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Inflation Report Could Test Warsh’s Tough Talk · The Financial Exchange Show

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Speaker 2: Following, good morning and welcome back to the Financial Exchange
1:16
Speaker 2: on an inflation week here where tomorrow morning at eight
1:19
Speaker 2: thirty will get the release on CPI. In the meantime,
1:24
Speaker 2: continued news out of the Middle East signifying not much
1:27
Speaker 2: of all. It has been an interesting kind of shift
1:31
Speaker 2: out of there, where we are getting less and less
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Speaker 2: information it seems compared to the very very early stages
1:37
Speaker 2: of the war. But we have definitely settled into an
1:41
Speaker 2: uncomfortable status quo when it comes to the Strait of
1:43
Speaker 2: Horror moves. It's Mike, Paul and Tucker with you here,
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Speaker 2: and I was alluding to our starting story the day
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Speaker 2: this piece from Bloomberg about why restoring normal traffic to
1:55
Speaker 2: the Strait is proving just as difficult as it is.
2:00
Speaker 2: And I think to those who were experts in the
2:05
Speaker 2: region ahead of time, it's not proving, you know, so
2:10
Speaker 2: surprisingly difficult. I think, you know, when I listened to
2:14
Speaker 2: experts very early on, it was Yeah, this entire region
2:18
Speaker 2: is defined by, you know, very mountainous rural areas where
2:22
Speaker 2: you can hide all sorts of weaponry. With the new
2:27
Speaker 2: advent of how drones are used, it is pretty self
2:30
Speaker 2: explanatory why the Strait of Horn Mouz reopening. It is
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Speaker 2: proving quite as difficult as it is, and so hence
2:37
Speaker 2: we sit here one, two, three, four five what I
2:43
Speaker 2: said six six months out nearly now from the from
2:47
Speaker 2: the beginning of tensions in the Middle East, with no
2:50
Speaker 2: real progress that can be discerned on the flow of
2:54
Speaker 2: oil and any sort of change of stance with with Iran. Here,
3:00
Speaker 2: I think the changes that I was alluding to earlier
3:03
Speaker 2: come from not Iran or the United States, but rather
3:07
Speaker 2: the neighboring countries around the Middle East who early on
3:10
Speaker 2: we were seeing a lot of reporting in those countries
3:13
Speaker 2: about you know, strikes in the area, and many of
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Speaker 2: those countries have now clamped down on that posting of
3:23
Speaker 2: you know, videos and any sort of external media, whether
3:27
Speaker 2: it's Western or not, from being able to be recorded there.
3:30
Speaker 2: There are a few people, I think in Saudi Arabia
3:33
Speaker 2: last week who were arrested for posting videos of not
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Speaker 2: even confirmed strikes, but you know, smoke in the area.
3:41
Speaker 2: And so on one hand, you have all of these
3:44
Speaker 2: countries who are very much struggling and pushing for some
3:47
Speaker 2: sort of negotiated deal, while simultaneously trying to reaffirm to
3:53
Speaker 2: the world that this, you know, the Middle East is
3:56
Speaker 2: open for business and able to be invested in, traveled through,
3:59
Speaker 2: and has a future as a stable region, and it's
4:03
Speaker 2: becoming increasingly difficult to convince the public that that's the
4:06
Speaker 2: case these days.
4:06
Speaker 3: No, if you look at the most recent shipping data
4:09
Speaker 3: that we've seen on the Strait of Hormuz, there were
4:11
Speaker 3: reports from Reuters that we saw about six vessels travel
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Speaker 3: through the strait yesterday. The ten day moving average has
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Speaker 3: been about eleven vessels, a far cry from one hundred
4:21
Speaker 3: to thirty to one hundred and forty that we saw
4:23
Speaker 3: pre war. So I think it's going to be harder
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Speaker 3: and harder for those countries to make the argument that
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Speaker 3: it is open for business. And you can bet that
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Speaker 3: there are many countries and companies throughout the world that
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Speaker 3: are probably already taking the steps to invest significantly to
4:39
Speaker 3: find alternative ways around the Strait for the future. Does
4:43
Speaker 3: that come online in the next three or six months, No,
4:45
Speaker 3: but it's certainly over the course of the next few years.
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Speaker 3: I'm sure confidence has been dented almost permanently that these
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Speaker 3: countries and companies need to find other ways to transport goods.
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Speaker 2: Unfortunately, one of those other ways was the Red Sea,
5:00
Speaker 2: which is now being attacked in pretty much the exact
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Speaker 2: same way as the Iranians are doing through the strait
5:06
Speaker 2: of what is it Bob Elbman something. Apologies, I'm not
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Speaker 2: a geopolitics expert. Got it a narrow strait in the
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Speaker 2: Red Sea that is being attacked byes. It's gotten name
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Speaker 2: starts with Bob. And so you have the alternatives being
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Speaker 2: attacked in the same way too. And I think the
5:30
Speaker 2: interesting thing to be like if you are some form
5:34
Speaker 2: of organization in Iran just thinking through your best interest
5:38
Speaker 2: at this stage, and you're working on limited resources. Obviously,
5:41
Speaker 2: the drive from the Iranians for the last several decades
5:44
Speaker 2: has been the development of a nuclear weapon. Some might
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Speaker 2: try and debate that, but I don't think it's much
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Speaker 2: in the way of debate. You know, they have constantly
5:52
Speaker 2: sought to go and do that, and for logical reasons,
5:55
Speaker 2: go look at countries that didn't develop it, and what
5:58
Speaker 2: you know, the powers struggle there versus those who did
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Speaker 2: develop a nuclear weapon. If you've got limited resources, I'm
6:07
Speaker 2: not sure that's where you divert them. Now, Iron has
6:10
Speaker 2: kind of discovered a new weapon that they have in
6:12
Speaker 2: their arsenal, and that weapon is shutting down traffic through
6:16
Speaker 2: the Strait of Horror moves using much cheaper technology that's
6:20
Speaker 2: much more readily available and can be manufactured easily. It
6:23
Speaker 2: might not give you the exact same powers as a
6:26
Speaker 2: nuclear weapon, but clearly they are exerting a whole lot
6:32
Speaker 2: of pressure on the global economy now at kind of
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Speaker 2: one tenth the effort that they had to put in
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Speaker 2: previously to try and develop something that would be as
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Speaker 2: much of a deterrent.
