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What really is the Santa Clause rally? · The Financial Exchange Show

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1:03
Speaker 1: This is the Financial Exchange with Chuck Zada and Mike Armstrong, Chuck,
1:11
Speaker 1: Mike and Tucker.
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Speaker 2: With you here on a Friday, the last full week
1:17
Speaker 2: of trading for twenty twenty five. As next week we've
1:22
Speaker 2: got the Christmas holiday, that'll be seeing traders kick their
1:25
Speaker 2: heels up a little bit in the week after we
1:27
Speaker 2: got the New Year's holidays, something called New Year's If
1:30
Speaker 2: you haven't heard of it, now you have. And again
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Speaker 2: I don't think there's typically not anything crazy that happens,
1:40
Speaker 2: you know, the last couple of weeks of the year,
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Speaker 2: just because when you are missing two and a half
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Speaker 2: days of trading, it's kind of hard for volatility to
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Speaker 2: get a hold of anything. That's part of the reason
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Speaker 2: why mechanically you typically see that Santa Claus rally that
1:53
Speaker 2: tends to happen into year end. And we'll see if
1:56
Speaker 2: we end up getting that this year, or if Santa
1:59
Speaker 2: Claus brings a big lump of coal for us.
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Speaker 3: But can we define it again, it's the seven trading
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Speaker 3: days I think post Christmas through the first two last
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Speaker 3: five of the year, plus first two of the year.
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Speaker 2: Right, yeah, so it is final five trading days of
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Speaker 2: December and first two of January, which again starts when
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Speaker 2: Friday of next week. Then it starts Tuesday of next week.
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Speaker 4: Tuesday of next week right.
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Speaker 2: After Tuesday, so Wednesday, yeah, because you've got half day Wednesday,
2:28
Speaker 2: full day Friday, and then three more days Monday, Tuesday, Wednesday,
2:31
Speaker 2: the following week, got it, and then Friday and the
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Speaker 2: subsequent Monday. So the reason why you tend to mechanically
2:38
Speaker 2: get that rally is it's very simple. Volatility can only
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Speaker 2: occur when markets are open, and so when you have
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Speaker 2: days in which the market is closed, you can't have
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Speaker 2: volatility by definition. The reason this matters to markets is
2:54
Speaker 2: if you look at the VIX, the volatility index for
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Speaker 2: the S and P five hundred, it uses a thirty
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Speaker 2: day calendar thirty calendar day window in which that calculation
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Speaker 2: is composed, which means that if you have more holidays
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Speaker 2: during that time period, it's tougher for volatility in a
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Speaker 2: mechanical sense to actually grab hold. And so this is
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Speaker 2: a very good mechanical reason why this happens. In addition
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Speaker 2: to the fact that, hey, most of the time, stocks
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Speaker 2: tend to be up for the year about seventy percent
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Speaker 2: of the time, and so given that there's often a
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Speaker 2: dearth of sellers into the end of the year because
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Speaker 2: investors want to kick any capital gains, you know, a
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Speaker 2: couple days down the road, because then they don't have
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Speaker 2: to deal with them for another twelve months. And so
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Speaker 2: those are the two big mechanical reasons why you tend
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Speaker 2: to see the Santa Claus rally. It's not some market
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Speaker 2: miracle or anything. It's just there are fewer trading days
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Speaker 2: for volatility calculations actually apply, and investors who might want
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Speaker 2: to sell a position with a gain tend to want
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Speaker 2: to wait until the next year, and so you have
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Speaker 2: fewer people trying to sell in that last week in
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Speaker 2: a lower vall environment, and that is what typically drives
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Speaker 2: that Santa Claus rallies.
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Speaker 3: So it's like immaculate conception, is what you're saying. Yes,
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Speaker 3: I didn't really listen to anything you said. I know,
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Speaker 3: I'm guessing it's just like that. I know, so in it.
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Speaker 3: We haven't prepared anything on this, but I would find
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Speaker 3: it interesting then to see if there's any Santa Claus
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Speaker 3: rally effect in crypto markets, which trade twenty four hours day,
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Speaker 3: three hundred and sixty five days a week.
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Speaker 2: No idea, they haven't been around long enough probably to
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Speaker 2: be able.
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Speaker 4: To say have any sort of de will whatsoever.
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Speaker 3: They do tend to correlate pretty heavily towards towards stocks,
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Speaker 3: so my guess would be recently there has been something
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Speaker 3: like specifically over the last five years, but not because
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Speaker 3: of Vanny the mechanics we just talked about.
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Speaker 2: So again, this is kind of where we are right now.
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Speaker 2: We did get a little bit of economic data this
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Speaker 2: morning at ten am Eastern. Existing home sales came in
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Speaker 2: at a rate of four point one three million units
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Speaker 2: per year. Previous read was four point one one, so
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Speaker 2: no meaningful change. We're continuing to see that series somewhere
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Speaker 2: between three point nine and four point two five million,
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Speaker 2: with no meaningful shift there. University of Michigan consumer sentiment
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Speaker 2: came in at fifty two point nine. That's up modestly
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Speaker 2: from reading a fifty one in the prior month. Five
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Speaker 2: year inflation expectations dropping from three to four to three
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Speaker 2: to two in that report, and one year inflation expectations
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Speaker 2: dropping from four to five to two four to two,
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Speaker 2: So overall, some modest improvement there, which I think is
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Speaker 2: good news. Does it mean anything, I'm not sure because
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Speaker 2: this series has kind of been broken during this business cycle,
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Speaker 2: much like a lot of different sentiment series, and so
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Speaker 2: I don't know that it necessarily means anything.
