Latest / The Financial Exchange Show / Cutting government spending is the only real solution to the affordability crisis

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Cutting government spending is the only real solution to the affordability crisis · The Financial Exchange Show

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Speaker 2: Good morning, Welcome back to the Financial Exchange. It's Mike,
1:19
Speaker 2: Mark and Tucker with you on an inflation Tuesday. This morning,
1:23
Speaker 2: at eight thirty a m. We received a report from
1:26
Speaker 2: the Bureau of Labor Statistics. We saw inflation in the
1:32
Speaker 2: month of December rebound increased from the month of November,
1:36
Speaker 2: but not at an accelerating rate headline point three percent
1:41
Speaker 2: on all items for a month over month number two
1:44
Speaker 2: point seven percent for the calendar year of twenty twenty five.
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Speaker 2: When you strip out the volatile food and energy sector
1:51
Speaker 2: from that inflation report, you get too point two percent
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Speaker 2: and an annualized pace of two point six percent for
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Speaker 2: calendar year twenty twenty five. This follows two messy reports
2:02
Speaker 2: or frankly no reports in October and November. In terms
2:06
Speaker 2: of the inflation there was no October CPI report. The
2:09
Speaker 2: November one was quite messy because of the lack of
2:13
Speaker 2: October and the collection period, and so this was the
2:16
Speaker 2: first supposedly normalized report. And while you did see some
2:20
Speaker 2: concerning items such as food prices increasing at a pace
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Speaker 2: of seven tenths of percent, there was not much here
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Speaker 2: that you could take as extraordinarily concerning. From an inflation perspective, it.
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Speaker 3: Doesn't appear that the trend in inflation over the past year,
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Speaker 3: and the trend is what the FED can control, So
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Speaker 3: it's what we should be interested in. We're not interested
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Speaker 3: in the bumps that come from that come from fleeting
2:43
Speaker 3: food and energy, as conspicuous as those prices are and
2:47
Speaker 3: as painful as they can be to bear, not really
2:48
Speaker 3: interested in those, right, right, So we're interested in, like,
2:51
Speaker 3: what is the underlying rate of inflation. There are ways
2:53
Speaker 3: to get at that core as one, and the core
2:56
Speaker 3: rate fell in twenty twenty five from twenty twenty four,
2:59
Speaker 3: from three point two to two point six, so good news.
3:03
Speaker 3: Should we be surprised by that? Well, unemployment rose, and
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Speaker 3: there is this short term relationship between the two. Unemployment
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Speaker 3: is a measure of whether the economy's running too hot.
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Speaker 3: When it gets too low, there's some region, there's some
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Speaker 3: range of unemployment which becomes inflationary. So maybe we shouldn't
3:20
Speaker 3: be surprised that inflation slowed because unemployment went up, and
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Speaker 3: the two are inversely related, at least in the short term.
3:28
Speaker 3: That's sort of the favorable machine you want to put
3:31
Speaker 3: on all this The cautionary note, if you had to
3:35
Speaker 3: insert one, would be that inflation appears to be above
3:38
Speaker 3: the FEDS two percent target, right, and yet they're easing.
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Speaker 3: They're making it easier. They're printing more money, is the shorthand,
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Speaker 3: even though that's an oversimplification. They're lowering their short term
3:49
Speaker 3: interest rate target, they're easing monetary condition should they be?
3:52
Speaker 3: I don't have an answer to that.
3:53
Speaker 2: And you know, the piece that they have been very
3:56
Speaker 2: concerned about has been the employment level. And Mark, you
3:59
Speaker 2: and I were talking not on the radio this morning,
4:01
Speaker 2: but this morning about the trend in employment, and it's
4:04
Speaker 2: clearly been on a downward trend in terms of the
4:06
Speaker 2: pace of hiring. The unemployment rate has been on an
4:09
Speaker 2: upward trend for the last several years. And so the
4:12
Speaker 2: Fed made it clear last year and the year before
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Speaker 2: that that is what they were focused on. They felt
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Speaker 2: that they had made progress enough on inflation to be
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Speaker 2: able to now focus their pivot their focus over to
4:23
Speaker 2: the employment situation. But again, if I'm to strip out
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Speaker 2: all of the context here and just land at a
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Speaker 2: point where we are experiencing unemployment of four point four
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Speaker 2: percent and inflation of two point seven headline or two
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Speaker 2: point six for the last year and two tens percent
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Speaker 2: of the last month. I'm not sure that I still
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Speaker 2: favor that employment situation anymore. I'm not sure that that
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Speaker 2: is still my focus. And therefore, if you're asking, hey,
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Speaker 2: what's the FED likely to do next, the answer is
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Speaker 2: probably nothing.
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Speaker 3: Yeah. I think that the burden of of people who
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Speaker 3: want to get the burden of proof that the balance
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Speaker 3: has shifted from or the balance remain shifted in favor
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Speaker 3: of the employment mandate over the inflation mandate. I think
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Speaker 3: the burden of proof is shifted to those who argue
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Speaker 3: that unemployed that's really awkwardly said. What I mean is
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Speaker 3: that unemployment seems to be doesn't seem to be. It
5:22
Speaker 3: is very low by historical standards, four point four percent.
