Douglas G. Duncan is Senior Vice President and Chief Economist at Fannie Mae where he is responsible for forecasts and analyses of the economy and the housing and mortgage markets. Duncan also oversees strategic research regarding the potential impact of external factors on the housing industry. He leads the House Price Forecast Working Group reporting to the Finance Committee.
Under his leadership, Fannie Mae’s Economic & Strategic Research Group (ESR) won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecasts, in both 2015 and 2016 – the first recipient in the award’s history to capture the honor two years in a row. In addition, ESR was awarded by Pulsenomics for best home price forecast.
Named one of Bloomberg/BusinessWeek’s 50 Most Powerful People in Real Estate, Duncan is Fannie Mae’s source for information and analyses on demographics and the external business and economic environment; the implications of changes in economic activity on the company’s strategy and execution; and for forecasting overall housing, economic, and mortgage market activity.
Prior to joining Fannie Mae, Duncan was Senior Vice President and Chief Economist at the Mortgage Bankers Association. His experience also includes work on the Financial Institutions Project at the U.S. Department of Agriculture and service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of Representatives.
Duncan received his Ph.D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University.
Episode Notes:
Narrator  This is The Norris Group’s real estate investor radio show, the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever-changing real estate market hosted by author, investor and hard money lender, Bruce Norris.
Bruce Norris  Is it, is it common or very unusual for monetary and fiscal policies to went to head in a different direction?
Doug Duncan  Um, I don’t know that it’s unusual, but in developed countries, it’s perhaps unusual, in undeveloped, underdeveloped countries, perhaps less usual. But there is typically some attention paid to the coordination of monetary and fiscal policy and of course, part of the intent in having the president, the president appoint members of theFederal Open Market Committee or the Federal Reserve Board is to, to offer one part one place in which there can be some alignment between monetary and fiscal policy. Though there’s also built into our, our system that desire to maintain some independence, a degree of independence…
Bruce Norris  Correct.
Doug Duncan  …monetary policy and fiscal policy, because if you, what you can do is get into a circumstance which frankly, we’ve been in where you use, where the monetary authority accumulates that debt to make fiscal policy more effective, at least in the short run. And in years, a place for example, that some people will refer to Keynesian Economics and Lord Keynes, who is an economist that said, he was the one who put out the, the idea that in periods of economic downturn, the federal government should run deficits and increase aggregate demand in the economy to pick up to revitalized productive processes and income generating the processes that come along with that and restore economic growth. The part of his admonitions, which is ignored, is he also said in the very short term, those budgets should be rebalanced.
Bruce Norris  Right.
Doug Duncan Â
Debt paid off, that part gets lost in, in Washington. So, it’s a, in a sense of this merging of his reputation that, that people accuse him of suggesting that we should have these large permanent deficits.
Bruce Norris  Yeah. Austerity was in, in his dictionary, but not in anyone else’s.
Doug Duncan  Yeah, yeah. Just to return, to your point of return of common sense and balancing the accounts.
Bruce Norris  So, inflation’s for 2021, what’s, what’s the likely number? And is that going to be, probably less in 2022?
Doug Duncan  The answer is about 5%, somewhere in the 5% range in 2021, and lower in 2022. I think our forecast is right around 5% total inflation headline in 2021. Part of that is, well, you’re hearing the word transitory.
Bruce Norris  Yeah.
Doug Duncan  So, I actually went to the Oxford English Dictionary, which is my source for the history of words.
Bruce Norris  Okay.
Doug Duncan  And definition of transitory is, in the first definition in the Oxford English Dictionary is not permanent. That now gives you a lot of leeway if you’re the Fed, if you’re saying inflation, the bulk of inflation is transitory. Now, you’ve sort of been released from a particular time frame, because it’s over any time period. You could say, well, it’s not permanent. It’s just gone on for five years. Well, I don’t, I don’t think that’s what meant. We do believe certain parts of the inflation pick up the function of measuring the very significant downturn last year year over year basis, it makes it look very large.
