Latent Recession Risk At 50% Underlines ‘Wile E. Coyote’ Worries

Recession risks are elevated. I suppose that goes without saying. If it does go without saying, maybe I shouldn't have said it. Because when the macro and geopolitical environment is as ambiguous as it is currently, declarative sentences are risky propositions. Nothing goes without saying. Anything can happen. Two months ago, the incoming macro data suggested the US economy was firing on all cylinders, which in turn raised the odds of the Fed hiking all the way to 6%. One month later (so, one

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28 thoughts on “Latent Recession Risk At 50% Underlines ‘Wile E. Coyote’ Worries

  1. A recession is very likely given yet another shock as a result of aggressive central bank tightening. Goldman, Larry Summers, Mohamed El-Erian and others can opine all they want. Shocks historically lead to downturns, unless there is a quick policy response. That does not seem to be happening this time.

    1. At this point, your zeal to tilt at various windmills is causing you to misquote and misread. Summers is warning of a sudden stop. Goldman’s 35% recession odds in 12 months are only “low” in the context of consensus. They’re very high on an absolute, historical basis. And on and on. I think, maybe, you should try to remember that these folks (where that means “brand name” commentators, former government officials, and so on) aren’t trying to irritate you. They don’t know who you are, don’t know you’re watching and surely aren’t trying to ruin your day. If you’re so vexed by the TV people that you feel compelled to name drop them nearly every weekday in online forums, I’d suggest taking a break from the TV for a while, because it’s clearly causing you some undue distress.

  2. Headline at 5.0% YoY, core at 5.6%, shelter at 8.2% — “cool” if 9.0 is your baseline but far from ideal. I have two millennial kids who are in the household-formation stage, and they and their friends are getting crushed by shelter costs.

    1. I posted this a few days ago, but here it is again (from The Week, summarized from Bloomberg)

      From 1970 to 2021, the median U.S. income increased 7.7 times, the median rent by 11 times, and the median home sales price by 18 times.
      The fastest increases came in recent years, especially during the wild pandemic housing market.

      I always advised my kids to work a little harder than everyone else around them if they wanted to be successful. I think that now, a parent also needs to advise to save as much as possible as early as possible in order to have any kind of financial security. No $5 lattes, limit subscriptions and sacrifice when you are young and single so you will have some savings with which to secure housing as you age into your 30s. Have a plan and spend less than you earn.

      1. I am a big fan of the FIRE (Financial Independence, Retire Early) subreddit. For extremists, there is “FatFIRE” 🙂
        A modern version of Robert Kiyosaki-type advice.

        1. Yeah, I mean, the latter paragraph in your first comment is generally true for a small subset of the population, but for everyone else, it’s not. First, the $5 latte thing is a canard. The difference between being able to afford a decent (i.e., 20%+) downpayment on a home isn’t going to depend on your choice of coffee, nor how many “subscriptions” you have, unless you’re just — you know — subscribing to everything under the sun. Second (and I still think you might not appreciate this), this “plan” is only viable for children who have opportunities in the first place. You can only “work a little harder” if someone will give you a decent job, and the fact is, discrimination is still rampant, and if you’re born poor into public housing someplace it’s not as simple as saying, “Well, just rise above!” Everywhere you go, there are going to be obstacles, and in a lot of cases, there will be people actively trying to prevent you from succeeding — at anything. And by that I mean “Hey kid, where you going?” “To the bus stop, for school.” “I see. Nice Jordans, are those new?” “Yeah. My mom saved up for six months to get them for me. They were my only Christmas gift.” “I see, well, take ’em off, because I’m robbing you.”

          Finally, I think we should be cognizant of the fact that the dynamic the commenter above (“mfn”) seems to be alluding to is becoming so daunting that “securing housing” is a mathematical impossibility for a lot of “young” (i.e., late 20s, early 30s) adults. Have you done this math? The average home price in America is nearly $500,000. A couple who wants to be a little better than average (say, because they have decent jobs and feel like they “deserve it”) is going to need to shop for $600,000. If they’re in an expensive locale, that could easily be $700,000. So, that couple would need $120,000-$140,000 in cash, and they’d need to show a combined, gross adjusted income somewhere in the neighborhood of double the national median. That’s not most young people. And no amount of foregone lattes will help.

          Indeed, I’d argue that the very fact that you mentioned lattes in the first place is evidence that you’re not really in touch with the “on-the-ground” reality in America. Most people don’t wake up in the morning and think “I’m gonna go get a latte.” They think “Well, maybe I’ll stop and get a coffee at the gas station, assuming there’s enough left out of this $20 bill after I put 1/4 tank of gas in this Kia that may or may not start up when I turn the key.”

          1. And here I was sitting here just thinking about going to get my latte…I don’t think I have any other choice now.

            I agree with you though. We’re inevitably moving away from a homeownership society much in the way that farming is no longer primarily a family business as the deck is increasingly stacked against the average young person. It’s unfortunate because housing is the one investment that is stable for families, gives them leverage, and makes it harder to access whatever equity someone might have built up (yes, you can take out equity lines of credit, but that’s a lot harder than swiping a credit card).

            Let’s just hope when corporations take over all housing that there are still some cage-free properties for the people.