5:25
Speaker 3: You could point out that job openings have fallen and
5:27
Speaker 3: payroll growth is stalled as a counter argument, but I'm
5:32
Speaker 3: just going to go with the unemployment rate as a
5:33
Speaker 3: measure of slacking the economy, and it's really low. The
5:37
Speaker 3: perennial question for the FED and for FED watchers is
5:40
Speaker 3: it is it unnaturally low? And there's a technical meaning
5:45
Speaker 3: for that. I'm not just trying to be colorful in
5:48
Speaker 3: my choice of words, is that is that rate actually
5:52
Speaker 3: inflation area? Is unemployment too low? You could say, well, no,
5:55
Speaker 3: unemployment's been a four point five ish percent in recent
5:59
Speaker 3: in the modern era a few times. It hasn't pushed
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Speaker 3: up inflation. Yeah, but the structure of the economy may
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Speaker 3: have changed, the so called natural rate might be higher.
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Speaker 3: The Fed is aware of all of these considerations and
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Speaker 3: it's constantly trying to balance them.
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Speaker 2: The likelihood now of a rate cut at that next
6:16
Speaker 2: meeting has dissipated even further after this inflation report. So
6:20
Speaker 2: last week we were talking about only a five percent
6:23
Speaker 2: chance of a rate cut at that January meeting. That's
6:25
Speaker 2: according to the Chicago Mercantile Exchange, the CME group, where
6:29
Speaker 2: you can effectively bet on this sort of thing. Next
6:32
Speaker 2: meetings in fifteen days. Now a ninety seven percent chance
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Speaker 2: that the Fed does nothing after that meeting. When we
6:38
Speaker 2: look forward to the last meeting that Jay Powell will
6:41
Speaker 2: be overseeing, there is a fifty nine percent likelihood that
6:44
Speaker 2: rates are still where they are today. So I think
6:48
Speaker 2: investors are starting to take this in context and say, Okay,
6:52
Speaker 2: what would really move the boat on this, And it
6:54
Speaker 2: would have to be a largely higher unemployment.
6:56
Speaker 3: I mean for people pounding the table for lower rates,
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Speaker 3: like the President's proxy on the FED board, Steve Moran.
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Speaker 3: I don't know, Mirror, excuse me, I don't know. I'm
7:05
Speaker 3: obviously mispronouncing his name, so I don't want to. I
7:08
Speaker 3: called him a puppet, a toty, a flunky. You know,
7:12
Speaker 3: those are all unkind. They're probably accurate, but it's sort
7:15
Speaker 3: of unkind. But he's clearly doing the President's bidding. I
7:17
Speaker 3: would love to if he ever came on the show,
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Speaker 3: which he probably won't, ask him, Steve, why should thetral
7:24
Speaker 3: Why do you think the neutral rate of interest is negative?
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Speaker 3: He wants a FED funds rate of what like two?
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Speaker 3: We're at three point five today. To get to the
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Speaker 3: real Fed funds, you just subtract the rate of inflation
7:34
Speaker 3: from that. So if you think Fed funds needs to
7:37
Speaker 3: be one hundred and fifty basis points one point five
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Speaker 3: percentage points lower, you think it needs to be about two.
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Speaker 3: Inflation is running it at least two and a half
7:43
Speaker 3: right now. I think if you use last month's month
7:46
Speaker 3: over month change and you annualize that, it's it's three
7:49
Speaker 3: point seven.
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Speaker 2: And The only context where you would want something like
7:52
Speaker 2: that would be if you believe that the economy is
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Speaker 2: falling off a cliff.
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Speaker 3: Falling off a cliff, that is an emergency level of
7:59
Speaker 3: real interest rates. Again, real is you should take the
8:02
Speaker 3: nominal what you see in the newspaper or wherever, and
8:03
Speaker 3: you subtract inflation from that. Some people would say, no,
8:05
Speaker 3: you should use expected inflation, et cetera. But for this
8:09
Speaker 3: purposes of this conversation, my definition suffices, why do we
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Speaker 3: need a negative real interest rate right now? What are
8:15
Speaker 3: you seeing?
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Speaker 2: Then?
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Speaker 3: I'm not I'm open to being I'm highly skeptical obviously, Mike,
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Speaker 3: But the Britner proof is clearly on those people.
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Speaker 2: By the way, we were talking about interest rates. Mortgage
8:26
Speaker 2: rates a bit of a separate issue, but the news
8:29
Speaker 2: has been coming fast. On January eighth, last week, the
8:31
Speaker 2: President announced that what was it that Fannie May and
8:36
Speaker 2: Freddie Mack I believe it was what it could be
8:38
Speaker 2: purchasing two hundred billion dollars of mortgage backed securities. In
8:44
Speaker 2: the short term, at least, it seems to have had
8:46
Speaker 2: the intended effect the average thirty year fixed rate mortgage,
8:50
Speaker 2: according to Mortgage News Daily. On January eighth was six
8:53
Speaker 2: point two one percent. We've now dropped to about six
8:56
Speaker 2: percent even on those mortgage rates. So having the obvious
9:02
Speaker 2: and intended effect here, it's.
9:04
Speaker 3: Spilled over in a stockport. That's monetary policy. The only
9:07
Speaker 3: reason this administration can do that is that we effectively nationalized.
9:10
Speaker 3: We took them into conservatorship right in two thousand and eight.
9:13
Speaker 3: Right before then, the president could not order Fanny freddie who.
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Speaker 2: To do anything.
9:19
Speaker 3: Yeah, so this is backdoor monetary policy. The White House
9:23
Speaker 3: found a loophole, and it was only a matter of
9:25
Speaker 3: time before some populist president would found a loophole that
9:28
Speaker 3: allows him to without Congress by edict, effectively inject two
9:33
Speaker 3: hundred billion. The Fed's buying five or ten billion, And
9:36
Speaker 3: just put this into perspective, the Fed's buying five to
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Speaker 3: ten million of the home mortgage back loans a month.
