like a tenure bond, so that drives down the tenure heel. So if it gets inverted, that reflects both the bond investors expectation of what the FED is going to do and what they think is that's all going to do to the economy going forward. And that's that's bond investors are. You know, this is books that put their money where their mouth is, right, so they're

really thinking about these things. And so I think, you know, we should pay attention to what they're saying. Great stuff, Mark really really appreciate it. And Uh, one thing we pay attention to around here, vildonna is do you know what we know where I'm going the craziest things in the market. I got predictable, craziest, craziest. I remember I used to call it weirdest for for such. You think after a hundred or so podcasts you'd get it right

by now, But yeah, I still can't. Yeh can't affriendiate. I've got a good one. In honor of Mark Sandy of Moody's first will you guys come up with one every week? Oh my gosh, you must like a day trying to figure this out. Actually, this one was easy for me because it was just the most interesting story to me. It's not actually so much markets related, but close enough, so I'm going to give myself a pass. But it's a Boomark story story called Eat the Rich

Popsicles draw NYC crowd opining on musk Twitter. So there's an ice cream truck in New York City and this guy is selling popsicles of faces of elon musk Jack, Ma, Bill Gates, like all these people. It's the whole stunt is called Eat the Rich, and I guess people gathered bought ice cream pops The only thing is each popsicle is ten dollars. I guess there's inflation and ice cream too. Ice cream truck driver is gonna I haven't musk face pop. I don't actually the faces. I maybe we can tweet

tweet out a picture or something the face. Some of the faces were like spot on, you can tell it's Bill Gates has little glasses. Ten bucks for Bill Gates pops class. It have to be a hot day for me to chuck out ten bucks. How about you, Mark, you see anything crazy this week? Well, I'm gonna go back to my home and virea. Uh this is crazy to me. I don't know, And I think it's symptomatic of the craziness according to Zillo, And I think we

all look at Zillo. I tend to look at Zillo when prices are going going down, but I have been looking a lot in the last couple of years because my according to Zillo, my home and bureau is literally doubled in price a few years in two years. Now crazy Now, how accurate to you think Zelo is these days?

Back in the day, I feel like it was pretty off, but it's gotten better to you think, Uh, yeah, you know, I don't think that's what my home is gonna transact at that price, But I think it's in the ballpark, right because they can transaction level data you can do there. You can do a pretty good job with the transactions that I actually occurred. So I think it's it's reasonably accurate. But but nonetheless that's not I don't you know, I don't I'm not expecting that I can sell that house

at that price. That is crazy. Sell now, Sell now? I said, that's why I love that home. I'm not selling but yeah, well all right. My crazy thing is actually, uh, someone someone's famous home, someone famous, someone who's famous is how don't you know how to say that? I'm tongue twisted famous person, famous person's home. First of all, Donna, I have to ask you, do you know the name of Elvis Presley's home in Tennessee? Mark? I know you know it? What is it? Oh? Wait? Shoot, I should

have watched to give you a hand. Is also a great Paul Simon album in the eighties? Yeah right, I know you guys are both this Graceland right now. What I did not know about grace Land and Mark? Maybe you knew this set at Moody's. I know you guys are heavy into the municipal bond market. There are MUNI bonds attached to Graceland. The City of Memphis and the County of Shelby, Tennessee have issued Moody bonds to sort of restore and make improvements to it. Um Unfortunately, they defaulted.

The MUNI bonds on Elvis's homes defaulted. So I talk about rock and roll being dead, I think that's you know, that's your biggest sign right now, did rate those bonds? I'm sure they did. I'm sure they did. I would imagine they did. I don't know. I'll have to I'll have to look at that. I'm very, very curious. This is all based on a calm by our own MUNI expert, Joe Mysak, who is, uh, you know, one of the

best columnists on this space around. Uh. I don't think he got into uh any of the ratings on him. But Mark, as you may or may not know, I like to turn this part into a game of prices, right.

So my Sack in his column says he uses the yearly attend in dance at of Graceland as sort of a benchmark for other MUNI bonds around the country that are based on some sort of attraction like this, whether you know, a county wants to open a museum or something like that, and they're they're selling mooney bonds to to purchase it. I think I can't imagine Dolly has a MUNI attached. Maybe I don't know. Maybe I think

that's all Dolly's money that went into that um. But so his line of thinking is if some county somewhere is floating a Muni bond based on the prospect of attendance at museum or whatever the attraction is. Grace Lands his his sort of benchmark. Okay, if they're expecting to do better than grace Land and it's yearly attendance, he's skeptical. U if they're somewhere below it, he sort of hears them out. So the game show today is what do you think the yearly attendance at Graceland was in nineteen

part of me not last year before the pandemic. We can ask my wife. She's lurking in the shadow. I have no idea. Why an Elvis fan? Are you an Elvis fan? Her dad was? Her dad was all right, have her guest for you. Will spousal guests grace Land attendance in twenty nineteen, Yeah, full your attendance. Should I go first? Or Mark? Would you like to go first? I'm very bad at guessing this, so I'm going to go with I'm guessing this number is much higher than

I would ever imagine. I'm keeping a poker face. I'm not going to tell I'll go with fifteen million, fifteen million, fifteen millions. Oh my gosh, is that too high? Can I revise. Thats like a lot of people. True already, Okay, Mark, Mark could be playing you here, could be if you playing with you, Yeah, he could. He could be one revision, one revision. Okay, two million, two million? Mark, what's your guests? Remember prices, right, rules are in effect. What's your guests

for the yearly attendance at Graceland in two thousand prices? Right? Thing? But I'll take a guess. I'll say three hundred thousand, five hundred and thirty four thousand, four for the year of nine. So wins? Okay? Yeah, Well I just multiplied a thousand times the number of days in the year. Take a few vacation days, because how many people can

actually go through a home in one day? Fifteen million, I think is I'm not going to see the foot traffic at Aldona's place sometimes looking back there, I just figured it's some absurd number because the stakes are so high. If this is the benchmark, all right, But his point is that, you know, if you think you can beat Graceland numbers of half million a year, you know six what is your action to, uh well, six flags? You know, I don't. I don't think the ship of Jackson New

Jersey has Ammuni bond to touch. No, no, but I was just thinking. I was just thinking about visitors. Yeah, okay, yeah, I think he's donna just give it up. You're never gonna get one. I didn't really want to the last a couple of weeks though. That's if it had been fifteen million, I think they wouldn't have defaulted on their bonds. Maybe, yeah, you never know, all right, I'll give it up. I'll look up Moody's writing on that one. Mark. I don't know. I think Joe would have made some hay out of

it if you guys got that one wrong. So I'm guessing that you uh, maybe it went unrated. I don't know. I was a good one though, the King Elvis. But I am disappointed you couldn't remember Graceland. Oh yeah, well you know, I've forgotten more important things. I'm a millennial. Yeah you get a pass. I guess you get a pass. All right. With that said, I think that is all the time we have, uh marksany of Moody. Such a pleasure to hear your thoughts, um, especially with this important

week of cp I and uh whatever comes next. Uh, We're sure you'll be right with all your predictions today and it's my goal. Mike h Yeah, I appreciate it. I really thank you so much for the opportunity. It was very, very enjoyable. Thank you. Thanks for joining us What Goes Up. We'll be back next week and so then you can find us on the Bloomberg Terminal website

and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter, follow me at Rea Anonymous, Bildanna hirach is at Bldanna Hira. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Stacy Wong. Thanks for listening. To see you next time. Just not being