December 16, 2025 • 38 mins
Mike Armstrong and Marc Fandetti discuss the return of jobs data and the death of the Sahm rule. Productivity is about to slump -- can AI come to the rescue? Is rent control going to become a national burden?
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Speaker 1 (00:00):
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(01:07):
and Mark Vandetti.
Speaker 2 (01:09):
Good morning, Happy Tuesday, and welcome back to the Financial Exchange.
We've got two main themes to discuss on today's program.
One is jobs, because we just got the first jobs
report in a few months, released at eight thirty am
this morning. The second has to do with AI, the
market and whether or not it is different this time.
(01:32):
That's the main thing when it comes to all these
articles that I'm hearing about AI. Is is it really
different this time? Or are we in for a repeat
of the same types of market booms and busts that
we have experienced before. Because I like talking about it,
We're gonna sneak a rent control discussion in here too.
I email Tucker this morning at like seven am focusing
on that one piece. But let's start with the eight
(01:54):
thirty am jobs report that failed to turn around markets
in any meaningful way. This one is messy for a
number of different reasons. First things first, the monthly jobs
report usually is just a month worth of data. This
time around, we've got data on both October and November.
(02:14):
If you've listened to this program enough or like following
government statistics enough, then you may have already been aware
that the monthly Jobs report is actually two separate surveys,
one done of households, another done of businesses, and due
to the government shutdown, all of this stuff was delayed,
and in fact, the survey of households in October just
(02:37):
didn't occur because there wasn't anyone working to do the surveys.
So what do we get from these two different surveys.
One from the business surveys, they mainly ask, in addition
to what industry the employer operates in, how many people
did you hire, how many did you fire, and a
bunch of information about wages and other information. When they
(03:00):
talk to households, they basically ask a similar set of questions,
but they're asking where you're working, where you're working as
many hours as you wanted to, how many hours were those?
And you get two different numbers here. One is did
the economy create or lose jobs in the prior month
and to what extent? And then from the households you
get to what extent did unemployment rate? Did the unemployment
(03:22):
rate rise or fall? And for this report and for
the last years worth of reports, I think the number
that has mattered has been the unemployment rate rather than
the pace of job creation. We talked about why, but
certainly this time around that seems to be what's in focus.
Speaker 3 (03:37):
Well, yeah, matters for what is the question if you're
going an inflation forecast. Both are kind of dubious in
terms of the usefulness. The more useful metric over the
past several years for slack in the labor market, for
whether or not the economy is overheating, it has been
the vacancy rate. It's been a better forecast or if
you're into that type of thing. The unemployment rate now
(04:00):
four point six percent, up from it's been creeping up
for two years. It's been subtle, but it's been pretty
with a couple of interruptions. It's more or less moved
in one direction, but it's been a slow creep. Usually
when the unemployment rate goes up, you get a little
worried because there's persistence, so to speak, positive changes and
I don't mean positive is in good, I mean positive
(04:21):
is in greater than zero tend to be followed by
positive changes.
Speaker 4 (04:24):
So it tends to creep up on that unemployment rate discussion.
Speaker 2 (04:27):
Just so we have a frame of reference here, back
in April of twenty twenty three, that was the low
that we have seen for over a decade. We had
three point four percent on that unemployment rate. Okay, so
it's creeping up right, steady creep, steady.
Speaker 3 (04:40):
Creep, right, a couple of retreats, but mostly one direction.
Is this just the big question for me? Because to
me this leads to is the FED doing the right thing?
Or is the FED goosing and economy that's already growing
it around trend with elevated inflation, which means they're gonna
have to back try at some point. This matters for
(05:01):
equity prices, it matters for a cost of living, for
real wages. Employers are about to make decisions for the
next twelve months. You're gonna get a two, three, five
or zero percent increase in What does that mean in
real terms? We're all kind of flying blind here, whether
you're investing or setting wages or asking for wages. If
(05:23):
I get a two point five percent increase this year,
is that just a cola or am I falling behind
in real terms?
Speaker 1 (05:29):
Right?
Speaker 3 (05:29):
I don't know, Mike, And this ties into this morning's report,
I think, because I don't know whether this creep up
in the unemployment rate to four point six percent, which
is still very low in historical terms. By the way,
if you chart out a smooth unemployment rate series for
those people who are into that kind of thing, you
see that four point six percent is very very rare
(05:50):
outside of the late sixties, late nineties, and late twenty tens.
Is this just a normalization, Mike.
Speaker 2 (05:56):
For some context. We did not get below or to
that four point six percent rate until to your point
twenty seventeen, very rare the entire twenty tens decade after
the Great Recession. We were well, if.
Speaker 3 (06:06):
You're looking at the actual series, which is choppy, if
you smooth that to try to get at the trend
in the series, which is what people mean when they
say they took a moving average or looked at a
moving window of some piece of some data that changes
over time, you see how rare unemployment below five percent
is the question that's nagged a lot of people. I'm
(06:28):
not a labor economist, but I think about it over
the past really couple decades. Is is unemployment in the
fours unnaturally low and bi unnaturally low? I mean, will
it push up inflation? Is that more than the productive
capacity of the economy can handle? So it is where
we are now just the normalization after the overheated labor
(06:49):
market that all that COVID stimulus and other factors created.
Speaker 2 (06:53):
I want to talk about something we haven't discussed since
last fall, but that's the some unemployment recession.
Speaker 4 (06:58):
Indicator that's dead. What this is, it's just because it
didn't work the most recent time.
Speaker 3 (07:05):
I mean, empirical regularity doesn't work. You can put it,
you could put it in the drawer. Okay, well say,
well you got a PhD. Congratulations, but nobody's gonna use it.
Speaker 4 (07:12):
Well, I'm still going to talk about it.
