“Off the Wall” Podcast

Robert Stein Pt. 2 | Midterm Results, 2023 Economic Predictions, and the 2024 Presidential Election

Dec 13, 2022 Market & Economic Updates

Bob is back!

Robert Stein, Deputy Chief Economist at First Trust Advisors, joins us again for our final episode of the year. With the midterms in the rear view and 2023 just around the corner, many people are wondering: What is the 2023 economy going to look like? What can we expect for the 2024 presidential election? Why are gas prices coming down? What can we expect with inflation and the housing market over the next two years?

In this episode of Off the Wall, hosts David Armstrong and Jessica Gibbs get Bob’s take on the 2022 midterm results and his predictions for a looming 2023 recession and the 2024 presidential election.

Bob shares his perspective on who will and will not run for president in 2024, how inflation and home prices will change in 2023, and what changes we can expect in government over the next two years.

“I think there’s going to be a lot of paralysis on Capitol Hill and spending time on investigations. I’m not pro or con, it’s just how they’re going to spend their time, looking into various things. There’s not going to be a lot of legislation on new territory, whether it’s green energy, whether it’s tech, whether it’s taxes, those bills will not get to the President’s desk.” – Bob Stein

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Episode Timeline/Key Highlights:

[01:15] Introducing Bob Stein & The topics of today’s episode.

[03:08] Addressing the 2022 Midterms Results: Why did the Republican party lose a seat in the Senate and barely capture the House?

[08:49] Were the 2022 Midterm elections a rebuke of President Trump?

[09:35] The Democrats’ strategy during the primaries to throw money and advertising behind Trump-endorsed candidates

[10:36] Bob’s thoughts on the Republican presidential run: What chance does Trump have to get nominated? What chance does Ron DeSantis have to get nominated? Are any candidates being overlooked?

[14:27] Will Biden run for president again? Will Kamala Harris run again?

[15:56] Why is Gavin Newsom so popular?

[18:53] Would Biden run with Newsom?

[19:54] Taxes, infrastructure, tech, green energy, fuel prices, inflation – Bob’s predictions for the future.

[22:39] Why are gas prices coming down?

[25:25] Changes in the government, inflation, and housing we can expect in the next two years.

[37:33] Are mortgage interest rates going to increase in 2023?

Resources Mentioned:

Listen to Bob’s episode from June 2022: https://bit.ly/3fU48CH

About Robert Stein, CFA:

Bob Stein is Deputy Chief Economist at First Trust Advisors. He is responsible for managing forecasting and analyzing economic indicators as well as writing economic commentaries.

Prior to joining First Trust, Bob was Assistant Secretary for Economic Policy at the U.S. Treasury Department. While there, Bob was responsible for briefing the Secretary of the Treasury on U.S. macroeconomic developments and formulating policy proposals. Day to day, he was responsible for leading a team of twenty economists conducting in-depth economic analysis and research.

Between 1996 and 2002, Bob was chief economist for the Senate Budget Committee on Capitol Hill and an economist for the Senate Banking Committee and Joint Economic Committee. Prior to his tenure on Capitol Hill and the Treasury Department, Bob was a journalist for Investor’s Business Daily where he covered the economy and authored many front-page stories.

Bob received a BA in both Economics and Government from Georgetown University. He is also a CFA Charterholder.

Connect with Bob:

Connect with him on LinkedIn: https://www.linkedin.com/in/robert-stein-4234ba18

Follow him on Twitter: https://twitter.com/BobStein_FT

Transcript:

Jessica Gibbs (Co-Host): We’re back with our final “Off The Wall” episode of 2022. It’s difficult to believe we’ve been doing this for two years. We started in January 2021. So two years of working on this project under our belts, Dave. Feels pretty good!

David B. Armstrong (Co-Host): It feels pretty good! For those of you who despise hearing my voice as much as I despise hearing my own, I’m a little scratchy this morning. Thankfully, the voice I lost yesterday has come back. So, there you go.

Jessica Gibbs (Co-Host): We have a killer guest today. To round out 2022, we have someone whose voice podcast listeners may recognize from previous episodes. We are delighted to welcome Bob Stein, Deputy Chief Economist at First Trust Advisors, back. Hello, Bob. Thank you for returning.

Bob Stein (Guest): Thank you, Jessica. It’s a pleasure being here today!

David B. Armstrong (Co-Host): That’s right, you get the award for one of our most downloaded episodes of all time on the podcast.

Bob Stein (Guest): I’m pleasantly surprised!

Jessica Gibbs (Co-Host): So, if you haven’t listened, we had Bob on the podcast back in June 2022. He also shared his forecasts for the economic and political landscape. So, if you haven’t listened to it yet, there’s still a lot of it that is unquestionably relevant. But, obviously, things have changed in the last six months, particularly in the political landscape. So, we were eager to have Bob back to discuss where he sees things going in politics and the economy. So, Dave, why don’t you kick it off?

