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Fed's ongoing balancing act between inflation and jobs · The Financial Exchange Show

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Face is the Financial Exchange with Mike Armstrong and Mark Fandetti.
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Speaker 2: Good morning, Welcome back to the Financial Exchange. It is
1:17
the Tuesday of a Federal Reserve meeting. They are in
1:21
meetings today discussing policy. We will hear from Jerome Powell
1:24
tomorrow at two pm. Two pm he starts speaking to
1:28
two thirty pm he starts speaking rather and they will
1:32
be releasing three important items here. One would be the headline,
1:37
which is how much do they cut rates tomorrow? Which
1:41
is baked in. They will be cutting rates tomorrow almost undoubtedly.
1:46
They will be releasing their summary of economic projections this step,
1:50
and then there will also be prepared remarks and a
1:53
Q and A that Jerome Powell does, and each of
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those in and of themselves are interesting pieces that you
2:00
give you a sense of what the Federal Reserve is thinking.
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And so if you turn on any financial media today,
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my guess is the only thing you will hear as
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we're looking at right now from Bloomberg, the ever Source
2:13
ISI founder and chairman, for instance, saying quote, I'd be
2:16
shocked if FED doesn't cut by fifty. You'll have somebody
2:19
else on I'm sure next saying the FED would be
2:21
idiots to cut by fifty basis points. And I'm here
2:24
to tell you that whether it's twenty five or fifty
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is probably less impactful in most people's views than their
2:31
projections about where things are and what they actually have
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to say about the state of the economy, although the
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fifty versus twenty five will be what gathers all the
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attention and gets all the attention tomorrow afternoon.
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Speaker 3: So why do we care well? The FED controls or
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exerts a lot of control over very short term interest rates.
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That's its main tool for speeding up or slowing down demand.
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Speaker 2: Explain what you mean by very short term interest rates?
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Speaker 3: Short term interest rates are rates onlineans say less than
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a year. Think Treasury build.
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Speaker 2: The mechanism by which they controlled them, though, is what the.
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Speaker 3: FED controls the money supply. I think we've all heard that,
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but it's hard to translate that into something meaningful. They
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do that by crediting banks with more reserves or taking
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reserves away. When you put the reserves into the system,
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The FED allows banks to lower interest rates. Basically, the
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FED funds rate is their primary policy tool. They have others,
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but that's their main policy tool, and again they try
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to control that. Though they don't control it precisely, they
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can heavily influence it by expanding or contracting the money supply,
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and they do that to goose or restrain demand, which
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in turn puts upward or downward pressure on inflation. It
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doesn't always quite work that formulaically, that mechanically, but that's
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the general theory, and it's been tested. You might think,
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why would somebody need to test that. It's common sense.
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Economists spend a lot of time, particularly in the late eighties,
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testing whether or not the Fed actually influence short term
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interest rates, and the answers yes.
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Speaker 2: So when we take a look at things here, like
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I said, what you know, financial media is going to
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pay most attention to is what actually happens with that
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FED funds rate tomorrow. And as of right now with
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the CME groups website not properly loading, but as of
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a couple hours ago when I was looking at it,
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it was pricing in about a two thirds chance of
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a fifty basis point rate cut, which is about a
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flip from where we were, say, this time last week.
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Speaker 3: Not clear why Mike. Let me first say I asked
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the question why do we care. We care because it
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should translate into lower credit card interest rates, though that
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will depend obviously on your credit card and credit rating
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and individual in factor specific to you. Lower auto loan
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rates they're tied to, like the five year treasury note,
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and again that'll depend on factors specific to you.
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Speaker 2: So eat lower saving rates It should.
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Speaker 3: Yeah, banks will very quickly lower rates on time deposits
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and CDs, but it should reverberate down the so called
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yield curve. It should to the extent that it hasn't
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already been priced in so to speak, to longer term treasuries.
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It should result in lower interest rates right on down
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the curve. So I guess that's why people listening who
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aren't concerned about this more complex capital market impact of this,
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which we'll get into, yeah, should should care. It will
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affect what you pay on your loans and what you
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get paid on your savings.
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Speaker 2: So as I mentioned about a sixty now now a
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sixty three percent chance of a fifty basis point rate
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cut tomorrow, that's, like I said, up pretty substantially from
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just a week ago when it was only a thirty
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four percent chance of that fifty basis point to rate cut.
