LOGAN MOHTASHAMI: 2017 was the year of globalization

‘The ‘recession bears’, the people that thought America was going to collapse because of low oil and gas prices when they crashed, when the dollar got strong, and the S&P earnings fell, the lull in the stock market, people were saying this is because ‘QE’ was coming off, but no…

Earnings fell because manufacturing went in a recession, oil crashed, then mining, and now that’s all up, that’s the story of 2017. This explains why world markets are doing better than the U.S. because exports are a bigger more important factor in economies of other countries, they were working from a deeper recession and their currencies got hit as well…

So the economic look for 2018, #1 is gonna be mortgage rates. First, the bond markets. The theory of ‘bond vigilantes’, have you ever seen these people, they are talked about, but I think they are more folklore, there are no bond vigilantes, there is no bond market bubble, this was always a myth. 36 years of interest rates falling and every year their call was ‘the mortgage rates have to go higher’, ‘the bond market has to sell off’, ‘the interest rates have to go higher’…

Next, inflation, so why were so many people wrong for so long (?), because they don’t know what causes interest rates to fall and they have a very obscure view of looking at inflation. For the past few years I have always talked about this ‘channel’ of the 10 year Treasury note being between 1.60% and 3.00% (it actually was about 1.56 to 2.62), and I’ve been saying we will be stuck in this ‘channel’ for a very very long time. What happened in the last few years (?), it pretty much stuck in that exact channel. The two times that the 10 year did break under 1.60% was both European events, the Spain default fear trade 2012 and the Brexit 2016 for a short time; and the 10 year break above 2.62% was the tail end of ‘the taper’. So interest rates can go down again, I still stick to that channel because there just is no inflation…

There is a case to be made, you could see higher than 3.00% interest rates on the 10 year Treasury notes. Which would mean above 4.50% on the mortgage rates, but it will be short-lived, why (?), because world trade and interest rates move hand in hand. PMI world growth is rocking. The entire world trade story is looking good, and typically when that happens, interest rates rise. It hasn’t this year, why (?), because while oil is going up higher, headline Core Inflation is falling, so why is Core inflation falling for Core PCE and Core CPI (?), because vacancies are up and rent inflation is fading this year. That rent inflation is the biggest component, it’s almost 43% of CPI inflation, and medical inflation went down as well. The Fed went ahead and hiked a third time anyway without that Core inflation going above 2%…

Look for the bond market to rally early in the year. Just one 4% selloff in the stock market and oil falling down $7.50, that could drive 10 year yields below 2.00% very easily. Meaning we could see a yield curve inversion, but I wouldn’t put a recession thesis on an inversion. So the token answer that ‘mortgage rates will rise’, nobody can explain why, just look for 10 yr notes to stay in that channel and mortgage rates so stay around 4.00%. Unless trade, oil, and inflation starts picking up, then you can make a case that mortgage rates can go up. If you want to be geeky, look at CPI and PCE and oil prices, if you really want to know about interest rates you track those things…

That’s mortgage rates, now let’s talk about home prices. Home prices have legs, will have legs, as long as monthly supply is under six months. However, the United States of America is no longer under that historical six month metric that people still use, that broke in 1996. From 1999 to 2005 we have had monthly supply under five months, not because of a bubble but because the demographics were good. Right now we have the greatest home-buying profile in our lifetime. Don’t look at nominal home prices, pay attention to real home prices and look at rent vacancies which are rising because of demographics. Existing home sales hit cycle highs while existing home inventories hit cycle lows, isn’t that funny how that worked?

The thing I got wrong about 2017 was that I thought the amount of cash buyers (historically 10%) would fall from 19% to 16%, that didn’t happen. The cash buyers were actually up YoY, another layer of demand for existing home sales. New home sales are still low (it still has legs); housing starts is low (it still has legs); new construction is low (it still has legs)…

All of our manufacturing data is kicking butt now. We had a PMI boom in 2017, but we were working from low levels. Manufacturing tend to run with oil prices. The rate of growth is not going too strong in 2018, so as long as oil stays to 43 – 63, manufacturing still has legs and CapEx spending still has legs…

Our trade deficit is rising. The trade deficit is not going to get ‘better’. Unless you actually want your dollar to collapse (so we can get our economy to grow, our trade to grow against other countries, by ‘beating’ them that way)…

In terms of consumption, debt service is the lowest in four decades. In 2018, car sales should trend lower, but don’t make to much of it, because ‘age fleet’ is still high so car sales still have legs. Same for home air conditioning and heating units, they are old too, those sales have legs…

If bitcoin blows up, don’t think ‘same as the late 90s’, that the supply and demand balance blows out like 2000, that the economy will blow up…

Don’t put so much weight on the GDP talk out there, if you actually normalize GDP growth for the past 25 years, 2.6% growth is pretty good for an economy our age…

Don’t Be That Guy who gets hysterical if the S&P pulls back 5% in 2018…

Don’t worry about what the president says or does, it doesn’t really change things in terms of macroeconomics that much…

Don’t think about trying to use things that worked in the 1940s, 1950s, 1960s, or even the 1990s anymore, because every decade presents a new equilibrium to macroeconomics…

We are in a historical jobs expansion right now and by mid-2019 we will be in the longest economic expansion. There is no over-leveraged consumer, no over-investment, no inflation scare, no consumption-demand crisis, no lack of federal gov’t spending, so a lot of these recession theories you’ve heard about from your Facebook friends, I would argue that they are more politically and ideologically tilted. This is math. This is numbers, things that actually matter, in the real world; not feelings, not human emotions in the Facebook world, which is why I always fight with the gold bugs and the MMT people.”