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Speaker 3: While we're on the subject of housing, you brought up
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Speaker 3: the home sales numbers. You want to just kind of
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Speaker 3: talk about housing in twenty twenty six as we head
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Speaker 3: towards the end of the year here and what reasonably
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Speaker 3: people could expect in different parts of the country, because
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Speaker 3: I had this conversation with Jim Polito this morning, and
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Speaker 3: you know, I know it's one that's of interest to folks,
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Speaker 3: especially when we're talking about rate cuts and everything else. So,
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Speaker 3: as of yesterday, according to Mortgage News Daily, the thirty
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Speaker 3: year fixed rate mortgage dropped a little bit down to
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Speaker 3: six point to two percent, which is down from a
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Speaker 3: recent tie of six and a third. But we are
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Speaker 3: still well well above what I think a lot of
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Speaker 3: buyers are hoping for in order to feel like a
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Speaker 3: home might be affordable.
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Speaker 2: Yeah, And I think that when we look at the
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Speaker 2: picture again, it's it varies based on the different parts
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Speaker 2: of the country that you might be in. In the
6:44
Speaker 2: southeastern part of the country kind of through Texas, you're
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Speaker 2: very likely to see continued affordability improvements over the next
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Speaker 2: year or so. As prices have been falling in a
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Speaker 2: number of those markets for the last twelve to eighteen
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Speaker 2: months to continue. You have some markets now that are
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Speaker 2: fifteen to twenty percent off their peak pricing that they've
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Speaker 2: seen and probably have another ten to fifteen percent to
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Speaker 2: go in order to get to, you know, kind of
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Speaker 2: where they locally bottom. That probably happens in the next
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Speaker 2: twelve to twenty four months. For other parts of the country, namely,
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Speaker 2: you know, the Northeast and the Midwest, inventory still remain
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Speaker 2: very low and so not buyers markets by any means
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Speaker 2: right now, but inventory has started to grow. We were
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Speaker 2: talking with Mike Simonson from Compass on this earlier this week,
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Speaker 2: and you've started to see some more inventory growth in
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Speaker 2: those areas. That probably gets you back to normal levels
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Speaker 2: of inventory three to four years from now. So it's
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Speaker 2: going to be a process to get there.
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Speaker 3: How does he define that, like.
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Speaker 2: Twenty seventeen to twenty nineteen levels of inventory.
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Speaker 3: And is that reasonably normal given population growth over the time? Right, Like,
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Speaker 3: I know population growth hasn't been huge over the course
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Speaker 3: of the last decade, but you know, really we're just
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Speaker 3: talking about returning to where we were back in twenty seventeen,
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Speaker 3: and that's still probably not enough properties to feel normal
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Speaker 3: in today's environment.
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Speaker 2: I think it probably is pretty close, just because the
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Speaker 2: pricing will adjust.
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Speaker 4: Ye.
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Speaker 2: And this was the point that he made is, Look,
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Speaker 2: the only way that you can clear that volume of
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Speaker 2: properties lower prices is if prices come down. Because the
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Speaker 2: reason you're seeing thirty percent fewer transactions now than twenty
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Speaker 2: one or twenty two is because that's the maximum number
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Speaker 2: that can actually be processed, not processed, that can be
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Speaker 2: completed with prices at this level. There just aren't enough
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Speaker 2: human beings who can buy property in the United States
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Speaker 2: at these prices to drive higher volume. It's Mike, if
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Speaker 2: if I gave you, If if I was running a
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Speaker 2: grocery store and I said, hey, Mike, just so you know,
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Speaker 2: I got three hundred dollars milk, and I got ten
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Speaker 2: bottles of it, do you want one?
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Speaker 4: You'd be like laid in gold.
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Speaker 2: And so my volume selling those three hundred dollars milk
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Speaker 2: bottles will be low because most people would be like, no,
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Speaker 2: not interested. If I dropped it to two hundred, people
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Speaker 2: still wouldn't be interesting because it's just not enough to
9:15
Speaker 2: move the needle. But if I drop that price down
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Speaker 2: to eight cents a bottle, I would sell out the
9:21
Speaker 2: first day, because like the volume can be supported. It's
9:24
Speaker 2: the same thing with housing. There are only so many
9:26
Speaker 2: people that can buy homes that cost five hundred thousand
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Speaker 2: dollars or more. Those prices need to either fall in
9:34
Speaker 2: order to get back to affordability, you know, relative to incomes,
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Speaker 2: or those prices can pause and incomes can catch up
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Speaker 2: a few percentage points a year.
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Speaker 3: Yeah, and this will look pretty calm when you look
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Speaker 3: at the national average level, would be My guess is,
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Speaker 3: oh yeah, maybe you see prices fall one to three
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Speaker 3: percent in twenty twenty six. At the regional level, it's
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Speaker 3: gonna look thing like that. At the regional level, you're
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Speaker 3: going to see some areas of the country where it
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Speaker 3: is a pretty dramatic drop yer over year in pricing,
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Speaker 3: and others where I mean, heck, I don't know what
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Speaker 3: prices in Connecticut are gonna do.
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Speaker 4: They could go up for all I know.
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Speaker 2: Yeah, And so you know, you look at this Bill McBride,
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Speaker 2: who runs a website called Calculated Risk. He goes through
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Speaker 2: and he publishes you know a lot of this data
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Speaker 2: that's out there. It's not like his data, but I
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Speaker 2: like to give him credit because it's where I find it.
