January 29, 2023

contrarian view of the economy

IMMEDIATE RELEASE 17 Oct 2022
WASHINGTON MERRY-GO-ROUND
Today’s Events in Historical Perspective
America’s Longest-Running Column Founded 1932
A contrarian view of the economy
By Douglas Cohn and Eleanor Clift
          WASHINGTON — It is time for us contrarians to state our case. The contrarian theory is predicated upon the reality that when most people predict something dealing with money – anything from interest rates to the stock market, to real estate prices, they are usually wrong. Why? Because they have already placed bets based upon their predictions.
          For example, if most people say the stock market is going down, they have already sold. This means they are no longer potential sellers. They are potential buyers. And when most people become potential buyers, the market goes up.
          But how do we determine what the majority is saying? Polls and pundits are the answer. When the noise becomes overwhelming in one direction or the other, that noise tells us what the majority is saying.
          And what is the noise telling us today? The stock market is in bear territory and continuing down. Inflation is running rampant, so interest rates are going up. With interest rates climbing, home purchasing will falter. In short, America is heading into a recession. But are we?
          We contrarians say au contraire. The stock market has bottomed out. Inflation has peaked. Interest rates have topped out. The pessimistic majority of investors sitting on the sidelines have created an enormous backlog of pent-up demand.
          But we are not contrarian purists. We look at other factors. We look at fundamentals. Unemployment is near historic lows. Pandemic-caused supply chain problems are coming to an end even though China’s pandemic lockdown continues because other countries are taking up the slack.
          Even the OPEC+-declared 2 million barrel a day reduction in oil is already being circumvented by some of the very OPEC+ members who voted for it. The “+” in OPEC+ is headlined by Russia, a war-embroiled, heavily sanctioned nation desperate for revenue. That nation is selling its oil to China and wherever else it can be sold and doing so at a substantial discount. And who believes Russia is cutting its oil production by so much as a barrel? The proof? The price of oil has been falling ever since the 2-million-barrel reduction was announced.
          And as goes inflation, so go interest rates, which is why T-bill rates have not risen near as fast as the Fed’s discount rate. True, most investors are still causing rates to rise, but at a decreasing rate, an ominous sign for sky-is-falling pessimists.
          This brings us to real estate. Housing prices witnessed a long overdue increase, a result of supply-chain problems that contributed to a persistent reluctance of builders to build ever since the housing crash during the 2008-2009 Great Recession. The demand has simply outrun supply. However, as the supply-chain problems continued and interest rates rose, real estate began to stall. What is overlooked by the pessimists is that demand remains high, and the supply of houses remains low. These facts combined with solid employment numbers, rising wages, and inflation-boosted government payouts are easing the pain of higher mortgage rates. So, housing prices are likely to plateau before once again increasing in 2023, though not at the same rate as in 2022.
          Finally, the pandemic has created a psychological pent-up demand of its own. Restaurants and airplanes are filling up. Demand for almost everything is picking up. This is not the stuff of a recession.
 
          See Eleanor Clift’s latest book Selecting a President, and Douglas Cohn’s latest books The President’s First Year: The Only School for Presidents Is the Presidency and World War 4: Nine Scenarios (endorsed by seven flag officers).
          Twitter:  @douglas_cohn
          © 2022 U.S. News Syndicate, Inc.
          Distributed by U.S. News Syndicate, Inc.
END WASHINGTON MERRY-GO-ROUND

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