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Speaker 3: But it's such a significant cost, which I guess they're
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Speaker 3: willing to bear for a much longer time than many
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Speaker 3: other countries out there of economic pain. But I just
6:53
Speaker 3: don't know if the ends justify the means here on
6:57
Speaker 3: their side of things. But ultimately it comes back to
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Speaker 3: we are going to be in this period it seems
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Speaker 3: like of limited updates or back and forth on these
7:07
Speaker 3: negotiations for.
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Speaker 2: Which does far longer. That doesn't necessarily mean a bad thing. No,
7:12
Speaker 2: to not be getting perfect information out of there can
7:16
Speaker 2: indicate that there is progress, but it is very much
7:21
Speaker 2: settled now into this uncomfortable status quo, and I think
7:27
Speaker 2: a lot of people are starting to ask themselves, are
7:29
Speaker 2: we in another forever war here? Because for the time being,
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Speaker 2: I don't see enough pressure being exerted in energy markets
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Speaker 2: to push for a negotiated settlement. It does not appear
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Speaker 2: that US and Iranian negotiators have much that they agree on.
7:47
Speaker 2: The you know, MoU that was put in place lasted
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Speaker 2: all of a couple of days, and you know, the
7:53
Speaker 2: Trump administration, you know, as much as I'm sure they
7:57
Speaker 2: are concerned about oil stockpiles, which reached I think the
8:02
Speaker 2: lowest level that we saw since the early nineteen eighties yesterday.
8:06
Speaker 2: It's tough for me to look at the US economy
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Speaker 2: and say that it's come to a grinding halt because
8:11
Speaker 2: of higher energy prices. In fact, quite the opposite. We're
8:13
Speaker 2: seeing all time highs in the stock market, accelerating domestic
8:18
Speaker 2: activity from the AI build out and so on the
8:22
Speaker 2: Iranian side, too, Yes, is their economy in shambles. Absolutely,
8:27
Speaker 2: is their military disjointed and broken up and their supreme
8:31
Speaker 2: leader removed. All of those things remain true, but it's
8:34
Speaker 2: now apparent that none of those have been significant enough
8:37
Speaker 2: to I think change their outlook on where to bring
8:41
Speaker 2: this conflict next, and so unfortunately I returned to where
8:46
Speaker 2: I was a few months ago on this, which is
8:49
Speaker 2: I hope to see some sort of negotiated deal that
8:52
Speaker 2: leaves the United States in a powerful position and returns
8:57
Speaker 2: to see the oil flowing through the straight of horb
9:00
Speaker 2: Mose again. But I have an increasingly difficult time seeing
9:04
Speaker 2: us getting there without a lot more pain inflicted on
9:09
Speaker 2: the Iranian side, the US side, or both. And I
9:12
Speaker 2: don't know, I don't know how you get there given
9:15
Speaker 2: given the status quo over the last several months. Oil
9:19
Speaker 2: prices are about flat for the day as we open
9:23
Speaker 2: up here, but those remain flat over eighty dollars a barrel.
9:27
Speaker 2: We're seeing nearly eighty two dollars a barrel on the
9:30
Speaker 2: West Texas crude price as we turn around and take
9:33
Speaker 2: a look at gasoline prices. According to Triple A national
9:37
Speaker 2: average for a gallon of gas going for just over
9:40
Speaker 2: four dollars gallon. Four to one is the national average
9:43
Speaker 2: that we are seeing here. We are going to take
9:45
Speaker 2: a quick break when we come back. I want to
9:48
Speaker 2: talk a bit about that inflation report that I alluded to.
9:50
Speaker 2: We'll be getting it tomorrow morning, and importantly, what that
9:53
Speaker 2: means for the new head of the Federal Reserve are
9:56
Speaker 2: Kevin worsh That's next on the Financial Exchange.
