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At the Money: What Data Matters and What Doesn't · Masters in Business

• 0:00
  Speaker 1: Somebody stuff.
• 0:08
  Speaker 2: Tail stalls. When it comes to the economy, it seems
• 0:16
  Speaker 2: like everybody has an opinion about what's going to happen next.
• 0:20
  Speaker 2: Are we getting a recession? Can we execute a soft landing?
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  Speaker 2: Is the FED about to cut rates or are they
• 0:27
  Speaker 2: standing pat And what about inflation? Has it stabilized in
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  Speaker 2: bottom or is it about to pick up again. The
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  Speaker 2: answer to these questions are mostly just opinions guesses from
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  Speaker 2: folks with rather questionable track records. As it turns out,
• 0:44
  Speaker 2: you can cut through all of this confusing noise and
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  Speaker 2: let the economic data tell you its own story. I'm
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  Speaker 2: Barry Riddelts and on today's edition of At the Money,
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  Speaker 2: we are going to discuss how to allow economic data
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  Speaker 2: to reveal itself to you without the guestwork, opinions or
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  Speaker 2: the usual pundit pontifications. To help us unpack all of
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  Speaker 2: this and what it means for your portfolio, let's bring
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  Speaker 2: in Bill McBride. He runs Calculated Risk. Bill has used
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  Speaker 2: economic data to create opinion free analysis of the economy
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  Speaker 2: over the past two decades, and he has accurately identified booms, busts, bubbles,
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  Speaker 2: and recoveries in real time and at major turning points,
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  Speaker 2: including the Great Financial Crisis and its subsequent housing bottom
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  Speaker 2: and recovery. So Bill, let's just start with economic data.
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  Speaker 2: Typically it's noisy most of the time, not especially meaningful.
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  Speaker 2: How do you identify what data series to follow and
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  Speaker 2: which releases are important?
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  Speaker 3: Well, there's several major releases on the Employment Report, the
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  Speaker 3: GDP report, and since my major focus is on the
• 2:03
  Speaker 3: housing market, is also housing starts and new home sales.
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  Speaker 3: But I follow quite a few other data releases, mostly
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  Speaker 3: just to see if something's not tracking what you kind
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  Speaker 3: of expect. And it's really kind of the surprises that
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  Speaker 3: change your views or brings you, you know, insights into
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  Speaker 3: what's actually changing in the economy.
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  Speaker 2: So it sounds like you're paying the most attention nonfarm payrolls,
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  Speaker 2: which comes out every month, GDP which comes out quarterly,
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  Speaker 2: and then housing sales and new home starts, both of
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  Speaker 2: which are monthly. Do I have that right?
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  Speaker 1: That's correct? I think those are the major releases to follow.
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  Speaker 2: Do you think those have the most predictive value as
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  Speaker 2: to what happens next?
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  Speaker 3: Well, I think the Employment Report actually tells you the
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  Speaker 3: best what's happening now. The GDP report tends to you
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  Speaker 3: know it's quarterly's it gets heavily revised. The unemployment rate
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  Speaker 3: is monthly, and so you know when the unemployment rates
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  Speaker 3: at three to nine that the economy is in pretty
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  Speaker 3: good shape.
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  Speaker 1: New home sales and housing starts do have some predictive value.
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  Speaker 3: Not always, but generally, if new home sales and housing
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  Speaker 3: starts are increasing, the economy is going to be fine
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  Speaker 3: for the next few years. If they decrease sharply, there's
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  Speaker 3: a potential for a recession. But it's not you know,
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  Speaker 3: no model is perfect. We saw a number of major
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  Speaker 3: economists get fooled by the inverted yield curve and the
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  Speaker 3: sharp drop in housing starts and new home sales that
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  Speaker 3: were related to the pandemic and that so you always
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  Speaker 3: have to take everything with a grain of salt.
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  Speaker 1: But I think those there is some predicted value in
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  Speaker 1: housing starts.
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  Speaker 2: I like the concept of GDP unemployment in housing starts
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  Speaker 2: as past, present and future really gives you the broad
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  Speaker 2: range of what's going on. But let's talk about the
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  Speaker 2: flips out of that. What do you think people in
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  Speaker 2: both investors and economists pay too much attention to and
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  Speaker 2: what data series perhaps should they be spending less time with.