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Speaker 3: This is a massive injection of liquidity into fixed income
9:47
Speaker 3: and thus, because money is fungible, it just makes its
9:49
Speaker 3: way around the system into equity markets. This is backdoor
9:52
Speaker 3: monetary policy. It's astonishing and it barely made. I bet
9:56
Speaker 3: a lot of people don't know what we're talking about.
9:58
Speaker 3: They're going to forget about it seems obscure, but it had.
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Speaker 2: It had a real impact on it.
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Speaker 3: It did oh interestingly though, one time dissipated and now.
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Speaker 2: They can't continue this every month like the fedcam.
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Speaker 3: Well they'll, they'll, they'll try. I don't know what the
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Speaker 3: limits are on what they can buy and hold.
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Speaker 2: I have to have cash to do it.
10:17
Speaker 3: Yeah, I just yeah, I don't know what they're a
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Speaker 3: balance she is.
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12:37
Speaker 2: Uh. The President has been on a affordability brainstorming push.
12:44
Speaker 2: I guess it seems like to me, I guess it's
12:47
Speaker 2: more than brainstorming, because he's been brainstorming then posting these
12:50
Speaker 2: ideas to true social and throwing them out there and
12:52
Speaker 2: having real conversations about it. It does follow a Fox
12:56
Speaker 2: News poll in mid December showing the President had a
12:58
Speaker 2: thirty nine percent approval rating on the economy, probably about
13:03
Speaker 2: in line with what we were seeing from the Biden
13:05
Speaker 2: administration in the last few months of their final days.
13:10
Speaker 2: And I think that has certainly spooked him and caused
13:15
Speaker 2: him to start thinking about all of these different items.
13:17
Speaker 2: And so what have we seen just really in the
13:20
Speaker 2: last week has been pretty stunning. One the proposal to
13:23
Speaker 2: ban large investors from buying single family homes. He successfully
13:28
Speaker 2: directed Fannie May and Freddie Mack to buy two hundred
13:31
Speaker 2: billion dollars worth of mortgage backed bonds to bring down
13:35
Speaker 2: mortgage rates, floating the idea, obviously of tariff revenue being
13:39
Speaker 2: used to fund two thousand dollars tariff checks to most Americans. Obviously,
13:45
Speaker 2: we have everything going on in Venezuela and the efforts
13:47
Speaker 2: to bring down oil prices. There's been a post now
13:52
Speaker 2: quote on social media saying the President never wants Americans
13:56
Speaker 2: to pay higher electricity bills because of data centers, and
14:00
Speaker 2: that big tech companies building data centers must pay their
14:03
Speaker 2: own way. And then, obviously this one's gotten a lot
14:07
Speaker 2: of headlines was the president's announcement that he wants to
14:10
Speaker 2: cap credit card interest rates. In fact, he didn't say
14:13
Speaker 2: he wants to, He said we will be capping credit
14:15
Speaker 2: card interest rates for a year at ten percent, and
14:18
Speaker 2: in fact had a call with Senator Elizabeth Warren on
14:21
Speaker 2: the subject, who has been speaking to the press about
14:24
Speaker 2: it and asking him to make the push. I want
14:27
Speaker 2: to talk about that one because that one, to me,
14:30
Speaker 2: of all the ones we just talked about, that one,
14:33
Speaker 2: to me, probably has the most obvious and immediate effects
14:37
Speaker 2: on individuals and the economy, Like, what is going to
14:40
Speaker 2: be the long term implications of the United States removing
14:43
Speaker 2: the Venezuelan president. I gotta say, I I don't know.
14:47
Speaker 2: I got real no idea. I really have no clue,
14:50
Speaker 2: and I think it could go a number of different ways. Likewise,
14:52
Speaker 2: what sort of an effect does banning large investors from
14:55
Speaker 2: buying single family homes? I don't know. They're pretty small
14:57
Speaker 2: buyer in the first place.
14:57
Speaker 3: It's funny, it's a little sad. Everything you mentioned is
14:59
Speaker 3: kind of a gimmick. The one thing under the presidents
15:02
Speaker 3: in Congress control that could get interest rates down is
15:06
Speaker 3: cutting spending. It's the thing he focused on early on,
15:09
Speaker 3: and we haven't heard anything about DOGE. I don't think
15:11
Speaker 3: it exists anymore, the Department of Government Efficiency. But if
15:14
Speaker 3: you want to get interest rates down, as we learned
15:17
Speaker 3: in the early nineteen nineties, we had.
15:18
Speaker 2: To call that Treasure Secretary Besson has been talking about
15:21
Speaker 2: prior to being yeah right, there is no some government spending.
15:24
Speaker 3: I just think the wrong people have the President's here
15:26
Speaker 3: on this. Get back to what you talked about early on,
15:28
Speaker 3: cut government spend. Now, I'm a fanatic when it comes
15:30
Speaker 3: to cutting government spending. I cut it by a third
15:33
Speaker 3: and let the chips fall. I think interest rates would
15:37
Speaker 3: respond quite positively to that development. It would offset any
15:39
Speaker 3: drag from aggregate, any dragon demand that comes from cutting
15:43
Speaker 3: government spending. That sounds like a kooky idea, but desperate times,
15:47
Speaker 3: desperate measures, and so forth. They're invoking every populist gimmick
15:52
Speaker 3: in the book. These are all Elizabeth Warren Bernie, forgive me,
15:55
Speaker 3: but these are these are left wing or right wing. Now,
15:57
Speaker 3: I guess populist band aids sos that do nothing to
16:01
Speaker 3: address the problem. For example, if you cap interest rates,
16:04
Speaker 3: people are going to pull out of the credit card business,
16:06
Speaker 3: and people who can get credit today wouldn't otherwise.