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Speaker 2: But if you look at what we are seeing again
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Speaker 2: in terms of you know, how far off the peak
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Speaker 2: you are in various areas. There are parts of the
10:37
Speaker 2: country that have seen You look at Austin, Texas, pricing
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Speaker 2: is down twenty percent from the peak in Austin, Texas.
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Speaker 2: You try telling anyone in Belmont, Massachusetts that, oh, yeah,
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Speaker 2: like home prices are down twenty percent from the peak,
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Speaker 2: They'll be like, h well, they're not. They're up five
10:58
Speaker 2: percent from the peak, which makes this the peak. Then,
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Speaker 2: so yes, on a there's going to be a wide
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Speaker 2: dispersion of how home prices are moving throughout local markets nationally.
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Speaker 2: But Mike Simonson got to the point and he was like, basically,
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Speaker 2: next year, you probably have a small period in the
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Speaker 2: first half of the year where home prices go negative
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Speaker 2: year over year nationally, and other than that you probably
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Speaker 2: are like somewhere flat to one percent price price growth nationally.
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Speaker 2: But parts of the country will see prices falling five
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Speaker 2: to ten percent, parts will see prices rising five to
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Speaker 2: ten percent, and everything in between Let's take a quick break.
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Speaker 2: When we come back, do a second look at the
11:37
Speaker 2: inflation data from yesterday right after this.
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12:26
Speaker 2: See yesterday we received CPI data. It was like we
12:32
Speaker 2: saw with the job support earlier this week, one of
12:36
Speaker 2: the stranger reports, just because in this case, like you
12:39
Speaker 2: literally pulled it open a missing It's just like a
12:42
Speaker 2: bunch of places where there's normally data just have dashes
12:45
Speaker 2: in them and you're kind of like, Okay, I guess
12:49
Speaker 2: we're just not going to have that there, and it
12:52
Speaker 2: creates a big hole in my heart that for like
12:54
Speaker 2: the rest of time. Now, when I'm looking at these
12:57
Speaker 2: data series, I'm just going to anything theareh.
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Speaker 4: She'll probably get that looked into, Chuck.
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Speaker 2: I should, but you know, tis the season. So in
13:06
Speaker 2: any case, I think that when we look at this report,
13:10
Speaker 2: a number of economists have pointed out, hey, there are
13:14
Speaker 2: some things in here about how the BLS calculated that
13:17
Speaker 2: aren't necessarily wrong. Sure, but present the possibility that subsequent
13:23
Speaker 2: reports for December, January, February may end up kind of
13:28
Speaker 2: retracing what we thought were gains that were made on
13:31
Speaker 2: the inflation fight in November.
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Speaker 3: Yeah, And to be clear, what's abnormal about this in
13:37
Speaker 3: particular is not only the drop in the pace of inflation,
13:42
Speaker 3: which dropped down to two point seven percent, which is
13:46
Speaker 3: it's abnormal to see the rate of inflation slow to
13:49
Speaker 3: that degree. What is also really abnormal is for economists
13:53
Speaker 3: to get it so wrong, right, Like, if you go
13:57
Speaker 3: take a look at how many times over the course
14:00
Speaker 3: of the last few decades economists who look at this
14:03
Speaker 3: stuff are off by what was the off four tenths
14:06
Speaker 3: of a percent? Say that again, I think the average
14:10
Speaker 3: economists polled was talking about three point one percent, Yeah,
14:13
Speaker 3: and we got two seven. So the number of instances
14:16
Speaker 3: where the average economists is off by four tenths of
14:19
Speaker 3: a percent, it's extraordinarily rare. And so there's just a
14:24
Speaker 3: bunch of things that point to huh, this is an
14:28
Speaker 3: interesting reading that was done right when the government reopened,
14:31
Speaker 3: probably with a smaller sample size. Are we going to
14:34
Speaker 3: get surprised with inflation to the upside once we get
14:37
Speaker 3: three more months of data, I think is the question
14:39
Speaker 3: that a lot of people are asking themselves.
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Speaker 2: The answer is, it's possible. But the counter to this is,
14:45
Speaker 2: we have a labor market that the data over the
14:47
Speaker 2: last three and a half years has shown is slowing. Generally,
14:52
Speaker 2: when you get a slowing labor market, it typically comes
14:55
Speaker 2: with slowing inflation. Yes as well. Yeah, so I do
14:58
Speaker 2: also think it's possible that when we look at, you know,
15:03
Speaker 2: kind of where inflation you know, is, at this point,
15:09
Speaker 2: it may have started to turn a corner and improve.
15:12
Speaker 2: We had seen it, you know, increasing a little bit
15:13
Speaker 2: over the prior five or six months, but maybe we
15:16
Speaker 2: are starting to see some improvement in the pace of inflation.
15:21
Speaker 2: The thing that throws a little bit of a wrench
15:24
Speaker 2: in the gears there though, is effectively when you look
15:28
Speaker 2: at what the Bureau of Labor Statistics was putting in
15:32
Speaker 2: for shelter as a component which remembers shelter makes up
15:36
Speaker 2: a huge piece of the overall puzzle when it comes
15:41
Speaker 2: to again the waiting in the CPI. Effectively, basically, you know,
15:49
Speaker 2: the the BOLS said, yeah, there wasn't any you know,
15:51
Speaker 2: real measurable you know shift in the rate of you know,
15:56
Speaker 2: in the cost of shelter during this two month period.