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To answer your pondering of what's changed, well, I don't
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think we have any more information that would lead you
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to a fifty basis point rate cut. I think what's
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changed is Nick Timros, who's you know, kind of referred
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to as the mouthpiece of the walls of the federals
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when they can't speak, put out a number of pieces
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over the last few days alluding to a fifty basis
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point rate cut. And then you also had interviews with
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several former FED cheefs. Because the current FED chairs cannot
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sit it cannot discuss anything with the media right now,
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they're barred from doing so. But you did have these
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others saying, hey, based on my opinion and my time
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at the FED, I think the FED will cut fifty
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basis points. And so that seems to be, in my view,
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the only thing that's turned things around. There's been no data,
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new data released on a weakening economy.
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Speaker 3: That's what I was referring to. So this morning we
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got retail sales, maybe you'll talk about that. We also
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got industrial production and capacity utilization, which the FED follows closely.
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In fact, they produce those statistics. Industrial production is more
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or less output at the nation's minds factories exactly what
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you would think. That index is at its highest level
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of the current expansion. It's odd to me that people
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are talking about a jumbo cut in light of that. Now,
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you could say, that's just one statistics. One's a statistic.
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Excuse me. Capacity utilization also relatively steady, not at its
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high capacity utilization, as the name suggests, is the percentage
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of its resources on average, that their resources that companies
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are using. How fully employed are your machines more or less?
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Also at relatively stable levels. GDP growing at a healthy
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clip according to Atlanta FS GDP now, which is as
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good as anybody's guess as a snapshot of where the
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economy is today. Unemployment, though it's ticked up, still very
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low by historical measures. You can go right on down
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the line. It's a little odd. Financial conditions, maybe we'll
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talk about those. There are various indices of so called
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financial conditions looser than they were a year ago. This
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is why it's odd to me. Maybe it's just me
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that the Fed is talking about an emergency size or jumbo.
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They're not calling it an emergency size, and they won't, but.
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Speaker 1: It's a big cut.
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Speaker 3: They prefer to move more gradually, So why other than
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the market seems to want it.
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Speaker 2: Well, play real devil's advocate here. So I agree with
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you financial conditions when you look at the overall published
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financial conditions index, and you know, I know everybody's got
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slightly different ones, but you know, generally speaking looser than
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they were previously. Markets are up near all time highs.
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But you know, playing the other side of that coin,
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we have seen a nearly full percentage point increase in
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the unemployment rate. I think if you look at like,
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let's look at the eighteen month low in the eighteen
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month high for a moment here, I think May of
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twenty twenty three got as low as three to four
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and July of this year got as high as four
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to three. Yeah, when you compare that to other rate
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cutting cycles, you could argue that the FEDS a little
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bit behind the eight ball when you look at nearly
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a full percentage point uptick and unemployment, wouldn't you.
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Speaker 3: Yeah, And I we talked about that earlier today. I
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tried to make that point to be balanced. Well, no,
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we should be fleshing it out on the air too,
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because I don't. The topic of our conversation here at
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Mstrong Advisory Group earlier today was is the FED behind
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the curve? Right in line with the curve ahead of
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the curve? This is the perennial, by the way, question,
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during the tightening or loosening phase of the cycle. Is
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the FED too early, too late? Just right? We won't
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know for a long time, and even then people will
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argue about it. But of course you're right. My unemployment
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has gone up the back of my mind, though I'm
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left asking was it unnaturally low? Unusually unnaturally low? To
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begin with? Is the low fours about right? Given what
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I'll call the structure of the economy, Is that the
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right so called natural rate, the rate that doesn't put
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upward pressure on inflation. That's the magic figure that the
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FED is trying to calibrate all of its decision towards.
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What is the so called natural or neutral rate of interest,
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natural rate of unemployment? Where would the economy rest, even
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though it never really rests, if it wasn't being buffeted
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by big shocks in either direction? Nobody knows the answer
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to that. I just again find it curious that conditions
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are so accommodating yet the FED is considering a jumbo
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rate cut. What's the risk of that, well, a reigniting
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of inflation. They apparently think the risk of increased unemployment,
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more rises and unemployment as awkward as that as I
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just phrased that, you know what I mean, and a
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GDP slow down. They apparently think the risks of that
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are greater than inflation reigniting. That's the obvious interpretation.
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Speaker 2: Jobs we're seeing if they go fifty, that's the obvious conclusion.
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If they go fifty. Let's take a quick break. When
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we come back, I want to touch on that data
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point that we got this morning at eight thirty, which
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at least in part seems to be driving markets a
10:31
little bit higher. We'll discuss retail sales next. On the
10:34
Financial Exchange.
10:36
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11:22
Speaker 2: Did you know what happens in ninety nine days?
11:25
Speaker 1: Uh?