Speaker 2 (07:13):
So last fall, what happened was the three month rolling
average of unemployment increased by more than half percent in
a twelve month period. We are knocking on that Psalm
rule recession indicator once again. Mark says it doesn't matter.
I'm not sure it doesn't. I think why did it.
Speaker 3 (07:29):
Matter in the first place? What was the theoretical motivation
for it, other than that unemployment was.
Speaker 4 (07:33):
Going empirical regularity, which is.
Speaker 3 (07:36):
A fancy way of saying. It has happened, So keep
an eye on it. If it happens again, the same
thing that happened after it happened, could happen again, and
I'm being nonsensical like mad hat or nonsensical for a reason,
because it's just a regularity. It's like when the NFC wins,
stocks go out, whatever the hell.
Speaker 4 (07:51):
The rule is.
Speaker 2 (07:52):
Yeah, So in either case we are knocking on the
door of that empirical regularity. It does not mean we
will hit a recession. We didn't the last time we
had a But I think one thing holds, which is,
when unemployment starts to climb very rarely does it just
pause and not keep climbing.
Speaker 3 (08:08):
And that's true, there's persistence in that, in that variable.
But I'm one every Chuck says this a lot trucks out,
and he's right, the COVID recession recovery MIC. We're so
unusual that we're going to break a lot of rules,
starting with the Psalm rule, which we can consign to
the dustbin of economic history. We're going to break a
lot of rules. And this could be another. It could
(08:29):
be an instance of unemployment just creeping up to something
more I don't know, normal sustainable. What does your gut
tell you is that?
Speaker 2 (08:35):
Is that my gut tells me is that when unemployment
starts climbing rarely does it just reach a certain threshold.
Speaker 3 (08:42):
That's true. Empirically, that's true, and by empirically that's fancy
way of a researcher saying, look at the data, that's
what it says.
Speaker 2 (08:48):
So whether you cross as a smile threshold or not,
my concern would be you have now climbed from four
percent unemployment back in January to four point six percent.
By the way, I don't think we even read the number,
but four point six percent was the number from this
morning's the jobs report. And so show me the instances
where you've seen the unemployment rate climb like that and
then just drop back down or plateau, and they're pretty rare.
Speaker 4 (09:11):
And so that I think is outside of learning.
Speaker 3 (09:13):
Yeah, but just keep in mind where I'm not arguing
with you. I agree it is. It is. I was
gonna say alarming. It's concerning that unemployment has been creeping
up for two years but it never got save once
as low as it got post COVID it was, i'll say,
gonna naturally low. Now, that doesn't mean that there aren't
momentum effects that where and I'm not using like a
(09:34):
technical term, that's that's just what the phrase that came
to mind at work here like, it doesn't matter that
it was a naturally low. Once it starts going up,
people get laid off, they freak out, employers freak out,
and recession becomes a self fulfilling prophecy.
Speaker 2 (09:48):
So unemployment rate jumped four four to four six. We
don't know what the reading was for October. We will
not know what the reading was for October because it
didn't get collected. The other side of the survey, they
talked to businesses and government employers. What did they find
in October? The labor the workforce, the number of people
working in the month of October dropped by one hundred
and five thousand employers. In November it bounced back up
(10:12):
sixty four thousand, for a net loss over the course
of the last two months of around fifty thousand total people.
But there was some tricky stuff in the month of
October that we need to account for. Let's take a
quick break. I want to talk about what did the
establishment data, Why do we see that hiccup in October,
(10:33):
if we want to call it a hiccup, and what
does all of this mean for the Fed and monetary
policy in twenty twenty six.
Speaker 4 (10:38):
That's next on the Financial Exchange.
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Speaker 2 (11:19):
Okay, so we were talking about the jobs report that
was released at eight thirty am this morning. As a reminder,
this one covered October as well as November and October.
We saw something interesting, which was employment dropped by one
hundred five thousand people according to the Establishment Survey, which
again surveys businesses, governments, et cetera. Digging in here, you
(11:41):
saw a job loss on the government side of one
hundred and fifty seven thousand. My immediate mind went to
government shutdown. Hey, did they count a bunch of people
who were furloughed? But we're still going to collect paychecks
as unemployed here? If so, that seems inaccurate. They put
a note right in there for us to make our
lives easier.
Speaker 4 (12:00):
No, we didn't do that. So what actually happened in here? Mark?
Do you want to do?
Speaker 2 (12:05):
You want to take exactly what happened in here with
the October data for the government workers just falling off
a cliff, not.
Speaker 3 (12:13):
Looking right at it, but one hundred and sixty five
thousand took the took the payout right or one hundred
and sixty thousand, which.
Speaker 2 (12:18):
Is so yeah, going back to this spring when the
Trump administration offered buyouts to you know, pretty much all
government employees. The last paycheck was September, so October came in.
One hundred and fifty seven thousand people fell off of
the payroll. So if we just take that out for
a moment and assume that that's not going to continue
to repeat itself, because it can't. The actual job creation
(12:43):
for the month of October was more like, I mean,
if we subtract that out, where do we land fifty
thousands to the no, one hundred thousand to the upside, right, yep. So,
so we saw a number that in October the job
creation was just fine. In November, we came in at
sixty four thousand. Again, no big drop offs or increases
(13:07):
in any area that I think are worth mentioning. But
ultimately where I land with all of this is we
are now at a pretty low pace of job creation.