16:09
Speaker 2: I want to explain what that really means. Right, So,
16:11
Speaker 2: credit cards are loans that are unsecured and can be
16:16
Speaker 2: very readily written off in bankruptcy.
16:19
Speaker 3: And frequently, which is why the rates are high.
16:21
Speaker 2: They also the credit card companies are liable for any
16:24
Speaker 2: fraud that occurs on the credit card, and so they
16:28
Speaker 2: have to monitor that and immediately refund if there's somebody
16:32
Speaker 2: that steals your credit card number. It's not like a
16:34
Speaker 2: bank account in that fashion. So in response to that,
16:36
Speaker 2: because people frequently do default on their credit cards. And
16:40
Speaker 2: because these banks are for profit entities that want to
16:43
Speaker 2: make a big, hefty profit, they charge very high interest
16:46
Speaker 2: rates for people that carry balances. So that's like with
16:50
Speaker 2: any cap, whether it's rent control or a cap on
16:53
Speaker 2: grocery prices. There is a very likely outcome to what
16:58
Speaker 2: would happen if you imposed a ten interest rate on
17:01
Speaker 2: credit cards? And I'm sorry, I want to get through
17:03
Speaker 2: this because maybe it's not often. No, the likely outcome is,
17:08
Speaker 2: like you said, banks immediately start lowering credit limits for
17:13
Speaker 2: existing borrowers. They probably cancel the credit cards for millions
17:18
Speaker 2: of borrowers who have a low credit score and are
17:20
Speaker 2: at risk of default, because hey, if I can only
17:23
Speaker 2: make ten percent in interest on these balances, that might
17:26
Speaker 2: someday go away. I'm not gonna wait for that to happen.
17:29
Speaker 2: I'm gonna call the loans now and get what I can.
17:33
Speaker 2: And so you would, I think, pretty immediately have these effects,
17:38
Speaker 2: which would, in my opinion, negatively impact many America.
17:43
Speaker 3: A lot of credit cards are gonna get canceled. Then
17:45
Speaker 3: we're gonna need another government intervention to correct the unintended consequences.
17:49
Speaker 3: This is gonna be my theme for the next However,
17:51
Speaker 3: many years we're under a populist regime left or right wing,
17:54
Speaker 3: another government intervention to correct the errors of the previous one.
17:58
Speaker 3: When all these people's credit cards get canceled because the
18:00
Speaker 3: technically stimulus checks.
18:01
Speaker 2: While I look at, for instance, banning large investors from
18:04
Speaker 2: the single family market and say, yeah, I don't really
18:07
Speaker 2: like I don't think it's a good idea. I think
18:09
Speaker 2: it's a bad idea to ban any degree of buyer
18:12
Speaker 2: from the US market unless you have national security concerns.
18:16
Speaker 2: But I'm not sure what sort of effect this would have,
18:18
Speaker 2: Like would it immediately hurt home prices? I kind of
18:21
Speaker 2: doubt it. By capping interest rates on credit cards, you've
18:24
Speaker 2: already had big bank CEOs come out and tell you
18:27
Speaker 2: what they would do. One, they would fight you tooth
18:29
Speaker 2: and nail. Two, they would cancel millions of Americans access
18:33
Speaker 2: to credit. And then what happens To your point, it
18:37
Speaker 2: could have a very immediate effect on consumer spending if
18:41
Speaker 2: they don't have the credit cards to put that spending.
18:43
Speaker 3: These aren't serious ideas, These are gimmicks. The tragedy of
18:46
Speaker 3: this is that the president has at his disposal the
18:50
Speaker 3: tools to affect some serious if Congress would wake up
18:53
Speaker 3: and maybe be proactive with respective spending cut initiatives. I'm
18:56
Speaker 3: focusing on the interest rate side of the picture. Why
18:58
Speaker 3: are interest rates elevate? It despite maybe a slowing economy
19:03
Speaker 3: is indicated by sluggish labor markets. Well, worries about government
19:06
Speaker 3: debt gee, I wonder who's in a position to do
19:09
Speaker 3: something about that?
19:10
Speaker 2: Too bad?
19:10
Speaker 3: We don't have a president of Congress that could cut
19:12
Speaker 3: government spending like they said they would focus on thirteen
19:15
Speaker 3: months ago. They're failing to use the tools that they
19:19
Speaker 3: have control over. I don't understand.
19:21
Speaker 2: We'll got credit card caps instead, though. Quick break Wall
19:25
Speaker 2: Street Watch coming up.
19:26
Speaker 1: Next, bringing the latest financial news straight to your radio.
