The economy is currently facing several economic headwinds from congressional gridlock, ongoing wars with Israel-Hamas and Ukraine-Russia, and mortgage rates reaching historic highs. Many investors are worried that these signal an oncoming recession for 2024. Meredith Whitney, Founder & CEO of Meredith Whitney LLC joins Yahoo Finance to discuss why she believes this will not happen.

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Video Transcript

- Mere, thanks so much for being here. It's great to have you.

MEREDITH WHITNEY: Thanks so much. And thanks, everyone, for having me.

- It's great to have this audience our here live. Want to kick the conversation off with your outlook for the economy. It's been more resilient than many folks would think. Do you think it could last?

MEREDITH WHITNEY: Well, I have never been one to say that we would go into recession in 2023. And I don't think we're going to go into a recession in 2024. And here's why-- I divide the economy into two sectors. Those under 38 years old, I call them the avocado toast generation.

So that's Gen Z and the lower cohort of the millennials. They have jobs. They're employed. So they have money, they have income, but they don't have wealth. They don't own homes.

And then you have 38 and above, which are the homeowners. And so what's staggering is the 38 and below own less in terms of US real estate than they've ever owned before. And those over 50, over 70% of US housing is owned by those over 50.

So if you've owned a home for the last 10 years, you've made $21 trillion in equity. So you're sitting on-- so when we went into the housing crisis, equity levels were very low. So equity levels were in the 40% range in terms of loan to value-- or equity to value.

And today, that's gone up over 70%. So Americans are sitting on a tremendous amount of equity in their homes. It's a question of when they tap into it. And I think that you do not see credit card debt rising as fast as you would think it was.

It's rising at about 24% of total consumer spending over the last 10 years. The US consumer is delivered dramatically. So like I said, 70% equity in homes, they can tap that at any point. Home equity lines of credit, which you would think they would tap, haven't been touched. They're actually lower than they were last year.

- Fed Chair Powell last week left the prospect of further interest rate hikes on the table. We heard this morning from Neel Kashkari, the Minneapolis Fed voter, saying that he would rather over-tighten. If we were to see rates move higher from where they are right now, does that change your forecast at all? Or on the flip side, to your point, on home equity, the fact that home owners are now sitting on fixed rate mortgages of 5% or lower-- 80% of Americans, I should say, are sitting on fixed rate mortgages at 5% or lower-- does that make the economy more immune, perhaps, to the Fed's blunt interest rate tool?

MEREDITH WHITNEY: Surely, it's going to have an impact. But it has the most direct impact on asset prices. And so I think if you look at the housing market today, and I think this is so critical with the US consumer, which drives 2/3 of the US economy, you see home prices that are roughly at 2021-- 2021-22 levels, maybe a little bit higher, reflective of very different interest rate environments.

So when you have interest rates go higher, home values have to go lower. And I think something else is going-- so that's just math. So I think something else is going to happen too. So when I say that over 70% of homes are owned by people over 50-- AARP estimates, and this is a long term estimate of multi-decade, that 51% of people over 50 downsized to smaller homes. That's over 30 million units of housing.

And I think it's rate agnostic, because older people have lower mortgages, if any mortgage at all. Last year, you had record all cash deals in terms of home purchases. So in Naples, 58% of the homes that were transacted were all cash.

So I think what happens is you have high levels of equity. When people want to sell, they will reduce their home prices and sell. That means the sooner you sell, the higher probability that you lock in the paper equity gains that you have. The later you sell, there's going to be-- what today there is a demand supply imbalance where there's too much demand, not enough supply.

That's going to invert as boomers-- more and more boomers start to sell and downsize, or over 50 start to downsize. And that's the vast, vast majority of homes that will come on the market. Then you'll see a supply demand dynamic shift. Now, because--

- What's going to drive that? Because, as you just mentioned, 80% of Americans sitting on fixed rate mortgages of 5% or less-- you're saying they bought all cash. They don't have mortgages right now. But mortgage rates right now are prevailing at 8%. So what's the incentive?

MEREDITH WHITNEY: Sorry. Sorry. What am I saying is that the cash-- the deals last year that were done had the highest cash components in over 10 years. Today, if you look at the homeowners-- 66% of homeowners-- the older cohorts don't have much of a mortgage at all. They're sitting on so much equity.

So when they sell a larger house and take out their equity, cash in their equity, they're going to be buying a smaller house, likely for all cash. The risk here is the ability of the buyer, the younger buyer, to buy from the boomer. And that's why I say prices have got to come down to be commensurate with rates. And there's a mismatch here now.

- So when do you see this playing out?

MEREDITH WHITNEY: I think it starts to happen in '24

- And when do you see the reversal of more supply on the market? Because--

MEREDITH WHITNEY: I think it's late '24 into '25, and it's a multi-decade cycle. Because the peak of existing home sales was around 7 million in 2005 at the peak of the housing market. And today, I think it's-- or next year, it's estimated-- Goldman Sachs estimates that they think it's going to be 3.8. I think it's going to be higher than that, for sure.

You've got upwards of, let's say, 30, let's say it's 20-- it's a pig through the python. So I think that's going to be a multi-year stage. So what I call the silver tsunami is over the next five years, the last of the baby boomers turn 65, and that'll be another tailwind to this trend.

- All right, switching gears, I know you cover the banks-- how are the banks' balance sheets now? Have they been doing the hard work to bolster their balance sheets as interest rates have gone up so that we won't see a repeat of the regional bank failures that we saw earlier this spring?

MEREDITH WHITNEY: Well, I think the regional bank failures were specific to interest rate mismanagement, asset liability management. And another issue where-- I mean, Silicon Valley was hiding in plain sight. I mean, there was no secret to it. Going into the fourth quarter, there was no secret to what was on their balance sheet.