David B. Armstrong (Co-Host): Yes. So, now that the midterms are obviously over, I just wanted to spend a few seconds on that because it’s an example of one of those low-probability events happening, where the 80% probable outcome still has a 20% chance of not happening. And I always like to use the example of Super Bowl 54, which took place in February 2020, which also makes me feel old. And you’ll remember that Super Bowl because it was probably the last time anyone double-dipped in the guacamole before COVID. However, with seven minutes remaining in the fourth quarter, the San Francisco 49ers ended up leading 20-10. And despite having a 90% chance of winning, the Chiefs went on to score 21 unanswered points, including one in the final seven minutes of the Super Bowl, to win 31-20.

So, it’s one of those situations where you have a 90% chance of winning with seven minutes left. You see, there are high probability events in politics, just like in investing or football, that occasionally don’t turn out as expected. So, returning to the midterm results, we have an unpopular Democratic president, record inflation, increased violent crime across the country, and a border mess, in my opinion. The Republican Party lost a seat in the Senate and managed to capture control of the House. Why?

Bob Stein (Guest): Great question Dave. So, let’s talk about the House and then Senate. How did things go in the House? I actually thought the Republicans would gain about 25 seats in the US House, depending on when we had our previous podcast. I was making different forecasts throughout the year about 2 + seats in the US House. In terms of the national popular vote for the House, the Republicans actually did slightly better than most polls predicted, which was unusual. I mean, if I knew exactly what the popular vote would have been before the House vote in early November, or the House elections in early November, I would still predict a 25-seat gain for Republicans in the House. What happened was that their support was very inefficient. Consider Hillary Clinton in 2016. She defeated Donald Trump in the popular vote by 2.1% points, but she lost the election because she lost the Electoral College.

The Republicans experienced something similar. So, what did the Republicans do? They performed far better in rural areas than they did in 2020, 2018, or 2016. Much better. However, these districts were going to win anyhow. They also performed significantly better in many areas of the country with a high Hispanic voter turnout. Let me give you an example. When I was a kid, the Republican Party usually got about 5%, maybe 10% of the vote, and would call it a good election year in the Bronx. They received 25% last year in the Bronx. I mean, if you told me 10 years ago that Republicans would get 25% of the vote in the Bronx, I would have assumed they would get 70% nationwide.

Jessica Gibbs (Co-Host): So, I have a quick question. As you say, there were more votes, which means more people voted and there were higher voter turnout or percentages in terms of independents who chose to vote for the Republican party. I’m just curious.

Bob Stein (Guest): By percentage, I mean percentage of the vote, not the share of the total population voting.

Jessica Gibbs (Co-Host): Okay.

Bob Stein (Guest): So, when I say Republicans, I mean they won the national popular vote in the House by about 3 percentage points and they were expected to win by 2.5. They actually performed better; however, I’m not referring to the share of the total population. I’m talking about the share of the vote. So, they did better in rural areas, and they did better in urban areas with high concentrations of Hispanic voters, i.e. the Bronx, Belle Pascal’s district in New Jersey, Hudson County won by 15 points instead of 30, but still won. So, the Republicans won in rural areas across the country and did better in many Hispanic districts across the country, but they still lost because they are not the majority in those districts. So they had an inefficient distribution of their vote, if you will. So, whereas a three-point victory would normally result in a gain of 25 seats, they gain only ten. So they shouldn’t be too dissatisfied with the performance in the house, it was just inefficiency. And that’s something that can change over time with how the district lines are drawn. The bottom line is that candidate quality mattered in the end even more than I thought it would.

So, going against the elections, I thought the Republicans had dominated a series of what were essentially duds in many key states across the country, particularly in New Hampshire, Georgia, Arizona, and Pennsylvania, where they had better alternatives that they chose not to go with or who chose not to run. However, given the high inflation, the border issues, and the fact that the Democrats were the incumbent party, I believed that fundamentals would be candidate quality in the end. And I was wrong; candidate quality ultimately mattered even more than I thought. So it was really just one big mistake for the Republican side that affected many races. So, if you add up the five key races in which Republicans had a good chance but lost, they are Nevada, Arizona, Pennsylvania, Georgia, and New Hampshire. These were all Trump acolytes. They were all candidates.

Four of them were novices, one was not, but all five were strong supporters of President Trump. And it’s clear in key states across the country that President Trump is toxic. Additionally, in several of these locations, there were additional candidates who performed better than the Senate candidates but weren’t Trump supporters or his backers. Herschel Walker in the state of Georgia is an example. Brian Kemp, the governor, was re-elected with surprising ease. It was a landslide victory for the Republican governor of New Hampshire. A statewide election was held in Arizona for the position of treasurer and there was only one candidate. As the only candidate who wasn’t endorsed by Trump, she won. Besides Trump acolytes, the senatorial masters, and the governorship candidate Kari Lake, they all lost. Putting two and two together isn’t difficult here.

