Latest / The Financial Exchange Show / Inflation Cools, But the Fed’s Job Isn’t Over

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Inflation Cools, But the Fed’s Job Isn’t Over · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Paul Lane and Mark Vandetti.
• 1:13
  Speaker 2: Welcome back to The Financial Exchange. Paul Lane, Mark Vandetti,
• 1:17
  Speaker 2: and Tucker Silva here with you. We have a busy
• 1:20
  Speaker 2: day here on the show. slew of economic reports that
• 1:24
  Speaker 2: came out this morning that we're going to dive into.
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  Speaker 2: We also will have more economic reports coming out later
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  Speaker 2: this week on the labor market, but we'll start the
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  Speaker 2: show today with a updated reading on some inflationary numbers.
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  Speaker 2: This inflationary report that we're going to be covering here
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  Speaker 2: is the core PCE, which is the Fed's preferred measure
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  Speaker 2: of inflation. And typically, there's not too much fanfare or
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  Speaker 2: coverage with these reports because oftentimes the CPI, the Consumer
• 1:55
  Speaker 2: Price Index data that comes out earlier in the month,
• 1:58
  Speaker 2: gives a pretty clear indication in terms of what this
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  Speaker 2: report that we're going to cover this morning is going
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  Speaker 2: to print out at. However, there has been some revisions
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  Speaker 2: as to how this core PCE and this PCE inflation
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  Speaker 2: report is calculated. And I think those are being reflected
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  Speaker 2: a bit here in the numbers that we're seeing. So
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  Speaker 2: to dive right into the numbers, this core PCE, the
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  Speaker 2: reason that the Fed prefers this report or this way
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  Speaker 2: of covering inflation is that One, the CorePC specifically strips
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  Speaker 2: out the impact of food and energy because those tend
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  Speaker 2: to be quite volatile. What we saw in terms of
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  Speaker 2: the most recent data from the month of August was
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  Speaker 2: that CorePC came in at about 3% year over year.
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  Speaker 2: That was below expectations of 3.3%. However, I will mention
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  Speaker 2: that There was some tweaking in terms of the methodology
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  Speaker 2: of the report that I think led to some revisions
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  Speaker 2: in the month of July, and that influenced that number
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  Speaker 2: coming in at 3%.
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  Speaker 1: If you look at.
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  Speaker 2: Just the PCE report here, the expectations were for, so
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  Speaker 2: this includes the impact of energy and food, expectations for
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  Speaker 2: a year-over-year read of 3.7%. We printed at 3.4%. So
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  Speaker 2: all that to say, this was a less inflationary report
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  Speaker 2: than expected, not as hot as expected. I guess we'll
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  Speaker 2: get into a second here, whether the revisions are the
• 3:30
  Speaker 2: cause to point to that there. But what we are
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  Speaker 2: seeing in terms of the market reaction to this is
• 3:35
  Speaker 2: the market was rallying a little bit. The S &
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  Speaker 2: P 500 is up about a third of a percent,
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  Speaker 2: most in particularly the US two-year treasury, which is heavily
• 3:45
  Speaker 2: tethered to interest rate expectations, are down about five basis
• 3:49
  Speaker 2: points to 4.85%. That had gotten as high as about 4.92%
• 3:51
  Speaker 2: or 4.93%. And so we'll get into what this What
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  Speaker 2: do they do? I lose track of the statistical adjustments.
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  Speaker 2: What they did was, so this report is done by
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  Speaker 2: the Bureau of Economic Analysis, and they made an adjustment
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  Speaker 2: to their methodology going all the way back to 2021
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  Speaker 2: in terms of how they price for legal services, portfolio
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  Speaker 2: management services, software and computer access services. All those components
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  Speaker 2: were adjusted, and so as a result of that, what
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  Speaker 2: you saw for the month of July's data is a 0.2%
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  Speaker 2: revision downward from what was reported in July versus what
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  Speaker 2: they adjusted to, and that has led to the year-over-year
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  Speaker 2: numbers looking a little bit more favorable.
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  Speaker 3: So forget about year-over-year, because that's quite backward-looking. Let's look
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  Speaker 3: at top-line PCE deflator, which is.
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  Speaker 3: The number the Fed targets. When they say our goal
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  Speaker 3: is 2%, they target the PCE. Deflator PCE is personal
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  Speaker 3: consumption expenditures. It's literally what people spend on stuff. It's
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  Speaker 3: different than the CPI index. It's better in some ways
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  Speaker 3: because it adjusts with the composition of spending. If we
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  Speaker 3: start buying more oranges instead of apples because apples get expensive,
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  Speaker 3: PCE captures that.
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  Speaker 4: CPI won't. CPI is just a basket of goods.
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  Speaker 3: I think it's updated twice a year. PCE is continuously updated.
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  Speaker 3: So A headline PC, which includes energy, which was the
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  Speaker 3: big driver of headline this last month, which is the
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  Speaker 3: number we got this morning, was up 0.3% month over month.
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  Speaker 3: If you annualize that, it's like 3.7% annualized. That's different
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  Speaker 3: than taking the last 12 months, but you've got to
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  Speaker 3: look ahead, right?
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  Speaker 1: Right.
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  Speaker 3: That's the fastest since May. So after a couple of
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  Speaker 3: quiescent months, June, July, it perked up again. And the
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  Speaker 3: culprit there was mainly energy. So naturally... the urge is
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  Speaker 3: to strip that out and look at core. And we
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  Speaker 3: said core, I don't have it in front of me,
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  Speaker 3: was what, 0.2?
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  Speaker 1: Correct.