15:59
Speaker 2: And the problem there is that that doesn't really you know,
16:01
Speaker 2: match up with what we've seen in recent right, in
16:05
Speaker 2: recent reports on this, and so that's where economists are saying, yeah,
16:10
Speaker 2: maybe we end up with some higher shelter readings in December, January,
16:15
Speaker 2: and February that kick those you know, readings up a
16:17
Speaker 2: little higher than they would have otherwise been.
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Speaker 3: The other thing that I've heard just talked about is
16:23
Speaker 3: again smaller sample size because the timing of this also
16:27
Speaker 3: the time in which they took the sample might not
16:30
Speaker 3: have matched November of last year. Correct, And so if
16:34
Speaker 3: you're measuring prices at the end of November when retailers
16:37
Speaker 3: are heavily discounting things because of the holiday shopping season,
16:40
Speaker 3: then perhaps that also contributes to lower inflation.
16:44
Speaker 2: So here's my take on the data from this week,
16:47
Speaker 2: so specifically on CPI and job support. Job report was
16:52
Speaker 2: not as good as anyone expected. In particular, some of
16:55
Speaker 2: the underlying stuff was, you know, meaningfully worse CPI meaningfully
17:00
Speaker 2: better than people expected. I think I can look at
17:03
Speaker 2: both of those and say, I'm not sure either one
17:06
Speaker 2: is really worth the paper it's printed on. I appreciate
17:09
Speaker 2: the folks at the BLS trying to put something out,
17:12
Speaker 2: but quite honestly, let's see what the next few months
17:14
Speaker 2: of data show, because there are enough reasons why each
17:18
Speaker 2: of these could be skewed, including the fact that the
17:20
Speaker 2: BLS itself said in a note published on Monday, Hey,
17:24
Speaker 2: there could be some larger variation than normal in these
17:27
Speaker 2: reports because of how we collected this and so on
17:30
Speaker 2: and so forth. And so I kind of look at
17:32
Speaker 2: these and I say, guys, I appreciate you getting back
17:35
Speaker 2: to work. Good job, good effort. We'll see you in January.
17:39
Speaker 3: I'll also, you know, just put the lid on the
17:43
Speaker 3: conspiracy theories here for a moment.
17:45
Speaker 2: Oh, there's nothing malicious on any of this.
17:47
Speaker 3: Yes, one the BLS is an organization of hundreds of economists.
17:52
Speaker 3: You're not going to be able to manipulate the data
17:55
Speaker 3: the way you want without people speaking out and resigning.
17:58
Speaker 4: Two.
17:59
Speaker 3: If you're going to try and make the economy look
18:01
Speaker 3: better than it is, then you're not going to tell
18:03
Speaker 3: the American public that the unemployment rate jumped by two
18:06
Speaker 3: tenths of a percent, No, over two months. It's the
18:08
Speaker 3: same organization that produces both of these data sets. Yes,
18:12
Speaker 3: And so if your goal is to say, hey, this
18:14
Speaker 3: economy's fantastic, then you're not going to disclose a higher
18:18
Speaker 3: unemployment rate.
18:18
Speaker 4: Along with a lower inflation rate.
18:20
Speaker 3: So is the data, you know, collection methodology screwed up?
18:24
Speaker 3: And might we see bounce backs in either direction from
18:29
Speaker 3: these datas?
18:30
Speaker 4: Yeah?
18:30
Speaker 3: Quite possibly. And we might look at this in hindsight
18:32
Speaker 3: and say, you know what, it was a blip on
18:33
Speaker 3: the radar. It was not intentionally miscategorizing the data. No,
18:38
Speaker 3: I'm comfortable saying that.
18:39
Speaker 2: Yes, I think very much this is a best effort
18:43
Speaker 2: at what was going on during this period, and we'll
18:48
Speaker 2: see if it's either confirmed or rejected in subsequent reports
18:52
Speaker 2: that we get. It's kind of where I tend to land,
18:55
Speaker 2: So I think overall, I continue to be in the
18:59
Speaker 2: camp of the labor market is weakening. Generally, when that happens,
19:04
Speaker 2: inflation is not the biggest threat in the short term,
19:07
Speaker 2: and so I know the market's not pricing it in
19:09
Speaker 2: right now, but I'm still of the opinion. Look, if
19:12
Speaker 2: you cut interest rates the last three FED meetings because
19:15
Speaker 2: you were concerned about the labor market, I don't know
19:18
Speaker 2: what would dissuade you from cutting in January. Yeah, I
19:22
Speaker 2: don't know what would. Let's take a quick break. When
19:25
Speaker 2: we return, We've got Wall Street Watch, and then let's
19:28
Speaker 2: talk a little bit more about that labor market.
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19:55
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20:01
Speaker 5: Market's adding to yesterday's gains and are currently in positive
20:05
Speaker 5: territory as traders digest existing home sales data for the
20:09
Speaker 5: month of November, which climbed zero point five percent from
20:12
Speaker 5: the month prior. Right now, the Dow is up two
20:17
Speaker 5: thirds of a percent, are three hundred and eleven points,
20:20
Speaker 5: SMP five hundred up three coreters of percent, fifty two
20:23
Speaker 5: points higher, NASDAC up nearly one percent or two hundred
20:27
Speaker 5: and twenty six points. RUSS two thousand also up three
20:30
Speaker 5: quarters of a percent. Ten Your Treas reeled up two
20:33
Speaker 5: basis points at four point one three nine percent, and
20:36
Speaker 5: crude oil up about a half a percent, trading a
20:39
Speaker 5: fifty six dollars and forty two cents a barrel. FedEx
20:43
Speaker 5: reported stronger than expected quarterly results, lifted by higher US
20:47
Speaker 5: package shipments. The company also raised the lower end of
20:50
Speaker 5: its annual guidance, however, shares pulling back about one percent. Meanwhile,
20:55
Speaker 5: Nike stock is dropping almost nine percent after the sports
20:59
Speaker 5: a pair Carl retailer revealed a seventeen percent drop in
21:03
Speaker 5: China sales for its most recent quarter. Nike's gross margin
21:07
Speaker 5: also decreased in the quarter as tariffs pushed up product
21:11
Speaker 5: costs elsewhere. Oracle shares climbing six percent after TikTok parent
21:15
Speaker 5: company byte Dance agreed to sell its US operations to
21:19
Speaker 5: a new joint venture that includes Oracle in private equity investors.