The last three months have probably averaged somewhere in the
sixty thousand range, and that does not seem to be Again,
I know, these are different surveys, so we shouldn't be
(13:30):
connecting them together, but that pace of job creation is
not likely fast enough to keep all the new entrants
into the labor market employed, and we're seeing maybe signs
of that through the unemployment rate rising. Again, these are
different surveys, don't connect them too thoroughly, but if you
look at it, you know if we're only creating sixty
(13:50):
thousand jobs per month. Also, the Federal Reserve has expressed
skepticism about that number and whether or not it's going
to get revised further downward like it has for the
last two years. Nothing about that indicates either free fall
or strong pace of job creation, I guess is where
I would land with the Establishment survey.
Speaker 4 (14:09):
Anything to add on that front from the last two months.
A day that we got this.
Speaker 3 (14:12):
Morning, other than the usual caveat, which is what we're
really interested in is the trend. And in order you
can estimate the trend like statistically, if you have the
tools in the time to do that. Most people they
just look at the last few months, and the last
few months suggest, last several months suggest well, let's just
go eat to date a dramatic slow down in job
creation relative to last year. By dramatic, I mean like
(14:35):
half as much. And the same multiple applies to the
year before. So from twenty twenty three, which was a
red hot, unsustainably hot, arguably labor market, we create about
half as many jobs a little bit more than that
in twenty twenty four, and we're on pace to be
haved again, if that's not too awkward in twenty twenty five.
Is this something to war? I'm asking rhetorically. I don't
(14:57):
really know. Does this foretel or is it merely normalization?
I know I asked that question in the last segment,
but I think it is the key question, especially when
you think about it. The FED doing the right thing.
Speaker 4 (15:07):
Here, Yeah, so let's go to that.
Speaker 2 (15:11):
The FED has pretty much publicly said that they don't
really care about the establishment.
Speaker 4 (15:15):
Survey data that they're not sure what it's going to indicate.
Speaker 2 (15:18):
They do care quite a bit about the unemployment rate
and what that is telling us. So FED seemed to
indicate a pause was possible come twenty twenty six. If
we are seeing the unemployment rate up over four point
six percent. Now, if we're seeing the unemployment rate having
climbed from four percent in January, what is the policy
prognosis from Jay Powell and the FED.
Speaker 4 (15:42):
I don't care what it should be. I want to
know what it will be.
Speaker 3 (15:45):
Well, I don't know what the heck it will be.
If you're asking me what these.
Speaker 4 (15:48):
Guys, I want you to read Jay Powell's mind.
Speaker 3 (15:50):
I mean you could do the second best thing. I mean,
everybody knows what type of models they're using, their standard
modern macroso to speak up models of the whole economy.
If unemployment continues to trend up, and if you assume
that the so called natural rate is lower than where
we are today, and that's the natural rate doesn't exist.
(16:12):
It's theoretical. You have to infer it, and it's a
moving target. On top of all that, depending on the
assumptions you make, Mike, you can get any FED. You
can get any quote right quote FED policy out of
the out of the apparatus that they use that you
want just assume the natural rate should be lower. Just
assume the natural rate of interest. Different concepts, same idea,
(16:33):
though theoretical, you have to infer it. It balances the
economy in theory so that nothing so that there's non
inflationary but not recessionary either. You make the right assumption
about the natural rate, which the media often calls our star,
because that's what you solve for when you do the
little model. You can get any FED fud's rate you want.
Speaker 4 (16:50):
Mike, It's not helpful.
Speaker 3 (16:52):
I know I'm trying to not be helpful. I'm not
trying to annoy you, as I respect you and I
work for you. But I don't know what else to say.
You can get any assumption you want out of it.
Speaker 2 (17:01):
The next meeting for the FED occurs on January twenty eighth.
According to the Chicago Mercantile Exchange, the likelihood of a
rate cut at that next meeting, which again a little
bit more than a month out. We just had a
FED meeting last week. That's sitting around a one and
four chance of an additional FED rate cut at that meeting.
I personally, where I betting on it, I'd be betting
(17:25):
higher odds. I think, you know it obviously depends on
what you get in January. But if you were to
see a repeat increase in the unemployment rate come January,
I don't know. Everything about this FED that I have
seen is that they are pretty dubvish and have favored
lower interest rates in the face of any concerns about
the labor market. And this November report I think has
(17:47):
some things to be concerned about when it comes to
the trend in employment.
Speaker 3 (17:51):
If you look at this as a typical business cycle,
and I'm not sure you should for reasons we discussed
in the last segment coming out of COVID, labor market
got unnaturally hot. Know what happened to inflation. If you
put that PTSD that we all have from that inflation
aside for a second, and you look at this as
a typical business cycle, Like you said, you've got unemployment
going up, payrolls slowing down. Jolt data until the last
(18:16):
update was suggesting a reduction in job vacancies. Different report here,
but we got some contrary evidence at the last issue
of the report. I guess we'll see what it says
when it's next released. I guess the upshot of all
this is, if you are looking at this through traditional
business cycle goggles, Yeah, the economy seems to be slowing.
(18:38):
The FED should be cutting, right, How much depends on
your view, as I said earlier, of what the natural
rate of interest is with the natural rate of unemployment is.
These are all the inputs to the models that researchers use.
Speaker 2 (18:49):
And don't forget they have already now cut at this
point by one and a half percentage points. Yeah, that
is not insignificant, and it's been done over the course
of a year and a half. It has been a
significant amount of cutting. And they constantly talk about how
long it takes for their policy to actually affect anything.
Speaker 4 (19:03):
So will they go further? Will they not?
Speaker 2 (19:06):
Will it actually bring down mortgage rates? Hasn't so far.
All of these are reasonable questions to ask. And you know,
if they do cut rates, what does that do in
terms of sparking even more speculation in equity markets, Because
as concerned as we might be about the labor market,
we're not seeing any of that concern bleed over into equities.
Quick break when we come back full market recap with
(19:27):
Wall Street Watch. It's worse and significantly since we started talking.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
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Street Watch. A complete look at what's moving market so
far today right here on the Financial Exchange Radio Network.