Jessica Gibbs (Co-Host): Do you think this election was a rebuke of President Trump?

Bob Stein (Guest): Yes, the Democrats were very successful in terms of campaign management. A midterm election is typically a referendum on the incumbent. They made it a binary choice between supporting Biden and supporting Trump. And by making it a choice election, they increased their candidates’ chances of winning. If it had simply been a referendum on Joe Biden’s performance, his approval rating has gone down to 42%. I believe that in a typical midterm election cycle, the Republicans would have picked up 4-5 seats in the US Senate. But, obviously, that didn’t happen because they turned it into a choice election instead.

David B. Armstrong (Co-Host): Right. And was some of that attributable to the Democrats strategy during the primaries to throw some money and advertising behind the candidates who were Trump candidates I heard that was happening.

Bob Stein (Guest): Absolutely. I’ll give you Pennsylvania, where Democrats spent a lot of money to get Republicans to nominate Doug Mastriano, but Doug Mastriano would be a solid Republican in Mississippi. He would win, but not in a purple state like Pennsylvania. As a result, Mastriano was a significant drag on the Republican ticket. Remember the gubernatorial elections? If the Republicans had nominated a mainstream Pennsylvania type Republican for that Governor slot, I believe that would have given Dr. Oz a fighting chance despite the fact that Dr. Oz was also a Trump acolyte, although not as strong as Mastriano.

Jessica Gibbs (Co-Host): So, while we’re on the subject of Trump, I’m curious to see if your thoughts have changed. So, on our podcast in June, you gave Trump a 70% chance of running for president in 2024. And you mentioned that if he runs, he has a 70% chance of being nominated. You stated that if he does not run, Ron DeSantis would be the front-runner. So, obviously, Trump has announced his candidacy. We also know that Ron DeSantis did exceptionally well in his reelection campaign. So I’m curious if your thoughts on the Republican ticket and Republican candidacies have changed since June.

David B. Armstrong (Co-Host): However, before you answer that question, I just want you to know I haven’t decided whether or not to run for president in 2024. So factor that in. I could be the wildcard here. But let’s hear your answer.

Bob Stein (Guest): So Donald Trump has declared his intention to run for president. So he’s 100% in. Despite the fact that he is 100% in, I think it is still 70% if he runs now. My opinion has changed because Ron DeSantis has done so well, especially because Trump-related candidates have performed so poorly in this midterm election cycle. Many Republicans who previously supported him or disliked him but were willing to vote for him are shaking their heads and thinking that his time has passed. So, at this point, I believe he has a 35 to 40% chance of receiving the nomination. I believe Ron DeSantis has a 40 to 45% chance of receiving the nomination. They have a combined 80%, so it’s either one or the other.

And I’ll bring up someone else in a minute; I may have mentioned them before. So they have about 80% in total. If for whatever reason, Donald Trump, who is notoriously mercurial, decides to withdraw from the race at some point, I believe DeSantis’ odds will skyrocket to roughly 70%, because Republicans have a history of picking the front runner. So the one other candidate I believe is being completely overlooked by most people is Mike Pompeo, former Secretary of State, a very bright man. The primary debates will most likely begin in mid to late summer. And if he does well in those debates, he will be able to raise funds and perform well. He appears to be acceptable to Trump supporters as well as mainstream conservatives, which is where DeSantis is. So, if Trump decides to withdraw or whatever, and DeSantis fumbles, I believe Pompeo is the natural alternative to DeSantis.

Jessica Gibbs (Co-Host): Do you really see Trump withdrawing if he saw that his numbers weren’t good?

Bob Stein (Guest): Yes, Trump needs to lose.

Jessica Gibbs (Co-Host): He’s not interested in the finality of the election.

Bob Stein (Guest): Correct. He’ll make an excuse, whether it’s his personal health or some other reason to withdraw because he enjoys being the center of attention. He enjoys being the center of attention when he can convince people that he has succeeded. He does not want to appear to fail in public. So he could say, you know, the establishment has it in for me. The system is rigged against me; even if I ran, I would not be nominated. So I’m just going to sit and let you guys figure it out yourselves. I’m not saying it’s a sure thing. But, it’s plausible, given his personality.

Jessica Gibbs (Co-Host): Yeah. Despite his official announcement, it seems he’s even willing to say, “Yeah, I don’t want to do this.”

Bob Stein (Guest): He has not done anything yet. He has just announced.

Jessica Gibbs (Co-Host): He raised a lot of money.

Bob Stein (Guest): Yeah. For himself!

David B. Armstrong (Co-Host): And I’m sure we’ll get to some of the economic aspects of this in a few moments. But I’ll ask the exact opposite question. What are the chances that the Democratic ticket will include Biden and Harris?