11:27
Speaker 2: What Christmas? So let's talk retail sales. How appropriate would
11:31
that be? I had no idea it was one hundred
11:33
days Tillchristmas? Yes, really, yeah, but my wife got emails
11:36
from like every retailer that she subscribes to letting her
11:39
know that there's only one hundred days till Christmas. So
11:41
get on in here and you know, start making your purchases,
11:45
and you know, to be fair. Retailers at this point
11:47
in time are either already stocked up or in the
11:51
process of stalking up for the holiday shopping season, which
11:54
will presumably kick in right after Halloween. I'm guessing November
11:59
first is when we'll start in Christmas trees at home depot,
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but you know, somewhere around.
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Speaker 4: Probably before that. Honestly, yeah, it might.
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Speaker 2: Be, might be. So taking a look here, we did
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get a government report on retail sales this this morning
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at eight thirty, and expectations here were for a decline
12:15
of zero point two percent. Now, this is a volatile series.
12:18
It does bounce all over the place, but what actually
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happened was a zero point one percent increase in monthly
12:24
retail sales data. And you know, maybe part of what's
12:27
driving the market up today with you know, the combined
12:30
expectation of a fifty bases point rate cut with sales
12:35
in the retail sector, which drives the bulk of this
12:38
US economy moving upwards. In particular, there's thirteen categories that
12:43
they that they look at here, and the leader was
12:46
on e commerce merchant sales, which posted a solid one
12:49
point four percent gain. Others such as electronics, appliances, clothing,
12:54
and furniture all did fall, but nonetheless you did see
12:59
a reason big uptick and a bit of a beat
13:02
compared to the expectations for retail sales. Again, I don't
13:07
know what to make of this in particular mark other
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than it speaks to what you're talking about, which is
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there aren't a ton of signs that that financial conditions
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are incredibly weak.
13:17
Speaker 3: I'm laughing because it gets bewildering people. We're relatively immersed
13:21
in this stuff because it moves capital markets, and that
13:24
matters for our clients. So we have to stay tuned
13:26
and we need to explain it or describe it. We
13:29
don't profess to know why, we just describe. Economists don't
13:34
agree on why. They still don't agree on what caused
13:37
the Great Depression. Okay, this is an ongoing debate. It's
13:40
not as lively as it used to be. The folks
13:42
that really care are a little older, but they still disagree.
13:45
Great Recession not even close to being settled. So my
13:49
point is we care because these things matter to people
13:53
that buystocks and bonds traders, and it matters therefore to
13:57
our clients. I'm sorry for being philosophical, but it's just
14:01
the way I'm feeling about all this data right now.
14:03
Some people would put this number into their model. Others
14:06
will wait for the personal consumption expenditures figure, which we
14:09
get in about a week and a half. There are
14:11
many measures of how much people are spending, and like
14:13
you said, Mike, it matters because that's most in an
14:16
accounting sense, that's most of gross domestic product or GDP,
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but it's not generally the thing that moves the most
14:24
during contractions, during recessions, that's inventories. That's why I went
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back to industrial production and capacity utilization a little bit earlier.
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The health of the business sector specifically, there are no
14:36
warning signs there at all. There are few warning signs
14:40
with respect to the health of the consumer, though there's
14:42
plenty of hand ringing about debt levels and stuff like that.
14:45
Probably justifiably, I'm just not seeing to go back to
14:49
the point that we started the show with today, or
14:51
at the point I was trying to make anyway, that
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it's not at all clear that the economy is meaningfully
14:56
slowing enough, that is to warrant what would be emergency
15:00
the action on the part of the Fed to stimulate
15:02
the economy. And they would say, we're not trying to
15:04
stimulate the economy. These cuts won't take effect for months
15:09
and months, maybe quarters. I would argue, the psychological effect
15:12
will be as we're seeing in markets, yeah, which have
15:15
a wealth effect. Your stocks go up, you spend money.
15:18
It sounds a little flaky to be worried about again
15:20
inflation reigniting. So I hesitate to voice that concern too
15:25
much because everybody, virtually everybody's in the other camp. But
15:29
imagine if it did. That's that's that's a rhetorical.
15:34
Speaker 2: Yeah, imagine if it did, would be the worst possible.
15:36
Speaker 3: Economy is not slowing, it's not even stalling, just lost
15:40
a little bit of altitude maybe, as evidenced by the
15:42
rise in unemployment, but it's about to pick up again.
15:45
We simply don't know.
15:48
Speaker 2: By the way that you know, I have to acknowledge
15:50
too that I don't think that there's any indication that
15:52
retail sales are any sort of leading indicator about the economy.