19:44
Speaker 1: Every day, It's the Financial Exchange on the Financial Exchange
19:48
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19:54
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19:57
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19:59
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20:00
Speaker 4: As markets are narrowly in negative territory after the consumer
20:04
Speaker 4: price index came in line with expectations of a zero
20:07
Speaker 4: point three percent increase in December and held steady at
20:10
Speaker 4: two point seven percent on an annualized basis, Investors also
20:14
Speaker 4: keeping a close eye on the drama surrounding the Justice
20:17
Speaker 4: Department's investigation into FED chair Jerome Powell, and a top
20:20
Speaker 4: at all off. We have the start of fourth quarter
20:24
Speaker 4: earning season right now. The Dow is off six tenths
20:28
Speaker 4: of a percent, or about three hundred points lower s
20:30
Speaker 4: and P five hundred is down just over a tenth
20:33
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20:37
Speaker 4: three points now. Russell two thousand also off nearly a
20:40
Speaker 4: tenth of a percent ten. Your treasure yield is flat
20:42
Speaker 4: at the moment at four point one eighty three percent,
20:45
Speaker 4: and crude oil up three percent higher now trading at
20:48
Speaker 4: sixty one dollars and forty two cents a barrel. JP
20:53
Speaker 4: Morgan reported during zan revenue that beat expectations. However, the
20:57
Speaker 4: bank's profit declined seven percent last quarter. JP Morgan down
21:01
Speaker 4: by about three percent. Meanwhile, Delta reported mixed quarterly results,
21:05
Speaker 4: saying the government shutdown knocked two hundred million dollars off
21:08
Speaker 4: its pre tax profit in the previous quarter. The company
21:11
Speaker 4: said earnings could jump more than twenty percent this year
21:14
Speaker 4: due to robust travel demand, particularly among premium flyers. Delta
21:20
Speaker 4: stock is down about two percent, Sticking with the airline sector,
21:23
Speaker 4: where Boeing stock is up over two percent after the
21:26
Speaker 4: aircraft maker log net orders of one one hundred and
21:29
Speaker 4: seventy three airplanes last year, marking the first time it
21:32
Speaker 4: outsold its European rival Airbus since twenty eighteen, and shares
21:36
Speaker 4: in defense contractor L three Harris A rising two percent
21:39
Speaker 4: after the company set of plans to spin off its
21:41
Speaker 4: missile business, backed by a one billion dollar investment from
21:45
Speaker 4: the Defense Department. I'm Tucker Silvan. That is Wall Street Watch,
21:50
Speaker 4: and in the previous segment we asked you the trivia question,
21:53
Speaker 4: who did Bill Gates a point as CEO when he
21:56
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21:59
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22:01
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22:27
Speaker 2: Develop If you haven't seen this video of Balmber from
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22:37
Speaker 2: during our next commercial break, not during the show. Obviously.
22:42
Speaker 2: Billionaire hedge fund manager of Pershing Square Bill Ackman has
22:46
Speaker 2: an idea when it comes to mortgage rates, and we
22:53
Speaker 2: are debating this off air.
22:54
Speaker 1: Mark.
22:54
Speaker 2: Let's let's talk about what the proposal is. So today,
22:57
Speaker 2: when you get a mortgage, you are welcome to pay
22:59
Speaker 2: that off at any pace you want. The most you
23:02
Speaker 2: can get out of it is a thirty year We've
23:04
Speaker 2: been talking about extending to fifty year mortgages. But today,
23:07
Speaker 2: if you get a thirty year mortgage, choose to pay
23:09
Speaker 2: it off in fifteen years, good on you. You'll pay
23:12
Speaker 2: less interest and there's no penalty associated with doing so.
23:16
Speaker 2: In other sorts of markets, let's say you're taking out
23:18
Speaker 2: a business loan, a pre payment penalty is very common.
23:21
Speaker 2: You know, you'll have a fifteen year loan and a
23:24
Speaker 2: pre payment penalty for the first ten or something like that.
23:27
Speaker 2: Then that allows the bank that is issuing the loan
23:31
Speaker 2: to get rid of some of the optionality concern here
23:34
Speaker 2: of okay, if the customer prepays this loan. Then I
23:40
Speaker 2: was planning for interest of X. I'm only going to
23:41
Speaker 2: collect interest of Y, and so I have to account
23:43
Speaker 2: for that when you know, packaging the loan, selling the
23:46
Speaker 2: loan to an investor, et cetera, et cetera. Acman's proposal
23:51
Speaker 2: allow banks to charge pre payment penalties on mortgages, and
23:56
Speaker 2: if you do so, they will offer a lower fix
24:00
Speaker 2: rate mortgage. Now, Marx frowning. One thing that I disagree
24:03
Speaker 2: with Acman on is he claims that adding pre payment
24:07
Speaker 2: penalties to new home loans could shave about sixty five
24:10
Speaker 2: basis points zero points sixty five percent off the borrowing cost,
24:13
Speaker 2: effectively bringing a thirty year mortgage from six down to
24:16
Speaker 2: five point three five. Were he correct about all this?
24:20
Speaker 2: I think there's no evidence to support that whatsoever. We
24:22
Speaker 2: don't have a market for this today. You can't measure
24:24
Speaker 2: it in any meaningful way. So he's guessing. Is my
24:27
Speaker 2: take here? But what's your What are your thoughts on
24:30
Speaker 2: this idea mark of pre payment penalties as an available
24:33
Speaker 2: option on mortgages, which are currently outlawed in almost every case.
24:37
Speaker 3: This is another convoluted gimmick if you want to cut
24:40
Speaker 3: interest rates, I'm gonna say it again. I'm sorry for
24:42
Speaker 3: repeating myself. Cut government spending. That will cut issuance of treasuries.
24:47
Speaker 3: That will reduce demand, that will increase demand for other
24:50
Speaker 3: types of debt. It will lower interest rates. So let
24:54
Speaker 3: me go. I have to make that point again because
24:56
Speaker 3: that is under the control of the government today and
24:58
Speaker 3: it's the only thing they're not talking about. Government spending
25:01
Speaker 3: went up last year about seven percent, not down, which
25:05
Speaker 3: is astonishing given the priority that they placed on cutting
25:08
Speaker 3: spending last year. I have to get that out there.
25:10
Speaker 3: Mike that said, I think the most devastating critique you
25:14
Speaker 3: can make of this proposal, which who know, he just
25:17
Speaker 3: he thought of it while he was shaving, or he
25:19
Speaker 3: thought of it while he was jogging.
25:21
Speaker 2: I don't know.