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  Speaker 3: Month over month. Okay, that's still 2.5% annualized. So way
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  Speaker 3: more than the Fed's long-term goal. But you might be
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  Speaker 3: inclined to downweight the importance of that in your little
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  Speaker 3: mental model, if you have one, because of the seepage
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  Speaker 3: of energy prices into core. But if you look at services,
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  Speaker 3: services was a large driver of the increase in core
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  Speaker 3: up 0.3% overall services were versus the prior two months, 0.1
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  Speaker 3: and 0.1. That explains why core went up from 0.1
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  Speaker 3: in June 0.1. These are month over month numbers now
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  Speaker 3: to 0.2 in, uh, August.
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  Speaker 4: Sorry.
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  Speaker 3: I'm, I'm even, I'm getting bewildered by all the, the,
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  Speaker 3: the decimal points and stuff. I think the upshot here, Paul,
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  Speaker 3: as we digest this and forgive me again for all the,
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  Speaker 3: all the stupid detail. Uh, I say stupid because in
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  Speaker 3: terms of trend, it's not really going to matter. Uh,
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  Speaker 3: But the big story is it did perk up, and that's,
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  Speaker 3: I don't want to say alarming, that doesn't allay anybody's fears.
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  Speaker 3: So if the Fed said we've got to tighten once
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  Speaker 3: or twice more to wring inflation out of the economy
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  Speaker 3: to the extent that we can control it by controlling
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  Speaker 3: or influencing demand, their, I don't think, view has changed
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  Speaker 3: based on this report is maybe what I should have
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  Speaker 3: led with. Talk about bearing the headline.
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  Speaker 2: It seems like the futures market has changed, though, a
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  Speaker 2: little bit more than your takeaway, where if we looked
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  Speaker 2: at the CME futures probabilities for the next Fed meeting,
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  Speaker 2: which is going to be at the end of October here,
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  Speaker 2: first of all, to go back a week ago, it
• 7:44
  Speaker 2: was about a 70% probability that there was going to
• 7:48
  Speaker 2: be another hike at that next meeting. You had John
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  Speaker 2: Williams come out, and we'll talk about that in just
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  Speaker 2: a moment, the other day on Tuesday and sort of
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  Speaker 2: push back and say, we've already hiked. We don't need
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  Speaker 2: to necessarily hike again in October. That tended to adjust
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  Speaker 2: some of the pricing. So as of yesterday, the CME
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  Speaker 2: futures had the probability for... rate hike at about 50-50,
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  Speaker 2: whether they would stay or hike. This morning, as of
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  Speaker 2: 9 o'clock off the heels of this report that came
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  Speaker 2: out at about 8.30, we now sit at a 65%
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  Speaker 2: probability that the Fed will not hike coming up on
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  Speaker 2: the next meeting. Okay, so a small change. Usually these
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  Speaker 2: don't shift. 15% in the course of a day is
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  Speaker 2: something to note, but it seems like the market's overall
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  Speaker 2: reaction to this is US two-year treasury coming down a
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  Speaker 2: little bit as well as, you know, the CME future
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  Speaker 2: probability peeling back, perhaps the likelihood of a hike in October.
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  Speaker 2: But we shall see. You know, it is just one report.
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  Speaker 2: That was something that it's going to be worth following.
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  Speaker 2: But again, perhaps some of the revisions playing into this
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  Speaker 2: as well.
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  Speaker 3: Yeah, you can't view economic data in isolation. You have
• 9:04
  Speaker 3: to have a model. You have to plug it into
• 9:05
  Speaker 3: a model. That takes work. What we do here is
• 9:09
  Speaker 3: not conducive to that. We're just sort of, it's like
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  Speaker 3: sports radio. We comment, we move on, we comment, we
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  Speaker 3: move on. It's not serious analysis. I will say, though,
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  Speaker 3: that said, and it's all you can do in real time,
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  Speaker 3: there's nothing about this. If your model told you, if
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  Speaker 3: you're a researcher, your model told you yesterday inflation is
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  Speaker 3: a problem, the trend is elevated, and because inflation month
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  Speaker 3: over month is persistent, you've got to get ahead of it.
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  Speaker 3: If you're, say, a Fed economist and that was your
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  Speaker 3: conclusion yesterday, it is absolutely still your conclusion today.
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  Speaker 2: We also got some other economic data. We had a
• 9:46
  Speaker 2: report on Q2 GDP. That was a third estimate that
• 9:52
  Speaker 2: was released this morning here. It increased to 2.2%. That
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  Speaker 2: was up about 0.7%. on Tuesday. on this adjustment here
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  Speaker 2: from where it was previously in the second estimate. We
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  Speaker 2: also saw an upwardly revised Q1 figure of about 2.5%. Again,
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  Speaker 2: bottom line, the takeaways here for listeners is that the
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  Speaker 2: economy remains quite strong. A lot of this GDP growth
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  Speaker 2: that I'm mentioning here is tied to the fact that
• 10:23
  Speaker 2: prices have gone up. That backs into what we were
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  Speaker 2: just speaking about at the Inflation has become a more
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  Speaker 2: significant concern. The Federal Reserve has telegraphed that by increasing
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  Speaker 2: interest rates, and there's continuous chatter about some of the
• 10:38
  Speaker 2: pricing pressure that continues to remain out there, whether it's
• 10:41
  Speaker 2: due to AI data center investment, pushing up demands for
• 10:46
  Speaker 2: a lot of those services, as well as some of
• 10:48
  Speaker 2: the energy socks here. But it is without a doubt
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  Speaker 2: apparent that the economy is continuing to grow. And inflation
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  Speaker 2: remains a concern as a result of that. And this
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  Speaker 2: data backs that up.