Bob Stein (Guest): I believe Biden has a one-in-three chance of running again. I can easily see him becoming President in two years. In six years and one month? Not so mch. So, in the end, I believe he will announce early next year that he will not run for reelection. This is not a promise. I wouldn’t be surprised if he ran again, but I’m leaning toward the possibility that he won’t, which really open up the Democratic field. Normally, I’d expect the Vice President to fill that role, but I believe she’d be extremely vulnerable for a variety of reasons. Gavin Newsom of California has already mentioned running from her home state, with the same fundraising base.

So, if he’s talking that way, I’m sure others are thinking the same thing. As a result, I believe she will face multiple challengers. And she’d have a tough time. She had ample financing for her run for the presidency in 2020, and she dropped out before Iowa because she ran a horrible campaign. She hired her sister as a campaign manager, and she would need to completely overhaul multiple aspects of her political operation in order to win the Democratic presidential nomination. And I don’t believe she’s capable of an overhaul that would push her to the top of the ticket.

David B. Armstrong (Co-Host): Newsom is interesting to me because he appears to be a popular candidate. When you listen to people, they say things like, “Oh, yeah, Newsom would be a natural candidate.” But he’s also a governor who barely survived a recall. Where does his stardom come from when he barely survives a recall?

Bob Stein (Guest): It was a resounding victory for him.

David B. Armstrong (Co-Host): That’s interesting, because how do you resoundingly win reelection after barely surviving a recall election?

Bob Stein (Guest): The recall election, on the other hand, is a little different. The recall format in California is designed to hinder the incumbent. As an example, if you collect enough signatures that the recall election occurs, there are two parts. Number one: the referendum – do you want to keep the guy in office longer, and people narrowly voted yes. However, if they are recalled, they will not be on the list of candidates who will take his place. So, it’s a little strange. This has always been my contention. Everyone remembers Gray Davis, the California governor, being recalled and lost the first thing. Do you want Gray Davis to stay? That, in essence, is the question. The majority said no. Then Schwarzenegger received the most votes of any alternative candidate. But the rule is that the person who was recalled cannot be on that list because it would make no sense. I still contend, from 20 years ago, if they had the recall. But then great. Davis had been capable of being on that other list, because every other Californian, literally millions could have been on that list if they got enough signatures, except for Gray Davis.

If Gray Davis had been on that list, he would have received more votes than anyone else. Because the first part is simply a referendum – do you like the guy in office? No, we don’t. So he was recalled. But, if he had been in second place, I believe he would have beat Schwarzenegger, but he couldn’t. So it was purely a referendum. Remember that elections are ultimately about choices. So, Newsom or somebody else. So, the recall was lose was Newsom or these other flavors. So, anyone who might have preferred a different flavor would have voted against Newsom. But in a real election, such as the primaries or our general election in the United States, it’s either one or the other; you can’t say no to that one, and then get to choose among 32 other flavors. In other words, I think people are reading too much into his recall top-line performance in assessing his popularity in California. He is in fact very popular relative to any other individual politician.

David B. Armstrong (Co-Host): Here’s a wildcard scenario. Based on what you said about Harris and Newsom, what if Biden and Newsom won and Biden resigned from the presidency?

Bob Stein (Guest): It will never happen.

David B. Armstrong (Co-Host): No? Okay!

Bob Stein (Guest): It will never happen. Vice President Harris will be Biden’s running mate if he runs. End of the story. Not choosing Vice President Harris would anger women voters in the Democratic party. It would anger black voters in the Democratic party. And it would also imply that I had the option of selecting any politician in America as my running mate, and I chose the wrong one. That’s why George W. Bush never dumped Dan Quayle. It’s an admission of failure. That is why Trump didn’t remove Pence. It’s an admission of failure in one of the most important decisions you could possibly make. He will never do such a thing. If he runs, it will be with Harris…unless she keels over, which is literally the only scenario where that would occur.

David B. Armstrong (Co-Host): So, with that as sort of our political opinion backdrop, what does that mean for taxes, infrastructure, technology, green energy inflation, like for the next two years? What just happened in the midterms? And do you have any predictions for the future? Do you think that increases the likelihood that anything gets done on any of the five things I mentioned or anything else I didn’t mention?

Bob Stein (Guest): In terms of taxes. If the Democrats had somehow managed to keep the house, it’s possible that the Democrats would have had an additional bite at the apple because they’ve won. The Senate was a big impediment, but they’ve won extra Senate seat now. Right.. And the switch with Kyrsten Sinema really doesn’t change anything. Right, which is news as of this morning. And she’s going to continue to caucus with the Democrats. So, it’s, it’s less than meets the eye. So, in terms of taxes, they would have had a bite at the apple had that kept the house, but they didn’t.