21:24
Speaker 5: Silver Lake home builder KB Homes said it delivered fewer
21:28
Speaker 5: homes in profit in the previous quarter, weighed by a
21:32
Speaker 5: stagnant houser, weighed down by a stagnant housing market.
21:36
Speaker 2: That stock is.
21:38
Speaker 5: Down seven percent. Let me just double check that I
21:41
Speaker 5: put seven percent. I didn't put a direction silly Goose. Yeah,
21:44
Speaker 5: down seven percent And Sony will pay more than four
21:47
Speaker 5: hundred and fifty million dollars to double its steak in
21:51
Speaker 5: Peanuts Holdings, owner of cartoon Ikon, Snoopy and Charlie Brown,
21:55
Speaker 5: increasing its ownership to eighty percent. The family of Peanuts
21:58
Speaker 5: creator Charles N. M. Schaltz will continue to own their
22:01
Speaker 5: remaining twenty percent steak. I'm Tucker Silva and that is
22:06
Speaker 5: Wall Street Watching. If you missed any of our shows
22:08
Speaker 5: this week, you can find them on our YouTube page.
22:11
Speaker 5: We stream the show live every day, but also archive
22:14
Speaker 5: every hour and all of our most newsworthy interviews. Just
22:18
Speaker 5: go to YouTube, search the Financial Exchange and hit that
22:22
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22:24
Speaker 2: We've been talking a little bit about the labor market,
22:26
Speaker 2: and we've got two pieces in the stack today, one
22:29
Speaker 2: from the Wall Street Journal jobs could soon replace prices
22:32
Speaker 2: as focus of anxiety, and another one from Bloomberg. Americans
22:36
Speaker 2: facing tough job market in twenty twenty five won't get
22:38
Speaker 2: a break next year.
22:40
Speaker 3: So, Chuck, you made the case that yesterday on yesterday's show,
22:43
Speaker 3: that we've reached peak anxiety when it comes to affordability.
22:47
Speaker 4: Yes, and these articles would certainly support.
22:50
Speaker 3: That, because if they listen to our show, if people
22:52
Speaker 3: start losing their jobs, then they will not be focusing
22:55
Speaker 3: on grocery prices anymore.
22:57
Speaker 4: Yeah.
22:57
Speaker 2: And this was the point that I think I was
22:59
Speaker 2: getting out, which is, let's think about this from the
23:02
Speaker 2: mechanics of why hiring or firing takes place. So let's
23:08
Speaker 2: say that I am running Chuck's amusement park.
23:12
Speaker 4: You're not sticking with the grocery store.
23:13
Speaker 2: Huh No, there's a tough business for me. I got
23:16
Speaker 2: out of it. It wasn't good. I sold to Tucker.
23:19
Speaker 2: So Kenny opened an amusement park. Yes, I wanted to
23:23
Speaker 2: ride the roller coasters.
23:24
Speaker 3: I'm just going to keep interrupting today. Did you see
23:26
Speaker 3: that Romania is building a Dracula theme park?
23:30
Speaker 2: Sounds great.
23:30
Speaker 4: I'm excited about it. Yeah, sorry, thanks.
23:32
Speaker 2: For bringing that up. That's where Transylvania actually is spending
23:35
Speaker 2: like a billion dollars on it.
23:36
Speaker 4: I'm excited.
23:37
Speaker 3: Cool man, I'm going We're going to do a remote
23:40
Speaker 3: from there, Tucker, and you can't stop us. Yeah, okay,
23:43
Speaker 3: we're even going to learn a little bit of Romanian,
23:47
Speaker 3: which I think they speak Romanian in Romania. Yes, okay,
23:50
Speaker 3: in any case, amusement park. So I opened this amusement
23:54
Speaker 3: park and I'm all excited about it. And the first day,
23:58
Speaker 3: thousands of people come in and I have all of
24:01
Speaker 3: these people coming, and I can't sell enough cotton candy.
24:03
Speaker 3: I can't flip enough burgers, and I'm like Dolly g Wilkers,
24:07
Speaker 3: i gotta hire some help. So I go and I
24:09
Speaker 3: hire some help, and I keep having thousands of people
24:11
Speaker 3: coming a day, and so like my help is really
24:14
Speaker 3: paying off.
24:14
Speaker 2: Like they're making money. I'm making money. It's it's a
24:17
Speaker 2: great world. But all of a sudden, you know, for
24:21
Speaker 2: some reason, hey, we had like an E Coli scare
24:25
Speaker 2: at the lettuce wrap station, and so you know what,
24:30
Speaker 2: our our ridership or our our entrance got cut in half.