Speaker 5 (20:00):
If it's a slightly negative territory. As Wall three reacts
to the November jobs report posted this morning. As a
result of the pause on economic data from the government
shutdown last month, sixty four thousand jobs were added, stronger
than forecasts of fifty thousand. The unemployment rate ticked higher
from four and a half percent to four point six percent.
(20:20):
Jobs data from October also revealed one hundred and five
thousand jobs were lost. Right now, the Dow is off
about four tenths of one percent, or one hundred and
eighty three points. SMP five hundred down nearly four tenths
of one percent or twenty five points lower, Nasdaq down
two tenths of one percent or forty five points lower.
(20:40):
Russell two thousand is off a quarter percent. Tenure Treasur
reeled down two basis points at four point one sixty
one percent, and crude oil down nearly three percent lower,
trading just above fifty five dollars a barrel. Ford said
it expects about nineteen and a half billion dollars in
charges as it scales back it's electric vehicle ambitions and
(21:02):
ships focus to gas powered in hybrid vehicles. Ford stock
is dipping. Meanwhile, Pfiser issued a twenty twenty six ergings
guidance that came in below analysts expectations. The pharma giant
also reaffirmed its twenty twenty five outlook. Pfiser shares are
down over four percent at the moment. Elsewhere, Craft Heines
(21:22):
announced former Kelenova CEO Steve K. Hillane will take over
as its chief executive next year as the company prepares
to separate into two publicly traded entities. Craft is up
by over one percent. Roku down by one percent despite
Morgan Stanley double upgrading the streaming platform stock to overweight
(21:44):
from underweight, citing its second half revenue growth in solid
execution on deepening streaming partnerships. PayPal shares are up modestly
after the payments company said it filed an application to
establish PayPal Bank that would focus on granting loans and
offering savings accounts to small businesses. And after today's clothes,
(22:05):
we'll see earnings from home builder lenaar Holdings. I'm Tucker Silvan.
That is Wall Street Watch, and remember you can watch
the show live every day on our YouTube page. We'll
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(22:28):
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Speaker 2 (22:32):
Don't tell them that do it. I don't want to
be proven wrong once a week. Leive me this stupid thing,
Mike said two years ago.
Speaker 5 (22:39):
Yeah, it's exactly what you can where you can do.
Speaker 2 (22:43):
Oh boy, on one of my favorite radio programs that
hasn't been on here for a good twenty years, used
to have a segment called Stump the Chumps, where they
would you give somebody car advice and then bring that
person on like two years later to prove them how
wrong they were.
Speaker 4 (22:56):
Maybe we should be doing that.
Speaker 5 (22:57):
Yeah, we've been around plenty of times.
Speaker 4 (23:00):
Yeah, interesting stuff.
Speaker 2 (23:01):
Productivity is about to slump that that wouldn't be good, Mark.
Let's talk about productivity before we get into the whole
AI arms race and how it's going to change all
of our.
Speaker 4 (23:11):
Lives for the better. It's tough for me to argue
that any.
Speaker 2 (23:18):
I guess you know, growth metric matters a lot more
than productivity, and I want to talk about why.
Speaker 3 (23:24):
The equivalent of standard of living, So.
Speaker 2 (23:26):
Yeah, let's talk about that. How does productivity equate to
bettering standard of living?
Speaker 3 (23:31):
It's the only way that real wages, that what you
get paid goes up. And this makes sense if you're
not more productive if and the literal definition is output
per hour, So if you're not doing more year after year,
don't expect your real wages to go up. I think
we all know that as employees. It applies to the
economy as a whole as well. So it is the
(23:53):
key to growing living standards over time.
Speaker 2 (23:55):
When the printing press came around and you no longer
had to pay a bunch of you know, monks to write,
you know, write script down over and over again, or
however you paid to do that back in the day,
productivity went up because you could use the printing press
and print a whole bunch more books and that person
then operating the printing press got compensated more. And you know,
(24:16):
the guy that used to manually write spreadsheets down at
the uh the Boston Fidelity office back in the nineteen
seventies was made more productive by the advent of the computer,
who could then run Excel spreadsheets, and then the Internet.
Why okay, so obviously that leads to more output a
(24:38):
more output person, which allows hypothetically for that person to
be paid more, or for profits to grow, or in
the US case both, Why does the author effectively argue that, hey,
you know, productivity is about to follow you can you
tell me?
Speaker 3 (24:54):
Mike, I'm sorry, I don't have the answers.
Speaker 4 (24:57):
Basically that it's been it's been, you know, doing a
reed for radio show today.
Speaker 3 (25:02):
Ologies.
Speaker 2 (25:04):
The argument has basically been that we have since twenty
twenty three seen a big productivity gain, and historically, once
you get to that level, it's unlikely to continue. Since
twenty twenty three, labor productivity gains have been pacing it
nearly twice the longer term rate, which has been you know,
(25:26):
one and a half to two percent since nineteen sixty
and since then we've been you know, running at three
point three percent pace, probably due to a number of factors,
once again the weird COVID aftershocks.
Speaker 4 (25:38):
That we've all been feeling.
Speaker 2 (25:40):
And so the argument is, hey, there's no technology that's
going to save us here. Even if AI is everything
that it's dreamed up to be, it usually takes a
little while for it all to come into play and
actually have effects on productivity. It doesn't happen overnight, is
their argument.
Speaker 3 (25:57):
Yeah, that's absolutely true. Any technology, from railroads to electrification
and all the knock on benefits took decades to permeate,
to seep into all types of economic activity and show
up in the show up in growth in the sense
that it matters living standards.