And so there aren’t gonna be any tax hikes over the next couple of years. I don’t see any additional bills like the inflation reduction act, I don’t see any additional infrastructure bill. I think there’s going to be a lot of paralysis on Capitol Hill. Spending time on investigations. I’m not for or against it; I’m just saying that’s how they’ll use their time looking into various things. And there won’t be a lot of legislation on new territory, whether it’s green energy, technology, or taxation; those bills won’t make it to the President’s desk.

David B. Armstrong (Co-Host): Is there anything about the last year’s inflation, particularly with regard to fuel, that you believe could generate bipartisan momentum on repealing regulations or fixing it a little bit? Last time, we discussed how plenty of energy price issues were caused by leases and other similar factors. Could any of that change now that Democrats have realized, “Wow, our agenda here really caused issues,” whether with leases or actual supply-demand? Does any of that get revisited?

Bob Stein (Guest): Not really. I mean, frankly, if you look at West Texas Intermediate crude prices, they’re about where they were 12 months ago. We really don’t have a year ago comparison inflation widespread in the energy sector at this point. My best guess is that the economy will be weaker at the end of next year than it is today. And that energy prices will be lower because of that a year from now. So I think that kind of backdrop is one in which the administration will not feel any pressure to really revisit in any significant way. How many leases and operations they’re allowing for drilling and, and pipelines and things like that.

David B. Armstrong (Co-Host): Okay. So, you know, gas prices are significantly lower than they were even six months ago. Is this due to a perceived slowdown in the economy? Is it a function of supply coming from the Strategic Petroleum Reserve? What has caused gas prices to fall to around $3 in our area?

Bob Stein (Guest): It’s a combination of factors. The first is seasonality. But it’s also because oil prices have dropped significantly since earlier this year. Remember, they peaked briefly, around $130 or so last January, so they’re down from that peak substantially. They’re even lower than they were earlier this year on average. So that is largely due to a combination of factors, including a little bit of SPR, which I think gets too much credit. I really just think it’s, it’s related to the weakening economies globally. I mean, the US is going to finish this year having grown real GDP around half a percentage point, real GDP. So over and above inflation, China is relatively weak. And I think it will remain relatively weak compared to the last 2030 years in China, for the foreseeable future. parts of Europe are already in recession, and they’re going to have a very soft economy, in part related to energy issues. Over the next few months, they may experience a lingering double or triple-dip recession over time. Especially with the conflict between Russia and Ukraine. I believe it is a combination of global and geopolitical events that are lowering oil prices. And that is the main thrust of it.

David B. Armstrong (Co-Host): I think if I go back to when oil was $130, and I am naturally the kind of person who sees something trending in one direction and sees more likelihood of it getting worse than better. Sometimes it just, you know, Oh, geez. And so if we were sitting down having this conversation about $130, I’d say like, geez, I really think that there’s a really high probability that oil can even go up higher than 130. Just forecasting out winter: Russia, Europe, War, like….really decreasing the supply of oil. But the exact opposite thing happened. Is that because the supply went up? Or is it literally because the demand went down and that was enough to offset the demand going up in Europe?

Bob Stein (Guest): The immediate supply and demand matter. But what also matters are our expectations of supply change compared to what you previously thought and changes in expectations about future demand. And I believe it was, to a large extent, expectations about future demand that shifted that. So when people realized that the economy was weakening relative to their previous expectations, that reduced demand.

David B. Armstrong (Co-Host): Okay. What else do you have planned for the next two years? Could we see a shift in this divided government now? Is there anything else?

Jessica Gibbs (Co-Host): The government is divided. Will there be any opportunities for bipartisan cooperation on any issues? Is it going to be completely deadlocked?

Bob Stein (Guest): No, they will eventually cooperate on certain issues. They’ll complain about the debt limit for a long time, but they’ll eventually raise it because it has to be raised, and they’ll reach some sort of agreement on appropriations. It’s just a matter of hold-outs and figuring out who gets what. There will be bipartisan bills will be sent to the president, will there be bipartisanship on new economic issues? New ground? Not really, I don’t see there being any major changes to energy sector technology or any of that. I don’t see any of that happening in this Congress.

Jessica Gibbs (Co-Host): We’re going to have a little bit of status quo for the next two years.

Bob Stein (Guest): They’ll be at each other’s throats pretty much the same as they have been.

Jessica Gibbs (Co-Host): Nothing would change.

David B. Armstrong (Co-Host): It’s funny, because, you know, I have a military background. And one of the things I saw just went in with the National Defense Authorization Act was the cancellation of the mandatory COVID vaccines. And I was joking with one of my friends yesterday, I was like, so all the Marines are standing in line, talking about “oh, well, we don’t have to get the COVID vaccine anymore” as they’re standing in line for their mandatory flu shot. Yeah. That’s kind of funny.

Bob Stein (Guest): I think that’s more of a recruiting issue than anything else.