Bruce Norris  Right.
Doug Duncan  Part of it is, but, but it is, from our perspective, not permanent. That is that the issues in the auto industry with the the lack of access to the chips that go into the production of modern automobiles, that’s a function of waiting until the production process for those chips, rebounds. And then that will restore pricing. In fact, we would expect used car prices to actually fall, subsequent to that the restoration of that balance. The airline industry is pricing up ticket prices with the rebound in demand to recapitalize themselves after significant losses.
Bruce Norris  Right.
Doug Duncan  With attic downturn. So, that will stabilize at some point which we’ll see competition re emerge, and some of those ticket prices are likely to come back down. The same thing will over time be true in the hotel space. So, those things I would, I would say our fair game from the feds perspective in terms of transitory there are other factors, however, that don’t appear to be sort of transitory, for example, excuse me, the, the imbalance between labor supply and demand suggests that wage rate pressures are going to be strengthened. And that was the case in today’s labor report, the hourly wage was up, I believe it was four tenths from last month, that’s pretty strong growth on an annualized basis and we think that that will persist for some time. It’s also the case that housing which enters is a significant piece of both the CPI and PC measures of inflation, operates on a lag basis and art because rents only renew typically on an annual basis. So, the Feds are now picking up strongly won’t be captured until over the course of the next year, that will be a substantive contribution to underlying inflation. And so, our our view is, while the Fed is targeting an average of 2%, over some time frame, we think it’s going to be higher than that. And our thought is for next year, it’s probably around 3%, and maybe the same going into 2022. And we’ll see what Fed policy does in the interim, you’ve started to see the Fed board members comment that rates might change sooner than what they had been saying for a while. And I think it’s a response to their, to the real belief that not all of these factors are transitory.
Bruce Norris  You know, I had an interesting experience buying a new car yesterday. And I’ve had other, another experiences building, building houses this year, and the price of the two by four went up 400%. But yesterday at the car, car dealership, I wasn’t really intending to buy a car. I was getting an oil change. And we were thinking about buying a car in the next couple months. So I, you know, entered into the showroom, and talked to a guy there and, and nice guy said, you know, ‘You got a Q7?’ He says we have one. ‘You have one, you have one new car for sale?’ Yes.
Doug Duncan  Wow.
Bruce Norris  That was an unexpected. So, you know, it’s interesting about GDP growth is obviously their GDP growth. can’t, they normally have the stock of 150 new cars?
Doug Duncan  Yeah.
Bruce Norris  So, how do you, how do you sell cars that aren’t there? And I said, ‘Okay, if I ordered one, what would be the timeframe?’ He said ‘Four months.’
Doug Duncan  Right.
Bruce Norris  So, Wow, that was a, that was just kind of a surprise that his industry was so impacted. I don’t even know have you have a dealership open?
Doug Duncan  Right
Bruce Norris  Other than used cars used cars they have?
Doug Duncan  That’s right. Yeah, I have a friend who’s a council woman here in Cape Coral, and she likes driving a Lincoln SUV and so she was shopping all over the state of Florida to attempt to find the new Lincoln SUV and could not find it. And so, she went online and actually built it from, you can build a car online now and order exactly the attributes that you want from a selection of things and then they give you a delivery date and a price. So, of course there’s tremendous pricing power built into that, because you’re reflecting demand where there is actually at the present time no supply.
Bruce Norris  Yeah.
Doug Duncan  Versus the efficiency of production for the auto firm, because there they are exactly building inventory one to one to demand.
Bruce Norris  Right.
Doug Duncan  There’s a there’s a question with even when competition re emerges, whether that is going to represent a structural shift in the conduct of the autoruns, the interesting thing to see.
Bruce Norris  Uh, bigger k ind of bigger picture question. I’ve been an adult since basically, like 1970, got married around 70, and I was 18 years old. So, I’ve had inflation as part of my vocabulary or experience my whole adult life. So, here’s a question, the, the timeframe that I’ve been an adult, would you say that that type of inflation has benefited the asset holder equal to the wage earner? Or was there a timeframe where that, that changed? In other words? Yeah, it just seemed like my salary and everything went up, along with my asset prices for a considerable period of time, almost as an equal, and then there was a change. So, did policy change to where it really benefited the asset holder more than the wage earner?
