Bill Gross, revered as Wall Street’s ‘Bond King,’ foresees a recession clouding the U.S. economy by the year’s final quarter. He pinpoints the burgeoning issue of overdue car payments and the financial strains beleaguering regional banks as catalysts for the impending economic slump.
Bill Gross Foresees Economic Clouds on the Horizon
On Tuesday, October 24, 2023, stock markets have risen, somewhat healing from the previous week’s bruises. Despite this uptick, market conditions remain tumultuous, with the 10-year U.S. Treasury bond yield hovering at 4.84%. Inflation has nudged slightly upward in the last two months, prompting anticipation of a 0.25% interest rate escalation in the forthcoming Federal Open Market Committee (FOMC) meeting.
On the social media network X (formally Twitter), the bond connoisseur Bill Gross publicly shared his projection of a deceleration in the U.S. economy’s momentum come the fourth quarter. “Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly,” Gross said. “Recession in 4th quarter,” the investor added.
Auto loan tardiness has surged of late, with other financial slip-ups such as consumer loans and credit card lapses reaching peaks not seen in over ten years. Just last month, an alarming 6% of sub-prime car loan patrons lagged behind by a full 60 days. The unsettling trend of vehicle confiscations began to rise in January and hasn’t looked back since. Intriguingly, while auto loans and other consumer debts reveal escalating delinquency, single-family mortgage payment misses haven’t shown the same consistent uptrend in 2023, though they’ve inched upward.
A closer look at the data paints a mosaic of delinquency trends, oscillating based on the mortgage type and the specific timeframe in focus. The Mortgage Bankers Association (MBA) has pointed out a noticeable uptick in delinquencies for commercial real estate and multi-family sectors in 2023’s second quarter. Amidst this backdrop of rising defaults and a stubbornly high federal funds rate, 2023 has been particularly brutal for regional banks. The scenario grew direr after the abrupt downfall of Silicon Valley Bank (SVB) in March.
In Gross’s commentary on X, he emphatically noted, “I’m seriously considering regional banks again,” following up with the investment advice: “On bonds. Invest in the curve.” The year has seen regional banks not only underperforming but also plummeting even deeper than their lows during the SVB debacle. The financial institution Huntington Bank felt the pressure, shuttering dozens branches across the Midwest.
These regional financiers, are heavily tied to commercial real estate (CRE) and are grappling with the rising defaults. This, coupled with consecutive Federal rate boosts, has nudged their unrealized losses perilously close to the edge.
What do you think about Gross’s prediction? Do you expect a recession in the fourth quarter? Share your insights and opinions about this subject in the comments section below.