VIDEO DETAILS
Logan Mohtashami on Trump, trade deals and the Fed
✓ FREE ACCESS
Logan Mohtashami on Trump, Trade Deals, and the Fed: Navigating a Complex Market Landscape
In a dynamic discussion, lead analyst Logan Mohtashami dissects the intricate dance between potential Trump-era policies, ongoing trade negotiations, and the Federal Reserve's monetary strategy. Mohtashami offers a detailed outlook on how these factors are shaping mortgage rates, the housing market, and broader economic expectations, emphasizing that current market conditions are rife with both uncertainty and underappreciated strengths.
Key Insights from Logan Mohtashami
Here are the pivotal takeaways from Logan Mohtashami's analysis:
1. Trump's "Godzilla Tariffs": The Wild Card Holding Fed Rate Cuts Hostage
Logan Mohtashami identifies former President Trump's proposed "Godzilla tariffs" as a primary source of market uncertainty and a key constraint on the Federal Reserve's ability to ease monetary policy. He argues that these potential tariffs are directly influencing the Fed's inflation outlook and, consequently, its timeline for interest rate cuts.
"What Godzilla tariffs did is that the market when obviously we could see now the stock market doesn't like tariffs... So market activity pushed the 10 year yield below 4%... what does this mean for the Federal Reserve now? Because they made their. We're waiting, we're waiting because of tariffs." - Logan Mohtashami
Mohtashami explains that before the intensified tariff rhetoric, the market had priced in two rate cuts. However, the prospect of significant tariffs forced the Fed to raise its inflation expectations, delaying potential easing. The recent legal challenges blocking some tariff implementations introduce another layer of complexity. Chicago Fed President Austan Goolsbee's comment that "if you do deals, we could lower monetary policy" underscores this direct linkage. The situation remains fluid, with Mohtashami noting, "we're in like limbo chaos even more."
For investors, this means that developments on the trade and tariff front are critical signals for future interest rate movements. The Fed's cautious stance is unlikely to shift significantly until there is greater clarity on whether these "Godzilla tariffs" will materialize, be negotiated away, or be permanently blocked. This uncertainty directly impacts bond yields and, by extension, mortgage rates.
2. Fannie & Freddie's Future: "Implicit Guarantee" a Cautiously Optimistic Step
Logan Mohtashami views former President Trump's suggestion of an "implicit guarantee" for Fannie Mae and Freddie Mac, should they be taken out of conservatorship, as a significant and somewhat positive development. This is primarily because it removes what Mohtashami considered a worst-case scenario: privatization without any government backing.
"He tactically used the word implicit to me. I mean, I applauded that because the worst case scenario that I thought could happen was removed. That you try to take them public without any implicit or explicit backing..." - Logan Mohtashami
Mohtashami clarifies that an "implicit" guarantee, while not as legally robust as an "explicit" one, historically suggests the government would step in during a severe crisis – as it did in 2008. This framework, he believes, provides a basis for discussions with investors about potential spreads on mortgage-backed securities (MBS). He recalls that even with an implicit guarantee, the market functioned, though extreme stress (like spreads hitting 5.82% on May 8, 1980) can occur. The key, according to Mohtashami, is that some form of government backing is essential, a point he believes is validated by models showing the GSEs cannot operate effectively without it.
This development is crucial for housing finance. If a plan moves forward with an implicit guarantee, it could prevent a drastic rise in mortgage rates that might occur with a fully private, unbacked system. However, investors will still demand a premium for the lesser certainty of "implicit" versus "explicit," influencing MBS spreads and ultimately the cost of mortgages. Mohtashami notes the administration's hesitancy to do anything that would raise mortgage rates in the current environment.
3. The Fed's Calculated Caution: More Than Just Tariffs
While tariffs are a major factor, Logan Mohtashami posits that the Federal Reserve would likely have maintained a cautious approach to rate cuts even in their absence. He attributes this to the underlying strength of the U.S. labor market.
"Let's say there was no, no tariffs, no Godzilla tariffs. The Fed would have been doing what it's normal done. We're going to take our time. The labor market is still sound. You know, jobless claims are still low. We're getting close to neutral policy. Maybe we don't need to." - Logan Mohtashami
Mohtashami emphasizes that Fed policy itself accounts for 65-75% of the potential range for mortgage rates, influenced by the 10-year Treasury yield. He believes the 10-year yield's dip below 4% was largely a reaction to tariff fears, not justified by economic data alone. His analysis suggests an "acceptable range" for the 10-year yield, based on Fed policy and labor data, is closer to 4.35% to 4.70%. He recalls Fed President Neel Kashkari's past statements affirming the Fed's power to lower mortgage rates if it chose to cut its policy rate.
This insight suggests that investors shouldn't expect rapid or deep rate cuts solely based on tariff resolutions. The Fed's data-dependent approach, particularly its focus on employment, will continue to guide its decisions. A resilient labor market provides the Fed with the leeway to be patient and ensure inflation is firmly under control before significantly altering its stance.