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  Speaker 3: Yeah, I think these numbers are real. So they're after inflation.
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  Speaker 1: What....
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  Speaker 3: What this might tell– well, I guess we're interested in
• 11:10
  Speaker 3: like what does it say to the Fed? What does
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  Speaker 3: the Fed glean from this? Most researchers think the potential
• 11:18
  Speaker 3: of the economy, the speed limit, if you will, growth potential,
• 11:22
  Speaker 3: is somewhere around two. So on average, you had first
• 11:26
  Speaker 3: and second quarter growth. I'm going to call it 2.3.
• 11:28
  Speaker 3: I'll just take an average of those rough average numbers.
• 11:31
  Speaker 3: Of those two, the economy is growing roughly at or
• 11:34
  Speaker 3: above trend, which is respectable. That's what you would expect
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  Speaker 3: if nobody was doing anything special. What's notable to me
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  Speaker 3: about this is the second quarter, as compared to the first,
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  Speaker 3: was all about consumption. Of that 2.2% upwardly estimated real
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  Speaker 3: growth that you pointed out, 2.5%, so greater than 100%,
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  Speaker 3: came from spending, PCE, that number that the PC deflator
• 12:00
  Speaker 3: comes from that we talked about earlier. So without spending,
• 12:03
  Speaker 3: it would have been a very different economy. Interestingly, data
• 12:07
  Speaker 3: centers contributed nothing to growth in the second quarter. There's
• 12:11
  Speaker 3: a category called computers and peripherals, which means exactly what
• 12:14
  Speaker 3: you think it would mean. And that captures data center investment.
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  Speaker 3: It's a subcategory within investment. That contributed approximately nothing, minus 0.1.
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  Speaker 4: So it actually detracted from. What was that in Q1?
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  Speaker 3: It was 0.62, a dramatic change. So let's go back.
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  Speaker 3: That's just where I was going.
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  Speaker 4: Thank you. You want to break here and then we
• 12:37
  Speaker 4: can hit this again? No, let's finish it off. So
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  Speaker 4: past few quarters, Paul?
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  Speaker 3: 0.62 in Q1-26, 0.55 in Q4-25, 0.4 in Q3-25, 0.52
• 12:50
  Speaker 3: in Q2-25. So it's been a gigantic contributor to, gigantic,
• 12:55
  Speaker 3: somewhere in the order of a third on average of
• 12:57
  Speaker 3: GDP growth over the past several quarters. And this goes
• 13:00
  Speaker 3: back to 2024 and earlier because this explosion of data
• 13:03
  Speaker 3: center activity started in the early 2020s, though it's revved
• 13:08
  Speaker 3: up as we're all reading about.
• 13:10
  Speaker 1: Interesting.
• 13:10
  Speaker 2: We're going to take a quick break here on the
• 13:12
  Speaker 2: financial exchange. When we come back, we'll be talking about
• 13:15
  Speaker 2: comments from John Williams, the Fed Reserve Bank of New
• 13:20
  Speaker 2: York's president, and we'll also dive into a little bit
• 13:23
  Speaker 2: of that GDP data that we were discussing as well,
• 13:25
  Speaker 2: right after this.
• 13:39
  Speaker 1: This is your home for the most comprehensive coverage of
• 13:42
  Speaker 1: the economy and the trends on Wall Street. This is
• 13:45
  Speaker 1: the Financial Exchange Radio Network.
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  Speaker 2: I mentioned earlier in the program that the Federal Reserve
• 14:32
  Speaker 2: Bank of New York President John Williams was speaking at
• 14:35
  Speaker 2: an event Tuesday at the University of Buffalo in which
• 14:38
  Speaker 2: he was quoted as saying that they would be one
• 14:42
  Speaker 2: more interest rate hike late this year. He said that
• 14:45
  Speaker 2: may be appropriate to contain inflation. That did seem to
• 14:50
  Speaker 2: cause a chain reaction in some of the futures markets
• 14:52
  Speaker 2: that try to project whether or not the Federal Reserve
• 14:56
  Speaker 2: will increase interest rates at its next meeting at the
• 14:58
  Speaker 2: end of October. He was quoted as saying that after
• 15:01
  Speaker 2: the raise in September, that they could continue to gather
• 15:05
  Speaker 2: more data before they make their next decision on interest rates.
• 15:10
  Speaker 2: We mentioned the first segment of the program, we just
• 15:12
  Speaker 2: got some inflationary data that the market seems to be
• 15:17
  Speaker 2: reacting to being softer than anticipated as a result. It
• 15:22
  Speaker 2: does now seem that the overwhelming probability at the moment
• 15:25
  Speaker 2: is is that the Federal Reserve would continue to hang
• 15:29
  Speaker 2: tight at the current interest rate level that they're at.
• 15:33
  Speaker 2: But it is interesting, Mark. This is a very different
• 15:36
  Speaker 2: approach from probably what Kevin Warsh would want. I just
• 15:40
  Speaker 2: found it puzzling. And all the members of the Federal
• 15:43
  Speaker 2: Reserve can conduct business how they like. With Jerome Powell's administration,
• 15:48
  Speaker 2: there was a lot more communication. Kevin Warsh has tried to...
• 15:54
  Speaker 2: contain some of that Fed talk a bit, but John
• 15:58
  Speaker 2: Williams did not get that memo.
• 16:00
  Speaker 1: He's just out.