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  Speaker 3: I think probably the one people should ignore the most
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  Speaker 3: is anything doing with sentiment.
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  Speaker 1: M it's more of an opinion.
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  Speaker 3: Especially in the last decade or two, we've we've we've
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  Speaker 3: seen a real a political tinge to it, so, especially
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  Speaker 3: especially on the conservative side, when there's a Democratic president
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  Speaker 3: that the economy is terrible to many Republicans, uh and
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  Speaker 3: their Democrats. Is a little bit the same way that
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  Speaker 3: there are some surveys that that's all it does is
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  Speaker 3: really tell you who's president?
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  Speaker 1: Right?
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  Speaker 2: Right? Is That's that's fascinating. I always find it amusing
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  Speaker 2: when you look at certain models that have a survey component.
• 4:53
  Speaker 2: Owner's equivalent rent What do you think you can rent
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  Speaker 2: your house for? Always kind of cracks me up. And
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  Speaker 2: the one that really I couldn't agree with you more
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  Speaker 2: about ignoring sentiment is the Federal Reserve asking ordinary people
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  Speaker 2: where do you think inflation is going to be in
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  Speaker 2: five years? I can't imagine a more useless question than that.
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  Speaker 3: There's probably a little value tobout, but I understand what
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  Speaker 3: you're saying.
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  Speaker 1: Sentiment in general is hard to measure.
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  Speaker 2: So let's talk a little bit about inflation. Are there
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  Speaker 2: things that you pay close attention to rent, food, fuel,
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  Speaker 2: mortgage rates. What are you looking at when you want
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  Speaker 2: to figure out what's happening in the world of inflation.
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  Speaker 3: You know, inflation is especially interesting topic right now, obviously
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  Speaker 3: because it impacts what the Fed's going to do, which
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  Speaker 3: impacts interest rates. Part of the problem is we had
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  Speaker 3: a huge surge in rent related to household firmation, really
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  Speaker 3: mostly in twenty twenty one, but going into twenty twenty
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  Speaker 3: two and now asking rents are basically flat year over
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  Speaker 3: year and have been for some time now.
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  Speaker 1: But the measure of rents.
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  Speaker 3: That go into CPI and PCEE, they include renewals, which
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  Speaker 3: they should. You know, the people that are getting in
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  Speaker 3: renewals are still catching up to the fact that the
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  Speaker 3: rent surged a year or two years ago. But this
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  Speaker 3: is a key point is monetary policy cannot impact what
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  Speaker 3: happened to rents two years ago. It can only impact
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  Speaker 3: what's happening today. So you know, there's a different people
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  Speaker 3: that sometimes renders say to me, well, wait, my rent
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  Speaker 3: still going up. Yeah, that's because it's a renewal and
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  Speaker 3: monetary policy doesn't impact that at all. So when you
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  Speaker 3: look at the CPI reports for the last few months, the.
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  Speaker 1: Government's reporting.
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  Speaker 3: One of the sentences in there has been a fifty
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  Speaker 3: is related to rents or something close to that of
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  Speaker 3: the of the CPI increase. So what I've been doing
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  Speaker 3: is I've been taking rents out of the inflation to
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  Speaker 3: see where we're at, and we're much closer, and for
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  Speaker 3: several months we were at the Fed's target. So this
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  Speaker 3: is this is a little balancing act for the Fed
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  Speaker 3: is how much should they look at rents and how
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  Speaker 3: much should they exclude it from what they're what they're doing.
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  Speaker 2: Let's talk real estate. There's so many different elements that
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  Speaker 2: go into residential housing. It's people's incomes, what mortgage rates
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  Speaker 2: are at local housing supply, and the aforementioned rentals. What
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  Speaker 2: do you watch most closely in this area? What do
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  Speaker 2: you think people should be watching that perhaps they're not.