24:35
Speaker 2: And so I'm sitting there and I'm going, gee, I'm
24:37
Speaker 2: I'm I'm hemorrhaging money.
24:39
Speaker 4: Now.
24:39
Speaker 2: My sales have gone down. I got my burger flippers
24:43
Speaker 2: just standing around. They're not flipping anything. My guy's pressing
24:47
Speaker 2: the button to start the coasters aren't doing anything. What
24:49
Speaker 2: do I do? I gotta lay some of you off.
24:52
Speaker 2: And this is what we mean when we say that
24:54
Speaker 2: sales leads hiring, because the reason that you hire people
24:58
Speaker 2: is because you have more sales than you can handle
25:00
Speaker 2: with your current staff. The reason you fire people is
25:02
Speaker 2: because you don't have enough work for them to do
25:03
Speaker 2: when you want to maintain margins and not go out
25:06
Speaker 2: of business. So when we look at the driver of this,
25:11
Speaker 2: consumer demand is a huge driver. In the United States,
25:14
Speaker 2: we are a consumer spending based economy.
25:16
Speaker 3: Seventy percent of our economy historically driven by that consumer correct.
25:21
Speaker 2: And so when I see things like year over year
25:24
Speaker 2: tax withholding growth slowing from the mid seven percent range
25:27
Speaker 2: to the high three percent range over the last five
25:30
Speaker 2: or six months, I say, gee, that means there's less
25:33
Speaker 2: income growth, which means potentially less spending growth. Now, one
25:38
Speaker 2: of the things we have talked about this year is
25:40
Speaker 2: demographically US is getting older. And so if you are
25:44
Speaker 2: someone who's listening and you happen to be seventy years old,
25:47
Speaker 2: it's a pretty good chance you're not working and your
25:49
Speaker 2: income is coming from a combination of social security, pension,
25:51
Speaker 2: and portfolio. Yep, and so yes, like your tax withholding
25:57
Speaker 2: for FIKA doesn't change because you don't pay to FAIKA.
26:01
Speaker 2: So if there are more people that are, you know,
26:04
Speaker 2: kind of out of that system and that are receiving
26:07
Speaker 2: their spending power from fixed sources or portfolio, that could
26:12
Speaker 2: potentially offset weakness and wages. But I still realize that
26:15
Speaker 2: there are one hundred and sixty million people in the
26:17
Speaker 2: United States that work, and if their aggregate wage growth
26:20
Speaker 2: is slowing, it represents a potential threat to sales, which
26:24
Speaker 2: represents a potential threat to hiring.
26:26
Speaker 4: Yeah.
26:26
Speaker 3: You know, we've been focused a lot on inflation and
26:30
Speaker 3: prices over the course of the last three to four
26:32
Speaker 3: years for very obvious reasons. So we've sucked, and we've
26:35
Speaker 3: made the case over and over again that while inflation
26:40
Speaker 3: is the least popular of these things, unemployment is the
26:43
Speaker 3: far more damaging one. Right if I to a certain extent, right,
26:47
Speaker 3: we did this exercise where where would you rather see
26:51
Speaker 3: a two percent uptick prices are unemployment? And my answer
26:55
Speaker 3: was uniformly, I would prefer to, unfortunately see it on
26:58
Speaker 3: the price side rather than the employment inside.
27:00
Speaker 2: I don't remember what I said.
27:02
Speaker 3: I think we I think we found some threshold where
27:04
Speaker 3: we were like, all right, at a five percent increase,
27:07
Speaker 3: the price problem might be the bigger problem. But when
27:09
Speaker 3: you talk about these smaller increases, the problem with the
27:12
Speaker 3: employment uptick is that it does not affect every single individual,
27:18
Speaker 3: but those that it does affect it devastates.
27:21
Speaker 2: And uh, that's.
27:24
Speaker 3: Again, we are seeing these signs that we saw last
27:27
Speaker 3: year too of a weakening labor market. One that we
27:30
Speaker 3: haven't brought up in a wild chuck the Psalm rule,
27:33
Speaker 3: which is no longer a rule because it.
27:35
Speaker 4: Broke last year.
27:36
Speaker 2: We had a false positive last year for the first
27:38
Speaker 2: time ever.
27:39
Speaker 3: So the Psalm rule, if you're not familiar, it's a
27:41
Speaker 3: measurement of the increase in the unemployment rate. And what
27:45
Speaker 3: it found, going back historically since the data existed, was
27:50
Speaker 3: that once the unemployment rate ticked up by more than
27:54
Speaker 3: a half a percent of three month average, they do
27:56
Speaker 3: a fancy average way of doing this here every single
27:59
Speaker 3: time it coincided with a recession. And so that happened
28:03
Speaker 3: back in August of twenty twenty four, and then we
28:05
Speaker 3: all sat there waiting and the recession didn't come we
28:09
Speaker 3: are now back in that same territory. We're sitting as
28:13
Speaker 3: of the November reading at point four to three.
28:16
Speaker 4: But it's rule.
28:17
Speaker 2: But here's the thing. It's complicated because there is no
28:21
Speaker 2: October unemployment rate correct, So what three months do we
28:25
Speaker 2: actually use is now a question.
28:27
Speaker 3: But to put it plainly, unemployment back in January this
28:30
Speaker 3: year was four one. It's now four to six. So
28:32
Speaker 3: if you see a continuation there, you get to the
28:35
Speaker 3: breaking of the Psalm rule again. Doesn't mean we're gonna
28:38
Speaker 3: get a recession, no, But man, the more you see
28:41
Speaker 3: these upticks and put away the whole sam rule thing,
28:46
Speaker 3: Unemployment historically, once it starts rising, doesn't just pause and
28:51
Speaker 3: plateau and move on aside from last year. Aside from
28:54
Speaker 3: last year.