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10:36
Speaker 2: So Paul, tomorrow, we're going to be getting the July
10:39
Speaker 2: inflation report. Expectations are for a relatively modest report here
10:46
Speaker 2: because energy has been what's been driving up prices in
10:50
Speaker 2: the aggregate and energy prices month over month, at least
10:52
Speaker 2: not a huge shift last month we saw for June,
10:57
Speaker 2: we saw the overall CPI come down by four tenth
11:00
Speaker 2: of a percent, but the core was flat because it
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Speaker 2: strips out the food and energy piece. This month, we're
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Speaker 2: expecting a very small increase of about a tenth of
11:08
Speaker 2: a percent, and on core prices seeing those uptick a
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Speaker 2: little bit further. And this, in combination with the jobs
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Speaker 2: report that we saw on Friday, has the potential to
11:24
Speaker 2: Nick tim Rose from the Wall Street Journal talks about
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Speaker 2: it in terms of a testing warsh is tough talk
11:28
Speaker 2: and further challenging his credibility on the inflation front. I'd
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Speaker 2: argue that it also has the potential to really give
11:36
Speaker 2: him a lot of leeway given what we saw in
11:39
Speaker 2: the jobs report on Friday of last week. I'm not
11:41
Speaker 2: sure I interpreted that job's report the same way that
11:43
Speaker 2: everybody else did. But you know, from a headline perspective,
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Speaker 2: you had net job loss, you had significant revisions to
11:50
Speaker 2: previous months pay rules, and so should you get an
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Speaker 2: inflation report this month that shows tepid month over month inflation,
12:00
Speaker 2: it might be in the position of being able to
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Speaker 2: justify his move of not having moved on interest rates
12:05
Speaker 2: or had much of a tough talk on the inflation.
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Speaker 3: Prolet Well, I mean, it does put him in It
12:10
Speaker 3: seems like the overall feedback is his public commentary has
12:15
Speaker 3: been really dismissed by a lot of different investors and
12:18
Speaker 3: reporters out there, not thrilled with his approach. But it
12:23
Speaker 3: does seem like there are certainly inflationary pressures sort of
12:27
Speaker 3: percolating in the economy, and to your point, maybe we
12:30
Speaker 3: don't get them in tomorrow's report.
12:33
Speaker 4: But let's play it the other way.
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Speaker 3: I mean, you mentioned that perhaps the inflation report comes in,
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Speaker 3: it's what are we looking at? I'd seen point two
12:41
Speaker 3: percent month over a month in terms of what these
12:44
Speaker 3: could be looking like.
12:44
Speaker 2: Yeah, on core prices too tense year over year, that
12:48
Speaker 2: still puts you at you know, three point four percent
12:51
Speaker 2: on the headline, two and a half percent on the
12:53
Speaker 2: core number, right, which you know, granted CPI is not
12:57
Speaker 2: the FEDS quote unquote preferred measure of inflation, but in
13:01
Speaker 2: either case, when you're printing three and a half percent
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Speaker 2: year over your inflation, that's not anywhere near your target, right.
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Speaker 3: And he has talked very tough about getting inflation under control,
13:11
Speaker 3: and maybe even if you get a tepid report though,
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Speaker 3: you still are sitting at three and a half percent
13:18
Speaker 3: or three point four percent inflation.
13:20
Speaker 4: And if Warsh is really.
13:22
Speaker 3: Focused on backing up what he's kind of come into
13:25
Speaker 3: the position stating, you would think that it would be
13:31
Speaker 3: prudent for him to potentially look to force a rate
13:35
Speaker 3: hike in September. But it now seems like there's been
13:38
Speaker 3: a traumatic shift on the probabilities market as to how
13:42
Speaker 3: tough this talk really is and if it will result
13:44
Speaker 3: in any action. I was looking at the numbers that
13:47
Speaker 3: about a month ago, it was about seventy thirty in
13:51
Speaker 3: terms of the CME futures that we look at so
13:53
Speaker 3: frequently when it comes to the Federal Reserve as to
13:56
Speaker 3: whether or not they're going to hike, and the seventy
13:58
Speaker 3: thirty probability the seventy percent compassed either a quarter percent
14:02
Speaker 3: hike or a half percent hike heading into this September meeting.
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Speaker 3: That now sits at more of a fifty to fifty
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Speaker 3: probability for the September meeting, so clearly, and we saw
14:12
Speaker 3: this after the Federal Reserve meeting with the long long
14:15
Speaker 3: end of the interest rate curve spiking up, sort of
14:18
Speaker 3: showing some skepticism that Warsh is going to be as
14:21
Speaker 3: tough as he said he was going to be on
14:24
Speaker 3: the inflationary front. And perhaps some of that is because
14:27
Speaker 3: he was rather vague on his explanation for the Fed's
14:33
Speaker 3: lack of action in the past meeting, but it does
14:37
Speaker 3: sort of put him in a tight bind, it seems
14:40
Speaker 3: like for the September meeting.
14:41
Speaker 2: Yeah, look, I was critical of his presentation at the
14:47
Speaker 2: most recent FED meeting. I wasn't as critical about his
14:51
Speaker 2: decision making process. I mean, clearly there were a bunch
14:55
Speaker 2: of FED members that wanted to hike interest rates, a
14:58
Speaker 2: number of them that show is not to and that's
15:03
Speaker 2: how these things go. His commentary to me was confusing.
15:07
Speaker 2: I don't think it. It's fine to want to say
15:10
Speaker 2: very little, but when you give confusing commentary about different
15:16
Speaker 2: situations in your effort to do so, that just muddies
15:18
Speaker 2: the water a little bit, and I think hits at
15:20
Speaker 2: your credibility, and nobody wants to see what happened in
15:23
Speaker 2: markets happened right after they speak. I think that's a
15:26
Speaker 2: fair point to make. The second piece on the FED
15:30
Speaker 2: that we have here is from Bill Dudley, a former
15:32
Speaker 2: FED member, and that was I think that was better
15:37
Speaker 2: put in terms of his criticisms for this rocky start
15:40
Speaker 2: at the FED. And to me, it all comes down
15:43
Speaker 2: to a point we made about Jay Powell's FED, which
15:46
Speaker 2: was there was all this discussion about, you know, changing
15:51
Speaker 2: some of the benchmarks, changing the goal post, moving the
15:54
Speaker 2: goalpost in terms of what the ultimate goals of the
15:56
Speaker 2: FED are, you know, two percent inflation target, for example,
16:01
Speaker 2: why do we have a two percent inflation target. It
16:03
Speaker 2: was kind of picked out of nowhere, and we've adhered
16:05
Speaker 2: to it through thick and thin, or at least saying
16:08
Speaker 2: that we're adhering to it. Why why does it matter?