15:55
I pointed out that, hey, stocks might be moving on this,
15:58
and that that may well be true. But taking a look,
16:01
for instance, at retail sales going through the Great Recession,
16:04
you didn't see any significant drop off there until maybe
16:08
fall of two thousand and eight, when that thing was
16:10
already well baked in terms of a recession. So I
16:13
would not consider retail sales one. We're looking at last
16:17
month's data on retail sales. Two, My guess would be
16:20
that the average American just keeps on spending right until
16:22
they lose their job, And so I don't know that
16:24
retail sales are going to be any sort of indicator
16:26
of anything other than what got spent last month and
16:29
did people still have a job in order to be
16:31
able to spend.
16:31
Speaker 3: Yeah, that's good point too. Some of the things we
16:33
talk about are leading indicators because they tend to lead GDP.
16:38
Others are coincident. They tend to move in the same
16:41
period as GDP. Industrial production that I mentioned earlier, capacity utilization,
16:45
I mentioned earlier, retail sales, those are more or less coincident.
16:49
Others are lagging. Unemployment, rear view mirror. If you think
16:51
about when companies make decisions versus when they hire, there's
16:54
a big lag there. So I think it's important that
16:56
we qualify these numbers that we talk about from time
16:59
to time with whether they matter for the present, whether
17:03
they are predictive to some extent, or whether their rear view,
17:07
whether they're backward looking.
17:10
Speaker 2: There is one group of people that seem to agree
17:13
with you, Mark. The editorial board of the Wall Street
17:15
Journal does have a peace out today saying that hey,
17:18
you know, the inflation story could still be there and
17:21
making a lot of the same arguments that I think
17:23
you are in this at this point in time, saying, look,
17:27
you know, monetary mistakes on the way up made them
17:30
late to the game, and are they too willing to
17:33
cut rates on the way down? And I know you
17:35
agree with them on the way up. I don't disagree either,
17:40
you know what I'm just saying.
17:41
Speaker 3: I'm just saying they made a choice. Was it the
17:42
wrong choice? I don't know the elector It's pretty pod
17:47
so you could argue that, on its face is evidence
17:50
that the FED made the wrong choice.
17:51
Speaker 2: Yes, it seemed like the wrong choice, right, I'm.
17:55
Speaker 3: Torn on this, I admit. Then again, what if the
17:58
FED had started tightening much sooner and faster, and unemployment,
18:02
instead of going down to three point five, had stayed
18:05
around four point five to five. This is the trade off.
18:07
There's always if you just take one thing away from
18:10
the financial exchange, it's at least today. I won't speak
18:13
for you and Chuck, there's a trade off in the
18:15
short term between inflation and unemployment. The FED is constantly
18:19
trying to balance these two things. I won't go so
18:22
far as to say they're in perfect tension, because that
18:23
sounds too precise, But the FED is always thinking do
18:27
we want to keep demand where it is today? Do
18:30
we want to goose it? Do we need to restrain it?
18:33
Can we tolerate a little more inflation? Do we need
18:35
to rein it in.
18:37
Speaker 2: Do you you speak FED speak a little bit more
18:41
than I do. Do you see their current? I know
18:44
I have ten seconds, But do you see them as
18:46
taking a victory lap right now on the soft landing?
18:48
Because I'm not detecting that from the way they're speaking,
18:50
the way that Federal Reserve members are speaking, the way
18:52
that Drone Palall speaking seems to be very much worthy
18:55
of the risks now. But a lot of criticism the
18:57
FED right now seems to be coming from a place
18:59
of taking this victory lap like they already achieved the
19:01
soft landing. I'm not seeing that from anywhere other than
19:04
Treasury Secretary Janet Yellen, who's no longer part of the FED.
19:08
Speaker 3: Yeah, they seem to be erring on the side of
19:10
avoiding a growth slowdown or worse. I'm not detecting any
19:15
obnoxiously triumphalist rhetoric from the FED. We'll see.
19:19
Speaker 2: Let's take a quick break Wall Street watch next.
19:32
Speaker 1: Like us on Facebook and follow us on Twitter, act
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TFE show. Breaking business news is always first right here
19:40
on the Financial Exchange Radio Network. Time now for Wall Street.
19:46
Watch a complete look at what's moving markets so far
19:49
today right here on the Financial Exchange Radio Network.
