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A 'real housing recession' will bring down inflation; Expect a 'Phoenix rising' of bonds - Michael Gayed

Kitco News

(Kitco News) - The housing market is looking bearish. Almost 60,000 home sales fell apart in June, and new home sales fell to their lowest level since April of 2020.

Michael Gayed, Portfolio Manager of Toroso Investments, warned of a substantial correction in housing.

"What [markets have] not priced in is a real housing recession," he said. "Housing is only now starting to roll over."

Gayed spoke with David Lin, Anchor and Producer at Kitco News.

Stocks and Bonds

Despite weakening home sales, stock markets are rallying. The S& P 500 is up 7.5 percent over the month, and the NASDAQ is up 11 percent over the same period.

Gayed argued that despite recent stock market gains, equities still have a downside ahead of them, which will be favorable for U.S. Treasuries. He termed this trend, "Phoenix rising."

"If you were to have another wave lower in equities, which I think is likely to come, Treasuries will go back to the way they historically behave, as the risk-off, 'safe haven' [asset]," he said. "You can actually make money then, during that classic risk-off environment."

Although Gayed cautioned that he cannot predict markets perfectly, he spoke in terms of "probabilities." He pointed out that utilities are a sign of overall stock market changes.

"Historically, utilities, the most boring sector of the stock market, tend to outperform in advance of high volatility events for the broader market," he said. "Utilities are the most bond-like sector of the stock market… Utilities, factually, when they perform a short-term burst, tend to precede major declines for equities."

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Real Estate

In the U.S. the home-price-to-median-income ratio is just above 8, the highest it has been historically. Gayed said that "this affordability issue" will result in a house market correction, especially as energy and food prices trend higher.

The FAO Food Price Index has declined in recent months, but still remains the highest it has been historically.

"When the average person, who's not in financial markets, starts realizing that their food prices are going up much faster than they ever thought, and home heating bills, that's going to break demand," he said. "It forces a choice between getting a house and dealing with a high mortgage payment, or paying for basic needs. That dynamic is still very much in play."

He added that the home prices must come down to dampen inflation, otherwise there will be "societal unrest" and "heightened inflation."

However, he said that it would take a while for housing prices to correct, since "you have institutions that are at the margin, holding these properties that are not necessarily going to be sellers, and price is always set by the marginal seller."

To find out Gayed's views on which investments are best, watch the video above.

Follow David Lin on Twitter: @davidlin_TV

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