• 16:01
  Speaker 2: There at some event telling exactly what he thinks they
• 16:04
  Speaker 2: should do.
• 16:05
  Speaker 1: I'm not surprised.
• 16:05
  Speaker 3: He's an academic. He's like a preeminent monetary policy researcher.
• 16:09
  Speaker 3: He basically invented the method for estimating the short-term neutral rate.
• 16:13
  Speaker 3: So he's an accomplished academic, sort of like in the
• 16:17
  Speaker 3: Bernanke mold, not quite as accomplished as Bernanke. What I'm
• 16:20
  Speaker 3: getting at is, These academics are big fans of forward guidance.
• 16:23
  Speaker 3: They believe in a deep toolkit for the Fed. And
• 16:27
  Speaker 3: forward guidance is one. Forward guidance just means telling the
• 16:31
  Speaker 3: markets what you think interest rates will be, which he
• 16:33
  Speaker 3: just did. He basically told us all, I expect Fed funds,
• 16:38
  Speaker 3: their short-term break target, that is to be at four.
• 16:40
  Speaker 3: versus three and three quarters, where I think.
• 16:43
  Speaker 4: It is today.
• 16:43
  Speaker 3: I'm just using the median, the midpoint of the target.
• 16:46
  Speaker 3: So he's a believer in forward guidance. Warsh doesn't want
• 16:50
  Speaker 3: to use it, but you can't control it. He's the
• 16:54
  Speaker 3: New York Fed's appointed president. So Warsh has no control
• 16:58
  Speaker 3: over who fills that seat, nor does he have any
• 17:01
  Speaker 3: control over him. I don't think that's a dramatic enough
• 17:05
  Speaker 3: departure from the sort of dictates that, Warsh is laid
• 17:09
  Speaker 3: down to get anybody's attention, but I'm.
• 17:11
  Speaker 4: Just not sure.
• 17:14
  Speaker 3: What one rate hike is supposed to do if they
• 17:16
  Speaker 3: think inflation is actually a problem, other than inspire confidence
• 17:20
  Speaker 3: in people that they want.
• 17:21
  Speaker 4: To get it under control.
• 17:23
  Speaker 3: And that as a role, managing expectations, also something an
• 17:27
  Speaker 3: academic would keep top of mind. Managing expectations is important,
• 17:32
  Speaker 3: and that's what Williams is trying to do there. Practical impact, though,
• 17:39
  Speaker 3: of a couple rate hikes spread out over a couple quarters,
• 17:43
  Speaker 3: probably nil if you think demand is the problem, which
• 17:47
  Speaker 3: I don't think these guys do.
• 17:49
  Speaker 2: Yeah, he goes on to say in this speech here
• 17:52
  Speaker 2: that while monetary policy cannot move ships or reopen pipelines
• 17:58
  Speaker 2: and refineries, it can diminish the risk that these supply
• 18:01
  Speaker 2: shocks spill over into broader and more persistent inflation. So clearly...
• 18:06
  Speaker 2: recognizing that they only have so many tools in their toolkit,
• 18:10
  Speaker 2: but they recognize that this persistent inflation is something that
• 18:15
  Speaker 2: needs to be addressed. And that is likely the signaling
• 18:19
  Speaker 2: behind the rate hike that we saw in September. But
• 18:21
  Speaker 2: to your point, it doesn't move the needle a lot
• 18:25
  Speaker 2: when you just talk about a quarter of a percent.
• 18:27
  Speaker 2: Many high-earning Americans... live paycheck to paycheck, according to Goldman Sachs.
• 18:32
  Speaker 2: The big takeaway from this survey that Goldman Sachs did
• 18:35
  Speaker 2: of 5,100 participants was that those who are earning $ 300, 000
• 18:41
  Speaker 2: to $ 500, 000, a third of them stated that they were
• 18:42
  Speaker 2: living paycheck to paycheck. I don't really know what to
• 18:50
  Speaker 2: do with these type of surveys, Mark. I know that
• 18:53
  Speaker 2: they're publicized to try and get some sort of visceral
• 18:56
  Speaker 2: feedback from readers. It is clear that inflation has been
• 19:02
  Speaker 2: a problem, but not sure if I take much from
• 19:05
  Speaker 2: this other than high income earners are feeling the pinch
• 19:09
  Speaker 2: too in terms of their paychecks. on a month-to-month basis here.
• 19:14
  Speaker 2: Taking a look around at markets, we've got the markets
• 19:18
  Speaker 2: rallying all in positive territory on this lighter than anticipated
• 19:22
  Speaker 2: inflation report that we saw. We'll have more on the
• 19:24
  Speaker 2: markets and the economy with Wall Street Watch right after
• 19:27
  Speaker 2: this break. Stick with us.
• 19:41
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• 19:54
  Speaker 1: Tracking the stocks, the data, and the headlines driving markets
• 19:57
  Speaker 1: so far today, right here on the Financial Exchange Radio Network.
• 20:01
  Speaker 5: While the Fed's preferred measure of inflation, the core PCE index,
• 20:05
  Speaker 5: showed 8%. Core inflation was at 3% on an annual basis,
• 20:08
  Speaker 5: softer than estimates of 3.3%. This morning, we also saw
• 20:12
  Speaker 5: an upwardly revised second quarter GDP reading where the economy
• 20:16
  Speaker 5: grew by 2.2%, higher than the previous estimate of 1.5%.
• 20:21
  Speaker 5: Right now, the Dow is up only two points, completely flat.