19:53
Speaker 4: Markets are in the green today as Wallstreet reacts to
19:55
August retail sales data unveiled earlier this morning, where we
20:00
tail sales climb zero point one percent last month, better
20:03
than estimates of a zero point two percent decline. And
20:06
of course, the Fed begins their two day monetary policy
20:10
meeting today or an announcement on interest rates will follow
20:14
tomorrow afternoon at two o'clock. Right now, the Dow is
20:18
up by about a half a percent, or one hundred
20:20
and eighty one points, SMP five hundred is up by
20:24
half a percent or twenty seven points, and the Nasdaq
20:27
up by three quarters of a percent or one hundred
20:29
and thirty five points. Russell two thousand up over one
20:32
percent so far today, ten You're Treasure reeled up by
20:36
two basis points at three point sixty four percent, and
20:39
crude oil up again today another one and a half percent,
20:43
trading just above seventy one dollars a barrel. Intel shares
20:48
jumping by four and a half percent after the struggling
20:50
chip maker announced it would reduce more costs It will
20:53
create a separate entity for its foundry business that will
20:57
allow the unit to have its own board and raise
21:00
outside funding Separately. Intel also agreed to a multi billion
21:04
dollar agreement with Amazon's cloud computing arm. Meanwhile, Microsoft up
21:08
by one and a half percent after the tech giant
21:11
said it would hike its dividend by nearly eleven percent
21:14
and begin a new stock buyback program of up to
21:17
sixty billion dollars. Elsewhere, Meta Platforms came to terms with
21:22
ray bandmaker Esselor Luxotica, extending the Facebook and Instagram parent
21:27
companies venture into smart Iewear. That stock is up by
21:31
about a third of a percent. And Flutter Entertainment, parent
21:35
company to online sports betting company fan Duel, announced it
21:38
will acquire Italian gambling companies sny Tech from Playtech and
21:43
a deal valued at nearly two point six billion dollars.
21:47
Flutter shares are currently up by three percent. I'm Tucker
21:51
Silva and that's Wall Street.
21:52
Speaker 2: Watch Tucker before today. Have you ever heard of what
21:55
was those company's named fly Tech Snakes? No? The answer
21:59
is my wutter sny tech and play tech. Sure, yes,
22:04
I'm just I'm impressed that you've managed to rattle all
22:06
that off with the straight face.
22:07
Speaker 1: That was.
22:07
Speaker 2: That was pretty good. Yeah, I didn't even know if
22:09
i'd pronounce some pres. You could have made up all out.
22:12
You could have made up all of those and I
22:13
would have had no idea.
22:16
Speaker 4: Flutter tech.
22:17
Speaker 2: I would encourage you to do that every once in
22:19
a while, just to see if anyone, just to see
22:20
if I'm paying attention. Keep you on your toes.
22:23
Speaker 3: He was having a stroke.
22:24
Speaker 2: I didn't know what.
22:26
Speaker 3: I thought it was gibberish, but he's a young guy.
22:28
I figured he would recover fast, so I didn't call anybody.
22:32
Speaker 2: I just blacked out what happened.
22:35
Speaker 3: It was brilliant, tuck se NBC's on the phone. They
22:38
want you today. Uh.
22:41
Speaker 2: According to Mortgage News Daily, in October of last year,
22:44
specifically October nineteenth of last year, you had the thirty
22:48
year fixed rate mortgage hit a cycle high of eight
22:50
point zero three percent. That's the that's the average new
22:54
mortgage that was being issued on October nineteenth, eight point
22:57
zero three percent. We are now almost two full full
23:02
percentage points off that high. We're sitting as of yesterday,
23:06
according to that same source, at a thirty year fixed
23:09
rate mortgage of six point one two percent and a
23:11
little bit of discount. For instance, if you're to do
23:13
a fifteen year fixed at five point six percent, I
23:19
would just logically kind of expect here that, hey, if
23:22
you were to tell me in the fall of last
23:25
year that mortgage rates were about to drop by almost
23:28
a full two percentage points, that you'd see an uptick
23:31
in housing demand, maybe more home sales, maybe more lines
23:35
out the door for open houses. And we've kind of
23:39
been continuing to buck that trend in what has been,
23:43
you know, kind of perpetually strange housing market over the
23:46
last few years, and I struggle to get at the
23:50
psychology of it.
23:51
Speaker 4: Do all.
23:52
Speaker 2: According to Altis Research, Mike Simonson comes on the show,
23:56
every once in a while, you're seeing more and more
23:58
home sellers that are just withdrawing their listings, saying, you know,
24:02
we have this home for sale but not getting the
24:04
price that we want, so rather than lowering, we're just
24:07
gonna take it off the market. And you, I don't know,
24:11
continue to have this mismatch of number of sellers and
24:15
interested buyers right now, it's not resulting in price declines
24:19
where you know, the sales that are going through are
24:22
continuing to hit new records, but this continued mismatch, and
24:27
it makes me just kind of wonder is there a
24:31
magic interest rate at which buyers become interested in again?