25:21
Speaker 3: He hasn't done any serious work. The best paragraph in
25:25
Speaker 3: this article by Bloomberg comes and I don't know why
25:27
Speaker 3: they printed this. It's just one guy's musings, but anyway,
25:30
Speaker 3: I guess he's newsworthy because he's rich, and people who
25:33
Speaker 3: have great success in one domain think they're experts in
25:36
Speaker 3: all kinds of areas. The best paragraph, the best rebuttal,
25:40
Speaker 3: if you will to this, comes from a Wells Fargo analyst.
25:44
Speaker 3: I want to credit him, Kevin Jackson, because his response
25:47
Speaker 3: is brilliant. Jackson says, there's no empirical evidence whatsoever. Quote,
25:51
Speaker 3: there's no empirical evidence whatsoever to suggests more pre payment
25:54
Speaker 3: penalty originations correspond to significantly lower mortgage rates period. Other
26:00
Speaker 3: than that, you know, great idea.
26:02
Speaker 2: Well, So, I thought about this a little bit, and
26:05
Speaker 2: I'm actually I don't think it's going to solve any
26:08
Speaker 2: of our problems. I don't think it's some genius idea
26:10
Speaker 2: to fix everything, But I'm not sure I would oppose it.
26:14
Speaker 2: The reason that banks can't do prepayment penalties is because
26:16
Speaker 2: the Dodd Frank Act they implemented this during the OA crisis,
26:19
Speaker 2: basically made it illegal for these banks if they wanted
26:22
Speaker 2: to sell their mortgages to the government, to be able
26:24
Speaker 2: to do prepayment penalties. And so I do think that
26:29
Speaker 2: on the margin, if you imposed pre payment penalties on mortgages, banks,
26:34
Speaker 2: if they're able to compete, would offer lower rates on
26:36
Speaker 2: those mortgages themselves.
26:37
Speaker 3: Like logical mechanism is I'm thinking I was thinking of
26:40
Speaker 3: it from a treating it as an option on the bond.
26:43
Speaker 3: The bank gets the option in this case, and the
26:45
Speaker 3: bond is the loan. If you adding an option, should
26:50
Speaker 3: that is that works to the detriment of the issuer
26:54
Speaker 3: of the bond, and the borrower is the issue of
26:56
Speaker 3: the bond, and my example, that should require the b
27:00
Speaker 3: of the bond. In my example, the banks are this
27:03
Speaker 3: little convolute, a little tortured, but that should require them
27:06
Speaker 3: to offer something to compensate you for the option that
27:10
Speaker 3: they're taking away. Pre payment is an option. You're paying
27:15
Speaker 3: for that option. Where's it coming from? Well, in theory,
27:17
Speaker 3: a higher rate. The problem is, Jackson says, here and
27:20
Speaker 3: maybe they've looked at this in other markets. Maybe there
27:22
Speaker 3: are countries that impose or removed the imposition or the
27:27
Speaker 3: allowance of a prepayment penalty. Jackson's statement is stort The
27:31
Speaker 3: Wells Fargo analyst statement is strong enough to suggest that
27:34
Speaker 3: unlike Acman, he probably didn't just pull this out at
27:37
Speaker 3: thin air. This is probably his area. And he says,
27:39
Speaker 3: there's no such evidence. I'm in now. He doesn't cite
27:42
Speaker 3: studies or lack thereof. He doesn't say, well, they tried
27:45
Speaker 3: this in Italy it didn't work, or Texas actually had
27:47
Speaker 3: a similar change in the law. It didn't work to
27:50
Speaker 3: lower rates, I'd be more comfortable with that, but it's
27:53
Speaker 3: in A quick Google search doesn't reveal anything either, Mike,
27:56
Speaker 3: So I'm skeptical, even though I can see that there
28:00
Speaker 3: arguments for lower rates. Sixty five basis points. That's so precise.
28:04
Speaker 3: Why not just go ahead?
28:05
Speaker 2: No, you're fine. It is a very precise estimate that
28:08
Speaker 2: I don't think much is bad. Where did it come from?
28:11
Speaker 2: The question of what to do with one's mortgage is
28:14
Speaker 2: one that we get pretty frequently from clients that we
28:17
Speaker 2: work with on financial planning, and oftentimes they're older mortgages
28:21
Speaker 2: with low interest rates. Sometimes they are higher mortgages. Maybe
28:25
Speaker 2: it's somebody that's moving in retirement and they're trying to
28:28
Speaker 2: figure out how to finance a purchase. Hey, should I
28:30
Speaker 2: be taking out a mortgage even though I'm pushing seventy
28:33
Speaker 2: years old? What is the best method to pay off
28:36
Speaker 2: that mortgage if I want to do it on a
28:39
Speaker 2: quicker time period, Let's say I'm taking it from Myra.
28:41
Speaker 2: What are the tax implications if you're facing a down
28:44
Speaker 2: a decision like, what is the best way to pay
28:48
Speaker 2: off my mortgage so that my monthly bills are more
28:50
Speaker 2: affordable in retirement. It is a common one and it
28:54
Speaker 2: is a complex one. It really depends on a lot
28:56
Speaker 2: of different factors going into your financial plan. If you're
29:00
Speaker 2: wondering about the same trying to figure out how to
29:02
Speaker 2: attack that mortgage before you get to retirement, give us
29:05
Speaker 2: a ring at the Armstrong Advisor Group. The numbers eight
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29:11
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29:14
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29:18
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
29:21
Speaker 1: registered investment advisor. Nothing in the ad or in any
29:23
Speaker 1: Armstrong guide a specific financial, legal or tax advice. Consult
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Speaker 1: your own financial tax into state planning advisors before making
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Speaker 1: any investment decisions. Armstrong make contact you to offer investment
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Speaker 1: advisory services.
