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Fed Rate Hike Leaves Markets Asking What Comes Next · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Chuck Zotta and Mike Armstrong.
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  Speaker 2: Chuck, Mike, and Tucker with you here the day after
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  Speaker 2: the Fed meeting where the Federal Reserve raised the federal
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  Speaker 2: funds rate by a quarter percent. They made no other
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  Speaker 2: changes to the Fed balance sheet or any other programs.
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  Speaker 2: And generally, in my opinion, it was a much better
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  Speaker 2: performance from Kevin Warsh, who was much tighter in what
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  Speaker 2: he was saying, didn't editorialize too much, didn't go off
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  Speaker 2: script too much. And as a result, I think that
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  Speaker 2: you're seeing a better post-market reaction from specifically in bonds
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  Speaker 2: to a certain extent. The equity side is going to
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  Speaker 2: be what it is, but I think overall this was
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  Speaker 2: a much improved performance from Warsh that was, again, tighter, shorter,
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  Speaker 2: more to the point, and didn't open himself up for
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  Speaker 2: the type of second-guessing that he did at the July meeting.
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  Speaker 3: Yeah, there were three Fed events in my mind yesterday
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  Speaker 3: that mattered to Warsh. investors. One was the press conference,
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  Speaker 3: as you mentioned, and I think he checked the box
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  Speaker 3: on it. He did not have bad answers to questions.
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  Speaker 3: There was really nothing to press him on. He avoided
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  Speaker 3: talking about issues that he shouldn't be talking about. Check
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  Speaker 3: the box there. The next was the SEP. What was
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  Speaker 3: going to be released there? What can you glean from it?
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  Speaker 3: What you learned from it was that not only did
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  Speaker 3: members raise rates at this meeting, but they think that
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  Speaker 3: they might need to go higher next time. I know
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  Speaker 3: Warsh doesn't love that tool, hence he doesn't submit anything
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  Speaker 3: to the SEP for the dot plot, but nonetheless, we
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  Speaker 3: have that. And then the third was just the decision itself,
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  Speaker 3: which was voted in unanimously. And so I think any
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  Speaker 3: of those lingering questions for the time being, at least,
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  Speaker 3: about whether or not the Fed is serious about inflation
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  Speaker 3: actually going to follow through, to me, were put to
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  Speaker 3: bed yesterday.
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  Speaker 2: So I think there are still some questions as to
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  Speaker 2: what we get from the Fed because of what the
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  Speaker 2: dot plot implies versus what the market's pricing in. And,
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  Speaker 2: you know, when we talk about that, what I mean
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  Speaker 2: there is if you look at what the dot plot
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  Speaker 2: priced in. And again, remember that the dot plot is
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  Speaker 2: basically it's all of the Fed members going out and saying,
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  Speaker 2: here's where we think inflation is going to be growth. unemployment,
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  Speaker 2: and the Fed funds rate. So all those the key
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  Speaker 2: things that really matter. And here's where we are right now,
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  Speaker 2: is that the Fed's median dot for the basically for
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  Speaker 2: the end of the year comes in at 4.1%. And
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  Speaker 2: so it's basically implying, okay, there's going to be one
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  Speaker 2: more rate hike before the end of the year. If
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  Speaker 2: you then take that and look at what it's saying
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  Speaker 2: for the end of 2027, so go out an additional year,
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  Speaker 2: what it is showing you is that the Fed is saying, okay,
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  Speaker 2: we think Fed funds is going to stay at 4.1%
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  Speaker 2: through 2027.
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  Speaker 3: Okay, got it.
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  Speaker 2: And then the longer run projection, or even if you
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  Speaker 2: just want to take a look at the 2028 projection
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  Speaker 2: and 2029 projection, what you have is the 2028 one,
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  Speaker 2: Fed funds rate declines to 3.9%. So saying, hey, at
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  Speaker 2: some point in 2028, we're then going to be able
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  Speaker 2: to cut interest rates by a quarter percent. So the
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  Speaker 2: Fed is saying, we're going to hike one more time,
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  Speaker 2: chill for a couple of years, and then we're going
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  Speaker 2: to basically be done.
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  Speaker 4: Got it.
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  Speaker 2: If you take a look at what the futures curve
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  Speaker 2: is showing, specifically the.
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  Speaker 2: Overnight bank lending rate, the SOFR rate, S-O-F-R. If you
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  Speaker 2: look at what that is showing for projections, it's showing
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  Speaker 2: two hikes by year end. It's showing a peak of 4.73%
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  Speaker 2: about a year from now. So it's saying, look, you're
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  Speaker 2: not going to get away with just two hikes. You're
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  Speaker 2: going to need probably two or three more after that.
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  Speaker 2: So it's pricing in like four or five hikes that
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  Speaker 2: need to happen. And then by the end of 28...
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  Speaker 2: maybe you can get that rate down to 4.6%. So
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  Speaker 2: maybe you take a quarter percent off the board in 28.
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  Speaker 2: So this is where I do think there's a discrepancy
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  Speaker 2: right now. And these can't both be right. Remember, interest
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  Speaker 2: rates can't be in two places at one time. They're
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  Speaker 2: just like people. Unless you have a twin, you know,
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  Speaker 2: you can't really do that game. So I think that
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  Speaker 2: the next question that is out there and what markets
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  Speaker 2: are going to pick up on is, okay, Rates markets
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  Speaker 2: are pricing in another three to four hikes. The Fed's
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  Speaker 2: saying we're going to go one more and we think
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  Speaker 2: that's enough. Which one of those is going to be correct?
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  Speaker 2: I don't know the answer, by the way. I don't
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  Speaker 2: have a dog in the fight. I don't know which
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  Speaker 2: one's going to be right. And remember, rates markets, it's
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  Speaker 2: not like they know things that we don't. If you
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  Speaker 2: took a look at that same market back in April,
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  Speaker 2: which remember, April was, what, we'd seen the Iran war
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  Speaker 2: going on for about two months now.