Doug Duncan  The first off, sound clear that people would all agree that I’m an adult, so I’m not sure if I can answer that question directly. But set that aside, the answer is things changed and if you look at return to capital versus return to labor, there was a shift in return to capital to the advantage of the return to capital, it’s part of the reason that you’re hearing the debates publicly about the income distribution.
Bruce Norris  Right.
Doug Duncan  ‘Cos higher income households tend to own more capital, and therefore generate more of the returns on that side, and monetary policy has actually benefited that in that the, when you lower the cost of capital through, through interest rates, for example, that actually benefits the holders of, the holders of capital and employers of capital. So, yes, there has been, there has been a shift and there’s a significant call for a, a reallocation of those returns. At present in Washington, it’s through that urge is suggesting through deployment of income transfers.
Bruce Norris  Right.
Doug Duncan  Frankly, pretty inefficient. Whereas you could change the rules in that govern the marketplace to, to allow the markets to do the reallocation, which would be a more efficient approach to making that adjustment.
Bruce Norris  The inflation of the 70s. So, I was, as I was buying a house and it went up and as I was earning, so what caused the inflation of the 70s? And how is that different from today?But then we had some pretty high inflation.
Doug Duncan  We did very high inflation. That was a, there’s you’ll get various views on that, part of it was monetary policy, that was not disciplined with regard to managing inflation, it was more, more focused on supporting fiscal policy as opposed to maintaining independence, a sole focus on inflation. So, for example, if you compare the US Central Bank, which has a dual mandate, which was put in place in 1968, by the Humphrey Hawkins bill, which gave them a mandate to not only monitor and keep low the pace of inflation, but also to, to set conditions for maximum employment. If you look at the mandate of the German central bank, which went through hyperinflation.
Bruce Norris  Right.
Doug Duncan ..to have one mandate, and that’s zero inflation. So, there’s a there’s that, that rebalancing in 1968, the Humphrey Hawkins bill, led to or supported what was already perhaps in train in the central bank, focus on something other than just zero inflation. The fact that inflation got away from the Fed led to Paul Volcker, for example, who clearly focused on the issuance of inflation and getting it into under control and did so masterfully. But it was there may have been lip service paid to the employment side of the equation, but it was really about getting inflation back under control. We’re at a position which could reflect a pivot point. And whether the central bank is heading back toward other social objectives other than maintaining control of inflation. So, when you hear them talking about income distribution, well, one of the reasons that would be legitimate for them to talk about income distribution is that these low-interest rates, advantage some sectors of the population over others, for example, if you’re already a homeowner, the fact that you can refinance the debt on your existing home for a small fee to two and a half percent, is a quite an advantage in terms of wealth-building for you.
Bruce Norris  Absolutely.
Doug Duncan  So, that’s an example of a have versus a have not if you’re an aspiring homeowner, the fact that home prices will have gone up some 28% in a two year time period, is a disadvantage to you in terms of the affordability of getting into a home. So, that there’s going to be discussion, I would argue about a Fed policy, because it is not solely focused on the issue of inflation. And interest rates as a management tool are a very clumsy tool to affect other social objectives.
Bruce Norris  If I, if I look at the financial paper today, 10 year t bills at about 1.25
Doug Duncan  Yeah.
Bruce Norris  Yeah, what does that tell you? I mean, you know, when you look at that, and especially if you have an historic perspective, and you have an economy growing at, at a pace that we are go, those two are not congruent numbers.
Doug Duncan  That’s correct. And so, a lot of discussion, I was in a meeting of a group of economists over the last couple of days, and someone asked the question, or made the statement in the opening. In the opening discussion, I would like someone in this meeting to be able to explain why the 10-year Treasury has fallen over the last few months from 1.8 to 1.2 and he got a resounding silence around the room. So, the profession is not particularly erudite at explaining those things. One of the things that it could be is that the market is signaling. We don’t actually think growth prospects are that great.
