Commercial Loans Blog

Soft Landings and Other Fantasies

Posted by George Blackburne on Sun, Apr 10, 2022

Screen Shot 2022-04-10 at 3.26.53 PMI went onto Google this afternoon and asked, "Has there ever been a soft landing?"  The answer was interesting.

But before we get into unicorns (the horses with a big wart on their foreheads), soft landings, and other fantasies, let's first define a soft landing.  Adam Hayes, in a superb article for Investopedia, defined a soft landing as follows:

 

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"A soft landing, in economics, is a cyclical downturn that avoids recession.  It typically describes attempts by central banks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a significant increase in unemployment, or a hard landing.  It may also refer to a sector of the economy that is expected to slow down without crashing."

Alan Greenspan, former chair of the Federal Reserve, engineered the only true soft landing in U.S. history from 1994 to 1995, when the Fed raised interest rates enough to slow the economy, but not enough to cause an economic contraction.

With inflation raging at almost 8% annually, and with the construction cost of new homes soaring by 17%, the Fed is receiving heavy criticism for allowing inflation to imbed itself into the economy.  It may take us a decade to unwind this inflationary bonfire.  Wage-push inflation, once ignited, is hard to contain.

 

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Wage-push inflation is an overall rise in the cost of goods and services that results from a rise in wages.  Workers at an Amazon plant this month successfully formed a union, the first for an Amazon plant.  According to Amazon Union's President, workers at another 100 facilities want to unionize.

Inflation is just transitory?  Someone has been smoking dope... not that there is anything wrong with that.  Haha!

The Fed recently announced that will soon start selling off the bonds it holds in its portfolio.  And it has trillions and trillions of dollars worth of bonds.  When the Fed sells off bonds, investors take money out of their bank account and securities accounts to buy them.  This takes money out of the economy.

 

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Think of a slice of bread sopping up some delicious gravy.  Yummy.  In our metaphor, that gravy is the money supply of the country, and a lot of it is suddenly about to get soaked up.

Unfortunately, too much of it.  Far too much.  As a result, the coming stock market and real estate crash is almost certainly going to brutal - at least as bad as the Great Recession.  We are talking about an imminent decline in real estate of at least 45%.  How imminent?  Certainly within the next 18 months and possibly even sooner.

Why is a horrible economic slump so certain?  Answer:  The Fed is about to reduce the money supply at the absolutely worst time.  It's going to be a disaster.

 

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A bad recession is already guaranteed by
the crash in China and the Ukrainian War.

China's once roaring economy has hit a brick wall, and to make matters worse, Covid-19 is raging in Shanghai.  The Chinese people never really got seeded, and their vaccines were not the best.  On top of China's crash is the fact that Ukrainian War has prevented the planting of half of Ukraine's vast wheat fields.  Ukraine is called the bread basket of the world.  Food prices are already rising sharply, and we haven't seen anything yet.  And, of course, oil prices are through the roof.

Therefore the Fed doesn't have to do anything to slow the U.S. economy and to cool inflation.  A major economic slowdown is already baked in, but the Fed won't have the courage to just say so.

Americans are furious with the Fed over inflation.  This is not a good year to be a Democratic Senator or Congressman running for reelection.  Blame will be spread.  Political blood will flow.

 

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Therefore, the Fed is about to make the worst mistake since the Great Depression in 1929.

The Fed is about to greatly reduce the money supply,
just as the U.S. economy enters a bad recession.

It will be like dousing a raging fire with gasoline.  Someone needs to tell Fed Chairman Powell not to start reducing the Fed's portfolio of bonds.  He needs to get up and simply say, "We blew it.  We missed the build-up of inflation.  This was OUR fault; but if we raise rates now, we will crush the U.S. economy."

But I suspect that Fed Chairman Powell lacks the courage to admit his mistake and to resist the pressure to raise rates.  We're toast.

Cute story:  Ted Turner used to own the Turner Broadcasting Company, and his two sons were both highly-paid executives.  He secretly sold out to Time-Warner for $7.5 billion.  If the story is true, he announced the sale for the first time to his sons at a family dinner.  "What about us?" asked one of his sons.  "You're toast," he dryly replied.  Ouch.

So when Fed Chairman Powell fearfully starts selling off bonds, you and I?  We're toast.

 

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My Advice to Mortgage Brokers:

  1. Downsize your office immediately.  Negotiate for far less space and MUCH lower rent.

  2. Kick yourself in the butt for not acquiring loan servicing rights.  I have been telling you for years that the real money in the mortgage business is in loan servicing fees.  Mortgage bankers are the guys who service their own loans.  Mortgage bankers survive real estate crashes because they have a steady cash flow.  Mortgage brokers simply get crushed.

  3. Consider getting into the property management business.  Your property management fees may be your only income when real estate falls by 45%.

  4. You love your employees, but if you have more than a dozen, you won't be able to keep them anyway.  Why wait for an economic miracle that is never going to happen?  Why waste the very last of your savings, when you are only going to have to lay them off anyway?  You could use the last dregs of your savings to do some fix-and-flips during the crash.

  5. Don't be too proud to retreat to your house.  Thousands of mortgage brokers work from their homes.  Don't apologize.  Most borrowers will salute your wisdom and envy your commute.  Over the past 42 years, I have been forced to retreat to my house at least four times.  Fortunately, since I began servicing hard money loans, it has not been necessary.  Hint-hint.  "It's the loan servicing income, Stupid!" (President Clinton had a yellow Post-It note on his wall for years.  "It's the economy, Stupid!"  Haha!)

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Topics: soft landing for real estate