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  Speaker 4: It wasn't like in its first days or anything.
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  Speaker 2: And in April, it was pricing in basically half a
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  Speaker 2: percentage point in cuts by the end of 2027. Well,
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  Speaker 2: that's clearly not what's materialized since. So I'm not suggesting
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  Speaker 2: the Fed is wrong and the market's right, because in
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  Speaker 2: the spring, the bond market and the rates market was
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  Speaker 2: not pricing this in But what I am saying is, hey,
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  Speaker 2: when these markets are telling you different things, the interesting
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  Speaker 2: question to think about is, okay, which way is this
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  Speaker 2: going to resolve? Is it going to resolve in the
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  Speaker 2: direction of what the Fed is telling us or the
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  Speaker 2: direction of what the market's telling us? And there isn't
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  Speaker 2: one that you can point to that's always right there.
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  Speaker 3: Yeah, I guess, you know, I think that some degree
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  Speaker 3: of different opinions and volatility and rate projections makes sense.
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  Speaker 3: given war, right? I mean, tell me where diesel prices
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  Speaker 3: are going to be six months from now, and I'll
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  Speaker 3: tell you where I think rates are going to need
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  Speaker 3: to be. I know it's more than that. I know
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  Speaker 3: this is more than an oil price shock. Even if
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  Speaker 3: you took out the war in Iran, I think there
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  Speaker 3: would be a case for more rate hikes. I'm not
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  Speaker 3: sure there'd be a case for a full percentage point
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  Speaker 3: of more rate hikes. I don't know.
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  Speaker 4: I don't know. And it's an open question.
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  Speaker 2: And the reason that I say it's an open question, Mike,
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  Speaker 2: did you happen to catch what was going on with
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  Speaker 2: jobless claims this morning?
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  Speaker 3: No. I did.
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  Speaker 2: And here's where we are right now. Initial jobless claims, again,
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  Speaker 2: came in very, very muted. 196,000. First time back below 200,000
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  Speaker 2: in a few months. But basically that's saying, hey, there
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  Speaker 2: is not much happening in the way of unemployment claims.
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  Speaker 1: Right.
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  Speaker 4: The bigger piece, in my opinion.
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  Speaker 2: Continuing jobless claims dropped from 1.769 million to 1.73. That 1.73
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  Speaker 2: is now a 10% year-over-year decline. These are the kinds
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  Speaker 2: of things that you start seeing when you expect the
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  Speaker 2: labor market to start perking up and hiring to start
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  Speaker 2: rising again.
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  Speaker 3: Or at least wages to start going up.
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  Speaker 4: Like something.
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  Speaker 2: It's like, okay, like, A 10% year-over-year decline in jobless
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  Speaker 2: claims is a big deal. And so if the labor
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  Speaker 2: market is, in fact, inflecting upward, I'm not saying that
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  Speaker 2: it definitively is, because the data is very much not
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  Speaker 2: suggesting that broadly at this point.
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  Speaker 4: It's okay.
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  Speaker 2: There's nothing going on for higher unemployment, but hiring hasn't
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  Speaker 2: really picked up meaningfully either. I know we had one
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  Speaker 2: good jobs report. If we get a couple more, then
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  Speaker 2: I can say, okay, it's coming through now. But if
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  Speaker 2: the labor market is, in fact, inflecting upward, then you've
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  Speaker 2: got a case where, okay, now that starts putting upward
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  Speaker 2: pressure on wages, and then the Fed does have to
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  Speaker 2: start moving beyond just one more hike.
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  Speaker 1: Yep.
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  Speaker 4: Absolutely.
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  Speaker 3: And like I said, I think there's a case for
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  Speaker 3: higher rates even outside of energy shocks. Here's the counter
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  Speaker 3: to it. I do think that is playing a role because...
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  Speaker 3: Where the energy shock is hurting the worst is not
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  Speaker 3: in the consumer's direct gasoline tank. That one hurts quite
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  Speaker 3: a bit, but that's not where the biggest shock is.
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  Speaker 3: The biggest shock is in the fact that all of
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  Speaker 3: the food that we consume, all of the stuff we
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  Speaker 3: buy at Walmart is all going to be higher because
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  Speaker 3: of diesel prices hitting records. Go ahead.
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  Speaker 4: The counter to this.
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  Speaker 2: Is if you take a look at what's going on
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  Speaker 2: with housing starts, they've now declined the last two months
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  Speaker 2: from an annualized pace of about 1.45 million down to 1.275.
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  Speaker 2: So that's about, you know, called a 10, 12 percent
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  Speaker 2: decline in the pace of housing starts in the last
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  Speaker 2: couple of months. This wall rates this month have continued
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  Speaker 2: to move up, probably making things more challenging for builders.
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  Speaker 4: Not probably.
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  Speaker 2: They're telling you in their earnings that it's becoming more
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  Speaker 2: challenging in the short term. And so you look at
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  Speaker 2: that and you say, okay, if housing does find some
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  Speaker 2: way that it takes another leg down, then there's your
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  Speaker 2: case for, okay, that maybe you don't need to see
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  Speaker 2: additional hikes. So I'm not... This is one of those
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  Speaker 2: times where I'll be 100% honest. I don't know exactly...
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  Speaker 2: what the path looks like over the next six months,
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  Speaker 2: my gut tells me based on what we're seeing and
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  Speaker 2: where the economic growth is coming from, it's not housing anyways,
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  Speaker 2: right now, the economy is strong enough to withstand another
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  Speaker 2: 1% in hikes. I said this yesterday, like if I
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  Speaker 2: were Kevin Warsh yesterday, which again, there's a reason that
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  Speaker 2: they don't put me running the fed and it's, it's,
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  Speaker 2: it's because it would.
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  Speaker 4: Be, it'd be bad.
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  Speaker 2: I mean, you'd be handing over control of monetary policy
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  Speaker 2: to like a, Admittedly, highly trained monkey, but still not...
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  Speaker 2: I shouldn't be running the Fed.