Speaker 2 (26:17):
Let's take true the Internet as an example here, so
as we came to use it really got invented in
the late nineties and early two thousands, and I want
to think through in our minds, like how long it
took for companies to kind of harness the power of
that and build profitable businesses because it was not overnight.
(26:40):
I think through some of the biggest companies in the
world today. Right, Maybe Microsoft isn't a great example here,
but let's take Facebook first, Facebook accounts I think got
created in two thousand and four, four to five years
after the creation of the Internet. Uber didn't exist until
two thousand and nine. Google really started getting it. I
(27:01):
don't even know when Google went public, but you know,
it started to really gain some traction in the mid
to late two thousands, and that is, you know, a
pretty recent event.
Speaker 4 (27:13):
It took a.
Speaker 2 (27:13):
Good decade for two thousand and four on Google was
founded in No. Four or when publican I went public
went public and four. So my point would be it
took quite a long time, even with a technology as
recent as the Internet, for companies to come about and
monetize it. And that's the point that I've been making
to folks when I speak to them, is you can
believe that AI is the most incredible generational transformation technology
(27:38):
that we've seen in our lifetimes.
Speaker 4 (27:40):
I'm not sure I buy.
Speaker 2 (27:41):
The argument, but unless you also buy that it is
so different this time that is going to be monetized
faster than any technology in history, then we've got some
pain coming.
Speaker 3 (27:53):
Yeah. So, in terms of computer it's just the IT revolution.
Mainframe computers became available in the nineteen sixties. Desktops of
the seventies and eighties. Throughout those decades, partly for other reasons,
productivity slowed, potential economic growth slowed. Eventually, we had a
little productivity boom from nineteen ninety six to two thousand
(28:13):
and four, if you just look at the jump in
the series, But even that petered out. So it took
decades for computers to make their way into the productivity statistics,
and it wasn't very long lasting. If you look at
if you want to see this all encapsulated in one series,
just look at the trend. Just look at GDP, you
can google it, look at its trend, and you'll see
(28:35):
that there was no There was a brief jump in
the mid nineties, just like there was a jump in
the fifties and sixties. The slope of the line increased,
indicating an increased growth rate if you look at it
the right way. But none of this stuff, is my point,
is changed the trend in growth. Bless you. None of
this stuff changed the trend in growth and standard of living.
(28:56):
So unless AI, however, you wanted to find that turn,
it's got to be different, different than every other technology,
including those on which it's piggybacking. You mean to tell
me AI is going to be, and it may be,
but I think the burden is on the person making
the claim, or making the investment, or trying to make
the investment with your money, that it's going to be
(29:17):
more revolutionary, more trend changing than electrification and all the
knock on benefits than the IT revolution, which took decades
and was relatively short lived in terms of its change
in the trend. I think that's a pretty optimistic claim.
I'm not saying it won't turn out to be the case.
I know by the way stocks are priced as if
it's going to be the case, so it had better.
Speaker 2 (29:37):
Let's take a quick break when we come back. I
want to take a temporary break from our AI obsession
and I want to go over to the Twin Cities
who have a pretty interesting case study in rent control,
which the state of Massachusetts is now considering. Quick break,
We're talking rent control next on the Financial Exchange.
Speaker 1 (29:56):
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(30:18):
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Speaker 2 (30:33):
This year, in the state of Massa Choose Commonwealth of Massachusetts,
petitioners successfully cleared an initial hurder by submitting over one
hundred and twenty four thousand signatures on a rent control
ballot initiative. The national political landscape and as far as
I'm concerned, seems to be well economically, it seems to
(30:55):
be talks of affordability, right like that seems to be
dominating every election, every narrative that we're hearing. It dominated
the New York City mayoral elections, It dominated pretty much
every other election that's happening.
Speaker 4 (31:07):
And I'm guessing that's what's going.
Speaker 2 (31:09):
To dominate the midterms in twenty twenty six as well.
The President's talking about it, Democrats are talking about Republicans
are talking about it. And so therefore I wouldn't be
surprised if nationally we're going to be having more of
these debates around rent control. And so while Street journal
I had no idea that this actually had happened a
(31:31):
few years ago, and they go over to Minnesota and
talk about the cities of Minneapolis and Saint Paul. If
you're not familiar with the geography of Minneapolis and Saint Paul,
go take a look. They're basically the same city, divided
by the Mississippi River, and they have different legislatures and
different policies and enacted different ones. And so this is
(31:51):
one I will admit for a moment here that this
is not a statistical analysis that they've done.
Speaker 3 (31:56):
It's better. It's what a research you will call a
natural ext It's like getting twins and subjecting one to
humiliation and really tough parenting and taking a totally different
style with the other and then finding.
Speaker 4 (32:10):
Out which which ones worked better.
Speaker 3 (32:11):
I don't know why I cite that as an example,
but twin studies are an example. There's sort of natural.
You take advantage of these.
Speaker 2 (32:17):
And it's pretty close to you can get because you
know what, there's not a big difference in whether patterns
or or employment or anything else.
Speaker 3 (32:25):
It's in every way it's a beautiful natural experiment.
Speaker 2 (32:28):
And so what happened here. In twenty twenty two, Saint
Paul passed a series of rules when it came to
rent control, largely passing a law that said the Ordnance
capped annual rant increases at three percent for most apartments,
even empty ones, and did not adjust that for inflation
(32:49):
twenty twenty two, by the way of some of the
worst inflation we have seen in five decades, and then
Minneapolis did not. And so what have we learned in
the couple of years since that enactment.
Speaker 4 (33:02):
One we can look at rents.