• 20:25
  Speaker 5: S & P 500 is up about half a percent
• 20:27
  Speaker 5: or 35 points higher. NASDAQ seeing a nice little rally
• 20:31
  Speaker 5: of over 0.8% or 215 points up. Russell 2000 is
• 20:35
  Speaker 5: up by a third of a percent. 10-year treasury yield
• 20:38
  Speaker 5: up one basis point at 5.27%. And crude oil jumping
• 20:43
  Speaker 5: 2% higher, trading at.
• 20:45
  Speaker 1: $ 91 a barrel.
• 20:46
  Speaker 5: Boeing, that stock is up by half a percent after
• 20:50
  Speaker 5: the company secured a $ 20 billion contract from the U.S.
• 20:53
  Speaker 5: Navy to build its next-generation jet fighter. Meanwhile, Bloomberg reported
• 20:58
  Speaker 5: that Apple plans to make a push into the smart
• 21:01
  Speaker 5: home market on October 13th with a smart home hub,
• 21:04
  Speaker 5: which will have a six-inch square display. Apple is up
• 21:08
  Speaker 5: by 2.5%. Elsewhere, CalMain Foods is seeing its stock sink
• 21:12
  Speaker 5: 3% after the egg producer posted a wider-than-expected loss. Eli
• 21:17
  Speaker 5: Lilly is edging higher after the drugmaker said its next-gen
• 21:21
  Speaker 5: weight loss drug when combined with ZepBound, help people lose
• 21:25
  Speaker 5: substantially more weight than ZepBound alone. And Micron Technology will
• 21:30
  Speaker 5: report earnings after today's closing bell. I'm Tucker Silva and
• 21:34
  Speaker 5: that is Wall Street Watch.
• 21:37
  Speaker 2: The gap between the rich and the very, very rich
• 21:41
  Speaker 2: is getting wider here. A piece from Barron's, I believe. No,
• 21:46
  Speaker 2: Wall Street Journal. This entails the 137,000 households that account
• 21:50
  Speaker 2: for the top 1.1%. So you're talking about an average
• 21:58
  Speaker 2: net worth of $ 200 million. So the real heavy hitters
• 22:02
  Speaker 2: account now for about 15% of the nation's total wealth.
• 22:06
  Speaker 2: That compares to the bottom 50% accounting for just 2.3%
• 22:11
  Speaker 2: of the nation's wealth. Again, this is similar to the
• 22:18
  Speaker 2: piece that we just covered in the segment before, which
• 22:20
  Speaker 2: I spoke a little bit about. Those who are earning $ 300, 000
• 22:24
  Speaker 2: to $ 500, 000, a third of the respondents in a Goldman
• 22:28
  Speaker 2: Sachs survey indicated that they were living paycheck to paycheck.
• 22:32
  Speaker 2: These two stories as a whole, I'm not really sure
• 22:35
  Speaker 2: what I can.
• 22:38
  Speaker 2: Add in terms of economic commentary, the one takeaway that
• 22:42
  Speaker 2: I have from gaps like this, the wider that they get,
• 22:47
  Speaker 2: you would imagine the risk that looms out there for
• 22:50
  Speaker 2: political shifts where there is perhaps more of a demand
• 22:56
  Speaker 2: from those people in the bottom 50% to have, whether
• 23:01
  Speaker 2: it be more socialist impact politically or just frustration with
• 23:06
  Speaker 2: the systems. But it is important to note, as much
• 23:09
  Speaker 2: as the 15% that is accounted for, that 0.1% saw
• 23:14
  Speaker 2: tremendous growth of wealth from this period of time since
• 23:20
  Speaker 2: 2019 to where we are today, about a doubling, there
• 23:23
  Speaker 2: was still tremendous growth for the bottom 50% as well. Basically,
• 23:27
  Speaker 2: over this period of time, for the most part, whoever
• 23:30
  Speaker 2: you are, you have seen a significant growth in in
• 23:33
  Speaker 2: your net worth, assuming you are either a homeowner, because
• 23:36
  Speaker 2: we've seen home prices appreciate 50 plus percent in this
• 23:40
  Speaker 2: span of time, and you likely have a relatively low
• 23:44
  Speaker 2: mortgage rate, though newer buyers obviously don't have the same
• 23:47
  Speaker 2: benefit of the COVID stimulus days where you get in
• 23:50
  Speaker 2: the 3% mortgages. Certainly, if you were investing in stocks
• 23:53
  Speaker 2: in any capacity, whether in your 401k or just in
• 23:57
  Speaker 2: a regular investment account, you have seen a significant gain.
• 24:01
  Speaker 2: I've got to imagine, Mark, I haven't looked at the numbers,
• 24:03
  Speaker 2: but close to a doubling over that six-year period, likely
• 24:07
  Speaker 2: with the amount of 20% gains that we've had from
• 24:09
  Speaker 2: 19 to 26 here. Looking back five years ago, where
• 24:14
  Speaker 2: was the S & P 500? In 2021, we were
• 24:16
  Speaker 2: at 4,200, and now we sit At 7,700. So certainly
• 24:24
  Speaker 2: there's been tremendous gains that have been made there. So
• 24:27
  Speaker 2: I'm not sure what I can take away other than,
• 24:29
  Speaker 2: I guess, the risk of potential political shifts. But other
• 24:33
  Speaker 2: than that, it is just the phenomenon of the recency
• 24:36
  Speaker 2: bias that we see with the market.
• 24:38
  Speaker 3: There's some work done on other countries by development economist
• 24:43
  Speaker 3: types who have all found that greater inequality translates into
• 24:48
  Speaker 3: slower growth. And the mechanism, so you might ask, well, how?
• 24:52
  Speaker 4: Like, what exactly is happening?