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  Speaker 3: I think the key to watch is inventory. That's you know,
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  Speaker 3: it's a there is supply and demand. We still have
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  Speaker 3: pretty good demographics. We have a large cohort in the
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  Speaker 3: home buying age group in their thirties. On the flip side,
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  Speaker 3: the inventory, of course has been very low, but it's
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  Speaker 3: starting to increase. It's still pretty thirty percent below kind
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  Speaker 3: of a normal level. Since sales are down so much,
• 8:03
  Speaker 3: I've been looking more at months of supply, and that
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  Speaker 3: is probably going to get back to twenty nineteen levels
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  Speaker 3: later this year, and that says that house prices will
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  Speaker 3: basically be flat to only up slightly by the end
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  Speaker 3: of the year.
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  Speaker 1: I think so.
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  Speaker 2: In twenty twenty two and twenty twenty three, just about
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  Speaker 2: every economist out there was looking for a recession. You
• 8:28
  Speaker 2: were not, And you got it right. What were you
• 8:31
  Speaker 2: seeing that told you we recession was not imminent when
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  Speaker 2: everybody else seemed to be stuck on the inverted yield curve?
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  Speaker 1: Yeah?
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  Speaker 3: Well, you know, there were several economic analysts who didn't
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  Speaker 3: think there would be a recession. Claudia Sami, who you've
• 8:46
  Speaker 3: interviewed recently, Yon Hotsuits, Goldman Sachs chief economists who everybody
• 8:52
  Speaker 3: should read if they get a chance. In twenty twenty two,
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  Speaker 3: I didn't see there was no reason.
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  Speaker 1: To expect a recession at all.
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  Speaker 3: In twenty twenty three that you started seeing some signs
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  Speaker 3: of a possibility. The Federal Reserve staff was even predicting
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  Speaker 3: a recession in twenty twenty three. So, but I mean,
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  Speaker 3: the key things that people were looking at was the
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  Speaker 3: inverted YO curve, which is still inverted, and the fact
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  Speaker 3: that housing starts dropped off pretty sharply. But what they
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  Speaker 3: weren't looking at was other parts of pandemic economics.
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  Speaker 1: If you will.
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  Speaker 3: Auto sales had been really depressed because of supply issues,
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  Speaker 3: and so that meant auto sales were going to pick
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  Speaker 3: up in twenty twenty three, which they did, and there
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  Speaker 3: were other parts of the economy that had similar things
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  Speaker 3: were the supply issues were going to start easing up
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  Speaker 3: from the pandemic. So if you factored in pandemic economics,
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  Speaker 3: I thought was saying, hey, we need to watch, but
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  Speaker 3: I don't think we're going to have a recession, and
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  Speaker 3: we didn't.
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  Speaker 2: So given all of the above, if investors want to
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  Speaker 2: focus on one or two data series to give them
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  Speaker 2: some idea of where we are and where we're going,
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  Speaker 2: what two data series should they be paying attention to
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  Speaker 2: over the next few years.
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  Speaker 3: Unemployment rate and the payroll report is critical. What's important
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  Speaker 3: over time changes. Yes, there's times when the weekly unemployment
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  Speaker 3: claims is very important. That's important when you really do
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  Speaker 3: think that there's a possibility of a recession, But that
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  Speaker 3: only matters in that particular situation. Probably the most important
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  Speaker 3: thing is the inflation reports and being able to look
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  Speaker 3: at them, look at them with taking the rents out
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  Speaker 3: to kind of get a feel for what's happening, So
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  Speaker 3: you know, I would definitely be following both of the
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  Speaker 3: inflation reports CPI and the PCE report wrap up.
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  Speaker 2: Investors should realize they don't need to follow every data release,
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  Speaker 2: every news report, every economic announcement that comes out, but
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  Speaker 2: you should be aware of where we are in the cycle,
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  Speaker 2: when we're closer to a recession, when things are in
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  Speaker 2: danger of slowing down. The weekly new unemployment claims are
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  Speaker 2: worth tracking, but in the meantime, you should be watching
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  Speaker 2: unemployment rates, you should be watching housing starts, and lastly,
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  Speaker 2: you should be paying attention to both CPI and PCE
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  Speaker 2: reports to give you a sense of when the FED
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  Speaker 2: or if the FED is going to cut or stay
• 11:40
  Speaker 2: pat I'm Barry Retolts and this is Bloomberg's at the
• 11:44
  Speaker 2: Money to Tail Store to Tail Ustall