The Finance Gourmet

Personal Financial Advice from a former Certified Financial Planner

Inflation Disappears (Again)

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Update: Yea! It looks like I was right, and everyone has come around. It’s August now, and it looks like those low inflation numbers were neither an aberration, nor temporary. There simply is no inflation, the job market, while full, is not hot, and there is no need to raise rates the rest of 2017, so say we all 🙂

The Fed has been working to raise interest rates because of the specter of inflation. However, with the exception of energy prices, there really hasn’t been much in the way of inflation. As a result, the Fed keeps explaining that they think that all those reports of low inflation were temporary.

That all took a bit of knock today as the U.S. Government reported that inflation in June was zero. That’s right, zero, as in no inflation (again). And that comes after the actual 0.1% drop in inflation in May. This is of course, a far cry from the Fed’s so-called target of 2.0% inflation, and calling two months in a row of data temporary starts to look like ignoring data, so the tone has changed. A lot hinges on the July report.

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Fed Chair Janet Yellen said in remarks that the Federal Reserve might have to pause its march of interest rate hikes if inflation stays low, but then came back to say that inflation might still be hiding in the form of rising wages. Ironically, the Labor Department report shows that while unemployment is falling, wages are not increasing by much.

no inflation

In other words, there is currently no inflation, and no wage pressure. The only reason left to push for higher interest rates is that it is cooler on Wall Street to play for Team Hawk.

That won’t stop certain bankers from pushing for more rate increases, but if July’s numbers come in like this, they won’t have much of a leg to stand on. On the other hand, if July’s numbers turn around, they will pounce and declare that those low inflation numbers were temporary aberrations and that THESE JULY numbers are the real numbers and we can totally trust that these numbers are legitimate and not temporary like those other numbers that didn’t fit the rate hike agenda.

What it all comes down to is that July’s numbers are going to be a VERY big deal for the stock market and the Fed agenda. If you like to play some volatility trades, put them on for the July inflation reports. Everyone else, prepare for a bumpy ride.

Mortgage Rates Climbing

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Mortgage rates have ticked up in the this month. Despite stories saying that rates have “jumped” the rise has been rather tepid, and still hasn’t taken rates back to their post election highs in the 4.25% range.

Rates had peaked back in January when some analysts still suspected that Crazy Trump was all an act and that the newly elected President would settle into the office as a regular business-friendly, regulation-busting, Republican. However, the Russia scandal has plagued the administration and health care has twice stalled out, pushing any pro-business legislation off. As a result, rates have basically trended eastbound and down, if you will.

Do Mortgage Rates Really Matter?

It’s always dangerous to say, “This time it is different,” in the world of finance. Such sentiments are typically used to justify things that should not be justified. However, is the world really different this time around with regards to mortgage interest rates?

rising mortgage interest rates

Consider that rates are still historically low, and that they will continue to be so long as they stay below the 5.0% to 5.5% range. A full percentage point is several Fed interest rate hikes away (a year… two?), or an economy that shakes off its slow motion ascent and plunges into overheating mode. Consider also that the limiting factor for most new home owners has become the purchase price.

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With too many homes, costing way too much, the interest rate on the mortgage isn’t the factor it once was. A young couple starting out that might be able to swing a mortgage payment on a new $300,000 house at 3.75%, but not at 4.0%, for example, would indeed have to watch mortgage rates carefully. But, with so few $300,000 houses on the market, they may be priced out by the fact that the only houses that currently meet their needs start in the $500K range. That being the case, mortgage interest rates are entirely moot.

In addition, mortgage rates have been so low, for so long, is it really plausible that anyone who wished to refinance at the least lower rates (and has the means and credit to do so) hasn’t already done it?

Equity and Refinancing

What that leaves in the world of finance is those people who take equity out of their homes as part of an overall mortgage refinance. (There are also those who use different products such as a home equity loan or line of credit, but those products use different interest rates.)

These are the people who may truly be impacted by rising rates. However, even in this case, the limiting factor is often the amount of equity, and not the ability to make the payment. Consider a couple looking to remodel (the most common reason to refinance) that has $50,000 in borrowable equity, on a 30-year fixed mortgage. Assuming they aren’t trying to do some sort of 100% finance (which would be different rates, as well), chances are that they have been paying on a mortgage that had the same balance that they will have after borrowing already, likely at a very similar interest rate.

In this case, the ability to borrow the $50,000 has little to do with whether the payment is $1,850 or $1,900, and everything to do with if they qualify and the amount of equity they have.

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In other words, mortgage interest rates may not have the same pull on the economy this time as they have in the past — and may again in the future.

The Fed and Mortgage Rates

The real story in all of this is the slow rise in interest rates from the Federal Reserve, as well as the potential unwinding of some of its “extraordinary stimulus” measures. The banks will feel the main impact as the ease of generating a profit from lending funds against an almost zero interest rate cost will require raising rates that may not be able to be raised.

Many credit cards rates are already in the low to mid 20%. Raising them by saying, “Hey, it’s just Prime + A Number,” will only work for so long. Interest rates in the 30% tend to be unacceptable to regulators, and customers alike. The profit spread will therefore tighten, which might make things more difficult for banks in the short run.

What nobody will say, but everyone knows, is that the banks haven’t had to compete in a “real” fiscal environment since 2008, and they may have forgotten how. The result could be either sliding bank profits, or customer gouging, neither of which is a great foundation for a growing economy.