• 24:54
  Speaker 3: And it's partly what you suggested, if I remember correctly.
• 24:57
  Speaker 3: It's been a long time since I've looked at this, like, literature.
• 24:59
  Speaker 3: But it's that people in the bottom, those of us
• 25:04
  Speaker 3: not in the 1% or 2% or whatever, we get disgruntled.
• 25:08
  Speaker 3: So we start voting for policies that encourage redistribution, not
• 25:11
  Speaker 3: wealth generation. And that slows growth.
• 25:13
  Speaker 2: Mm-hmm.
• 25:14
  Speaker 3: So democratic socialist policies, for example, you could say you
• 25:16
  Speaker 3: like them. You can say you think AOC's got terrific ideas.
• 25:19
  Speaker 3: I'd say you might want to revisit that. But honest
• 25:23
  Speaker 3: people could probably disagree. But that would probably, you know, more.
• 25:28
  Speaker 3: fewer incentives to create wealth. They slow down the potential
• 25:32
  Speaker 3: GDP number that we talk about a lot. They slow
• 25:34
  Speaker 3: the economy's speed limit. That's what researchers have found. People
• 25:38
  Speaker 3: looking at this objectively, mainly other countries, but there's reason
• 25:41
  Speaker 3: to believe that at some point we're not there yet.
• 25:43
  Speaker 3: And you could say, well, marginal tax rates were like
• 25:46
  Speaker 3: 90% under FDR and Eisenhower. Yet there were a lot
• 25:50
  Speaker 3: of loopholes too, a lot more than there are today.
• 25:54
  Speaker 3: And I'm not going to quibble with that. I don't
• 25:55
  Speaker 3: know what that point is. What's the top bracket now?
• 25:59
  Speaker 3: Is it 37 under Trump?
• 26:01
  Speaker 4: It was 39. 37, yep. Okay.
• 26:03
  Speaker 3: So you hike it to 45. You hike it to
• 26:06
  Speaker 3: 50 to pay down some of this awful national debt.
• 26:10
  Speaker 3: That itself would have benefits probably for investment. It would
• 26:12
  Speaker 3: bring interest rates down, which would help investment. So to
• 26:16
  Speaker 3: a point, these people who want to level income a
• 26:19
  Speaker 3: little bit by raising marginal rates– to a point they're
• 26:22
  Speaker 3: not incorrect when they say it might actually help the economy.
• 26:25
  Speaker 3: There is a point beyond which, and I'm not talking
• 26:27
  Speaker 3: Laffer curve here. You might be envisioning the Laffer curve
• 26:29
  Speaker 3: when I say this, but it's not what I mean.
• 26:32
  Speaker 3: There's a point beyond which it's not helpful. And the
• 26:35
  Speaker 3: Laffer curve might kick in at some point too. You
• 26:37
  Speaker 3: might actually be able to raise more revenue by pairing rates,
• 26:40
  Speaker 3: but we're not anywhere near the point where that would
• 26:42
  Speaker 3: come into play. So that's what comes to mind to me, Paul,
• 26:45
  Speaker 3: when you talk about surveys like this.
• 26:48
  Speaker 2: The other area that might have to be touched is
• 26:51
  Speaker 2: cap gains rates because a lot of those people who
• 26:53
  Speaker 2: are in that 0.1%, the example that always gets thrown
• 26:57
  Speaker 2: about is that Warren Buffett will say that his tax
• 26:59
  Speaker 2: rate is lower than his secretary's is because, first of all,
• 27:02
  Speaker 2: Berkshire Hathaway, which he owns a ton of that stock,
• 27:04
  Speaker 2: doesn't pay a dividend. And as a result of that,
• 27:08
  Speaker 2: he is either subject to capital gains rates if he
• 27:12
  Speaker 2: were to sell or if he has other income-producing assets
• 27:16
  Speaker 2: that are from dividends from his stock ownership it is
• 27:19
  Speaker 2: taxed at the capital gains rate rather than the ordinary
• 27:21
  Speaker 2: income rate. So that may have to be an area
• 27:24
  Speaker 2: that gets looked at too. Again, none of this is
• 27:27
  Speaker 2: going to change immediately, but those, I think we've hit
• 27:31
  Speaker 2: the main points, is the political shift it could cause.
• 27:34
  Speaker 4: I think so.
• 27:35
  Speaker 3: Yeah, it would result, the upshot for me is that
• 27:38
  Speaker 3: policies that punish successful people will probably also punish potential GDP.
• 27:45
  Speaker 4: I am not saying.
• 27:46
  Speaker 3: that wealth inequality doesn't result in other social problems that
• 27:51
  Speaker 3: aren't worth mitigating. I'm saying simply that, and I was
• 27:57
  Speaker 3: going to say more equal societies are slower growing, but
• 28:00
  Speaker 3: that's not true either, like empirically. I am saying there
• 28:04
  Speaker 3: is a pretty tight correlation researchers have found between policies
• 28:09
  Speaker 3: that aggressively redistribute income.
• 28:11
  Speaker 4: Maybe that's the best way to put it. And slower growth.
• 28:14
  Speaker 2: We're going to take a quick break here on The
• 28:17
  Speaker 2: Financial Exchange. When we come back, I want to talk
• 28:19
  Speaker 2: about mortgage rates. They jumped for the sixth straight week,
• 28:23
  Speaker 2: hitting some pretty significant highs here. We're going to cover
• 28:25
  Speaker 2: that and much more right after this break.