24:35
Is it just a long and steady, you know, pace
24:39
at which finally these homes do eventually get sold, or
24:43
or you know, is there some We've talked about the
24:47
self fulfilling prophecies of believing that prices are going to
24:50
go up or go down. And if you are a
24:53
buyer out there who just has this fundamental belief that
24:57
rates will eventually go down, does it it becomes some
25:00
sort of interesting self fulfilling prophecy where yeah, home purchases
25:04
just don't go through because everybody expects the cost of
25:07
transacting to go down in the future.
25:09
Speaker 3: My answer to your questions are yes, no, yes, maybe, yes,
25:11
and no.
25:12
Speaker 2: I did ask a lot of questions there, thank you
25:15
a bunch of loaded.
25:16
Speaker 3: Now I might you ask all great questions, and a
25:18
lot of them I know are just rhetorical. Two things
25:20
come to mind, and again I'm feeling a little maybe
25:22
philosophical today. One is you can't hold everything else constant
25:27
when you give an opinion. This is a common This
25:31
distinguishes forgive me for sounding a little snooty, but this
25:34
distinguishes professionals from like armchair types. Yep, they say insurance
25:38
will come down, it's gonna be good for housing, thanks
25:41
a lot. You know, my cocker spaniel could have told
25:43
me that it's It's just not very deep. It's impossible
25:47
to say what the effect of something will be because
25:50
in your mind you're holding everything else constant. It's partial economy,
25:54
or if you want to get really fancy, partial equilibrium,
25:57
as an economist likes to say. Thinking you can can't
26:00
hold everything else constant, it would seem to make sense
26:03
that if interest rates come down, yes, the demand for
26:05
home should pick up.
26:06
Speaker 2: But what's happening on maybe the supply of homes.
26:09
Speaker 3: But the demand and the supply are both movings. You
26:12
don't keep the supply curve constant when you move the
26:15
demand curve. This is what makes the analysis challenging. So
26:18
just make a general point that you can't hold everything else.
26:21
If an analysis holds everything else or conclusion, I should say,
26:23
holds everything else constant. It's probably not very reliable. That's frustrating,
26:28
I know, but it's just too hard to say. And
26:30
the other thing that keeps coming to mind for me
26:32
is that the housing market really broke during the Great
26:35
Recession when a large number of home builders just went
26:38
out of business. They've since reconstituted themselves, most have, but
26:44
that change their mentality, I think permanently. They're not building
26:49
recklessly and as a result, we've got these supply issues.
26:53
This coupled with stubborn local regulations, which by the way,
26:58
I would defend in my own area, want multi family
27:01
housing cropping up everywhere.
27:02
Speaker 1: Either.
27:04
Speaker 2: Proud nimbi across the town.
27:05
Speaker 3: I am. I admit it. I don't want and I
27:07
defy anybody to tell me. You know that they genuinely
27:11
that they do want multi family housing all over the
27:13
place because they feel bad for other people. Blowney. I
27:16
like the quality of living in my neighborhood. I don't
27:18
want it to change. That's why I bought there. All
27:21
that said, again, housing market broke fundamentally changed in O
27:25
eight and it's still I don't know for covering is
27:28
the right word, but still evolving maybe is a better word.
27:32
Speaker 2: Yeah, And the breakage there to be clear what you know.
27:35
We can debate what cause did, what the effects were,
27:37
but I mean one of the effects was pretty clearly
27:40
that we produced significantly fewer homes in the decade following
27:45
the Great Recession compared to every six million.
27:49
Speaker 3: Too many going into.
27:50
Speaker 2: It, I have. But even if you go take a
27:51
look at decades before that, right, if you go take
27:54
a look at, you know, home construction in the twenty
27:56
tens decade compared to the nineteen nineties or other peers
28:00
as the time, to my knowledge, we still pretty significantly
28:03
underdeveloped homes during that twenty ten decade compared to almost
28:07
any normalized period of home construction in the United st.
28:09
Speaker 3: So, yeah, the right way to answer that question, and
28:11
I can't do it here in real time. We look
28:13
at the okay, look at the old trend and then
28:14
see where we were relative. It's not hard to do,
28:16
but I can't do it in thirty seconds. I don't know,
28:19
but I suspect you're probably right. We're below trend. If
28:24
the excess hadn't happened and the Great Recession hadn't happened,
28:28
we'd probably have more homes right now. We built too much,
28:31
said differently in the twenty in the two thousands, and
28:33
then overcompensated in the opposite direction.