29:34
Speaker 2: I can't stop thinking about this. I've convinced myself that
29:38
Speaker 2: I would want banks to be able to do it now.
29:41
Speaker 2: I would think if all your options were just prepayment
29:44
Speaker 2: penalty mortgages, because the media and tenure of home ownership
29:47
Speaker 2: right now is like twelve years, so that is a
29:50
Speaker 2: big factor in terms of the mortgage that I take.
29:53
Speaker 2: If I'm only planning to be there for a decade
29:55
Speaker 2: or you know, most of the time people move because
29:57
Speaker 2: it's not in their plans, and I face a massive
29:59
Speaker 2: penalty that it really really hurts.
30:01
Speaker 3: Mike, I'm okay as a matter of free market principle,
30:06
Speaker 3: letting banks do what they That is a different argument
30:09
Speaker 3: from we need to do this to improve affordable You goofballs.
30:14
Speaker 3: You control federal spending, would you please cut it in earnest?
30:17
Speaker 2: But I think my takeaway is.
30:20
Speaker 3: Issue in and cut interest rates.
30:21
Speaker 2: Sorry, We're seeing all these goofball ideas about affordability, and
30:25
Speaker 2: I think the most consistent one that I can agree
30:27
Speaker 2: with is impose fewer regulations at local level, at huge
30:32
Speaker 2: level at the federal level. And this falls into those
30:36
Speaker 2: categories as opposed to new regulations like you know, institutions.
30:41
Speaker 3: Again like do it because you believe that individuals who
30:45
Speaker 3: are capable of who are competent, have reached the age
30:50
Speaker 3: of majority in a free society are free to do
30:53
Speaker 3: what they want as long as I hate to sound
30:55
Speaker 3: so high minded here, like the crazy libertarian that I
30:58
Speaker 3: tend to be, but do it out of principle. You
31:01
Speaker 3: don't give banks this in one hand and with the
31:03
Speaker 3: other hands, smack them with a ten percent interest rate
31:06
Speaker 3: cap Agreed, there's no consistency here. This proposal comes from
31:10
Speaker 3: Liz Warren. That proposal comes from Milton Friedman. Would you
31:13
Speaker 3: please go to therapy for your split personality? Because I
31:17
Speaker 3: can't handle this.
31:19
Speaker 2: Uh, we gotta take a break, but feel free to
31:21
Speaker 2: text the show about your thoughts on prepayment penalties on
31:24
Speaker 2: mortgage loans. I think it's just a really interesting idea
31:27
Speaker 2: to think through number six one, seven, three, six two,
31:29
Speaker 2: thirteen eighty five. We're gonna take a quick break when
31:32
Speaker 2: we come back. Stack Roulette is next.
31:35
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32:03
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32:16
Speaker 2: Time for a bit of STACKERU let here. Do you
32:18
Speaker 2: want me to kick things off, Marke or do you
32:20
Speaker 2: have something right, I.
32:22
Speaker 3: Got a quick inflation.
32:22
Speaker 2: Let's do it.
32:23
Speaker 3: We talked about headline inflation point three percent month over
32:26
Speaker 3: month in December, a little bit of an uptick. Core
32:28
Speaker 3: inflation ex. Food and energy a little more subdued point
32:31
Speaker 3: two percent month over month. Core is useful because it
32:34
Speaker 3: strips out some of the things that can disguise the
32:36
Speaker 3: trend in inflation, which is what the FED and policymakers
32:39
Speaker 3: really care about. There's a measure preferred by researchers because
32:42
Speaker 3: it does an even better job of stripping out outliers,
32:46
Speaker 3: no matter where they come from. Because food, energy, insurance,
32:49
Speaker 3: there is insurance cost, there's shelter. Shelter's not very variable.
32:52
Speaker 3: But there are lots of categories, some of which might
32:54
Speaker 3: not be representative of the FEDS, whether or not the
32:58
Speaker 3: Fed's doing a good job. The median inflation or the
33:02
Speaker 3: trimmed mean. Both of those basically do the same thing
33:04
Speaker 3: in a math sense, does a better job of getting
33:07
Speaker 3: at the trend in inflation and cutting to the chase. Here,
33:11
Speaker 3: median inflation ticked up in December as well, a month
33:13
Speaker 3: over month zero point three percent. It's more in line
33:15
Speaker 3: with headline than with core. I know. I was going
33:19
Speaker 3: to say, that's not very reassuring. We'll need, as we
33:21
Speaker 3: always say here, Mike, we need at least a few
33:23
Speaker 3: months to establish whether or not something bunky's going on
33:26
Speaker 3: with the trend. But that's that's not entirely reassuring.
33:30
Speaker 1: Uh.
33:31
Speaker 2: I was going to go in a different direction. So
33:33
Speaker 2: I'm glad you took this seriously, Mark, because I want
33:35
Speaker 2: to talk about la boo boos. So you may not
33:38
Speaker 2: have any idea what a lob boo boo is. I
33:40
Speaker 2: hope you don't.
33:41
Speaker 4: I saw one, and I took my kid an Arcade
33:43
Speaker 4: birthday party on Saturday, and they had a chain chain
33:47
Speaker 4: game machine with the laboo boos all in it, so
33:49
Speaker 4: it's like, I want one of those. I was like, no, yeah,
33:52
Speaker 4: let's they suck at the chain game, the claw, not
33:55
Speaker 4: chain the claw.
33:56
Speaker 2: Game, which is directly taken from South Park, which I like.
