February 20, 2019

Categories Real Estate

Last Year the Fed Was Coming. Not This Year…and Other Predictions

America’s best business thinker was Peter Drucker, born in Austria in 1909 and lived until 2005. He was grim on the subject of predictions: “Trying to predict the future is like driving down a country road at night with no lights while looking out the back window.”

But he gives us this alternate approach: “Nobody can predict the future — the idea is to have a good grasp of the present.”

So, here we go:

 

  1. The Fed has adopted an open-ended pause. Not just to see the effects of what it has done, raising the cost of money from .25% to 2.50%, but to study the fundamentals of what is taking place. Odds are rising that its old metrics — the job market and sustainable growth in GDP — have been suppressed by IT, global trade, and demographics. “Normalizing” its cost of money makes some sense after the emergency near zero-percent, 2008-2015, but not for the reasons which were useful in 1985. If the objective is low and stable inflation, done. Hunch: the present continues.

 

  1. Same for mortgage rates. The excursion above 5.00% last fall may have done more harm than we thought at the time.

 

  1. Home prices here on the Front Range? Easy. That cake is baked. After six years of rocket ride we are due for a breather, a year or few or several with more balance. The best stuff and lower price ranges still with buyer competition, the top end soggy unless exceptional.

 

  1. Oil. Also easy. Fracking is profitable at prices above $50/bbl, which is too low for OPEC. When prices fall to $50, OPEC cuts production and prices rise. But when oil reaches $70, OPEC begins to cheat and the less-efficient frackers are suddenly in the money, and gushing drives prices back down to $50. Repeat maybe for a long time.

 

  1. The stock market? Don’t be silly.

 

  1. What change will national politics bring to business, employment, and incomes? In the second half of the first terms of presidents, it’s unusual for anything much to happen because everyone is getting ready for the next election. If a president is re-elected, the whole second term is usually quiet because the day it starts everyone is getting ready for the next election.

 

  1. Theresa May will lose another Brexit vote.

 

  1. The one guaranteed prediction? As my Okie forebears would say, “A lead-pipe cinch?” Circling back to Peter Drucker: surprises. Brace thyself. It’s a big world out there, outside the US, bigger relative to us all of the time. We have the great luxury of living in a stable place (although it may not seem so). In the 20th Century, after 1945, we conferred a lot of our stability on the outside world, but today we are less and less able to do so. Look out there for surprises.

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Meet the author

Lou Barnes

Lou is our credit-market oracle: a new posting every Friday noon under the “Credit News” icon, written in the voice of a bond trader overdue for his martini. No fluff, no blue-sky predictions, afflicting partisans of all affiliations, real-time right-now news.
Lou Barnes

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