28:36
Speaker 2: So I mean, why it all matters? Aside from those
28:38
you know, there's thousands probably you know people listening right
28:41
now who want to be in a home, want to
28:43
buy a new home, home, might want to sell and
28:45
buy a home. But one of the big reasons that
28:47
matters in my mind too, is that the idea with
28:51
lowering interest rates is that it stimulates economic activity compared
28:55
to higher interest rates. And we have this example here
29:00
where we've seen rates decline by two percentage points. It
29:03
wasn't the FEDS doing it was market related. But if
29:06
the interest rate on mortgages has declined by almost two
29:09
full percentage points, and I don't think you can really
29:12
look at any of the data in the economic in
29:15
the real estate world and say, oh yeah, look at
29:17
all this additional activity that was generated via lower interest rates.
29:22
And so I just I question, Okay, is it because
29:28
we haven't hit that magic number yet and if the
29:30
FED keeps going we will eventually get to that magic
29:33
accumulation of economic activity in housing? Or do we need
29:36
to be substantially lower on thirty year fix before that
29:39
activity tax up. I don't think anybody knows.
29:41
Speaker 3: I think you had the answer right off the top
29:43
of this segment, which is the supply side. People selling
29:47
is changing its behavior is the same time as the
29:50
demand side. So if you did your little supply and
29:52
demand curve like a good you know, housing economists, they're
29:55
both wiggling around. Find the intersection. People remember this exercise
29:59
from int econ you find the intersection. They call that equilibrium. Ooh,
30:03
we've got the price. Yeah, yeah, right, But it's if
30:07
they're if both curves are moving around, it's I'm oversimplifying,
30:10
but that's how I'm looking at this, and I think
30:12
and you made this point early on.
30:14
Speaker 2: So let's take a quick break. When we come back,
30:16
I want to talk a little bit further about that
30:18
question of lower interest rates. When and where will we
30:20
see it pick up economic activity? Will we or is
30:24
it just a you know, a potentially false narrative. There
30:27
quick break, We'll be covering that next on The Financial Exchange.
30:30
Speaker 1: Miss any of the show. The Financial Exchange Show podcast
30:34
is available on Apple, Spotify, and iHeartRadio. Hit the subscribe
30:38
button and leave us a five star review. This is
30:41
the Financial Exchange Radio network.
30:57
Speaker 3: Mark.
30:58
Speaker 2: We crossed a grizzly benchmark the other day. Some of
31:04
all US federal deficits just pass twenty eight trillion dollars,
31:08
nearly one hundred percent of GDP. If Congress does nothing
31:12
over the next decade, then total debt, just with regular
31:16
current spending and tax levels are estimated to climb by
31:18
another twenty two trillion dollars through twenty thirty four. We
31:23
aren't hearing much of this disgust, and I think the
31:27
Wall Street Journal sums it up pretty well without the
31:29
other seven pages of articles. Both candidates were parts of
31:33
administrations that produced growing deficits, and neither is likely to
31:37
reverse that trend if elected. I guess the question that
31:42
I would have is why do neither party seem see
31:47
it as a winning strategy for getting votes.
31:50
Speaker 3: Well, austerity doesn't sell. You've got to because spending or
31:55
raising taxes, both of which probably need to be done,
31:58
definitely need to be done to get this deficit and
32:02
debt underkid. So, deficit is the yearly short fall. Debt
32:06
is the cumulative yearly shortfall. Sorry for spelling those terms out,
32:12
but we throw them out there. And we had luxury
32:14
thinking about this every day. Maybe some people don't. So anyway, Mike,
32:18
it's pain. Pain doesn't sell. The last guy to impose
32:21
it effectively was George HW did in nineteen ninety and
32:25
he got raked over the calls for it, you know,
32:28
Pat Buchanan challenged him, arguably helped cost him the election,
32:32
but he started fiscally responsible tax cuts, tax increases, spending cuts.
32:37
Clinton continued that, and we ended up with the surplus
32:40
by in the end of the decade due to both
32:41
George HW and Clinton. They were kind of courageous.
32:44
Speaker 2: There have been other deficit hawks. I mean, Paul Ryan
32:47
arguably was his.
32:49
Speaker 3: Record is abysmal, but passed yeah in terms of rhetorics.
32:53
So you're right. So the Republican Party from Yeah, but
32:57
then they got in, once their guy got in power,
32:59
and I refer to Donald Trump, it was spending like
33:02
there was no tomorrow and he So this is the
33:04
tragedy of me to me of the modern Republican Party.