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  Speaker 3: Highly trained monkey. I like that.
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  Speaker 4: That's how I describe myself. I'm a very highly trained monkey.
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  Speaker 2: So I think that when you look at what I
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  Speaker 2: would have done yesterday, I'd say, look, hike 1%. It's
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  Speaker 2: not going to break the economy, but it will show
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  Speaker 2: people that you're serious about the inflation picture. And... Ultimately,
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  Speaker 2: I think the economy is strong enough, even though it's
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  Speaker 2: not showing up in hiring, the places where the economic
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  Speaker 2: growth is happening, I think are broad enough and not
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  Speaker 2: dependent enough on interest rates to matter there. It's this
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  Speaker 2: whole AI ecosystem that is flowing, and that is not
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  Speaker 2: going to stop whether interest rates are 5.5% or 6.5%
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  Speaker 2: for those companies to borrow.
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  Speaker 3: Chuck, you brought up housing. I know we've got to
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  Speaker 3: take a break. Yesterday, I was doing an interview with
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  Speaker 3: Channel 5, WCVB here in Boston. Ben Sato asked me
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  Speaker 3: the question that we are seeing right now. Perversely, could
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  Speaker 3: the Fed hiking rates lead to lower mortgage rates? I
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  Speaker 3: want to talk about what this actually means for people.
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  Speaker 3: It was a great question that he asked yesterday. I
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  Speaker 3: want to dive in there. What does this rate hike
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  Speaker 3: actually practically mean for everybody listening right now? That's next
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  Speaker 3: on The Financial Exchange.
• 12:36
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  Speaker 2: Mike, you raised the question at the end of the
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  Speaker 2: last segment. It was asked to you yesterday, hey, if
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  Speaker 2: the Fed is raising interest rates, is there a chance
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  Speaker 2: that that could mean that mortgage rates still come down?
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  Speaker 2: And to start on this, remember, when the Federal Reserve
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  Speaker 2: changes interest rates, the Fed does not tell you what
• 13:28
  Speaker 2: your mortgage is going to be. The Federal Reserve directly
• 13:31
  Speaker 2: controls short-term overnight lending rates that it sets. It does
• 13:37
  Speaker 2: not set longer-term rates directly. In some instances, it has
• 13:41
  Speaker 2: intervened in the bond market to buy longer-term bonds to
• 13:45
  Speaker 2: try to make those rates lower. Quantitative easing in the
• 13:48
  Speaker 2: 2010s is an example of this.
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  Speaker 4: But the Fed does not say, we.
• 13:52
  Speaker 2: Are going to target 4.3% for the 10-year Treasury.
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  Speaker 4: That's not what they do.
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  Speaker 2: So, to start to answer this, we're going to look
• 14:02
  Speaker 2: at the mirror situation here.
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  Speaker 4: That we saw in both.
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  Speaker 2: 2024 and 2025. 2024, on September 12th, the effective Fed
• 14:14
  Speaker 2: funds rate was 5.33%, and the mortgage rate, the average
• 14:20
  Speaker 2: 30-year fixed rate mortgage, was about 6.4%. The Fed embarked
• 14:25
  Speaker 2: on a cutting cycle where they cut interest rates by
• 14:28
  Speaker 2: 1% into the end of 2024, Mortgage rates actually rose,
• 14:33
  Speaker 2: touching almost 7% by the start of January. Fed cutting,
• 14:38
  Speaker 2: mortgage rates went up. Fast forward another year, 2025. Mid-September,
• 14:45
  Speaker 2: Fed funds raised at 433. 30-year fixed rate mortgage, 635.
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  Speaker 2: Fed cuts interest rates again. And mortgage rates basically don't move.
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  Speaker 2: They didn't go up in this case, but they basically
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  Speaker 2: stayed right in that 6.3, 6.2 range. over the rest
• 15:00
  Speaker 2: of the year, despite the Fed cutting short-term interest rates
• 15:03
  Speaker 2: by 0.75%. So now it's been one day. Again, you
• 15:09
  Speaker 2: can't read too, too much into this. One day means
• 15:11
  Speaker 2: absolutely nothing. But, Mike, did the Fed cut or hike yesterday?
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  Speaker 3: They hiked.
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  Speaker 2: Ten-year Treasury down 5.9 basis points to 4.947%.
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  Speaker 4: It's one day.
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  Speaker 2: I'm not saying that this is what we are going
• 15:29
  Speaker 2: to see definitively, but we've seen the opposite happen where
• 15:33
  Speaker 2: the Fed cuts rates and mortgage rates move up over
• 15:35
  Speaker 2: the next three months. There is absolutely a world in
• 15:38
  Speaker 2: which the Fed hikes and mortgage rates can come down
• 15:41
  Speaker 2: over the next three months.
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  Speaker 3: Yeah. Now, this is the opposite of what happened yesterday
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  Speaker 3: after the announcement, right?
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  Speaker 2: Yes.
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  Speaker 3: Rates were flat. We saw some of what we are
• 15:49
  Speaker 3: seeing now after the announcement. Sorry, not Jay Powell. Kevin
• 15:53
  Speaker 3: Warsh started talking. And rates started climbing again. So again,
• 15:57
  Speaker 3: a single day's move, you should not write in too
• 15:59
  Speaker 3: much to it. But the real power of the Fed
• 16:04
  Speaker 3: here is attempting to convince investors, convince markets that they
• 16:08
  Speaker 3: are going to be willing to exert the painful conditions
• 16:11
  Speaker 3: under which inflation would come down. Because that's what they have, right?
• 16:15
  Speaker 3: They have this really nasty hammer that can crush the
• 16:19
  Speaker 3: economy if they do as much if they're willing to
• 16:24
  Speaker 3: do so, which does nothing to pump more oil out
• 16:28
  Speaker 3: of the ground. It does nothing to refine diesel. It
• 16:30
  Speaker 3: does nothing to produce more clothes that get onto the
• 16:34
  Speaker 3: shelves and bring down costs there. They can't grow potatoes.