16:10
Speaker 2: Why is two better than two and a half or
16:12
Speaker 2: two and a quarter? Why do these things exist? But
16:16
Speaker 2: the point that we made was, while those are good questions,
16:21
Speaker 2: they're inappropriate to ask while you've got inflation running three
16:24
Speaker 2: and a half percent.
16:25
Speaker 4: Right.
16:26
Speaker 2: That was the takeaway is, yeah, these are good long
16:29
Speaker 2: term questions that we should be asking and restructuring how
16:32
Speaker 2: we're doing things here. But when you just came off
16:36
Speaker 2: of some of the worst inflation that you've seen in
16:39
Speaker 2: five decades, asking them before you've beaten that inflation back
16:44
Speaker 2: is not the appropriate time to be asking. And now
16:49
Speaker 2: we've got a new FED chair. He's been brought in
16:53
Speaker 2: by the President, has been lauded by the President as
16:55
Speaker 2: the person who's going to do his bidding. Whether worsh
16:57
Speaker 2: believes that or not, that's the president's view. He's said
17:01
Speaker 2: it several times. I don't think I'm putting words in
17:04
Speaker 2: his mouth here. He wants lower interest rates and he
17:05
Speaker 2: thinks that Kevin Walsh is going to be the person
17:07
Speaker 2: to navigate that, and he seems to be doing the
17:14
Speaker 2: exact thing that we said Jay Powell shouldn't do at
17:16
Speaker 2: that point in time. Granted it's a new person in there,
17:20
Speaker 2: he is not responsible for the mistakes that Jay Powell
17:23
Speaker 2: and his Federal Reserve made back in twenty twenty one
17:25
Speaker 2: and twenty twenty two that led in part to the
17:28
Speaker 2: much higher inflation that we saw. So I do think
17:31
Speaker 2: Kevin worsh has more latitude to go about looking at
17:34
Speaker 2: these things and studying them critically. But I have to
17:36
Speaker 2: tell you, you know, it's tough for me to square this
17:41
Speaker 2: very tough talk on inflation at the same time that
17:45
Speaker 2: he's setting up committees to study whether or not our
17:48
Speaker 2: current way of measuring inflation is quote unquote the right
17:51
Speaker 2: way to do it.
17:52
Speaker 3: That's what I think is most frustrating in all of
17:54
Speaker 3: this is his slight skepticism being placed on the current
17:58
Speaker 3: metrics in place, while at the same time adhering to
18:02
Speaker 3: them in a sense by saying that inflation is too
18:06
Speaker 3: high and we need to get it under control. And
18:09
Speaker 3: I just wish that the rhetoric around trying to reframe
18:14
Speaker 3: the way that they track inflation could just be put
18:17
Speaker 3: on the back burner for the moment because at this
18:20
Speaker 3: critical time in the economy, when I'm meeting with clients,
18:23
Speaker 3: and I don't know how you phrase it, inflation is
18:26
Speaker 3: just one of the biggest subjects that I'll mention in
18:29
Speaker 3: terms of what we are following with the economy in
18:31
Speaker 3: the markets right now. Not to say that we think
18:33
Speaker 3: it's problematic today, but it's something that is of utmost
18:37
Speaker 3: focus at the moment, and I'd rather shelve some of
18:39
Speaker 3: this kind of rejiggering metrics for the time being.
18:43
Speaker 2: And I think some of this comes from again not
18:45
Speaker 2: having just like Powell wasn't a trained PhD economist that's
18:49
Speaker 2: heading the FED right, Like he's expressed skepticism about the
18:52
Speaker 2: measurements of inflation. He's expressed some skepticism about the cause
18:57
Speaker 2: of inflation coming from the labor market. And so you know,
19:01
Speaker 2: while I think it might be appropriate to study, Hey,
19:04
Speaker 2: how much should iis FED chair be speaking to the
19:06
Speaker 2: public and giving foreign guidance, like that's an appropriate thing
19:09
Speaker 2: to look at. You're a new chair, you should figure
19:11
Speaker 2: out your policy on that. Studying what causes inflation and
19:16
Speaker 2: whether or not we should be using the current readings
19:19
Speaker 2: to do so. Seems like you're trying to find an
19:22
Speaker 2: excuse to not be tough on inflation. At least that's
19:25
Speaker 2: my read. We've got to take quick break. When we return,
19:28
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19:58
Speaker 5: Markets are mostly quiet, with more turmoil in the straight
20:01
Speaker 5: of for moves after the Wall Street Journal reported US
20:03
Speaker 5: forces fired on a Panama flagship that attempted to run
20:07
Speaker 5: the American blockade of Iranian ports earlier today. As for
20:11
Speaker 5: a potential deal, Pakistan's defense minister said, the US and
20:15
Speaker 5: Iran are quote close to some sort of arrangement right now.