4. Housing Market's Surprising Resilience: Building a Base for 2025
Contrary to widespread pessimism, Logan Mohtashami highlights the surprising strength and resilience of the U.S. housing market, even with elevated mortgage rates. He sees current trends as laying a healthier foundation for future growth, particularly looking towards 2025.
"Purchase application data yesterday up 18% year over year. For the last four weeks it's been up double digits. It has had a 17 week winning streak... This is all happening with elevated rates." - Logan Mohtashami
Mohtashami points to several positive indicators: robust purchase application data (up 18% year-over-year recently, with a 17-week winning streak), growing housing inventory, and a slowdown in price growth. He argues this combination is characteristic of a market building a sustainable base, a pattern observed in historical cycles. He also notes that the latter half of 2024 (July-November reports for sales from June-October) will compare against historically low existing home sales figures, potentially leading to year-over-year growth even with modest sales volumes. His target for a "functioning housing market" where he'd stop saying "low inventory" is 1.52 million active listings.
For investors, this contrarian view suggests that the housing market may be more resilient than headline narratives suggest. The underlying demand, particularly from demographic tailwinds like Millennials and Gen Z, coupled with improving inventory, could lead to a more active market if mortgage rates were to fall, even modestly to around 6%. Mohtashami dismisses extreme versions of the "mortgage rate lockdown" theory, noting that life events continue to drive transactions.
5. Decoding Housing Data: Focusing on Forward-Looking Indicators Amidst "Chaos"
Logan Mohtashami advises caution when interpreting volatile month-to-month housing statistics, such as the NAR's pending home sales data, which he describes as "a little bit too extreme." Instead, he advocates for focusing on forward-looking indicators and longer-term trends.
"We believe the NAR's pending home sales data is a little bit too extreme on the month to month [prints]... Not much is going on. So we want to track our forward looking data... Purchase application data... look out 30 to 90 days." - Logan Mohtashami
He emphasizes the value of purchase application data, which provides a 30- to 90-day leading indication of market activity. Mohtashami explains that there can be lags between when applications are made and when sales are officially recorded, sometimes leading to seemingly sudden jumps in sales reports, as seen in 2022 when 12 weeks of improving purchase application data culminated in a single strong sales report. He also warns against drawing simplistic parallels to past market conditions, such as 2006, without considering the vastly different underlying dynamics.
This guidance is crucial for investors trying to make sense of often conflicting housing market signals. By prioritizing trends in leading indicators over noisy monthly figures, and understanding the mechanics of data reporting, one can gain a clearer picture of the market's true trajectory. Mohtashami's approach encourages a more nuanced analysis, filtering out short-term volatility to identify fundamental shifts.
Insightful Quotes from Logan Mohtashami
-
On his analytical framework and political uncertainty:
"My job as an analyst is basically conform whatever my models believe that we could arrange in but now I don't... You know there might be other ways that the President and the White House can get tariffs in but obviously that was a blow."
-
Defining a healthy versus unhealthy housing market:
"The unhealthy housing market was prices escalating out of control because it kills future demand. The healthy housing market is. Inventory is growing, more choices, price growth cools down, wages and households can catch up."
-
On the significance of current housing strength despite high rates:
"If this was with mortgage rates were at 6% I really really wouldn't have made a big deal about this. This is all happening with elevated rates. So when I did the interview with Yahoo this morning I said positive story."
Market Implications
Logan Mohtashami's analysis paints a picture of a market at a crossroads, heavily influenced by political variables (tariffs, Fannie/Freddie reform) yet underpinned by certain fundamental economic realities (labor market strength, housing demand).
- Mortgage Rate Volatility: Expect continued sensitivity in the bond market and mortgage rates to news regarding tariffs and trade deals. A resolution or de-escalation could pave the way for Fed easing, while an escalation could further delay cuts and pressure yields.
- Housing Market Potential: The underlying demand in the housing sector, as evidenced by strong purchase application data, suggests significant pent-up potential. Mohtashami believes a drop in mortgage rates to the 6% level could unlock a more substantial recovery in sales activity. Investors might consider opportunities in homebuilders and related industries if they align with this outlook.
- Fannie/Freddie Watch: The discussion around an "implicit guarantee" for Fannie Mae and Freddie Mac offers some reassurance against worst-case scenarios for the MBS market. However, the lack of an "explicit" guarantee means investors will continue to price in a degree of uncertainty, potentially keeping MBS spreads wider than they might be otherwise.
- Fed's Path: While tariff news is a key catalyst, the Fed's actions will also hinge on core economic data, particularly inflation and employment. Mohtashami's view that the Fed would be cautious even without tariffs suggests that any easing cycle might be gradual, barring a significant economic downturn.
Investors should adopt a strategy that acknowledges the heightened uncertainty from trade policy while also recognizing the fundamental drivers Logan Mohtashami highlights. This involves closely monitoring Fed communication for shifts in tone, particularly in response to tariff developments, and looking for opportunities in sectors like housing that could benefit from even modest improvements in the interest rate environment.