• 16:38
  Speaker 3: They can make it more difficult for people to get
• 16:42
  Speaker 3: wage gains. They can make it more difficult for companies
• 16:44
  Speaker 3: to borrow, individuals to borrow money, and thereby hurt the
• 16:50
  Speaker 3: demand side of the equation. And so that's how they
• 16:54
  Speaker 3: may be capable of bringing down those longer term rates
• 16:57
  Speaker 3: is by convincing the investing public that, no, I don't
• 17:00
  Speaker 3: need to demand higher on those long term bonds because
• 17:03
  Speaker 3: inflation is not going to be as much of a
• 17:04
  Speaker 3: problem as I thought it was yesterday.
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  Speaker 2: Now, the counter to this is if what they are
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  Speaker 2: doing is not enough to convince the public that. then
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  Speaker 2: you could have a case where the Fed is hiking,
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  Speaker 2: but just not quickly enough, and so mortgage rates either
• 17:19
  Speaker 2: stay the same or continue to rise as well.
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  Speaker 3: Yeah, I was actually looking for that yesterday. We got
• 17:24
  Speaker 3: a mini effect of that. Because let's say we had
• 17:27
  Speaker 3: seen the Fed hike rates yesterday, but Warsh hadn't given
• 17:34
  Speaker 3: a very convincing press conference, or maybe it was a
• 17:36
  Speaker 3: divided vote, and you had three people voting for no
• 17:41
  Speaker 3: rate hike. I think there would have been an argument
• 17:42
  Speaker 3: there that, oh, hmm, they don't seem terribly firm in
• 17:46
  Speaker 3: their convictions here. Maybe they're not going to do enough,
• 17:50
  Speaker 3: and rates possibly could have blown out to the upside.
• 17:53
  Speaker 3: I was talking about that with Mark Fandetti on Tuesday
• 17:56
  Speaker 3: of this week. Like, huh, it would be pretty fascinating
• 17:59
  Speaker 3: if we got a rate hike with yields up. I
• 18:02
  Speaker 3: don't think we convincingly got that yesterday and today. And
• 18:06
  Speaker 3: today we are seeing that longer term bond come down
• 18:08
  Speaker 3: a bit. I think for the reasons we talked about,
• 18:10
  Speaker 3: the press conference was pretty good. It was a unanimous
• 18:13
  Speaker 3: vote for a rate hike. They may not be forecasting
• 18:16
  Speaker 3: as much of a hiking cycle as the markets are,
• 18:21
  Speaker 3: but I think there's still a lot of time for
• 18:23
  Speaker 3: that to be resolved.
• 18:25
  Speaker 2: Yeah, the biggest question to me over the remainder of
• 18:28
  Speaker 2: the year, other than energy prices, which, look, I think
• 18:32
  Speaker 2: the cake is mostly baked there in that I don't
• 18:36
  Speaker 2: know that there's too much room for them to come
• 18:37
  Speaker 2: down until you get a conclusive resolution to what's going
• 18:40
  Speaker 2: on in the Middle East. You may be seeing some
• 18:42
  Speaker 2: signs of things that could at least cap prices and
• 18:44
  Speaker 2: prevent them from moving too much higher, but we'll have
• 18:47
  Speaker 2: to see how the next couple weeks go.
• 18:48
  Speaker 4: So forget about energy prices.
• 18:51
  Speaker 2: I'm really curious what's going on in the labor market
• 18:53
  Speaker 2: right now. Because, once again, the last few weeks, starting
• 18:57
  Speaker 2: to see some green shoots after a relatively quiet summer.
• 19:01
  Speaker 2: You've got continuing and initial claims falling again the last
• 19:04
  Speaker 2: couple weeks. You've got the ADP weekly data that's showing
• 19:09
  Speaker 2: a little bit of a pickup there. The JOLTS report
• 19:12
  Speaker 2: may be showing some stability and starting to find a
• 19:15
  Speaker 2: bottom as far as openings. And so maybe you get,
• 19:20
  Speaker 2: as opposed to the last three years where the labor
• 19:22
  Speaker 2: market weakened into year-end... maybe you get a little bit
• 19:25
  Speaker 2: of a boost to the labor market heading into year end,
• 19:28
  Speaker 2: and that could be something that a lot of people
• 19:30
  Speaker 2: didn't have on their bingo card.
• 19:32
  Speaker 4: Quick break here. We've got Wall Street Watch next.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:42
  Speaker 1: TFE Show. Breaking business news is always first, right here
• 19:46
  Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
• 19:51
  Speaker 1: Street Watch. Tracking the stocks, the data, and the headlines
• 19:55
  Speaker 1: driving markets so far today. Right here on the Financial
• 19:58
  Speaker 1: Exchange Radio Network.
• 19:59
  Speaker 5: Equity markets are in rally mode. One day after the
• 20:02
  Speaker 5: Fed hiked interest rates for the first time in three
• 20:05
  Speaker 5: years as Kevin Walsh reiterated the central bank's mission to
• 20:08
  Speaker 5: tame inflation. Right now the Dow is up half a
• 20:11
  Speaker 5: percent or 264 points up. S & P 500 is
• 20:13
  Speaker 5: rising 76 points or 1% higher. NASDAQ is up 1.6%
• 20:20
  Speaker 5: to 432 points. Russell 2000 is up over 1%. 10-year
• 20:21
  Speaker 5: treasury yield retreating five basis points at 4.947%. Crude oil
• 20:24
  Speaker 5: down 2%, trading at $ 100 a barrel, while Brent is
• 20:25
  Speaker 5: down nearly 3% to trade at $ 102 a barrel. Generac
• 20:27
  Speaker 5: shares are rallying 19% after the generator maker agreed to
• 20:45
  Speaker 5: a deal with Amazon to supply backup power generators for
• 20:49
  Speaker 5: its data centers. Generac also granted the e-commerce and tech
• 20:52
  Speaker 5: giant the right to buy up to $ 340 million worth
• 20:56
  Speaker 5: of its stock. Meanwhile, homebuilder Lenar posted third-quarter earnings that
• 21:01
  Speaker 5: disappointed and cut its full-year home delivery target between 80,000
• 21:06
  Speaker 5: and 81,000 homes, citing interest rate pressure and worsening market conditions. Elsewhere,
• 21:11
  Speaker 5: Fluence Energy is sinking 17% after the battery storage maker
• 21:15
  Speaker 5: cut its full-year guidance in overseas. Volvo announced it is
• 21:19
  Speaker 5: making its largest-ever product push, launching 13 new car models
• 21:24
  Speaker 5: by the end of the decade in a turnaround effort.