David B. Armstrong (Co-Host): Absolutely. So, what are your thoughts on inflation? One of the things I find really interesting about inflation, and this ties back to legislation, is that we saw the peak, and then just an astronomical increase in empty money supply hitting the system in April of 2020, and then it tapered down very, very quickly. And I think there is a definite lag, let’s call it a year and a half, for inflation to catch up and sort of match the reduction in M2, and we’re there right now. Are we actually seeing the possibility that inflation could be coming down faster than what the Fed is thinking is going to happen or they’re reacting to in terms of interest rates?

Bob Stein (Guest): So, here’s what I’m expecting. We had 7% CPI inflation last year; this year, we’re going to finish around 7.4 or 7.5%, something like that, at the end of the calendar year, for December, so they’ll be released in January. I’m estimating a four and a quarter percent increase for next year. As a result, it will be higher than the Fed anticipates. So if you want to translate my CPI forecast and to the measure that the Fed follows, called the PCE deflator. So that would be about 4% PCE in my forecast. The Fed will have a new forecast that comes out on Wednesday, I expect their forecast for next year to be 3% or lower. So I’m forecasting more inflation next year than the Fed is anticipating for next year. But it will be down. It will be clearly down from the past couple of years, we’re starting to run low on that extra M2 money supply measure that the Fed injected into the economy in 2020 and 2021.

David B. Armstrong (Co-Host): That’s right.

Bob Stein (Guest): So my expectation for 2024 is that we get to the Feds 2% target by the end of the year. Because my forecast is that we’re going to have a recession starting in the second half of 2023. Now I could be wrong about this, it could be early 2023…could be early 2024, but It’s not going to be like the COVID depression where the unemployment rate goes up to 15%. It’s not going to be like the Great Recession, financial panic of 2008 and 2009, but it’s gonna be a recession, like we had in 2001, 1990 and 1991. Where the unemployment rate goes up around two and a half percentage points, bottom to top. So that would take us to roughly 6% eventually. And in that environment, I think inflation is going to come down significantly because that will be a sign that the Fed really has tightened up and if you look at the growth of them to since February of this year, it’s been roughly flat, like literally zero growth. Some say it’s been negative. So I anticipate a reduction in inflation next year, but not quite as much as the Fed anticipates. But that we are going to be at, at or very close to maybe even below the Feds target by the end of 2024. So we’re two years away, but we are going to get there.

David B. Armstrong (Co-Host): Yeah. You have just seen some anecdotal evidence. I mean, the housing numbers lag a lot. Everybody knows that we’ve been writing about that here. I can’t imagine that if we fast forward eight months from today, like the general lag in the housing data, if we fast forward to eight months from today, there’s no way we’re talking about how the housing prices have done anything other than go down. Now with mortgage interest rates where they are. There’s a lot of current anecdotal evidence like, I just saw something on the news the other day about how the Zillow Price Index, you know, their listing prices are coming down. And I also saw that used car prices have come down a lot. And that’s all got to factor into inflation, too, let alone just the expectation of a recession.

Bob Stein (Guest): I focus a lot on housing. And my view is that the housing rents, as counted by the Consumer Price Index, and the government’s inflation measures are going to be more resilient and are going to stay higher longer than some of the commentary I’ve seen out there. In terms of housing prices, I think a year from now, national average home prices will be lower than they are today. They’ve come down, generally speaking over the past two or three months, well, actually I think we have data through September, maybe October at this point. But we’re gonna generally see prices, national average basis, and not necessarily your home your neighborhood national average basis, housing prices in the US will be lower a year from now than they are today. However, and this is really important, when people think about falling home prices, they immediately think of the housing bust that we went through from like, late 2006 to 2011. They think of that five-year period, where the national average home prices fell 25% over that period. Half the country even more, places like Fort Myers, Florida, Inland Empire, California, Scottsdale, Arizona, they fell like 50% or so. So national average basis with 25% I do not see anything like that this time around. So I think, peak to bottom national average, home prices will drop, maybe 10% at most. For a few reasons: Number one, prices have gone up a lot relative to rents, but they haven’t gone up a lot relative to construction costs. Construction costs are much higher than they were a few years ago. So even though lumber has come down a bit. It’s not just lumber and copper pipe and drywall, it’s also labor costs. And labor has gone up a lot over the past few years. So relative to construction costs we’re not nearly as overvalued as we were at the peak of the previous housing bubble. And then I look around the country, we had massive overbuilding before the previous bubble, we built around 4 or 5 million too many homes around the country. And because of that, when people were fleeing home ownership during that prior housing bubble.

David B. Armstrong (Co-Host): You’re talking about the bubble of 2007-08?