          2. With respect to a comment I made on a post yesterday, I do think Jerome Powell — most certainly not a regular guy — gets this in a way that most people who have spent their lives in and around finance don’t and is determined, in his steady, under-the-radar way fashion, to do something about it. I believe that Mr. Powell, in a 21st-century twist on the example set by FDR, is going to ignore the protestations of his Wall St. friends and class and do what he’s been telling us all along: keep rates higher for longer. And I think his reasons for doing so, though not as transparently clear as his commitment to higher rates over a longer period are obvious enough: 1) to end the post-GFC “free” money/ZIRP/Fed put paradigm and 2) shift the economy away from the inequality-producing financialization the paradigm has engendered and toward a more balanced, Main Street-focused model. Or maybe I’m just crazy.

          3. The KC property comes with a $1600 monthly HOA fee, which adds an effective half mil to the total cost. That’s in perpetuity, and can potentially go up. Also, you would have to live in Kansas City, MO. Those pictures of the interior are flipping amazing though, I’ll grant you that.

          4. The HOA isn’t the problem. That’s just money. As “Bill W.” noted below, the exposed rebar is the problem.

        2. If I were starting out, I would look for a nice mid-western smaller city with job opportunities. Average home prices are much lower. I know of a great city with decent schools that has a well maintained 2,100sf 3br home in a top neighborhood coming on the market for $200,000.

          1. Well when that comes on the market, do us all a favor and post the Zillow link here as a comment so we can have a look at it and decide whether $200,000 does indeed secure a three-bedroom single-family home in a “top neighborhood” in 2023 America. I doubt it very seriously. That’s $95 per square foot. Forgive me, but there’s no way that’s true. Not as you described it, anyway.

          2. Exactly. And no offense to the sellers, but I wouldn’t even want that. I mean, think about it: That’s what you get for $1.7 million. Imagine what it’d cost in that area code to get a house that would really wow people. And you know, not everyone is mobile for work. Some people get stuck in area codes where there’s no choice but to pay that price per square foot.

          3. You are right about this. I live in a decent KC suburb and there are many 200k, 3 BR, 2 BA homes for sale all around my neighborhood. Most are 25-30 old and have been maintained. The schools are decent throughout the community. The homes I’m describing are generally 1500-2000 sq’ splits and raised ranch homes. You can’t have huge parties in such places but you can house yourself and a couple of kids. Then you can earn your way to the next level. Zillow will in fact show such homes. I get their ads in my email monthly.

          4. 3 bed, 2 bath, 1823 sq. ft. on a 1/3 acre plot, only $220k. I can vouch for the high quality of the school district, and only ~85 miles from Philly and DC.


            Okay, I kinda fudged. That one’s an auction, who knows how it will go.

            Here’s $274,000 3 bd, 2ba, 1,297 sqft plus a “partially finished” basement and an attached garage.


            But honestly, if you’re going to move out here, pay a bit more, get a lot more. $420k for 3b/4ba and 4,456 sq.ft red brick on a 0.6 acre lot:

            Gotta love Amish country.

            Of course if it’s for Heisenberg, I would have to assume he’d want to live in Miller’s Crossing:

          5. Also, that Arlington, VA property is ring-fenced by major highways and a daunting 30+ minute ride across bridges to DC, just a couple miles away. Very similar to my experience in the Los Feliz area of LA and around the mainline in Philly. OTOH, one of St. Louis’ biggest office buildings recently sold for pennies on the dollar — a touch over $4 million for 45 floors and 1.4 million sq ft, or less than $3 per sq foot. Who’s in with me? I’ll take any of the offices not near the break room microwaves or bathrooms.

          6. Is nobody going to give me an opinion on the KC condo I linked to? I mean, I’m not sure I’ve ever seen anything quite like that interior-wise for just half a million.

    2. I’m from the silent generation. When I went off to work, my wife and I bought a nice smallish new house in a 9% mortgage market. I was making a grand a month and my wife didn’t work. We moved a couple years late, bought another new house for 8.5% making 1500 a month. Then the baby came. Made no money on either house. Couldn’t afford a house in the mid-70s and we built during the monster recession in ’82 and paid 7.5% for the loan. We had five grand in the bank after the house but we both had jobs as underpaid professors. You manage. During all that time we were crushed we still managed to save 12-15% of our income. What you can’t do when you are young is eat all your money and buy stuff. If a home is what one wants. Do that and nothing else. The data clearly shows the average person can’t have it all.

  3. H- OK, I’ll bite on the KC condo. Seems to be situated with excellent views of two interstates. Photo #29 shows exposed rebar on a support column in a 15 year old building. I’d want to see financials and 2 years worth of meeting minutes from the condo association. And I know nothing about KC MO.

    1. Good call on Photo #29. I didn’t make it all the way through the slide show before the Fed minutes interrupted me.

    1. That’s another picture they left for the back-half of the slide deck. Seems they wanted to emphasize the extraordinary interior first and the rest of it only later. Ha.

        1. Nice and clean, but not sure about quality. Fiberboard cabinetry and 2×4 studding throughout? In tornado country? And the surrounding landscape is so unrelievedly flat!

    2. The fastest growing menace to property values after climate change is pickleball courts, followed by new Norfolk Southern rail lines.

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