• 21:29
  Speaker 5: I'm Tucker Sullivan. That is Wall Street Watch.
• 21:33
  Speaker 2: Mike, let's talk a little bit about what we're seeing
• 21:35
  Speaker 2: on the energy side of things. Any last items to
• 21:37
  Speaker 2: button up on the Fed and interest rates?
• 21:40
  Speaker 3: No, but it'll play in throughout the rest of the program.
• 21:42
  Speaker 3: We're going to be talking about mortgages, homes, rent, everything. Honestly,
• 21:47
  Speaker 3: the 10-year Treasury is arguably the single most important price
• 21:52
  Speaker 3: in the world for pricing all sorts of other goods,
• 21:56
  Speaker 3: and it's moving today in part maybe because of what
• 21:59
  Speaker 3: the Fed did, and we'll be touching on it. probably
• 22:02
  Speaker 3: for the next few weeks.
• 22:04
  Speaker 1: Energy.
• 22:05
  Speaker 2: Things not looking great there short term. AAA national average
• 22:08
  Speaker 2: for gas prices up 7 cents overnight.
• 22:10
  Speaker 4: To $ 4. 43 and change.
• 22:13
  Speaker 2: Diesel up another 8 cents overnight to $ 6.
• 22:15
  Speaker 4: 39.
• 22:16
  Speaker 2: And based on what we have in the pipeline as
• 22:18
  Speaker 2: far as wholesale price increases, diesel's probably getting into that $ 6.
• 22:22
  Speaker 4: 45 to $ 6. 55 range later today.
• 22:26
  Speaker 2: Yes, I did say later today, so like when we
• 22:28
  Speaker 2: do our show tomorrow, you'll probably hear it somewhere, you know,
• 22:31
  Speaker 2: my guess in that $ 6. 45, probably close to $ 6. 45, $ 6.
• 22:35
  Speaker 3: 50.
• 22:36
  Speaker 2: Gas has a little bit more room to run, maybe
• 22:38
  Speaker 2: towards $ 4. 50, but probably coming a little bit shy there.
• 22:41
  Speaker 2: The good news today, diesel futures off about $ 0.
• 22:45
  Speaker 3: 19.
• 22:46
  Speaker 2: I can't find any direct proximate cause. The closest I
• 22:51
  Speaker 2: can find, there's a bunch of rumors out there that China...
• 22:55
  Speaker 2: signed a bunch of tenders with Saudi Arabia for crude
• 22:59
  Speaker 2: ship through Hormuz, the suspicion being that the Saudis have
• 23:05
  Speaker 2: agreed on some kind of payment to the Iranians in
• 23:07
  Speaker 2: order to get the ships through Hormuz cleanly, and then
• 23:12
  Speaker 2: China will be able to take these cargoes and ramp
• 23:16
  Speaker 2: up refinery throughput that could help with the production that
• 23:20
  Speaker 2: is offline in refineries in the Middle East and Russia
• 23:23
  Speaker 2: right now.
• 23:24
  Speaker 3: So.
• 23:26
  Speaker 4: Maybe that's what you're seeing here.
• 23:27
  Speaker 2: This could just be like a one-day wiggle just because
• 23:29
  Speaker 2: there's been so much short-term pressure on diesel prices. I mean, again,
• 23:33
  Speaker 2: like you look at the last month, Mike, we've gone
• 23:36
  Speaker 2: from $ 5. 44 to $ 6. 39 on diesel. It's almost a dollar
• 23:41
  Speaker 2: in a month. It went nine cents last night. The
• 23:44
  Speaker 2: United CEO was out today, and they asked him, like, hey,
• 23:48
  Speaker 2: how are things going, was the general question. And he
• 23:52
  Speaker 2: was like, yeah, fuel moving higher by a dollar with
• 23:55
  Speaker 2: the speed it's moved at is a big act, so
• 23:57
  Speaker 2: I'll leave it at that. The specific question that the
• 24:00
  Speaker 2: analyst asked, this was actually pretty informative in my opinion.
• 24:04
  Speaker 2: You guys are famous for always including one, if not two,
• 24:07
  Speaker 2: acts of God in your guide for earnings. Is what
• 24:10
  Speaker 2: you're seeing in fuel an act of God? And the
• 24:13
  Speaker 2: CFO said, fuel moving higher by a dollar with the
• 24:15
  Speaker 2: speed that it's moved at is a big act, I'll
• 24:17
  Speaker 2: leave it at that.
• 24:19
  Speaker 4: They didn't have this on their bingo card.
• 24:21
  Speaker 3: No.
• 24:22
  Speaker 2: And so I think that, look, where we stand right
• 24:26
  Speaker 2: now is if China starts to operate at a higher
• 24:32
  Speaker 2: level in terms of their refinery capacity, it probably takes
• 24:37
  Speaker 2: some of those apocalyptic scenarios off the table for where
• 24:40
  Speaker 2: diesel goes in that, yeah, you're probably not getting like
• 24:44
  Speaker 2: $ 8 to $ 10 diesel. It very much does not bring
• 24:49
  Speaker 2: diesel back down to foreign change.
• 24:50
  Speaker 4: Right.
