I’ve been reading lots of analysis of where the economy is going, and one word that keeps popping up is the word “shadow”. Shadows are things that don’t show up in the official statistics, but might be big factors to what happens next. Shadow inventories that might suddenly come on the market could turn a shortage into a glut. Missing workers that are no longer looking for jobs, might reappear. Assets that are worth less than their book value will have to be recognized if they have to be sold or marked to market. Uninsured deposits that might flee the banks can cause bank runs.
Recession
Housing is, by pretty much anyone’s definition, becoming unaffordable in many or most parts of the country. Between the high cost of buying a home and the high cost of the mortgage needed to purchase it, the investment to become a homeowner has become daunting.
A drop in home prices would be welcome news to everyone who is currently priced out of the market. But home values are also the biggest part of whatever wealth most Americans have, especially older retired people.
In March of 2023 we almost had a bank crisis. Lots of money was quickly pulled out of banks and suddenly everyone realized 1) bank deposit interest rates are ridiculous when compared to other alternatives like money market funds and CDs and treasury bills, 2) banks might actually be in trouble because they have so much money tied up in low interest rate investments and loans, and 3) lots of bank deposits aren’t covered by federal deposit insurance and could be lost if the bank goes under.
We’ve had the highest inflation since the 1970’s. It’s come down some, but what happens next? The conventional wisdom is that inflation is on its way down and that we’ll have a soft landing, the fed will pivot soon and start cutting interest rates, inflation will drop back to 2%, and the economy will rally from here,
Lots of people are speculating whether we’re headed for a recession. John Hussman notes that historically recessions are not officially called until long after they happen. That means we won’t know until way after the fact when or if a recession happens. We could already be in the beginning of a recession, or we might not have one at all, we won’t know for sure until later.