Okay, here’s my synopsis of what Dr. Roubini is saying:
- Yes some of the rally is fundamental. Any time you step back from disaster, there’s a sense of “wow, we survived.”
- But the market is rallying like a V shaped recovery is happening and the current employment situation doesn’t justify that.
- So, we’re most likely going to see an adjustment in the market. Roubini’s estimation is some time in the next 6 months.
So what does that mean for the mortgage markets?
A couple of scenarios that I can see playing out:
- If the adjustment/correction is a mild and orderly one (they haven’t been lately), then I don’t expect it will have a major effect on mortgage rates. Money would move from the stock market to the bond market and that could push down some, but not significantly. Keep in mind that at the same time, we’ll have the upward pressure of the Fed leaving the mortgage backed securities market. So I’d expect the two to wash out with very little change.
- If the adjustment is a CORRECTION, we could see a dramatic movement of money. Depending on the emotional toll that comes from it (aka “here we go again?”), will determine if money goes from the stock market into bonds and mortgage backed securities (push down on rates – see above) or if money goes all the way to cash. If people just get out of the market and take everything to the sidelines, then we could see higher rates and lower stock prices.
The way I see it, if Roubini is right (and I wouldn’t bet against him on this one), the two most likely scenarios of how that would play out would result in either stable rates or rising rates.
Keep that in mind as you make plans going forward.
“Some of [the rally] is fundamental,” he said. “We avoided Armageddon, there is a light at the end of the tunnel, and risk aversion is lower.”
“But it has occurred so fast, so soon, in my view that it’s diverging from the underlying economic fundamentals,” he said. “Markets today are pricing in a V-shaped recovery and they have to start pricing in a U-shaped recovery, so the fourth quarter or first quarter could see a correction.”