Bob Stein (Guest): Yeah. You would think that if people were leaving homeownership due to negative equity, mortgage resets, and other factors, that would be the perfect time for landlords to jack up rents because people want to become tenants again. But they couldn’t because rents decelerated for two years and then went negative for two years. Because there were just too many homes around the country, landlords had no leverage. This time around, we under built housing for the previous decade. We have around one or 2 million too few homes around the country. And because of that rents have accelerated over the past 18 months or so, I think they’re gonna continue to grow at a fairly rapid rate over the next two years, given the work and calculations I’ve done. And the increase in rents over the next couple of years are going to put a floor or a threshold under home prices that didn’t exist last time around. Because if I’m a landlord, and I’m getting more cashflow, more rent generated from my properties, if a potential buyer comes along, I’m gonna ask for more money than I otherwise would. Okay, that didn’t exist 15 years ago during that housing bust, because rents were falling too, so that threshold doesn’t exist. Let me give you one more reason that I’m not quite as worried this time around. I know a ton of people who locked in mortgage rates, 30 year fixed, in 2020 and 2021 during COVID. Okay, so let’s say you’re sitting on a mortgage where you’re locked in fixed at two and five eights. You lose your job during the next recession. Hypothetically, if someone with a two and five eights mortgage rate loses their job during the next recession, they’ll consider going delinquent, maybe even defaulting on their credit card debt. They might even consider it for that car loan. They’ll put a meth lab in their basement before they default on that mortgage. They will resort to criminal activity to pay a mortgage locked in fixed at two and five eights for the next 30 years. That’s an asset, not a liability. You want to keep that. So there’s simply no way that these people are going to walk away from those mortgages. They’ll put a fentanyl lab in their in their garage, if they have to, you see what I mean, they’ll work off the book, they will do whatever they have to do to pay that mortgage. So it’s a very different environment.

David B. Armstrong (Co-Host): Because the alternative is way more expensive.

Bob Stein (Guest): Yeah. An apartment that’s gone up or a house that’s gone up. And then perhaps hope to become a homeowner in the future at a rate of 6.5% or 4.5% is not something you want to do. So, during the previous housing bust, mortgage rates were resetting to much higher levels, and people had deep negative equity, but this time around, they don’t. So they had it made sense. It was rational for many people to abandon their house and their mortgage. Okay, use exercise to put option and give it back to the bank. This time around, it makes no sense. So people are going to hold their homes, dear. And you’re not going to see the implosion you saw last time around. That said, yes, national average home prices will be lower a year from now than they are today.

David B. Armstrong (Co-Host): So with so much being driven by housing and cars and the economy and everything that you just said, what is the prospect for homebuilding to actually increase over the next decade? This sounds to me like if I’m a home builder, I’m trying to buy raw land and build houses right now.

Bob Stein (Guest): So I’m going to talk out of both sides of my mouth, but I’m an economist, so I am allowed. Okay, here’s the scoop. If we go through a session, as I expect over the next year, I think the number of housing starts will be lower next year than they are this year. They’re already lower this year than they were last year. So that’s just natural and normal, because during a recession, fewer people are buying new homes, etc. So totally natural and normal. However, if we’ve underbuilt housing over the previous decade, when we come out of that recession, okay, and maybe even the tail end of the recession, I think you’re gonna see a surge in homebuilding. That’s very powerful, much more powerful than the surge we got in the early stages in 2009, and 2010. Homebuilding remained low and stagnant for multiple years, even after that recession ended because we had to work off the excess inventory left over from the previous decade of overbuilding. This time around, we have too few homes when we come out of the recession homebuilding should do very well.

Jessica Gibbs (Co-Host): I’m just curious, what do you think about mortgage interest rates? I mean, they’ve obviously gone up, do you see them falling back down and at what pace?

Bob Stein (Guest): Great question. So, my best guess is that a year from now mortgage rates will be a little lower than they are today. So why a little bit lower? It’s a confluence of two offsetting factors. Driving interest rates higher will be the fact that I think the market right now is underestimating how to determined and willing the Fed is to raise interest rates. So I think, you know, the market is pricing in 50 basis point hike next week, I think that’s going to happen. But I think we’re gonna see an additional 100 basis points and short term rate hikes next year. And once the market figures that out, the rest of the bond market, I think long term interest rates move up a little, and that’s gonna push mortgage rates a little bit higher than they are today. However, I also think that next year, we’re gonna hit that recession. And that’ll eventually start putting downward pressure on long term interest rates. In addition, I think that right now, many mortgage investors are assuming that the recession, or whatever occurs, is going to have a more negative impact on the housing market than will actually occur. I think, as I explained earlier, people are going to hold those mortgages dear, they’re not going to default or go delinquent like they did last time around. So I expect the mortgage spreads. In other words, the amount by which mortgage rates are higher than the 10-year rate to compress a little bit to narrow a little bit over the next year. So the combination of all those factors combined is a little bit of narrowing. So I think a year from now, mortgage rates will be a little bit lower than they are today.

Jessica Gibbs (Co-Host): I was going to say that we’re not going to get back to 3%.