20:19
Speaker 5: The Dow is up only forty three points, s and
20:21
Speaker 5: P five hundred edging six points higher, Nasdaq dipping by
20:26
Speaker 5: fifteen points, Russe two thousand is up six tenths of
20:29
Speaker 5: one percent. Tenure treasureeled down one basis point at four
20:32
Speaker 5: point six eight percent, and Oil is flat, trading at
20:36
Speaker 5: eighty two.
20:36
Speaker 1: Dollars a barrel.
20:38
Speaker 5: Intel down modestly after the chip maker increased the size
20:41
Speaker 5: of his stock offering to twenty billion dollars, higher than
20:44
Speaker 5: the fifteen billion dollars had previously announced. It intends to
20:47
Speaker 5: use the net proceeds for general corporate purposes. Meanwhile, Bitcoin
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Speaker 5: minor Riot Platforms is seen its stock climb five percent
20:55
Speaker 5: after Bloomberg reported that the company secured a nine point
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Speaker 5: one billion dollars cloud deal with Anthropic. Ryot also beat
21:02
Speaker 5: second quarter revenue expectations. Elsewhere, shares and Hymns and Her
21:07
Speaker 5: are falling one percent after the telehealth company trim the
21:10
Speaker 5: upper end of its full year EBITA outlook. Swiss sneaker
21:14
Speaker 5: maker On Holding posted mixed second quarter results and reduced
21:18
Speaker 5: its full year revenue guid in, sending the stock plunging
21:21
Speaker 5: by eighteen percent. And after today's closing bell, we'll see
21:25
Speaker 5: earnings from Core Weave and super micro Computer on Tucker
21:32
Speaker 5: Slovan that is Wall Street Watch.
21:34
Speaker 2: Before we move on, I did we were talking about
21:36
Speaker 2: the FED before and inflation and these you know, difference
21:40
Speaker 2: between two and a half and three and a half
21:42
Speaker 2: percent inflation, and you know which tool of the FED
21:44
Speaker 2: uses to measure. But I wanted to get back to
21:47
Speaker 2: why this is so critically important, right, I mean, when
21:53
Speaker 2: I'm going to put this in the focus of what
21:55
Speaker 2: Paul and I do for work outside of the radio show,
21:57
Speaker 2: which is manage people's in investments, primarily for their future retirement.
22:03
Speaker 2: And when you talk about, you know, risks, everyone tends
22:08
Speaker 2: to focus on the risk that they very easily understand
22:10
Speaker 2: because they've seen the risk firsthand of their stock portfolio
22:14
Speaker 2: dropping ten, twenty, thirty, forty fifty percent back in eight
22:18
Speaker 2: as an example that one's real. They understand that pretty easily.
22:23
Speaker 2: Rarely have people lived through a really high inflationary environment.
22:27
Speaker 2: But I want to, you know, bring up, you know,
22:30
Speaker 2: the compounding effect of that inflation on retirement. So you know,
22:35
Speaker 2: the it's not unheard of these days for people to
22:40
Speaker 2: have thirty year retirements increasingly common. And you know, if
22:45
Speaker 2: you've got one hundred thousand dollars budget in retirement, which
22:50
Speaker 2: is not uncommon here in New England, and you phase
22:53
Speaker 2: two percent inflation by the time that thirty years elapses,
22:58
Speaker 2: you're going to be talking about a budget that's more
23:00
Speaker 2: like one hundred and eighty thousand dollars. If it's three
23:02
Speaker 2: percent inflation, you're talking about two hundred and forty three
23:04
Speaker 2: thousand dollars. That tiny change and how much inflation you
23:09
Speaker 2: see has a massive impact obviously on compounding, and everyone's
23:14
Speaker 2: fully aware of this, But this is something that I
23:16
Speaker 2: bring up on all the time. Everyone's so focused on, Oh,
23:20
Speaker 2: what if the stock market falls apart? That is a concern,
23:24
Speaker 2: and you should be worried about it if you are
23:26
Speaker 2: close to retirement and you are an aggressive investor. The
23:30
Speaker 2: reality is that most people that are close to retirement
23:32
Speaker 2: aren't set up that way, and so most people that
23:35
Speaker 2: I meet with anyway, the far bigger risk to them
23:39
Speaker 2: than the market falling by forty percent is inflation running
23:42
Speaker 2: an extra half percent higher than they were prepared for
23:45
Speaker 2: and being incapable of keeping up with their expenses.
23:49
Speaker 3: That absolutely is a huge risk that looms out there,
23:52
Speaker 3: I believe. I feel like the reason it doesn't get
23:54
Speaker 3: talked about as much, Mike is, Yeah, there are some
23:56
Speaker 3: tweaks that you can make within your portfolio to try
24:00
Speaker 3: and protect against inflation, but ultimately it's a silent killer,
24:05
Speaker 3: Like there's not a lot you can do. I mean, yes,
24:08
Speaker 3: you can make tweaks within your portfolio, but to your point,
24:11
Speaker 3: it is extremely detrimental, but there's not a huge way
24:14
Speaker 3: to wiggle your way out of it. Versus a portfolio
24:17
Speaker 3: if you have a mass enough assets. There are people
24:19
Speaker 3: in this world who just have such a lump sum
24:22
Speaker 3: savings that they could sit with it in a money
24:24
Speaker 3: market and probably coast along just okay, because maybe their
24:27
Speaker 3: budget isn't one hundred thousand, maybe it's a lesser sum,
24:30
Speaker 3: or they have a pension, you know, YadA YadA. There's
24:32
Speaker 3: a million different distinctions there, and I feel like that's
24:36
Speaker 3: why there's more focus on the portfolio, because it's more
24:38
Speaker 3: easily controllable versus inflation. Unfortunately, is a lot in the
24:42
Speaker 3: hands of sort of the governing bodies, the Federal Reserve,
24:46
Speaker 3: and just the economic forces that are played in general.