Speaker 2 (33:05):
According to co Star, the average rent in Minneapolis over
the course of two years rose to one thousand, five
hundred and six dollars a month, which is a seven
ten percent average increase. According to that co Star reading,
that is pretty much pretty substantially lower than the national
average of three point three percent, and is less than
(33:27):
half the rent increase in Saint Paul, Minnesota, who enacted
rent control, which saw average growth of one point eight
percent during that period. The other unsurprising and yet interesting
piece is the pace of multifamily building permits in Minneapolis
compared Mint to Saint Paul. Prior to this enactment, Saint
(33:47):
Paul was running much higher than Minneapolis. After the enactment
of rent control, the multi family permitting in Minneapolis soared
to well above what Saint Paul was experiencing. To say
that it's still early in the game, I'm willing to
say that you should look at this a decade from
now too, although Saint Paul is now rolling back some
of their rent control because it was a pretty stupid idea.
(34:09):
It looks like, but this is the exact stuff we're
going to be. I promise you this will not be
the last city in the country to consider enacting something
along now.
Speaker 3 (34:19):
Dumb dumb ideas never die. I mean, economist, we know
for yeah it's true because people stop reading or nobody's
done a TikTok where they wrap about rent control, so
millennials don't understand the issue, right, economists have known for
a long time. It discourages new construction.
Speaker 4 (34:34):
The reason I know anything about Hamilton.
Speaker 3 (34:38):
Discourages new construction. Why would you build if your profits
are going to be limited? Landlords will convert rental units
to I'm just reciting which I by the way, I'm
taking off Gemini. They cite scholarly sources, so I know
this is probably this is a good summary, but AI
is a good tool for quick summaries. Like this, when
you forget what the literature says. They talk about converting
(35:00):
mental units to other uses, absolutely spot on reducing quality
and maintenance. Why would you do any more than the
bare minimum legally required if you were a landlord, if
your profits are capped.
Speaker 2 (35:09):
Also, just psychologically, if I know that I cannot rent,
increase my rent by more than three percent, I'm going
to increase it by three percent every year.
Speaker 3 (35:17):
And you're going to do as little as possible units
compliant with code.
Speaker 2 (35:21):
And if I have to wait a little while to
find a new tenant, that's okay, because I know that
if demand turns around and I should be able to
raise rent by ten percent, but I'm capped to three percent,
I won't be able to see.
Speaker 3 (35:31):
Rent Controls are as dumb as tariffs. Anyone who's ever
looked at them says they reduce this. They do the
opposite of what it is you are trying to do.
And why we insist on shooting ourselves in the foot
when the evidence of past shots to the foot is
playing for anybody who can, as I did in this
case as Gemini, to find some scholarly recent scholarly studies.
(35:52):
And by the way, the difference in rents in this
study proves nothing because they're not controlling for other factors.
There may be something that happened in Saint Paul, or
something unique that some unique demography that these two cities,
the twin cities, don't They aren't twins in every respect,
I guess, is what I'm saying. So, like you said,
it's going to take a few years and a few
actual studies that can hold other factors constant. But it
(36:12):
is suggestive and it is consistent with what every study
that's ever looked at rent control has found.
Speaker 4 (36:19):
So good luck Masschest's voters.
Speaker 5 (36:21):
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Speaker 2 (37:35):
As we head towards the top of the hour, here
we've got all three major US indicies in negative territory,
although NASDAK is attempting to stage a comeback as we
speak now flat for the day, but the S and
P five hundred off about fifteen points one fifth of
one percent now off ninety five points percentage wise, the
exact same as the SMP five hundred and when we
(37:57):
take a look around at some other markets. Here price
of a barrel of oil dropping another three percent today,
down to fifty five bucks per barrel. We've got a
whole lot more to cover on the second hour of
the Financial Exchange, including Ford's nineteen and a half billion
dollar charge on their ev business.
Speaker 4 (38:15):
Stay tuned, folks,
The Financial Exchange is produced by Money Matters Radio and
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(01:07):
and Mark Vandetti.
Speaker 2 (01:09):
Good morning, Happy Tuesday, and welcome back to the Financial Exchange.
We've got two main themes to discuss on today's program.
One is jobs, because we just got the first jobs
report in a few months, released at eight thirty am
this morning. The second has to do with AI, the
market and whether or not it is different this time.
(01:32):
That's the main thing when it comes to all these
articles that I'm hearing about AI. Is is it really
different this time? Or are we in for a repeat
of the same types of market booms and busts that
we have experienced before. Because I like talking about it,
We're gonna sneak a rent control discussion in here too.
I email Tucker this morning at like seven am focusing
on that one piece. But let's start with the eight
(01:54):
thirty am jobs report that failed to turn around markets
in any meaningful way. This one is messy for a
number of different reasons. First things first, the monthly jobs
report usually is just a month worth of data. This
time around, we've got data on both October and November.
(02:14):
If you've listened to this program enough or like following
government statistics enough, then you may have already been aware
that the monthly Jobs report is actually two separate surveys,
one done of households, another done of businesses, and due
to the government shutdown, all of this stuff was delayed,
and in fact, the survey of households in October just
(02:37):
didn't occur because there wasn't anyone working to do the surveys.
So what do we get from these two different surveys.
One from the business surveys, they mainly ask, in addition
to what industry the employer operates in, how many people
did you hire, how many did you fire, and a
bunch of information about wages and other information. When they
(03:00):
talk to households, they basically ask a similar set of questions,
but they're asking where you're working, where you're working as
many hours as you wanted to, how many hours were those?
And you get two different numbers here. One is did
the economy create or lose jobs in the prior month
and to what extent? And then from the households you
get to what extent did unemployment rate? Did the unemployment
(03:22):
rate rise or fall? And for this report and for
the last years worth of reports, I think the number
that has mattered has been the unemployment rate rather than
the pace of job creation. We talked about why, but
certainly this time around that seems to be what's in focus.