Bob Stein (Guest): No, we’re not going back to 3% anytime in the immediate vicinity.

Jessica Gibbs (Co-Host): If you’re thinking about borrowing an ARM, a 5 or 7-year ARM probably makes sense. Because you could possibly go down a little bit, but not substantially.

Bob Stein (Guest): If I were in the market today for a home, I would look for a short-term ARM, not as short as I can get, perhaps 3 years. And I believe you have the ability to refinance that, especially if we go through a recsession. It’s late 2022, if you can refinance that in late 2024, maybe early 2025, to a fixed interest rate or longer term. You don’t want to be too short. You don’t want an interest-only loan. It seems a little risky to me. But somewhere in the vicinity of about three years, maybe five years if your bank doesn’t offer this rate?

Jessica Gibbs (Co-Host): Yeah, I’ve noticed that the difference in rate between a seven-year and a five-year isn’t all that different. So, there’s a propensity to want to do the seven years because you’re at least locking in that, but you’re also ensuring that you have the option to refinance earlier.

Bob Stein (Guest): That would make sense Jessica.

Jessica Gibbs (Co-Host): Bob, as our time is coming to an end, do you have any parting thoughts for our listeners?

Bob Stein (Guest): I think they should bet on the Eagles to win the Super Bowl.

David B. Armstrong (Co-Host): I was gonna ask if you had a College football pick, but okay.

Bob Stein (Guest): And, I like Texas for the NCAA Basketball.

David B. Armstrong (Co-Host): Interesting pick. I like that!

Bob Stein (Guest): I like Texas right now.

David B. Armstrong (Co-Host): Do you do brackets? You may not be able to mention it, but just purely for entertainment purposes.

Bob Stein (Guest): Absolutely. Purely for only entertainment purposes. No exchange value whatsoever.

David B. Armstrong (Co-Host): We also do a lot of entertaining with the brackets around here.

Bob Stein (Guest): I put a lot of time and effort into my brackets by the way.

David B. Armstrong (Co-Host): Do you really? What do you usually do? Pretty good?

Bob Stein (Guest): Yeah, I’ve won multiples over time, usually fairly competitive. Here’s the key thing to remember when you fill out a bracket. Key thing to remember is, you need to think in terms of cumulative probability. So when you’re figuring out you’re looking at the second round, and you’re thinking, you know, I think this team might get upset in the first round. Yeah. But probably not. But they might. Okay. So if you really think that you don’t necessarily have to pick the upset in the first round, just make sure the team that you thought would be upset in the first round doesn’t win two games. Think in terms of cumulative probability. And when you get late in the tournament, think Blue Bloods, and big conferences, okay, you want the Blue Bloods and the big conferences, the ECCS. You want the SECs now it’s a much more competitive conference, you want the Big East teams, if you have them going deep. So you know, big 12. Don’t go with a Gonzaga to win it all. Because in the end, there are other teams that are doing well so far this year that I don’t think necessarily win, for example Houston. They are an excellent team, they might be the best team in the country right now. Like if you’ve watched some playback college basketball it’s like watching an NBA team almost. But they have a really weak conference. So they’re gonna go two months, without really consistent competition. And then boom, they hit the NCAA’s, and maybe their first one or two games are easy. And then they hit the real competition again. And you know, the ACC teams and Big East teams they’ve been, they’ve been banging against each other for a while. And those guys are ready.

David B. Armstrong (Co-Host): We like to make that point to our clients and everybody else who is kind enough to listen to us that like the cumulative probability, we look at the stock market. I mean, over time, it’s undefeated. Right? It’s undefeated. So, if you can have a long term perspective on the stock market, you have a great plan, and you are able to absorb these minor setbacks and make your portfolio as financially unbreakable as possible, you’re essentially doing the same thing. Absolutely. Talk about that all the time, too. So you can get the probabilities versus the possibilities.

Bob Stein (Guest): Absolutely. Don’t try to time the market. It’s time in the market.

David B. Armstrong (Co-Host): We’d like to take a moment to thank our mutual friend, Marie McClughen, for setting this up for us to talk. This is Bob Stein with the First Trust, and if anyone is listening, and you know Marie professionally, please thank her for all of her hard work in setting this up. And we appreciate our partnership with First Trust, as well as you taking the time to come in here on what I believe will be a very busy Friday for you.

Bob Stein (Guest): It was my pleasure to be here!

Jessica Gibbs (Co-Host): Thank you, Bob!

David B. Armstrong (Co-Host): Thanks!

Bob Stein (Guest): Thank you!

About "Off The Wall"

OFF THE WALL is a podcast for business professionals and high-net-worth investors who want to build wealth with purpose. A little bit Wall Street, a little bit off-the-wall; it’s your go-to for straightforward, unfiltered wealth advice on topics that founders, business owners, and executives care about.

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