24:49
Speaker 2: It is, but that's that's the point that I try
24:51
Speaker 2: to make people like, yeah, you can pretty quickly adjust
24:54
Speaker 2: the risk of your portfolio downwards so that you're not
24:57
Speaker 2: as subject to a market crash. Easy to do. What
25:02
Speaker 2: I have a much tougher time convincing people of is hey,
25:05
Speaker 2: you know that warm and fuzzy bank account that you
25:07
Speaker 2: have that makes you sleep well at night because it's
25:10
Speaker 2: FDIC inshort and you've got two hundred thousand dollars in it.
25:14
Speaker 2: It's not every person. I recognize that's a ton of
25:16
Speaker 2: money to have in a bank account, but we see it.
25:20
Speaker 2: That's your risk, right you leave it like that. I
25:23
Speaker 2: know you can sleep at night, but inflation is going
25:25
Speaker 2: to eat you alive. So right, do you feel about that?
25:28
Speaker 2: You know that money that you have losing purchasing power
25:31
Speaker 2: year after year here, Yeah, you know just as well
25:35
Speaker 2: as I do. You will have a much tougher time
25:37
Speaker 2: separating somebody from that money sitting in the bank account.
25:40
Speaker 2: Then you will go into them and saying, hey, I
25:41
Speaker 2: think we should be less risky in your stock portfolio.
25:44
Speaker 4: Yeah, no one, No one jumps on board on that.
25:46
Speaker 3: You can quote them any statistic that you want, but
25:48
Speaker 3: no one will ever say that that two hundred thousand
25:52
Speaker 3: in the bank doesn't help them sleep at night.
25:54
Speaker 2: Mortgage rates are all over the place, and that could
25:57
Speaker 2: be good for buyers. I kind of doubt it. They're
26:00
Speaker 2: also not really all over the place. They've been.
26:03
Speaker 4: It's actually pretty tightly range bound, but so.
26:06
Speaker 2: Over the last twelve months, you've gotten as low as
26:09
Speaker 2: six percent and as high as let me give you
26:14
Speaker 2: the high according to Morgins Daily six eight five. So
26:16
Speaker 2: we are within one percentage point on the average thirty
26:19
Speaker 2: year fixed rate mortgage that you have seen for the
26:22
Speaker 2: last twelve months. That does not seem to me to
26:25
Speaker 2: be highly volatile. And in fact, when I look at
26:29
Speaker 2: the last what do you want to do? Last three
26:32
Speaker 2: years here, so that would bring me to what June
26:34
Speaker 2: July of twenty twenty three you've been, it's.
26:39
Speaker 4: Got to be a real tight Yeah, you've.
26:41
Speaker 2: Been as low as six percent and as high as
26:44
Speaker 2: seven eight percent, So like within two percentage points. I
26:51
Speaker 2: actually don't think that that's all over the place. Here's
26:55
Speaker 2: their argument, the authors of this piece, You're not gonna
26:59
Speaker 2: have as much competition in those homes if you're looking
27:02
Speaker 2: to buy, because when mortgage rates are this high, it
27:05
Speaker 2: prices out more and more buyers. It makes it so
27:09
Speaker 2: that they can't afford it, or they just get discouraged
27:12
Speaker 2: because they have no interest in having a seven percent
27:14
Speaker 2: mortgage or a six point eight or six point seventy
27:16
Speaker 2: five percent mortgage. And so if you stay disciplined and
27:19
Speaker 2: stay in there and you know, go to those open houses,
27:22
Speaker 2: then there's gonna be fewer of them that are lines
27:25
Speaker 2: out the door.
27:27
Speaker 3: Well, that's true, it's been three years. To your point,
27:31
Speaker 3: you know, at what point to expectations reset. I feel
27:34
Speaker 3: as if they have. If you talk with anybody who's
27:36
Speaker 3: in the housing market. You know, my brother and sister
27:38
Speaker 3: in law are and they had bought their first home,
27:42
Speaker 3: a starter home in I want to say twenty two
27:45
Speaker 3: or twenty three, so and they're looking for their next home.
27:48
Speaker 3: The difference in their mortgage rate to the point that
27:50
Speaker 3: they were making like yeah, we might have to go
27:52
Speaker 3: up a percent or something like that, which they don't love.
27:55
Speaker 3: But ultimately their expectations are set there that yeah, we
27:58
Speaker 3: were sitting around five and change and now maybe we
28:00
Speaker 3: have to go up to six seven or something like that.
28:04
Speaker 4: Uh, it is not enough to really thanks Tucker.
28:09
Speaker 3: There's not enough to really showing that, showing that young kids,
28:15
Speaker 3: showing that they are I just feel like there's there's
28:19
Speaker 3: less sort of a mental block with the mortgage rates
28:23
Speaker 3: because to your point of how long we've sat this
28:25
Speaker 3: point in time, I do feel like it is a
28:28
Speaker 3: little bit more of a tep at housing market in
28:30
Speaker 3: terms of demand, and it does feel a little bit
28:32
Speaker 3: more common that we are past the point in time
28:35
Speaker 3: whereas these bidding wars there does seem to be much
28:38
Speaker 3: more of a the listed price is something that could
28:41
Speaker 3: be negotiated down. That seems a little bit more probably
28:45
Speaker 3: in the conversations that I've had in yeah, totally.