Speaker 3 (03:37):
Well, yeah, matters for what is the question if you're
going an inflation forecast. Both are kind of dubious in
terms of the usefulness. The more useful metric over the
past several years for slack in the labor market, for
whether or not the economy is overheating, it has been
the vacancy rate. It's been a better forecast or if
you're into that type of thing. The unemployment rate now
(04:00):
four point six percent, up from it's been creeping up
for two years. It's been subtle, but it's been pretty
with a couple of interruptions. It's more or less moved
in one direction, but it's been a slow creep. Usually
when the unemployment rate goes up, you get a little
worried because there's persistence, so to speak, positive changes and
I don't mean positive is in good, I mean positive
(04:21):
is in greater than zero tend to be followed by
positive changes.
Speaker 4 (04:24):
So it tends to creep up on that unemployment rate discussion.
Speaker 2 (04:27):
Just so we have a frame of reference here, back
in April of twenty twenty three, that was the low
that we have seen for over a decade. We had
three point four percent on that unemployment rate. Okay, so
it's creeping up right, steady creep, steady.
Speaker 3 (04:40):
Creep, right, a couple of retreats, but mostly one direction.
Is this just the big question for me? Because to
me this leads to is the FED doing the right thing?
Or is the FED goosing and economy that's already growing
it around trend with elevated inflation, which means they're gonna
have to back try at some point. This matters for
(05:01):
equity prices, it matters for a cost of living, for
real wages. Employers are about to make decisions for the
next twelve months. You're gonna get a two, three, five
or zero percent increase in What does that mean in
real terms? We're all kind of flying blind here, whether
you're investing or setting wages or asking for wages. If
(05:23):
I get a two point five percent increase this year,
is that just a cola or am I falling behind
in real terms?
Speaker 1 (05:29):
Right?
Speaker 3 (05:29):
I don't know, Mike, And this ties into this morning's report,
I think, because I don't know whether this creep up
in the unemployment rate to four point six percent, which
is still very low in historical terms. By the way,
if you chart out a smooth unemployment rate series for
those people who are into that kind of thing, you
see that four point six percent is very very rare
(05:50):
outside of the late sixties, late nineties, and late twenty tens.
Is this just a normalization, Mike.
Speaker 2 (05:56):
For some context. We did not get below or to
that four point six percent rate until to your point
twenty seventeen, very rare the entire twenty tens decade after
the Great Recession. We were well, if.
Speaker 3 (06:06):
You're looking at the actual series, which is choppy, if
you smooth that to try to get at the trend
in the series, which is what people mean when they
say they took a moving average or looked at a
moving window of some piece of some data that changes
over time, you see how rare unemployment below five percent
is the question that's nagged a lot of people. I'm
(06:28):
not a labor economist, but I think about it over
the past really couple decades. Is is unemployment in the
fours unnaturally low and bi unnaturally low? I mean, will
it push up inflation? Is that more than the productive
capacity of the economy can handle? So it is where
we are now just the normalization after the overheated labor
(06:49):
market that all that COVID stimulus and other factors created.
Speaker 2 (06:53):
I want to talk about something we haven't discussed since
last fall, but that's the some unemployment recession.
Speaker 4 (06:58):
Indicator that's dead. What this is, it's just because it
didn't work the most recent time.
Speaker 3 (07:05):
I mean, empirical regularity doesn't work. You can put it,
you could put it in the drawer. Okay, well say,
well you got a PhD. Congratulations, but nobody's gonna use it.
Speaker 4 (07:12):
Well, I'm still going to talk about it.
Speaker 2 (07:13):
So last fall, what happened was the three month rolling
average of unemployment increased by more than half percent in
a twelve month period. We are knocking on that Psalm
rule recession indicator once again. Mark says it doesn't matter.
I'm not sure it doesn't. I think why did it.
Speaker 3 (07:29):
Matter in the first place? What was the theoretical motivation
for it, other than that unemployment was.
Speaker 4 (07:33):
Going empirical regularity, which is.
Speaker 3 (07:36):
A fancy way of saying. It has happened, So keep
an eye on it. If it happens again, the same
thing that happened after it happened, could happen again, and
I'm being nonsensical like mad hat or nonsensical for a reason,
because it's just a regularity. It's like when the NFC wins,
stocks go out, whatever the hell.
Speaker 4 (07:51):
The rule is.
Speaker 2 (07:52):
Yeah, So in either case we are knocking on the
door of that empirical regularity. It does not mean we
will hit a recession. We didn't the last time we
had a But I think one thing holds, which is,
when unemployment starts to climb very rarely does it just
pause and not keep climbing.
Speaker 3 (08:08):
And that's true, there's persistence in that, in that variable.
But I'm one every Chuck says this a lot trucks out,
and he's right, the COVID recession recovery MIC. We're so
unusual that we're going to break a lot of rules,
starting with the Psalm rule, which we can consign to
the dustbin of economic history. We're going to break a
lot of rules. And this could be another. It could
(08:29):
be an instance of unemployment just creeping up to something
more I don't know, normal sustainable. What does your gut
tell you is that?
Speaker 2 (08:35):
Is that my gut tells me is that when unemployment
starts climbing rarely does it just reach a certain threshold.
Speaker 3 (08:42):
That's true. Empirically, that's true, and by empirically that's fancy
way of a researcher saying, look at the data, that's
what it says.
Speaker 2 (08:48):
So whether you cross as a smile threshold or not,
my concern would be you have now climbed from four
percent unemployment back in January to four point six percent.
By the way, I don't think we even read the number,
but four point six percent was the number from this
morning's the jobs report. And so show me the instances
where you've seen the unemployment rate climb like that and
then just drop back down or plateau, and they're pretty rare.