34:00
Speaker 2: In any case, these are the latest craze among primarily
34:06
Speaker 2: in my experience, six to ten year olds. They are
34:09
Speaker 2: these ugly tiny, like six inch tall dolls that go
34:16
Speaker 2: for an outrageous price. I've seen them as high as
34:20
Speaker 2: seventy dollars per six inch doll with a little it's
34:24
Speaker 2: got a little caribeine or hook on it to carry
34:27
Speaker 2: it around with you. But yeah, I mean the trend,
34:29
Speaker 2: at least among my kids school, is everyone has them,
34:32
Speaker 2: they're trading them. They are you know, they're Pokemon cards
34:36
Speaker 2: or tickle me elmos or whatever other trend that you
34:39
Speaker 2: can think of from you know, your days of growing up.
34:42
Speaker 2: These are what's dominating right now. But the whole reason
34:46
Speaker 2: I'm talking about it is the idea of them is
34:49
Speaker 2: you get them in a box that does not tell
34:51
Speaker 2: you which let booboo you are getting. It's just a
34:54
Speaker 2: you know, white box, and it's a surprise, and you
34:56
Speaker 2: know you're getting one of these things. They create some
35:01
Speaker 2: falsified rarity by making one of them harder to find
35:04
Speaker 2: and less likely for you to get and therefore more valuable.
35:08
Speaker 2: But it's actually sparking a bit of a trend in
35:10
Speaker 2: retail and I'm seeing it also. I was sitting in
35:14
Speaker 2: the stands of my kids hockey game this weekend and
35:17
Speaker 2: I was talking to one of the eleven year olds
35:21
Speaker 2: that was sitting the stands with me because he had
35:23
Speaker 2: this hockey stick, mini hockey stick with Canada on it.
35:27
Speaker 2: I was a big Canadian national hockey team fan, and
35:30
Speaker 2: he explained to me that no, in fact, just like
35:34
Speaker 2: La Boo Boos, if you go to any sporting good
35:36
Speaker 2: store now, you can get a surprise mini hockey stick.
35:39
Speaker 2: Where you buy the package, it doesn't tell you which
35:42
Speaker 2: team you're getting or what theme you're getting. And this
35:45
Speaker 2: is apparently a trend that is dominating retail right now
35:48
Speaker 2: that I thought all of you needed to be aware.
35:50
Speaker 4: I just had a similar situation at a trading card store.
35:54
Speaker 4: It was a mystery pack of one psa ten graded card,
35:58
Speaker 4: so I got one for my kids birthday. It was
36:00
Speaker 4: twenty five bucks and it's a mystery card, so you
36:03
Speaker 4: open it and you know it could be much more
36:06
Speaker 4: valuable than twenty five dollars, but I like it.
36:09
Speaker 2: Yeah, it's not the first time we've had this trend
36:12
Speaker 2: in in retail. But anyway, the La Boo Boo one
36:16
Speaker 2: is just disturbing. And again, I'm just very close so
36:20
Speaker 2: right now, so I felt they need to talk about it.
36:21
Speaker 4: So these La Boo boos do anything or they just
36:24
Speaker 4: stand there?
36:24
Speaker 2: Are they just figures? Okay, they're ugly, they've got these
36:28
Speaker 2: sharp Oh yeah, I see the picture they offer and
36:31
Speaker 2: bring absolutely nothing to the table. You want me to
36:34
Speaker 2: picture of Mark. No, that's what they look like, Mark,
36:39
Speaker 2: just so you have some content. But they don't do anything.
36:40
Speaker 2: They do nothing. They don't talk, they don't giggle, they
36:43
Speaker 2: don't like Chucky in at night. They literally are just
36:46
Speaker 2: keychains of these tiny little dolls that belong in a
36:52
Speaker 2: landfill before they get to your home, and that is
36:54
Speaker 2: ultimately where they will end up. But in the meantime,
36:58
Speaker 2: it is dominating K through five everywhere.
37:01
Speaker 4: Like at least ferbies the they used to make noise
37:04
Speaker 4: and their eyes used to move or whatever, like yeah, okay,
37:08
Speaker 4: like I could see that pet would grow some hair.
37:10
Speaker 2: At least, yeah, there's movement. You know, there's nothing with it.
37:13
Speaker 2: There's nothing, there's nothing redeeming about these toys. So if
37:17
Speaker 2: you have a child between you know, the ages of
37:20
Speaker 2: five and eleven right now, be prepared for answering questions
37:24
Speaker 2: about the number six seven and bringing home the boo
37:29
Speaker 2: boo dolls that do nothing, or at least getting a
37:32
Speaker 2: bunch of complaints about how they don't have lab boo
37:34
Speaker 2: boo dolls, Which was the boat we were in until
37:37
Speaker 2: the holiday of late That is all the time we
37:41
Speaker 2: have for my rant about current fashion trends among kindergarten
37:45
Speaker 2: through fifth graders, So we're going to have to take
37:47
Speaker 2: a break for the rest of the day. Markets remain
37:50
Speaker 2: open and very mixed. At the moment. We opened down
37:52
Speaker 2: across all three major indices, the S and P. As
37:55
Speaker 2: we close out, the show is almost exactly flat for
37:58
Speaker 2: the day. NASDAC up three t of a percent, whereas
38:02
Speaker 2: the Dow off six tenths of a percent in early trading.
38:05
Speaker 2: We'll have a full recap for you tomorrow, along with
38:08
Speaker 2: some additional economic data that's coming out. Then have a
38:11
Speaker 2: great rest of your day, folks, and we'll catch you
38:12
Speaker 2: then