And I think that what caused the demise of Silicon Valley was something that I call a faith-based run on the bank. So any financial market is a faith-based system. And when investors lose faith, the institution doesn't survive.

So bank balance sheets today are-- and this is important, too, because if you look at the biggest banks that used to be the biggest consumer lenders, all of those that have been under higher capital standards have basically ceded their involvement in consumer lending to non-bank players. And so more of the activity has moved off bank balance sheets.

Now, the new 16 banks that are ring fenced in terms of over $100 billion in assets that will have higher capital standards, you're going to take even more money away from basic lending into non-regulated entities. And how that-- so to say about bank balance sheets, they're more securities interest rate variable than credit variable.

And in 2007-2008, it was a credit variable thing. The economy is just totally different because the consumer is under-levered. The banks are basically securities warehouses. And what that means for the economy is, and I think this is an important point-- if Basel III end game goes through, and as the 16 banks-- new banks that are ring fenced with over $100 billion in assets, you're going to have more and more lending go outside of the banking industry.

Now, outside of the banking industry means that there's no Community Reinvestment Act that mandates that they have to reinvest in low income areas or rural areas. So you're going to see capital come out of those areas. And that is-- that's truly upsetting, because you want to enable as many people to be a part of the banking system as possible. And I think that's an unintended consequence that the regulators really need to think about.

- So do you think the proposal as it stands right now the Fed has put forth, as pertains to Basel III, is a bad idea?

MEREDITH WHITNEY: I think there's a lot that's wrong with it. And I think that for the first time in my professional career, the banks are going after the regulators and saying, what are you thinking? There's no data that's supportive of any of this.

You know, they took a long time to do this. It seems absolutely ham fisted. And if they're really focused on protecting the system and protecting the US consumer, this is not the way to go about it.

- How worried are you? You mentioned that a lot of this is going to move outside of the regulatory realm into the unregulated realm. How worried are you that that's going to create complications like we saw leading up to 2008 with the shadow banking system?

MEREDITH WHITNEY: Not at all, because if it goes out into-- so the banks were systemic. I worked in the '90s, and I covered subprime finance. And I remember-- I covered auto finance-- subprime auto finance. I went on the Houston loop and visited all the used car dealerships. It was very glamorous.

99% of those companies went out of business. And nobody noticed. I noticed because I was in the industry. Similarly in 2005-2006 when non-regulated mortgage companies went out of business, it didn't hurt anybody because it wasn't government guaranteed. So am I worried about it? Investors, buyer beware for those stocks.

But what I worry about specifically is access to credit for communities that are really going to be deprived of it. I think that's what regulators should focus on.

- So given your outlook for credit, what is that going to mean for the economy going forward?

MEREDITH WHITNEY: It means that people will pay more for credit. That's for certain. And so it--

- You're not forecasting a recession-- you're seeing slower growth as a result?

MEREDITH WHITNEY: I think growth has already started to slow. I think that various industries have gone through a rolling industry recession. The consumer has not. But the consumer doesn't have sort of the post-COVID, let's go out and party, you know, and buy as much stuff as we can.

They're tempering it, but they still have-- they still have money to spend. I would also point out that I go to the church of Walmart, where what they say is what I believe. And they said in August, September if they see a very strong back to school season, they'll see a very strong Halloween season and a very strong Christmas season. And that's what they saw. So I'm going to-- I put a lot of stock in that.

- All right. Well, the economy keeps on ticking. Switching gears, I always like to shine a light on women in the economy. And you, as a woman, have worked on Wall Street for years-- first in an investment bank, now you're back with your own advisory firm. How did you see Wall Street handling the gender pay gap?

I mean, women are still making $0.83 on the $1.00 versus men. And these are women who have full time jobs. How do you think we should go about closing the gender pay gap?

MEREDITH WHITNEY: I don't know that that gap-- is that a Wall Street gap or a national gap?

- National.

MEREDITH WHITNEY: Yeah, so I hit the jackpot when I started on Wall Street in that I landed in research. It was the greatest job that I ever imagined. I worked-- like Mike Bloomberg says, you're probably smarter than me but I'll outwork you every day. Like, I worked-- because I knew-- I was a history major in college. What did I know about-- I assumed everybody was smarter than me. I still do.

And so I just worked really hard. I never had an issue with pay. I could have-- Wall Street is a meritocracy, and that's all I've ever known. Now, you can not like the lifestyle, but if you deliver, and you work really hard, and you have a product that sells, you'll get paid.

And I thought that that was very fair. So I got very lucky, actually, getting into Wall Street when I did. And other industries may not be the same. And, certainly, that has to change.

One thing that certainly happened when I started, I had a bunch of women with me when I started, and they left the industry because they didn't like the lifestyle. I never left the industry because I loved-- I loved the content, and I loved learning, and it was amazing. And I also think that what you learn on Wall Street working as intensely as you do, you can take to any other industry and your work ethic and approach, it will differentiate you. So I have only gratitude for Wall Street.

- So what's your advice to younger women who are trying to climb the career ladder now?

MEREDITH WHITNEY: I would say don't keep asking the questions about work life balance. There's work, and there's life, and shoes, right? So when you start out, you have this unbelievable opportunity to learn and get everything-- absorb everything. And you know, it-- you can work-- you're never going to learn as much at that point.

And you're never going to have as much mentorship at that point in terms of 360 mentorship, and have people work next to you that you can learn from. It's really extraordinary. So just appreciate the opportunity that you have, and take it all in, and work really hard, and differentiate yourself. And find something you love, because what I do today does not feel like work. I still feel like I hit the jackpot.

- All right, well, Meredith Whitney, thank you so much for your insight. So appreciate it. Great to have you here.

MEREDITH WHITNEY: Thank you so much.

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