His firm prepared the economic forecast for the East Bay Economic Alliance for Business for many years. Typically, he is outspoken and you don’t have to guess at his opinions. He pulled no punches in his latest newsletter.
In Thornberg’s view, the Great Recession and the current economic mess with inflation and soaring interest rates both can be tied directly to ill-advised government actions.
He wrote, “ Little doubt that most people over the age of 30 are suffering from some level of PTSD, remembering the economic carnage that came after the last collapse of the real estate market in 2007-08.
“This real estate cycle and the last have similar roots — they were both created by bad policy on the part of the Federal government. The one bit of good news is that the underlying malfeasance in each cycle was completely different.”
He goes on to point out that the recession was caused by government inaction, while the doldrums hitting the real estate market now have the opposite cause—too much action. Prices have been falling as interest rates have more than doubled in less than a year—yes, rates were in the 3% range in January that now are 6.5-7% with another rate hike by the Federal Reserve looming this month.
“The real estate cycle that generated the ‘Great Recession’ started with one of the greatest snake oil inventions ever dreamed up by Wall Street: the subprime mortgage-backed security. Regulators, believing in the economic myths of efficient markets and rational investors, sat idly by as trillions of dollars flowed into the housing market without any basic underwriting standards.”
” The Covid pandemic was a tragic human event but was never the existential economic crisis it was made out to be by too many economists and pundits. The result was one of the most preposterous overuses of stimulus ever experienced — in two short years the nation saw an enormous increase in Federal outlays funded by $6.5 trillion in fiscal borrowing. This was, in turn, funded by $5 trillion in new money delivered by the Fed in the form of quantitative easing despite the fact that the pandemic did not create any major financial problems. As a result, all this stimulus went straight into the money supply, and M2 ended up increasing by 50% in two years, faster than we’ve ever seen before.”
Thus, no surprise inflation soars and contrary to the fed and Biden Administration pronouncements, there was nothing transitory about it. Once the Fed woke up to reality, it jacked up interest rates. That immediately slowed the housing market as interest rates soared, purchasing power fell and buyers grew cautious so prices fell.
Long term real estate in desirable markets such as the Tri-Valley will do fine, but we’re in for a short term bump thanks to terrible federal policy from both the Federal Reserve and the Biden Administration pushed along by Democratic majorities in Congress.