28:57
Speaker 2: Yeah, and the other piece, I'm just.
28:58
Speaker 4: Not personally willing to test that theory over and over again.
29:01
Speaker 2: The other piece just at a more micro level. Historically,
29:04
Speaker 2: biggest driver of us, you know, marginal demand. Housing. There's
29:08
Speaker 2: a reason why they say that housing leads the business cycle.
29:11
Speaker 2: And if I am a builder, so now I've gone from.
29:16
Speaker 5: There are a lot of things today.
29:17
Speaker 2: Yeah, the first theme park. I am a renaissance man.
29:23
Speaker 2: I do a little dabbling in everything here.
29:26
Speaker 4: Wow.
29:26
Speaker 2: So now I run I run a general contractor. Indeed,
29:30
Speaker 2: and I built twenty homes this year, right, and I
29:34
Speaker 2: sold them in an average of five hundred thousand dollars
29:36
Speaker 2: with fifty thousand dollars profit on each one. It's a
29:39
Speaker 2: million dollars in profit now. But now the problem is
29:42
Speaker 2: the place where I'm selling my homes. It's in Florida,
29:44
Speaker 2: and prices are falling. Still. They fell another ten percent,
29:48
Speaker 2: let's say next year, from where they are. So now
29:50
Speaker 2: I'm sitting there and I'm going gee, in order for
29:52
Speaker 2: me to sell these homes, remember I'm not just competing
29:55
Speaker 2: with other new homes, I'm competing with the existing housing stock.
29:57
Speaker 4: I think you mean golly g Whillakers, golly g.
29:59
Speaker 2: Will And So now if I want to compete on price,
30:04
Speaker 2: I've got to say, Okay, I got to sell these
30:06
Speaker 2: twenty homes at four hundred and fifty thousand. Well, gee,
30:10
Speaker 2: that's what I it cost me to build them. I'm
30:13
Speaker 2: gonna make no profit doing that. So instead what I
30:15
Speaker 2: do is I say, look, I know I can't sell
30:17
Speaker 2: twenty homes at five hundred K, but I can still
30:20
Speaker 2: do ten at five hundred k. But I don't need
30:24
Speaker 2: as many of my subs working as much. And when
30:27
Speaker 2: those subs get the orders coming in from me saying, hey,
30:31
Speaker 2: we've got you know, ten plumbing systems to install instead
30:33
Speaker 2: of twenty this year, and ten electrical systems instead of twenty,
30:37
Speaker 2: then my sub say, Steve, Bill, don't come in today.
30:42
Speaker 2: We don't have the work for you.
30:43
Speaker 4: Yep.
30:44
Speaker 2: And that's the other risk to employment next year is
30:47
Speaker 2: where you have falling prices coming in the southeast, Southwest,
30:50
Speaker 2: and west guys. That's that's where the construction happens. It's
30:55
Speaker 2: it ain't happening in Arlington. I mean it is, but
30:58
Speaker 2: like not as much. It's not happening in you know,
31:04
Speaker 2: bangor Maine. It's not happening in.
31:08
Speaker 4: Westport, Connecticut.
31:09
Speaker 2: Correct, like that A big development in Massachusetts, Like, hey,
31:12
Speaker 2: we built two hundred units. A big one in Florida
31:15
Speaker 2: is we built twenty thousand. Yeah, that's where the problem is.
31:20
Speaker 2: Let's take a quick break when we return, enough about
31:23
Speaker 2: what's going on in the United States. When we come back,
31:27
Speaker 2: we're going to Japan.
31:29
Speaker 1: Find daily interviews and full shows of the Financial Exchange
31:32
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31:35
Speaker 1: caught up on anything and everything you might have missed.
31:38
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31:50
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32:07
Speaker 2: All right, Having discussed the US economy for the last
32:10
Speaker 2: forty five minutes or so, we now turned to Japan
32:15
Speaker 2: and the Bank of Japan raised interest rates to zero
32:19
Speaker 2: point seventy five percent. Was a quarter percent hike for
32:22
Speaker 2: the Bank of Japan. This puts interest rates at the
32:24
Speaker 2: highest they've been there since nineteen ninety five.
32:28
Speaker 4: That is a long time ago.
32:30
Speaker 2: Yes, So in any case, there's a piece in the
32:33
Speaker 2: Wall Street Journal the Bank of Japan raised rates. Here's
32:36
Speaker 2: why you should care, and ultimately, look, there are two
32:41
Speaker 2: reasons why you could potentially care what the Bank of
32:44
Speaker 2: Japan does. The first is rising interest rates in any
32:50
Speaker 2: major economy can potentially push up interest rates in other
32:54
Speaker 2: major economies, just because of international investors who may be
32:59
Speaker 2: seeking out arbitrage options and trying to figure out the
33:03
Speaker 2: best place to park their money.
33:04
Speaker 3: Putting it plainly, if Rana get paid for owning a
33:08
Speaker 3: government's debt, if other governments start offering more interest, you
33:13
Speaker 3: might go there. You might go there instead of to
33:15
Speaker 3: the United States. Current United States needs you because we
33:18
Speaker 3: are not great at managing our finances.
33:20
Speaker 2: To be fair, no one's great at managing nor is Japan.
33:23
Speaker 4: No.