• 28:27
  Speaker 1: Find daily interviews and full shows of The Financial Exchange
• 28:30
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• 28:36
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• 28:58
  Speaker 2: Mortgage rates have jumped for the sixth straight week, hitting
• 29:02
  Speaker 2: both refinance and home buyer demand hard. We now sit
• 29:06
  Speaker 2: on the 30-year fixed mortgage at 7.3% as of the
• 29:08
  Speaker 2: close of last week. That was up from 7.12%. a
• 29:14
  Speaker 2: pretty significant increase for a very short span of time,
• 29:17
  Speaker 2: for just a week. There's some other data out there.
• 29:19
  Speaker 2: Mortgage News Daily tries to track mortgage rates on a
• 29:22
  Speaker 2: daily basis that as of Tuesday, they were indicating that
• 29:26
  Speaker 2: the average 30-year fixed mortgage was up to 7.58%. This
• 29:31
  Speaker 2: comes right off the heels. We've talked about it a
• 29:33
  Speaker 2: lot on the program, but just for listeners who are unfamiliar,
• 29:37
  Speaker 2: the US 10-year treasury serves as the benchmark that has
• 29:41
  Speaker 2: significant correlation to how 30-year fixed mortgage rates are originated.
• 29:46
  Speaker 2: The US 10-year treasury now sits at 5.26%. That's the
• 29:48
  Speaker 2: highest it's been since 2007 and certainly doesn't seem like
• 30:00
  Speaker 2: there is going to be any relief on the mortgage
• 30:02
  Speaker 2: front anytime soon. Obviously, interest rates can change quite quickly,
• 30:05
  Speaker 2: but we were sitting at as low as 4% on
• 30:10
  Speaker 2: the US 10-year treasury earlier this year. I believe in
• 30:13
  Speaker 2: the February timeframe, we were down as low as sub 4%,
• 30:19
  Speaker 2: but certainly has upticked quite a bit. And as a result,
• 30:24
  Speaker 2: you're seeing a lot higher mortgage rates on that as well.
• 30:27
  Speaker 5: Leaving your IRA to your children may sound like the
• 30:30
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• 30:34
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• 31:46
  Speaker 1: The proceeding was paid for and the views expressed are
• 31:48
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• 31:50
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• 31:56
  Speaker 2: One last thing on mortgages here. There's this piece that
• 32:00
  Speaker 2: I think Tucker put in the stack just to tick
• 32:02
  Speaker 2: us off because it is just an outrageous piece. It
• 32:05
  Speaker 2: comes from the Truth About Mortgage website where The headline
• 32:10
  Speaker 2: for this states mortgage rates could top out at 8.8%
• 32:14
  Speaker 2: if history repeats. And it goes back to cite a
• 32:18
  Speaker 2: technical double top in the early 80s and then tries
• 32:22
  Speaker 2: to say that if that were to happen again, mortgages
• 32:26
  Speaker 2: would get to 8.8%. I mean, how you can just
• 32:29
  Speaker 2: cherry pick one example where there's a double top in
• 32:32
  Speaker 2: rates and just say if that happens again, they'll be higher.
• 32:35
  Speaker 4: Excuse me. So the.
• 32:38
  Speaker 3: First top in the— I' ve never really understood technical analysis. I've
• 32:42
  Speaker 3: talked to a lot of these guys, and I get
• 32:44
  Speaker 3: more confused every time I do. Where was the first
• 32:50
  Speaker 3: camel's hump here in the double top?
• 32:51
  Speaker 4: For us, in the.
• 32:52
  Speaker 2: Current context of the 1980s. Using the current context. The
• 32:59
  Speaker 2: current top would have been the peak that we saw
• 33:03
  Speaker 2: in 2023 at about 7.8%.
• 33:03
  Speaker 1: Yeah.
• 33:03
  Speaker 5: Okay.
• 33:03
  Speaker 4: So where did they get 8.88% from? Sorry to put
• 33:05
  Speaker 4: you on.
• 33:05
  Speaker 2: The spot, but.
• 33:06
  Speaker 4: The 8.8% comes from... We hit that peak at 7.8%
• 33:08
  Speaker 4: in October of 2023. If we were to see a
• 33:11
  Speaker 4: similar move that we did in the 1980s, that it
• 33:12
  Speaker 4: would land around 8.8%.
• 33:13
  Speaker 1: And I just....
• 33:28
  Speaker 2: This is clearly just driven to get people's eyeballs on
• 33:32
  Speaker 2: this type of headline for 8.8% mortgage. You can't just
• 33:35
  Speaker 2: cherry pick one example in history and say, oh, if
• 33:37
  Speaker 2: that happens again, this is where we go. To me,
• 33:42
  Speaker 2: the contexts economically are so different. I don't know why
• 33:45
  Speaker 2: that's worth even.
• 33:45
  Speaker 3: That's why some fundamental model of interest rates to have
• 33:49
  Speaker 3: in your head is useful. If you think about rates as...
• 33:54
  Speaker 3: The interest rate you see quoted in the newspaper or
• 33:56
  Speaker 3: wherever is a combination of expected inflation and some real
• 34:00
  Speaker 3: interest rate. That real interest rate is a function of
• 34:02
  Speaker 3: a few things, namely economic growth, but risk, too, and supply,
• 34:07
  Speaker 3: concerns about government debt and other fuzzier factors. It's not
• 34:13
  Speaker 3: hard to get to 8% to 9% on the 10-year Treasury,
• 34:17
  Speaker 3: for that matter. Do you think inflation is going to
• 34:19
  Speaker 3: average 4% or 5%? And you think real rates should
• 34:22
  Speaker 3: be about the same? And that would be a lot
• 34:25
  Speaker 3: higher than real rates are today, but not outside the
• 34:27
  Speaker 3: realm of possibility and not outside the realm of historical
• 34:30
  Speaker 3: precedent either.