28:47
Speaker 2: We will see how the next spring housing market share.
28:50
Speaker 2: I mean, you know, this spring housing market's done. It
28:52
Speaker 2: was a it was a dud of a market. There
28:55
Speaker 2: were not a lot of home sales, mainly because buyers
28:57
Speaker 2: and sellers dropped out because of rising mortgage rates. It's
29:00
Speaker 2: mostly due to the war in Iran. I don't know
29:03
Speaker 2: that expectations are for much lower mortgage rates by next springs.
29:06
Speaker 2: So maybe to your point, you get some of that
29:08
Speaker 2: used to it effect, But to the overall point, the
29:11
Speaker 2: only people that I see benefiting from these high mortgage
29:15
Speaker 2: rates are really wealthy buyers that can afford just about
29:18
Speaker 2: any mortgage payment or can go in and buy with cash.
29:21
Speaker 4: Yeah.
29:21
Speaker 2: Yeah, if you're sitting pretty in that position, you're right.
29:24
Speaker 2: You will have less competition from other buyers and you
29:27
Speaker 2: might be able to scoop up something that's been sitting
29:29
Speaker 2: on the market for a while. Otherwise, Yeah, those higher
29:33
Speaker 2: mortgage rates just mean that you can afford less homes.
29:36
Speaker 2: That's not exactly working in your favor. Let's take a
29:39
Speaker 2: quick break. When we come back, I want to talk
29:43
Speaker 2: about what do I want to talk about? I think
29:46
Speaker 2: I want to talk about the home being used as
29:49
Speaker 2: a piggybank. More and more stories about this recently, credit
29:53
Speaker 2: card debt, high home equity line debt increasing. What does
29:56
Speaker 2: this actually mean? Is it a threat to the economy?
29:58
Speaker 2: That's next on these Financial exchang.
30:00
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30:38
Speaker 2: So in mixed news here we do have a continued
30:44
Speaker 2: and always problem with credit card debt in this country.
30:47
Speaker 2: The average debt per cardholder grew twenty two point seven
30:51
Speaker 2: percent from twenty eighteen through last year. That's discouraging, but
30:58
Speaker 2: is almost exactly in line with inflation. So I don't
31:03
Speaker 2: look at it as you know this. It was already
31:06
Speaker 2: bad news in twenty eighteen. It got worse over the
31:09
Speaker 2: last seven years, but that mainly got worse because of inflation.
31:13
Speaker 2: And that's the story. As though home equity values have increased.
31:19
Speaker 2: As home values have increased, and therefore equity has increased.
31:22
Speaker 3: The.
31:24
Speaker 2: Next possible way of borrowing money has opened up some
31:28
Speaker 2: doors for folks through the through second mortgages, home equity,
31:32
Speaker 2: lines of credit, reverse mortgage. Is all sorts of different
31:36
Speaker 2: buckets here, and while those have been on the rise,
31:40
Speaker 2: to the fantastic news here is that you know, owner's
31:45
Speaker 2: equity and real estate has never been higher than it
31:48
Speaker 2: is right now, and is substantially higher than it was
31:54
Speaker 2: pre COVID levels. Like when I look at so the
31:57
Speaker 2: Saint Louis FED has a chart here on owner's equity
32:01
Speaker 2: in real estate and it's just a dollar threshold. It's
32:04
Speaker 2: roughly doubled, just shy of doubled since pre COVID.
32:08
Speaker 4: What level do they have it read? I had read, No, No,
32:11
Speaker 4: I had read.
32:12
Speaker 3: A seventeen trillion of equity out there from inner common
32:15
Speaker 3: exchange is estimated but bottom line being, yeah, it's trended
32:19
Speaker 3: up way higher.
32:20
Speaker 2: At tremendous level. It's way This is clearly a different
32:23
Speaker 2: measurement because I had about eighteen trillion prior to COVID
32:27
Speaker 2: and now like thirty some odd trillion dollars, so more
32:32
Speaker 2: than doubling. But I don't take this as a good indication.
32:35
Speaker 2: And you know, the New York Times interviews a miss
32:38
Speaker 2: Beroski who got an offer from Rocket Rocket mortgage company
32:43
Speaker 2: to take out a home equity line. She paid off bills,
32:46
Speaker 2: bought new windows, and you know, still had enough left
32:49
Speaker 2: to take a trip for your grand dot to see
32:51
Speaker 2: your granddaughter. And I don't mean to de emphasize, you know,
32:55
Speaker 2: seeing family, but as a sixty three year old retired
32:58
Speaker 2: school teacher, borrowing my for vacations is probably not a
33:01
Speaker 2: very sustainable path. So I think there's good financial planning
33:05
Speaker 2: lessons in here. But if you wanted to try and
33:09
Speaker 2: convince me that problems in the housing market or what
33:13
Speaker 2: was going to sink the economy next, I'd tell you
33:16
Speaker 2: you're crazy.