• 24:52
  Speaker 2: You know, at least not this fall, because remember, the
• 24:55
  Speaker 2: ships that are leaving Hormuz today, which these Saudi ships
• 24:59
  Speaker 2: have not, they're still filling on the east coast of
• 25:02
  Speaker 2: Saudi Arabia.
• 25:04
  Speaker 4: They leave today.
• 25:05
  Speaker 2: It's a 25, 30 day journey over to China. Then
• 25:09
  Speaker 2: China's got to get the crude to the refineries, if
• 25:14
  Speaker 2: I'm being 100 percent honest. I have no idea where
• 25:17
  Speaker 2: the refineries are in China.
• 25:19
  Speaker 4: I have no clue. So, like, maybe it takes a day,
• 25:22
  Speaker 4: maybe it takes a few.
• 25:23
  Speaker 2: It's in the teapot region. I've not been there myself. So, again,
• 25:29
  Speaker 2: don't know anything about how long it takes there. But then,
• 25:31
  Speaker 2: even if you want this to get out to global markets,
• 25:34
  Speaker 2: it still is, depending on where you're shipping it. If
• 25:36
  Speaker 2: it's within Asia, it still is like five to seven
• 25:38
  Speaker 2: days of shipping. If it's Europe, you know, you're talking,
• 25:41
  Speaker 2: you know, almost a couple months to get it to Europe.
• 25:44
  Speaker 2: And if it's to the west coast of the U.S.,
• 25:46
  Speaker 2: you're talking, you know, 20, 30 days. So what is
• 25:49
  Speaker 2: happening now is not going to be able to move
• 25:53
  Speaker 2: things enough to really loosen the diesel market for the
• 25:56
  Speaker 2: fall diesel season.
• 25:57
  Speaker 3: And in the meantime, Chuck, those same companies that back
• 25:59
  Speaker 3: in June were kind of crossing their fingers and telling
• 26:02
  Speaker 3: the public, we really hope we don't need to raise prices.
• 26:05
  Speaker 3: are now acknowledging they need to raise prices. You know,
• 26:07
  Speaker 3: Campbell's did it, Clorox did it. A number of smaller
• 26:11
  Speaker 3: companies have now acknowledged like, yeah, we don't really have
• 26:14
  Speaker 3: a choice here. And I think more and more are
• 26:16
  Speaker 3: going to have no choice but to follow suit here
• 26:19
  Speaker 3: because while there were some, you know, threads of hope
• 26:22
  Speaker 3: back in June, that's all but disappeared at this point.
• 26:25
  Speaker 3: And the idea of getting significantly cheaper transport costs is
• 26:28
  Speaker 3: kind of out the window.
• 26:29
  Speaker 2: Yeah, it's something where we're going to have to see
• 26:33
  Speaker 2: how this is navigated in the short term, because if
• 26:36
  Speaker 2: China's not spooling up those refineries, then there is still
• 26:40
  Speaker 2: the case where, look, at the end of the month,
• 26:41
  Speaker 2: we're talking $ 7 diesel and $ 8. 910 is not off the
• 26:45
  Speaker 2: table as we head through the rest of the fall.
• 26:48
  Speaker 2: If they are spooled up, you could see a world
• 26:50
  Speaker 2: in which diesel maybe settles somewhere in the range of,
• 26:54
  Speaker 2: you know, between $ 5. 50 and $ 6. 75 is the closest that
• 26:57
  Speaker 2: I can get on that. Let's take a quick break.
• 27:01
  Speaker 2: When we come back, I do want to talk about
• 27:02
  Speaker 2: what's going on in housing. A lot to cover there.
• 27:04
  Speaker 2: We'll discuss next.
• 27:07
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• 27:10
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• 27:13
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• 27:17
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• 27:26
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• 27:33
  Speaker 4: Got a piece here in the Wall Street Journal.
• 27:34
  Speaker 2: It's titled The New Rules for Selling Your Home with
• 27:37
  Speaker 2: Mortgage Rates Near 7%.
• 27:40
  Speaker 4: Michael, what are the rules?
• 27:43
  Speaker 3: Get ready to not have a lot of buyers are
• 27:46
  Speaker 3: basically the rules. It's gone now.
• 27:48
  Speaker 4: It depends on where you are.
• 27:49
  Speaker 3: Of course it does. But yeah, the article talks about
• 27:52
  Speaker 3: a few Realtors who are saying you've got to be
• 27:55
  Speaker 3: very careful not to overprice your home. You might want
• 27:58
  Speaker 3: to do those repairs that you wouldn't have considered doing
• 28:01
  Speaker 3: a few years ago. I'm with you, Chuck. It is
• 28:04
  Speaker 3: all about where you are. If you're in the Midwest,
• 28:07
  Speaker 3: if you are in New England, this probably isn't much
• 28:11
  Speaker 3: of a concern because there is way more demand for
• 28:14
  Speaker 3: housing than there is supply. If you're in the South,
• 28:16
  Speaker 3: if you're in the West, it's a pretty different story
• 28:19
  Speaker 3: right now. Yeah.
• 28:20
  Speaker 2: I saw yesterday, uh, Mike Simonson, who we have on
• 28:23
  Speaker 2: the show, uh, occasionally he, uh, posted an updated inventory
• 28:28
  Speaker 2: change from, uh, 2019 to 2026. So basically pre pandemic
• 28:33
  Speaker 2: to right now, uh, in the Northeast and Midwest, as
• 28:35
  Speaker 2: you mentioned, uh, Massachusetts is an example still has 38%
• 28:40
  Speaker 2: fewer homes than it did at this time in 2019,
• 28:43
  Speaker 2: New York still has 48% fewer homes.
• 28:45
  Speaker 4: Uh, Vermont still has 29%.
• 28:50
  Speaker 2: For some reason, the numbers on Connecticut and New Hampshire
• 28:53
  Speaker 2: are not showing up. The only state in New England
• 28:56
  Speaker 2: that has more homes for sale now than it did
• 28:58
  Speaker 2: in 2019 is Maine.
