I have to let you in on a little secret, and it's this: Economists are really bad at predicting the economy. I know; I was surprised too. Who would've thought that? Think back to December 2021. What were they predicting for 2022? 3% GDP growth. What did we get? Negative GDP growth in the first two quarters of this year.

Now, in fairness to all these smart people with squiggly lines and models, here's what they're missing on most of their models: It's what I call the X Factor, an exogenous factor to their model that they tack on to the end to really reflect the risk that's out there to their model. So in other words, if you're predicting 3% growth but you know your supply chains are stretched, you know maybe inflation's coming around, you may want to adjust that, put an X Factor in there of a minus-a-half-a-percentage point, and maybe a full percentage point. I don't know.

Now, I'm going to let you in on another secret. Here it is: Back in 2007, I wrote a book called “World Event Trading.” No one read this book. Nobody read it, not even my mom. I gave her two copies, one for my dad and her. I think they use it as a window stop or something. Keep the door open. Seriously, no one read this book, but the concepts are pretty good. Why? Because the first five chapters were on infectious disease outbreak and their impact on the markets in the economy, and the rest of the chapters were outbreak of short-term war, U.S. elections, things like that. All of these things are wrapping together today in what I call the X Factor.

So when I look at these predictions, and they're predicting very slow growth for next year, I just suggest everybody take not a grain of salt, but literally a Morton's can of it when it comes to these. But that's what's going on. The markets, we're anticipating a bad year in 2023. Now, we had a decent quarter in the third quarter. It was plus 2.6%, but we know the next quarter's not going to be very good. That little squiggly line down there shows a negative number for housing investment because we know that when you raise interest rates this fast and housing prices are already high, you basically crush people. They can't afford to buy a home, and that's what we're seeing.

So housing, not only here, but also in Canada, has really taken a hit. It's not reflected just yet in all the numbers, but it's coming, and it's going to be bad. Canada's already seen a 31% drop in transactions, and the USNBA mortgage application index is basically cratering. We know that even rents are starting to come down. That's incredible; we didn't think that was going to happen for a while. But this is the canary in the coal mine. When you raise rates this fast, this is what happens.

The other thing that happens is auto sales, and a lot of other things, anything that's tied to an interest rate, starts to crater. It's fascinating to see that tech stocks have gotten hit the hardest. Tech stocks rallied the most during the shutdown because we all needed that technology, too. But here's the thing that was going on underneath the surface: Think about discounted cash flow. If the economy's growing and rates are low, if you think about the structure of that thing, the numerator is earnings, and the denominator is a discount rate. If the denominator is zero, which is where it's been for a while, then whatever's in the numerator looks fantastic out 10 years.

But the world changes when you raise that denominator up to 4%, and suddenly, your earnings, which are small, start to look terrible. And that is what a tech growth company looks like. And if you look at what their valuations are now, they're down significantly. If you look at what venture capital's doing, it's doing very little right now, in a lot of the tech space that was very active over the last year. And PE follow-on, same thing. If you're a company, why would you seek venture capital right now? Because the valuation's bad, and again, if you're a company seeking maybe to do a follow-on in PE, why would you do it? Because the valuation, again, is going to be so low, it's going to hurt everybody. So that's really dried up significantly, so I just want to point that out: There are mechanics behind what's going on when you see rates go up so significantly.