33:17
Speaker 3: No, that's certainly not something that is of top of
33:20
Speaker 3: mind in terms of concern. I do feel like the
33:22
Speaker 3: data is interesting because it does sort of provide some
33:25
Speaker 3: evidence behind what is probably a pretty likely trend. You
33:28
Speaker 3: have a lot of homeowners who are sitting on these
33:30
Speaker 3: three percent four percent thirty year fixed mortgages, and you're
33:34
Speaker 3: seeing with the second mortgage origination the home ECHU lines
33:37
Speaker 3: of credit being laid on. That growth is reflecting that
33:40
Speaker 3: two things are occurring. One is you have high rates
33:45
Speaker 3: of credit card interest out there, so it seems like
33:48
Speaker 3: by this data that a lot of folks are looking
33:51
Speaker 3: for one to lock in and continue to hold their
33:54
Speaker 3: three or four percent thirty year fixed mortgage and maybe
33:57
Speaker 3: bar on top of the equity that they've built up
33:59
Speaker 3: because home prices of gone up fifty percent over the
34:01
Speaker 3: last five or six years, to do that renovation, but
34:04
Speaker 3: not doing that cash out refinance where you do the
34:06
Speaker 3: whole rate over again on your march.
34:08
Speaker 4: So that's one aspect of it.
34:09
Speaker 3: The second is to consolidate some credit card debt that
34:12
Speaker 3: may be out there. You know that's something that you've
34:14
Speaker 3: bumped into.
34:15
Speaker 2: None of which is necessarily a bad idea.
34:17
Speaker 3: No, it's not a bad idea where it becomes problematic
34:20
Speaker 3: and not something that we're worried about today. Is if
34:22
Speaker 3: the economy deteriorate for a significant period of time. Okay,
34:25
Speaker 3: you have people who are a little bit more levered,
34:27
Speaker 3: but it's not to the points that we're at the
34:29
Speaker 3: two thousand and eight level.
34:30
Speaker 2: By the way, Like, please beware, you know, if you
34:33
Speaker 2: have a mortgage from pre COVID or you know, pre
34:36
Speaker 2: twenty twenty one, every bank out there is going to
34:39
Speaker 2: desperately try and get you to cash out REFI and
34:42
Speaker 2: take that mortgage and convert into something else. And it
34:45
Speaker 2: may you know, give you a bunch of cash up
34:47
Speaker 2: front with a relatively small increase in the monthly payment.
34:51
Speaker 2: You do not have to do that to cash out
34:53
Speaker 2: of your home. I'm not saying there's a good idea generally,
34:57
Speaker 2: but like, there are options available to you that do
34:59
Speaker 2: not involve you getting rid of your unbelievable three percent
35:03
Speaker 2: mortgage that you will never see again in your life.
35:05
Speaker 2: You can take a second mortgage, you can take a
35:07
Speaker 2: home mech were you want to credit. There are other
35:09
Speaker 2: ways than having the bank saying nope, we're canceling that
35:12
Speaker 2: thirty year mortgage that you have fixed at three and
35:14
Speaker 2: a quarter percent, and now you're going to take out
35:16
Speaker 2: a even bigger mortgage, but at six and a half percent,
35:19
Speaker 2: because that is what they would love, love, love, love
35:22
Speaker 2: for you to do.
35:23
Speaker 5: One day you're living in your own home, the next
35:26
Speaker 5: you can't.
35:27
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35:32
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35:35
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35:42
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36:18
Speaker 1: The proceeding was paid for and the views expressed are
36:20
Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
36:22
Speaker 1: or Armstrong Advisory may contact you offering legal or investment services.
36:25
Speaker 1: Cushing and Armstrong did not endorse each other and are
36:28
Speaker 1: not affiliated.
36:29
Speaker 2: Boston Globe reporting on a reporting on a report from
36:33
Speaker 2: a company called Synaps who looked at the rate of
36:36
Speaker 2: electricity here in New England and are alleging that households
36:40
Speaker 2: in New England were overcharged by billions of dollars. So
36:44
Speaker 2: I got to be clear about what they're arguing here.
36:47
Speaker 2: They are not arguing that electric utility companies mischarged you
36:51
Speaker 2: screwed up in some way and you can, you know,
36:54
Speaker 2: apply for a reimbursement. That is not the allegation here. Instead,
36:57
Speaker 2: what they're saying is that ever source in National Grid
37:00
Speaker 2: who don't actually generate the power that they sell, right,
37:04
Speaker 2: they maintain the lines, they buy the power from producers
37:08
Speaker 2: and then sell it to all of us. They are
37:11
Speaker 2: arguing that the rates that they are negotiating with the
37:13
Speaker 2: power generators are obscenely high and too profitable for the generators.
37:23
Speaker 2: And they look at it by saying that, you know,
37:24
Speaker 2: the premium. So basically those generators always charge a premium
37:28
Speaker 2: to the companies like aversource and net Grid. They do
37:32
Speaker 2: that because they don't actually know what it's going to
37:34
Speaker 2: cost them to generate the electricity. They're guessing and so
37:36
Speaker 2: they build in a profit margin in order to make money,
37:39
Speaker 2: and that margin has been growing over time. The premium
37:42
Speaker 2: has been rising, reaching forty nine percent of the median
37:45
Speaker 2: monthly charge for how much actually cost them to generate
37:49
Speaker 2: that electricity over the past five years. And that's the
37:53
Speaker 2: allegation here. It's not that you know, net Grid or
37:56
Speaker 2: ever source is marking things up, or that they are
37:59
Speaker 2: misbilling you. They're basically saying that they're doing a garbage
38:02
Speaker 2: job of negotiating with the power suppliers. I don't know
38:05
Speaker 2: if there's any truth to it, but that's the allegation.
38:07
Speaker 2: We're gonna take a quick break, a lot more to
38:09
Speaker 2: cover in the second hour of the Financial Exchange. We'll
38:10
Speaker 2: be right back. Stay tuned.