33:08
I know it's going to rankle a lot of you,
33:09
but nobody's more fiscally conservative than I am. And it
33:14
bothers me that I don't have a fiscally conservative choice.
33:16
But to answer the question, Mike. I think the obvious
33:20
response is because it wouldn't be popular to propose spending cuts.
33:23
I would also tax increases, right.
33:25
Speaker 2: I would also say that some of the rhetoric around
33:27
it of hey, if we raise our death sits to
33:31
if we if we increase this to twenty eight trillion dollars,
33:33
then the entire United States society will fall apart. We've
33:36
consistently shown that that hasn't been true. Well, we haven't
33:38
found that, we haven't found the magic number that does
33:41
make it.
33:41
Speaker 3: At some point, it will put severe upward pressure on
33:43
interest rates.
33:44
Speaker 2: But I think that that's also part of the failure here,
33:47
is that the rhetoric has been so strong that, oh,
33:49
if you keep this up, it's going to all come
33:50
crumbling down, and so far it hasn't. And that's been
33:54
a I guess, a pretty good argument in the quiver
33:56
of why why would you have proposed for depth, you know,
33:59
austeria during eight or at any point over the last decade,
34:03
because we've increased spending, increased deficits, and economy sense is.
34:07
Speaker 3: An okay, oh eight we needed it. I know you
34:09
weren't asking me, but sure we needed it. The economy
34:12
was in shambles. There's an argument for the government to
34:14
spend because recessions can leave deep wounds that take years
34:18
to heal. I'm not saying I like the way Obama
34:21
handled it, but you know what I mean. That's an
34:23
argument recarpment spending did it in the early nineteen eighties,
34:26
which Reagan did. Cut taxes, increased spending, really got the
34:29
economy going. Should have brought deficits in more. We didn't,
34:32
but we got our act together in the nineties. It's
34:34
it's a tragedy that we are where we are in
34:36
that neither party is fiscally responsible.
34:38
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35:45
Speaker 2: Mark. I want to do a bit of a kind
35:47
of a rapid fire here because it's been four years
35:50
since rates were cut and I want to actually try
35:54
and lay out some of the results of this type
35:58
of thing. So let let's start with the basics. Rates
36:01
get cut, uh, Deposit rates at banks result down mortgage
36:08
rates Hmm.
36:10
Speaker 3: It's tough to say because they are tied to the
36:11
ten year treasury, which has already come down a lot
36:14
in yield, and it depends on other economic forces too.
36:16
All l sqel exactly what I said you should not
36:19
ever do earlier. All l s equal might down, but
36:22
I could also see them going up a little bit.
36:24
Speaker 2: Yeah, I would say, I would say unclear, yes, yeah.
36:27
Speaker 3: Credit card rates down, all SQL bond prices which bond?
36:32
Speaker 2: Yeah, sure, yeah, that's the term bills.
36:36
Speaker 3: Medium term notes are long term bonds. Which are you
36:38
talking about?
36:39
Speaker 2: Let let's start with I guess what's the average out there,
36:41
which would be somewhere in the six to eight years
36:44
down for.
36:44
Speaker 3: No reason to be a blockhead contrary and here, Yeah,
36:47
on average, rates should come down.
36:48
Speaker 2: And prices of bonds therefore prices go up.
36:51
Speaker 3: That's the mechanism.
36:52
Speaker 2: Yeah. Uh consumer spending, Oh.
36:56
Speaker 3: Too hard to say. It depends on broader economic business spending. Also,
37:00
I was just looking at investment. When the FED cuts
37:02
and the economic backdrop matters a lot, you should not
37:05
make an allse equal statement there.
37:06
Speaker 2: Yeah, I think you know. My point here is that
37:10
I have gotten questions like, well, should I wait until
37:12
the FED cuts rates to go get a mortgage or
37:15
should I buy bonds because I think that the FED
37:17
is about to cut rates. And the answer is, if
37:19
you're thinking about it, it's probably already baked in with
37:22
some of that stuff. There are a few items like
37:23
CD rates, like money market.
37:25
Speaker 3: Rates that yeah, you lock those today.
37:27
Speaker 2: Yeah, But there are others that aren't likely to move.
37:31
And I think that's an important distinction, and I guess
37:33
they've already practically speaking. Just think about it this way.
37:36
If you are a business that is planning on spending
37:39
twenty million dollars to build a new factory, a half
37:43
a percent change in the rate that you're able to
37:45
borrow at, if it even changes that much, is not
37:48
likely to sway your decision one way or the other.
37:50
It's based on the overall economy. We got to take
37:52
quick break, but a lot more to cover. In the
37:53
second hour. We will be right back on the financial
37:55
Exchang