• 29:00
  Speaker 4: So that's the only one.
• 29:02
  Speaker 2: And look, you could probably make a case that that's
• 29:05
  Speaker 2: like a demographic thing more than anything else.
• 29:08
  Speaker 4: You know, but again, I mean.
• 29:10
  Speaker 3: The oldest country in the nation on average.
• 29:12
  Speaker 1: Yeah.
• 29:12
  Speaker 4: Oldest state.
• 29:13
  Speaker 5: Yes.
• 29:14
  Speaker 3: Yeah. All the state in the nation.
• 29:15
  Speaker 4: Yes.
• 29:15
  Speaker 3: All the country in the nation. Doesn't make a lot
• 29:17
  Speaker 3: of sense.
• 29:17
  Speaker 2: Well, sometimes, you know, it does. Depends on the country,
• 29:20
  Speaker 2: you know, right? So, New England, still very tight for inventory.
• 29:25
  Speaker 2: Most of the Midwest, in the same boat. Michigan, still
• 29:28
  Speaker 2: 30% below. Wisconsin, 41% below 2019 levels. Illinois, I don't
• 29:34
  Speaker 2: know what's going on in Illinois, but inventory levels are 69%.
• 29:40
  Speaker 2: 69% below where they were in 2019. It just has
• 29:43
  Speaker 2: not moved at all. Everyone that I know in.
• 29:45
  Speaker 3: Illinois wants to get out of Illinois. Which is why
• 29:47
  Speaker 3: I can't make heads or tails of this. It's only
• 29:50
  Speaker 3: like two people, so maybe I have to buy a
• 29:51
  Speaker 3: sample size. And it's just Illinois.
• 29:54
  Speaker 2: It's surrounded by other states that, again, Wisconsin has low inventory, but.
• 30:00
  Speaker 4: Minnesota's flat.
• 30:01
  Speaker 2: Iowa's up 15%. Missouri's down 13%. Indiana's up 1%. Kentucky's
• 30:06
  Speaker 2: down 10%. So nothing else is screaming, hey, there's an
• 30:10
  Speaker 2: inventory problem there. So I don't know what's happening. The
• 30:13
  Speaker 2: southeast is where inventories have not just rebounded, but in
• 30:16
  Speaker 2: a lot of cases, jumped. Florida now is 12.8% above
• 30:20
  Speaker 2: 2019 levels. And that's the closest you're going to get
• 30:23
  Speaker 2: in the south. The Carolinas, 29.7% and 18.8% above 2019 levels. Georgia, 23.7% above. Tennessee, 40.8% above. Arkansas, 52.5% above. Texas, 43.1% above. Again,
• 30:40
  Speaker 2: you've got robust inventory there. So yes, if you're in
• 30:44
  Speaker 2: these states where inventories are now higher than 2019.
• 30:48
  Speaker 4: You've got some work to do.
• 30:50
  Speaker 2: If you are in, you know, particularly states with low
• 30:54
  Speaker 2: inventory and in the Historically desirable parts of those states
• 30:58
  Speaker 2: like there's let's acknowledge there's a difference between trying to
• 31:01
  Speaker 2: sell a home in New York City and Albany. There's
• 31:07
  Speaker 2: a difference in trying to sell a home in Chicago and.
• 31:14
  Speaker 4: I don't know what's what's like a really remote part
• 31:17
  Speaker 4: of Illinois.
• 31:19
  Speaker 3: Peoria.
• 31:21
  Speaker 4: Don't even know if that's remote. But maybe.
• 31:24
  Speaker 3: Probably not. If I knew the name of it, it's
• 31:27
  Speaker 3: probably not remote.
• 31:28
  Speaker 2: Right. If you're trying to sell a home anywhere in
• 31:30
  Speaker 2: North Dakota, it's still probably going to have its own
• 31:34
  Speaker 2: challenges because there's only so many people who want to
• 31:36
  Speaker 2: move to North Dakota in any given year. We know
• 31:39
  Speaker 2: this because the population has remained low.
• 31:41
  Speaker 3: Plain and simple. All else equal, rates at 7.25%, which
• 31:44
  Speaker 3: is where we were yesterday.
• 31:45
  Speaker 1: Yeah.
• 31:50
  Speaker 3: It's going to make selling your home more challenging than
• 31:53
  Speaker 3: it was six months ago.
• 31:56
  Speaker 2: The other thing that I think is worth watching, and
• 31:59
  Speaker 2: here's the one thing to be careful of on this.
• 32:02
  Speaker 2: There are, it's not a ton, but there are people
• 32:07
  Speaker 2: who locked in five and seven year adjustables back in
• 32:12
  Speaker 2: 2020 through 2022. And those adjustments are coming up starting
• 32:16
  Speaker 2: in 2027. There could be some more inventory coming to
• 32:21
  Speaker 2: market from those people who say, look, my mortgage, my
• 32:24
  Speaker 2: principal and interest was $ 1, 400, but now my adjustment is
• 32:28
  Speaker 2: kicking that up to $ 2, 300, and I can't make that payment,
• 32:32
  Speaker 2: so I'm going to sell. And I've seen this anecdotally.
• 32:37
  Speaker 2: You know what's really interesting? You know the population that
• 32:39
  Speaker 2: I've found anecdotally to use adjustable rate mortgages the most?
• 32:44
  Speaker 3: No.
• 32:45
  Speaker 4: Realtors.
• 32:47
  Speaker 2: Hmm. especially the ones that have been in the game
• 32:49
  Speaker 2: for like 30, 40 years, they would always take out
• 32:52
  Speaker 2: adjustables in the 90s and 2000s because it was, hey,
• 32:55
  Speaker 2: I can refi out before the adjustment period's up and
• 32:58
  Speaker 2: mortgage rates will be lower then, and that was what
• 33:00
  Speaker 2: they did. I think a few of them might have
• 33:03
  Speaker 2: gotten caught by this cycle here.