• 34:30
  Speaker 4: You can get there.
• 34:32
  Speaker 3: But for technical reasons, I don't know how successful technical analysis,
• 34:35
  Speaker 3: which is just.
• 34:36
  Speaker 4: It's charting.
• 34:37
  Speaker 3: Right. And it's looking at patterns. You don't care what
• 34:40
  Speaker 3: the asset is. You just look at a pattern and say,
• 34:43
  Speaker 3: in the past, when it zigged like this, it is
• 34:45
  Speaker 3: then zagged. Therefore, I think it's going to zag again.
• 34:49
  Speaker 3: People usually couple that with something fundamental. Very few people
• 34:51
  Speaker 3: do standalone technical analysis. But it's interesting and often profitable,
• 34:56
  Speaker 3: maybe because of the self-fulfilling nature of these things.
• 35:00
  Speaker 2: Homeowners are sitting on record equity and not using it.
• 35:03
  Speaker 2: There's Cotility, a data tech company that states that in
• 35:08
  Speaker 2: the second quarter of this year, there's a collective 11
• 35:11
  Speaker 2: and a half trillion of so-called tappable home equity. It
• 35:15
  Speaker 2: is worth noting that, first of all, we know the
• 35:17
  Speaker 2: reason why everyone is sitting on record home equity. The
• 35:21
  Speaker 2: price increases that we've seen on houses domestically over the
• 35:24
  Speaker 2: last five or six years has been quite significant. But
• 35:28
  Speaker 2: many people are hesitant to take out a second mortgage
• 35:31
  Speaker 2: or a home equity line of credit because those rates
• 35:33
  Speaker 2: are far higher than most homeowners' initial 30-year fixed mortgages
• 35:38
  Speaker 2: that they may be sitting on that may be at
• 35:40
  Speaker 2: that 3% or 4% or 5% rate. It is worth
• 35:43
  Speaker 2: noting that we have seen in Q2 20% more interest.
• 35:48
  Speaker 2: in terms of second mortgages and home equity lines of credit.
• 35:50
  Speaker 2: So there is an uptick in that transactional volume compared
• 35:54
  Speaker 2: to Q1, but still people are sitting on a lot
• 35:58
  Speaker 2: of record equity. To me, this doesn't really become significant
• 36:01
  Speaker 2: unless you see rates come down significantly. Maybe there's more
• 36:04
  Speaker 2: of an appetite for people to utilize home equity lines
• 36:07
  Speaker 2: of credit more to do renovations and other projects. But
• 36:11
  Speaker 2: other than that, Homeowners' equity not tend to tap into
• 36:17
  Speaker 2: that much if you're sitting on a lower rate.
• 36:19
  Speaker 3: Not at the rates we saw in the 2000s, certainly.
• 36:22
  Speaker 3: Although that would explain the big jump in spending that
• 36:25
  Speaker 3: we talked about earlier that contributed to the increase in
• 36:29
  Speaker 3: the estimate of economic growth last quarter.
• 36:32
  Speaker 2: The hopes for a big IPO season are fading for
• 36:36
  Speaker 2: Wall Street. Anthropic is one of the companies that was
• 36:39
  Speaker 2: slated to go public this year. Still, it appears on
• 36:42
  Speaker 2: course for November, but we did have news yesterday that Aura,
• 36:47
  Speaker 2: the smart ring maker, postponed its IPO offering, citing the
• 36:51
  Speaker 2: economic conditions. Anthropic and OpenAI were really the two big
• 36:56
  Speaker 2: IPOs that are of biggest focus this year.
• 36:58
  Speaker 1: Obviously, we had.
• 37:00
  Speaker 2: SpaceX come out in June going public, but OpenAI has
• 37:03
  Speaker 2: said that they are postponing their IPO to next year
• 37:06
  Speaker 2: or also postponing their IPO as well. Anthropic at least
• 37:09
  Speaker 2: still on track for a November timeframe, but... It has
• 37:14
  Speaker 2: been a trend here recently that anytime there's any sort
• 37:17
  Speaker 2: of economic uncertainty, and I would say that there's minor
• 37:21
  Speaker 2: economic uncertainty at the moment, it's still been a very
• 37:23
  Speaker 2: good year for markets. You do have companies pulling away
• 37:27
  Speaker 2: their potential public offering.
• 37:29
  Speaker 4: Also, the locally.
• 37:30
  Speaker 2: Duncan-owned Inspire Brands also indicating that they're going to delay
• 37:35
  Speaker 2: their IPO to what was initially late 2026 but could
• 37:39
  Speaker 2: be now 2027 because a lot of those consumer brands
• 37:44
  Speaker 2: are having trouble purchasing. think the McDonald's and other businesses
• 37:48
  Speaker 2: on the fast food side of things. Taking a look
• 37:51
  Speaker 2: around at markets as we head towards the bottom of
• 37:54
  Speaker 2: the hour here, we had an inflation report come in
• 37:57
  Speaker 2: later than expected. That led to markets rallying a bit
• 38:00
  Speaker 2: in early trading. That momentum has continued with the S
• 38:04
  Speaker 2: & P 500 up two-thirds of a percent. We'll have
• 38:07
  Speaker 2: more information for you on the markets and the economy
• 38:10
  Speaker 2: right after this break here on the Financial Exchange.
• 38:12
  Speaker 4: Stick with us.