33:24
Speaker 2: You know the list of countries that are really good
33:27
Speaker 2: at managing their finances, it's pretty slim. It's a pretty
33:30
Speaker 2: small list. But so this is one of the reasons
33:33
Speaker 2: why it matters. The other reason why it matters to
33:35
Speaker 2: the US is because of the potential impact on equity markets,
33:38
Speaker 2: because Japanese investors one of the things that they love
33:41
Speaker 2: to do is they say, okay, we've had, since you know,
33:45
Speaker 2: the mid two thousands a currency that's been depreciating against
33:48
Speaker 2: the US dollar. This is Japan. I'm now a Japanese
33:51
Speaker 2: hedge fund manager. So the Japanese yen has been depreciating
33:55
Speaker 2: against the US dollar for the better part of the
33:57
Speaker 2: last fifteen years. Well, I know what, Mike, as a
34:02
Speaker 2: as a person in Japan, Can I eat dollars noware?
34:07
Speaker 2: I can't? But what I can do is I can
34:10
Speaker 2: I can use yen to go and buy food, and
34:13
Speaker 2: so if I can take my yen convert them over
34:15
Speaker 2: to dollars, go earn a higher rate of return in dollars,
34:19
Speaker 2: and then pay myself back with an exchange rate that
34:22
Speaker 2: has depreciated. I'm coming out with more yen, which means
34:25
Speaker 2: I can feed myself more good. The wrinkle in this
34:29
Speaker 2: is if Japanese investors start saying, and this is again
34:33
Speaker 2: kind of the extension of what we talked about, Hey,
34:35
Speaker 2: I can earn more in Japan than having to do
34:38
Speaker 2: that big currency conversion, bring it over and then bring
34:40
Speaker 2: it back and do this whole thing with a bunch
34:41
Speaker 2: of you know, currency swaps and everything. Does it impact
34:45
Speaker 2: flows into US risk asset markets like equities in real
34:50
Speaker 2: estate as well, not just bonds. And we saw this,
34:55
Speaker 2: by the way with Jen mcgeddon last year in late
34:57
Speaker 2: July early August, where basically the yen dollar exchange blew out.
35:03
Speaker 2: You saw the Vicks go up to sixty in one day,
35:05
Speaker 2: and everyone's sitting there like, what the heck happened?
35:07
Speaker 4: What is the carry trade?
35:09
Speaker 3: Yeah, which probably makes Harry why not that likely to
35:11
Speaker 3: happen again in steach sht time, the.
35:13
Speaker 2: Same thing usually doesn't cause problems in short order that way.
35:17
Speaker 2: But these are reasons why in theory you might want
35:20
Speaker 2: to care what the Bank of Japan does, even though
35:22
Speaker 2: most of the time it's not really worth it for
35:24
Speaker 2: the average person to pay attention to.
35:26
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36:07
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36:34
Speaker 3: Yesterday we were talking on the show about ghost jobs,
36:36
Speaker 3: and specifically what we're talking about here is job listings
36:40
Speaker 3: on job boards that companies have really no intention of
36:43
Speaker 3: actually hiring for, but just like collecting resumes and lazy,
36:46
Speaker 3: don't take the postings down. A couple comments we got
36:49
Speaker 3: from listeners that can lead to a person applying to
36:52
Speaker 3: multiple places never hearing back. That can cause the serious
36:55
Speaker 3: financial strain, especially if they were laid off or fired
36:57
Speaker 3: and need to find a job fast. I know several
36:59
Speaker 3: people who are put in that situation wound up just
37:01
Speaker 3: about underwater. One of our proposals was, hey, job boards,
37:05
Speaker 3: like fix this so that the employer at least you
37:08
Speaker 3: can see the last time they were active on the
37:10
Speaker 3: job post or interviewed somebody and somebody else exiting. Yeah,
37:14
Speaker 3: employers will get around that. They'll just touch the job
37:16
Speaker 3: posting to make it look more active. And you're absolutely right,
37:19
Speaker 3: which is still where I've come to that there is
37:23
Speaker 3: no good fixed to this problem.
37:25
Speaker 4: Right. There are minor things that you can do to
37:26
Speaker 4: make it slightly better. But if you.
37:29
Speaker 3: Genuinely want employers to not put fake postings up, then
37:34
Speaker 3: the economic solution would be to raise the cost of posting,
37:38
Speaker 3: have a tax on job postings.
37:40
Speaker 2: Does anyone want that?
37:41
Speaker 4: Which is a terrible idea.
37:43
Speaker 3: Again, the reasons the terrible idea is because then there's
37:45
Speaker 3: a tax on job postings, company posts fewer jobs and
37:47
Speaker 3: hire fewer people.
37:48
Speaker 2: So or post fewer jobs but engage in more network
37:52
Speaker 2: based hiring, which means that, hey, if you don't know
37:54
Speaker 2: the right people and you're not getting your job, like
37:57
Speaker 2: it makes that network even more important.
37:59
Speaker 3: Though there is no good solution here, I don't think
38:01
Speaker 3: government intervention is the right one, and I have just
38:04
Speaker 3: come to accept the suck when it comes to job postings.
38:07
Speaker 2: What if ope just gave everyone a job? Oh oprah, Yeah,
38:11
Speaker 2: you get a job, and you get a job, and
38:14
Speaker 2: you get a job.
38:16
Speaker 4: I don't know it's a solution.
38:18
Speaker 2: If we do that a few million times, we'll get there.
38:22
Speaker 2: Let's take a quick break when we return hour two
38:24
Speaker 2: coming up