Bruce Norris  That’s what I was thinking. Yeah.
Doug Duncan  Well, and that would be a very reasonable conclusion, because so much of growth has been effectuated by transfers.
Bruce Norris  Right.
Doug Duncan  But transfers come to an end will grow slow precipitously, and we definitely have growth slowing this year, our expectation is somewhere in the neighborhood of 7%, across the four year, next year, something around the 3%, or maybe even less than 3%. As all of that stimulus passes its way through the system back out in the next couple of years beyond that to more in the 2% range. The other thing that it could be a sign of is financial repression. So, if you looked up until about a year ago, I’ve lived in Cape Coral, Florida for a decade or more. And the, I came here in the depths of the 2007 to 10 downturn and from that, from the time that I was here out until the last year and a half or so, if you went through the grocery line. The bulk of the checker bags were over 65. So, you look at that and you say no, why would that be the case? Because Florida is the average age is actually not much different than the national average. There’s, there are certain pockets where there’s older population, but unbalanced. Florida is actually not an old state from the distribution of its population. Typically, where I grew up, a lot of the baggers in checkers were younger people they were working their way through college or they you know, they were a second income or something like that.
Bruce Norris Yeah.
Doug Duncan  If you’re from percent on your passbook savings. And you thought you might be getting three to 5% on your things, then the amount of cash that you would have to have at a quarter percent to throw off the returns to allow you to live the lifestyle that you expected you would get if rates were three to 5%, that’s called financial repression. And the question is, is that simply the flip side of the coin of inflation? If you were getting 5%, but inflation was 5%, you’re kind of back to that 0.5 percent right
Bruce Norris  Right.
Doug Duncan  Which is, which is the reason for the focus on 0% inflation and being able to maintain your, your purchasing power and forward interest rates being positive signaling growth in economic activity?
Bruce Norris  Do you think there’s a chance at that we’re gonna have a bout of deflation, for, okay, well, let me just go down some categories and just maybe, demographics for the US is that a deflationary where we’re at is that deflationary or inflationary?
Doug Duncan  Already the moment we’re, I haven’t seen the most recent statistics. But given where I what I knew about where we were, say, two years ago, versus where we are today, growth is in our, our population is pretty close to zero.
Bruce Norris  Right.
Doug Duncan  And if that were sustained for a period of time, then deflation would likely become that would become a more likely phenomenon.
Bruce Norris  I do see, does the age of population have the effect that like a Japan? I know they’re much older in general, but..
Doug Duncan  Oh, yeah, yeah. Well, Japan is popular is the poster child.
Bruce Norris  Right.
Doug Duncan Given that their birth rate is 1.3 and replacement is 2.1. So, that, they have they’re shrinking.
Bruce Norris  Yeah.
Doug Duncan  That is definitely deflationary
Bruce Norris  Okay.
Doug Duncan  So, the that’s one of the reasons why the adults in Washington are not calling for either the end of immigration or open gates, but rather a rational policy, because the our domestic birth rate is about 1.8. So, without immigration, we will eventually come to a point where we’re in a deflationary demographic profile. It’s not the case today. The, the question, part of the question is, comes back to what you were saying earlier about, will the Fed, at some point, simply freeze the size of their portfolio and let the economy grow past it as a strategy for removing the QE portion delivered by the balance sheet, and then normalize interest rates. One, one clue to that is, in the most recent press conference, the Chair Powell did indicate that they’re likely to start raising rates before they would make a change in the purchases in their portfolio. So, that, that may be an indicator that, that might be their strategy.
Bruce Norris  Do you think things like artificial intelligence is that inherently deflationary?
Doug Duncan  Not inherently. Though it certainly can have a deflationary impact in that it can reduce the cost of certain things by making them more efficient than it you know, you perhaps thinking here of big screen TVs, for example, where, you know, 10 years ago, but it costs Well, you wouldn’t have been able to get a seven inch flat screen that didn’t exist.