• 33:05
  Speaker 3: Yeah, well, we were in a, what, 40-year downward cycle
• 33:08
  Speaker 3: on rates, and we no longer seem to be.
• 33:12
  Speaker 4: I think a few of them might have gotten caught there.
• 33:14
  Speaker 5: Leaving your IRA to your children may sound like the
• 33:18
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• 33:22
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• 34:19
  Speaker 1: The proceeding was paid for and the views expressed are
• 34:21
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 34:24
  Speaker 1: or Armstrong Advisory may contact you offering legal or investment services.
• 34:27
  Speaker 1: Cushing and Armstrong do not endorse each other and are
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• 34:31
  Speaker 4: More housing news.
• 34:32
  Speaker 2: We've got Lenar, the home builder, giving some rather downbeat
• 34:37
  Speaker 2: guidance on what they are expecting for the full year.
• 34:41
  Speaker 2: And just like some comments from the CEO that are
• 34:44
  Speaker 2: just like, hey, this is, you know, not great. Quote,
• 34:48
  Speaker 2: consumer confidence has declined as rates and affordability have driven
• 34:51
  Speaker 2: more consumers to slow their purchase decision. Nevertheless, even while
• 34:54
  Speaker 2: market conditions have weakened, the overall housing environment remains constructive.
• 34:58
  Speaker 2: as housing shortages continue to drive demand from both primary
• 35:01
  Speaker 2: buyers as well as single family for rent and build-to-rent buyers.
• 35:05
  Speaker 2: So the company pretty much saying, look, it's pretty hard
• 35:08
  Speaker 2: out there right now. They're relying on some pretty big
• 35:11
  Speaker 2: discounts to be able to sell properties at the moment,
• 35:16
  Speaker 2: and their average pricing is down about 3% from a
• 35:22
  Speaker 2: year ago in terms of what they're able to realize
• 35:25
  Speaker 2: on home sales.
• 35:27
  Speaker 3: This isn't mentioned in this piece, but I have to imagine,
• 35:30
  Speaker 3: as we were talking about earlier this year, that the
• 35:33
  Speaker 3: labor market cannot be a good situation for these groups.
• 35:37
  Speaker 3: Do you remember the statistics that we had brought up
• 35:39
  Speaker 3: that were estimated for what portion of the home construction
• 35:43
  Speaker 3: trade was done by foreign-born labor?
• 35:48
  Speaker 2: It depends on the specific area. But I think it
• 35:54
  Speaker 2: varied from like 15% up to like 50 plus percent.
• 35:58
  Speaker 4: Yeah. I think it was like it averaged like a third,
• 36:00
  Speaker 4: like 30% or so.
• 36:02
  Speaker 1: Yeah.
• 36:02
  Speaker 3: I've seen estimates that the industry is short as many
• 36:05
  Speaker 3: as a quarter million construction workers right now. And yeah,
• 36:09
  Speaker 3: it's cannot be an easy set of circumstances to be
• 36:14
  Speaker 3: a home builder right now. You saw a quick rise
• 36:16
  Speaker 3: in rates. Your labor situation has deteriorated, and the cost
• 36:21
  Speaker 3: of all of the supplies that go into not only
• 36:24
  Speaker 3: building the home, but getting the things to the site
• 36:26
  Speaker 3: is now more expensive. Right.
• 36:28
  Speaker 2: I mean, you go through and you look at it,
• 36:31
  Speaker 2: and you're like, okay, diesel's up, so transportation cost is up.
• 36:37
  Speaker 2: Not something we ever really talk about much on the show,
• 36:39
  Speaker 2: but Mike, have you paid attention to the price of
• 36:40
  Speaker 2: copper over the last year? No.
• 36:43
  Speaker 4: It's up about 40%.
• 36:44
  Speaker 3: Okay.
• 36:46
  Speaker 4: So does any copper go into homes?
• 36:48
  Speaker 3: Yeah, quite a bit.
• 36:49
  Speaker 2: A little bit goes in there. So again, you've got
• 36:52
  Speaker 2: a lot of big input costs that are up. Labor
• 36:54
  Speaker 2: cost is up. Labor availability is down. And so it
• 36:58
  Speaker 2: very much is. I'm not going to say the most
• 37:03
  Speaker 2: challenging home building experience in my life, because that's obviously
• 37:07
  Speaker 2: like the 20 to the first half of the 2010s.
• 37:09
  Speaker 4: Yeah. But in like last half of the 2000s.
• 37:13
  Speaker 3: But.
• 37:15
  Speaker 2: Outside of that, it's hard to find a more challenging
• 37:19
  Speaker 2: environment for home builders to operate in now in the
• 37:22
  Speaker 2: last 30 years.
• 37:24
  Speaker 3: Yeah, in the last 30. I've got to imagine the
• 37:26
  Speaker 3: 70s was a tremendously challenging period of time.
• 37:29
  Speaker 4: Yeah, I wasn't alive then.
• 37:30
  Speaker 3: You look at right now and you're right. Other than,
• 37:34
  Speaker 3: which was a completely different set of circumstances, but the
• 37:36
  Speaker 3: 08 cycle where you bought land to build and then
• 37:39
  Speaker 3: suddenly that land was worth half of what it was
• 37:42
  Speaker 3: a year prior. Yeah. That was the most challenging, but
• 37:46
  Speaker 3: this is a fairly distant second. Yeah.
• 37:50
  Speaker 2: That's where I'll put it. Yeah. It's not easy out
• 37:54
  Speaker 2: there is what I hear from people all throughout that
• 37:58
  Speaker 2: home building ecosystem.
• 37:59
  Speaker 4: Let's take a quick break, but we.
• 38:02
  Speaker 2: Still got a whole nother hour. We got lots of
• 38:04
  Speaker 2: stuff to chat about. We're not done. And so make
• 38:07
  Speaker 2: sure you stick around for hour two. We might even
• 38:10
  Speaker 2: mix in a little artificial intelligence. if that happens to
• 38:14
  Speaker 2: be your thing.