As always, a diversified portfolio is best for long-term investors, but if you use a very fine diversification process, or you have some medium trades going on, it’s time for a second look at your financial holdings. In the short-term (next six months), we aren’t there yet, but be sure to watch like a hawk after the next two rate increases.

Will The Fed Trigger a Recession?

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Will the Federal Reserve trigger the next recession?

The Fed is meeting and most analysts expect that they will signal that they are making no changes in their plan to move forward with at least two more rate hikes this year despite the weakest first quarter economic growth in three years.

More Rate Hikes or Bust

The Fed is still trying to work its way out of the “historically low” interest rate environment it has been forced to use to keep the economy upright since the Great Recession a few years ago. The trouble is that despite years of economic expansion, none of those years have come across as particularly strong.

interest rates federal reserve

In fact, with just two exceptions in the last few years, every time the Fed thought the time was right to raise rates, new, bad economic news came out to derail their plans. This time, however, the Fed looks like it will not be deterred by any run-of-the-mill negative data. Even as inflation falls.

Fed officials are blowing off the poor first quarter of economic performance. They say that they fill it is temporary and the economy will recover and continue to grow at a better rate, as soon as the second quarter.

But, with no inflation pressure to speak of, one can’t help but wonder what their hurry is? Is there really more to this than wanting to be with the cool kids on the “hawks” side of the equation? On the other hand, employment is full by most any measure, so if you were going to raise rates, this is a good time. Historically, however, when you get this either/or type of economic teeter-totter, whichever side the Fed sits on, is the way the economy moves.

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With most Fed watchers anticipating a June rate hike, the central bank won’t have much time to gather new data to bump it off course. Unless some more data comes out (a weak job report, maybe?) more rate hikes are coming.

Couple up those rate hikes with the fact that the stock market has been racing ahead of the actual economy’s growth, and the fact that we are eight years into an economic cycle that tends to reverse every eight to ten years, and the Fed’s insistence on boosting rates might just be the push the system needs to roll over into a correction and what will, hopefully, be a mild recession. Otherwise, here we go again.


Best Argument For a Coming Recession

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Recently, I wrote about how lots of various financial analysts and pundits predicting a coming stock market crash or imminent recession are more interested in trying to take credit for making a guess than in accurately predicting what the facts actually support. However, there is one very good case for predicting a recession coming in the next few years.

Predicting Recessions

It is as likely as not that the next recession will trigger the next stock market correction. Of course, the opposite has been known to happen as well. Most recently, the internet bubble popping took the economy with it, when it caused the bankruptcy and fire sale of dozens of formerly high-spending technology companies and sent their employees flooding onto the market, just when the demand for them vanished.

On the other hand, the slow motion implosion of the housing market, and its affects on poorly leveraged, and managed, banking companies, followed by their panicked actions to stay alive, is what caused the so-called Great Recession of the Bush the Younger era.

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These days, most analysts like to predict a stock market crash based on “knowing” that the market is over-valued, or propped up by the Fed, or whatever else you want to say. That’s a lot sexier than saying that an economic recession will likely cause the rapid rise of the stock market to halt.

recession coming prediction

Expansion and Recession Cycles

This morning over on MarketWatch, an article makes maybe the best possible argument for an coming recession. Of course, solid, accurate, reporting, absent some sort of “click-trigger” is an anathema to journalism today, so the article has to include Trump in the headline, although the President has NOTHING to do with why the article says a recession is coming.

If we look past the “we’ll get more clicks with Trump’s name in the title” shenanigans, we get a solid point.




The reality is that expansions come and go, and they do so, with recessions in between. While the length of expansions and recessions vary widely, the reality is that neither lasts forever. In fact, most recent expansions have lasted around eight years or so.

How long has the current expansion been going?

Eight years.

You see the logic.

When Will The Next Recession Hit?

Predicting exactly when the economy will roll over into a recession is a suckers game. However, with 8 years of expansion behind us, history would suggest that one is coming in the next couple of years.

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That is the catch, of course. If it takes another three years, then you would miss out on a lot by bailing out now. If it happens in just 6 months, you should be getting prepared.

Also, while the last recession was a doozy — there’s a reason they call it the Great Recession — the next one doesn’t have to be. It might end up being mostly statistical with most people not really being affected beyond a little worry.

Here is where things get really iffy.

This expansion has been going for 8 years, but realistically, only the last year or two has been “real” expansion. The rest has been barely moving upwards, with very low inflation, and slow recovery in the job market. Does that mean that this expansion can last longer?

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For example, if we only counted decent growth as part of this expansion, then it is only two or three years old.

Best Guess

What do I think?

I think this economy is still teetering on weakness and with the Fed so gung-ho to raise interest rates, it’s a good bet that it will roll over in the next year or two, when it gets unable to handle tightening monetary policy. However, there isn’t an overheated housing market (some places, but not nationwide), and even the stock market isn’t that far out of whack. As a result, this coming recession should be milder than the last one.

If I had to make a bet, I’d say the recession comes at the beginning of 2018, after analysts realize that the holiday shopping season was too weak to support a growing economy, and the Fed just finished pushing through a third or fourth rate hike for 2017. Furthermore, I’d guess that it will be relatively mild, maybe pushing employment back up north of 5%, but not all the way to 6%.

Of course, I don’t have a crystal ball either.

This article is for informational purposes only and is not a recommendation to buy or sell securities. Talk with your financial and tax professionals for advice on your specific situation.


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