Bruce Norris  That’s right.
Doug Duncan  When they did come into existence, they might have been $5,000. Today, they might be $750 and they give you 228 inch screens as a gift when you go out the door. So, that’s deflation, and it’s productive deflation.
Bruce Norris  Okay.
Doug Duncan  That is one thing that that you don’t hear from some of our policymakers is that there is productive deflation. That is the advancement of technology lowers the costs of goods and services…
Bruce Norris  Right.
Doug Duncan  …the purchase in if you maintain the value of our currency, it increases your purchasing power in the process. So, it’s not, they tend to focus, lead the public to believe that deflation from a financial markets perspective, is actually the same as deflation driven by increases in, in productivity. Those are two different things.
Bruce Norris  We’re pretty much out of time, I wanted to touch bases on the being the reserve currency of the world, I probably just narrowed down to a couple of questions. So, the United States has enjoyed that since officially what were, right around the end of World War Two?
Doug Duncan Pretty much
Bruce Norris Okay. There’s a history of countries losing that privilege.
Doug Duncan  Yep
Bruce Norris I mean, it’s 100%.
Doug Duncan  Yeah.
Bruce Norris  So is, is that a desired seat to sit in? And if so, why
Doug Duncan  But it is, if you’re cognizant of it, and you protected, it is a strategic objective of China to supplant the dollar as the world’s reserve currency, because then all the trades are structured in your currency. And from your perspective, it’s, it’s much more financially efficient for you to be the dominant currency than it, than to have to, have to adjust to the, to that of some of another hedeman. So, it’s something to be protected and the current level at which we’re expanding our deficits and outstanding debt, work against that.
Bruce Norris  Okay. When we elect, when we elect president, we have a vote, how do you have a vote to change a reserve currency?
Doug Duncan  No, you have to vote for people whose economic policies would suggest growth as a priority over debt expansion.
Bruce Norris  Okay. But I mean, worldwide, how do you? How do, you wake up one morning and say, ‘guess what, there was a vote in the dollar is no longer the reserve currency?’ So, who in the world stage gets to determine that ultimately?
Doug Duncan  Oh, the global markets.
Bruce Norris  Okay.
Doug Duncan  It is the participant, we now operate in a global capital market. Ours is perhaps the deepest, most liquid and transparent of any around the world. But it’s all the people who, who transact in ways that interface with that, that will ultimately make the vote on on whether the dollar stays the reserve currency.
Bruce Norris  And that how big of a factor is trust?
Doug Duncan  Oh, it’s huge. Yeah, we talked about that earlier on whether or not the US would ever honor all of its Treasury obligations and if you start to see a deterioration of that, and rate rise in the yields, that can’t be explained in other ways, that’s probably a warning signal.
Bruce Norris  Okay. So, just to wrap up one other question your, your level of concern about hyperinflation, if it was a percentage would be close to zero
Doug Duncan Â
At the moment, I don’t see hyperinflation as, as the issue. But I am watching this discussion on infrastructure. And the, the, that’s being talked about in the trillion dollar level, the share of it that’s actually infrastructure is substantively less than that. But there’s an attempt to tie that to another unfunded three and a half trillion of spending, which to me is a real warning sign that, that to me, is would be a negative for economic activity. Now, you could get what Larry Summers has been arguing for some time, which is stagflation such that that increase in expenditures slows the private sector in and but nonetheless, stimulates demand in such a way that you get, you get a significant growth in inflation at the same time as economic growth slows down.
Bruce Norris  Okay. Okay. Well, Doug, thank you so much for spending part of your time with us today. I appreciate it very much.
Doug Duncan  I always enjoy the conversation. You always come with good questions and stimulating things to think about, so I appreciate the invite.
Bruce Norris  Okay. All right. Have a great day. Okay.
Narrator  For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com
Aaron Norris 29:51The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.