Economic conditions are tightening. This is something that was forewarned for much of the 4th quarter and into this year.
We are starting to see certain sectors of the economy feeling the pinch. This is something that few monitor until it is making headlines. However, we can garner a great deal of insight simply by watching what is happening and understanding what it means.
There are many reasons why the economy is going to tank. This is something that predates the situation in Ukraine although that only solidified what was occurring. With the recent actions by both sides, we are now assured a double-dip recession. As we move through 2022, things are only going to get more dire.
Here is what is really happening, stuff the mainstream media is not focusing upon.
Mortgage Industry Tanking
For months I posted how the mortgage industry was in troubled waters. This was concluded simply by watching the weekly mortgage application data, for months on end. Since June of last year, the trend was primarily down.
What does it mean when mortgage applications are heading south? The mortgage industry is in trouble.
Here is a forecast from earlier in January:
Of course, we hear how the real estate market is on fire. Yet, here we see signs that the mortgage industry is in for troubled times ahead. Keep in mind, the mortgage industry tanking precedes the real estate market following suit. So this is a warning.
Unfortunately, this is no longer a forecast. It is starting to happen.
This is from an article that was put out by Bloomberg:
Online-mortgage lender Better is firing roughly 3,000 employees in the U.S. and India as rising interest rates weigh on the volume of new loans.
Leave it to them to mislead and not tell the truth. Mortgage applications were on the decline since June of last year. This was long before threats of higher interest rates.
Of course, this is quite a hit especially when we put it in context of the company:
The total represents about 35% of the company’s workforce, according to a person familiar with the matter who asked not to be identified discussing private information.
We now see that 35% of this company is now gone. Keep in mind that people in the mortgage industry usually make a significant income. This means that some high income earners are out the door.
The countdown is on for the real estate market.
The Screaming About Inflation
In case you were absent for the last few months, it is likely the Fed will raise the Fed Funds Rate. This is giving the market exactly what they want. Most are screaming about inflation and looking to the Fed to solve the issue. Do people actually think this will work? Interest rates are on the rise yet we see the cost of commodities skyrocketing.
So people think the Fed will solve this problem. I am not sure why that is, since they didnt cause it. The Fed is now backed into a corner with this misdirection and making everyone believe they could control anything. The reality is they are impotent and have little impact other than managing expectations.
Here we have most looking to Jerome Powell to solve a problem the politicians of the world caused. Supply chains were a mess since the lockdowns took place and now they are being obliterated by the Ukraine situation.
Of course, everyone knows how smart it is to tighten heading into a recession. The Fed tightening is going to put out that expectation. Well, we are going to see tightening, as in economic conditions.
But have no fear, inflation will end up being transitory. The economic headwinds will guarantee that. At first we are going to get stagflation which will then turn into outright deflation. For all those who think inflation bad, deflation good, just wait. Japan over the last 25 years was not a picnic. Neither was the Great Depression. Both were period of prolonged (and painful) deflation.
The 3,000 laid off at this mortgage company is just the start. We are going to see many sectors of the economy falter as spending is constrained. After all, when people have to spend more for food and energy, they have less left for elsewhere.
Price runs are difficult for the average person. However, they are not sustainable because wages do not keep up unless we have a massive expansion in monetary policy. This is something we have not seen in 50 years. Bank instruments that are held at the Fed have no way of making it into the economy. Hence, the supply shock that the global economy witnessed is only getting a double dose with the Russian invasion of Ukraine.
Things Start With A Trickle
The challenge in timing things the fact that the floodgates rarely just open up. We have to look at certain sectors for signs of what is taking place. During the lead up to the Great Financial Crisis, we saw how the mortgage industry led the reversal there. Is this coincidence?
What we are likely seeing is the fact that real estate, no matter what else excels, makes up a large part of most countries' economy. It is impossible to get around the tentacles of this industry. It ripples throughout a major portion of any nation's economy.
For this reason, it is prudent to watch what takes place. Plus, when things get difficult, it is one of the most impactful areas. We see a lot of unskilled labor that is able to earn a decent living put at risk. This is coupled with those who are able to earn significant incomes via mortgages, construction, or the selling of properties.
When layoffs start to take place, along with rising prices, we see how certain sectors take a hit. We can look to anything travel related as a prime example. How many people are going to travel with oil pushing $130 per barrel? This affects everything from price at the pump to the cost of airline tickets.
If discretionary income dries up, people start to adapt. This means a lot of industries that enjoy nice runs when times are good see revenues dropping. Here is where the snowball starts to build. Those industries are forced to start cutting jobs to compensate.
And so it goes. By the time the media picks up on this we are 6-9 months in. The warnings signs are evident for those who are looking. Too many believe that everything is going to up forever. This is never the case.
Fiscal stimulus did a great job keeping things afloat. It also distorted a lot of what was taking place. This means that, since it ended for the most part, we are left with how the economy truly is. Unfortunately, this is a sick looking situation. The Russian situation only makes it that much worse.
As bad as rising prices are, the opposite can be even more painful. When this turns, not only will prices drop but so will the value of assets and the number of people working. Companies do not keep people around when revenues slow down.
The mortgage industry is already starting to teach everyone this lesson.
Unfortunately, things that start as a tickle end up with the floodgates opening.
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