Speaker 4 (09:11):
And so that I think is outside of learning.
Speaker 3 (09:13):
Yeah, but just keep in mind where I'm not arguing
with you. I agree it is. It is. I was
gonna say alarming. It's concerning that unemployment has been creeping
up for two years but it never got save once
as low as it got post COVID it was, i'll say,
gonna naturally low. Now, that doesn't mean that there aren't
momentum effects that where and I'm not using like a
(09:34):
technical term, that's that's just what the phrase that came
to mind at work here like, it doesn't matter that
it was a naturally low. Once it starts going up,
people get laid off, they freak out, employers freak out,
and recession becomes a self fulfilling prophecy.
Speaker 2 (09:48):
So unemployment rate jumped four four to four six. We
don't know what the reading was for October. We will
not know what the reading was for October because it
didn't get collected. The other side of the survey, they
talked to businesses and government employers. What did they find
in October? The labor the workforce, the number of people
working in the month of October dropped by one hundred
and five thousand employers. In November it bounced back up
(10:12):
sixty four thousand, for a net loss over the course
of the last two months of around fifty thousand total people.
But there was some tricky stuff in the month of
October that we need to account for. Let's take a
quick break. I want to talk about what did the
establishment data, Why do we see that hiccup in October,
(10:33):
if we want to call it a hiccup, and what
does all of this mean for the Fed and monetary
policy in twenty twenty six.
Speaker 4 (10:38):
That's next on the Financial Exchange.
Speaker 1 (10:41):
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Speaker 2 (11:19):
Okay, so we were talking about the jobs report that
was released at eight thirty am this morning. As a reminder,
this one covered October as well as November and October.
We saw something interesting, which was employment dropped by one
hundred five thousand people according to the Establishment Survey, which
again surveys businesses, governments, et cetera. Digging in here, you
(11:41):
saw a job loss on the government side of one
hundred and fifty seven thousand. My immediate mind went to
government shutdown. Hey, did they count a bunch of people
who were furloughed? But we're still going to collect paychecks
as unemployed here? If so, that seems inaccurate. They put
a note right in there for us to make our
lives easier.
Speaker 4 (12:00):
No, we didn't do that. So what actually happened in here? Mark?
Do you want to do?
Speaker 2 (12:05):
You want to take exactly what happened in here with
the October data for the government workers just falling off
a cliff, not.
Speaker 3 (12:13):
Looking right at it, but one hundred and sixty five
thousand took the took the payout right or one hundred
and sixty thousand, which.
Speaker 2 (12:18):
Is so yeah, going back to this spring when the
Trump administration offered buyouts to you know, pretty much all
government employees. The last paycheck was September, so October came in.
One hundred and fifty seven thousand people fell off of
the payroll. So if we just take that out for
a moment and assume that that's not going to continue
to repeat itself, because it can't. The actual job creation
(12:43):
for the month of October was more like, I mean,
if we subtract that out, where do we land fifty
thousands to the no, one hundred thousand to the upside, right, yep. So,
so we saw a number that in October the job
creation was just fine. In November, we came in at
sixty four thousand. Again, no big drop offs or increases
(13:07):
in any area that I think are worth mentioning. But
ultimately where I land with all of this is we
are now at a pretty low pace of job creation.
The last three months have probably averaged somewhere in the
sixty thousand range, and that does not seem to be Again,
I know, these are different surveys, so we shouldn't be
(13:30):
connecting them together, but that pace of job creation is
not likely fast enough to keep all the new entrants
into the labor market employed, and we're seeing maybe signs
of that through the unemployment rate rising. Again, these are
different surveys, don't connect them too thoroughly, but if you
look at it, you know if we're only creating sixty
(13:50):
thousand jobs per month. Also, the Federal Reserve has expressed
skepticism about that number and whether or not it's going
to get revised further downward like it has for the
last two years. Nothing about that indicates either free fall
or strong pace of job creation, I guess is where
I would land with the Establishment survey.
Speaker 4 (14:09):
Anything to add on that front from the last two months.
A day that we got this.
Speaker 3 (14:12):
Morning, other than the usual caveat, which is what we're
really interested in is the trend. And in order you
can estimate the trend like statistically, if you have the
tools in the time to do that. Most people they
just look at the last few months, and the last
few months suggest, last several months suggest well, let's just
go eat to date a dramatic slow down in job
creation relative to last year. By dramatic, I mean like
(14:35):
half as much. And the same multiple applies to the
year before. So from twenty twenty three, which was a
red hot, unsustainably hot, arguably labor market, we create about
half as many jobs a little bit more than that
in twenty twenty four, and we're on pace to be
haved again, if that's not too awkward in twenty twenty five.
Is this something to war? I'm asking rhetorically. I don't
(14:57):
really know. Does this foretel or is it merely normalization?
I know I asked that question in the last segment,
but I think it is the key question, especially when
you think about it. The FED doing the right thing.
Speaker 4 (15:07):
Here, Yeah, so let's go to that.
Speaker 2 (15:11):
The FED has pretty much publicly said that they don't
really care about the establishment.
Speaker 4 (15:15):
Survey data that they're not sure what it's going to indicate.
Speaker 2 (15:18):
They do care quite a bit about the unemployment rate
and what that is telling us. So FED seemed to
indicate a pause was possible come twenty twenty six. If
we are seeing the unemployment rate up over four point
six percent. Now, if we're seeing the unemployment rate having
climbed from four percent in January, what is the policy
prognosis from Jay Powell and the FED.
Speaker 4 (15:42):
I don't care what it should be. I want to
know what it will be.
Speaker 3 (15:45):
Well, I don't know what the heck it will be.
If you're asking me what these.
Speaker 4 (15:48):
Guys, I want you to read Jay Powell's mind.
Speaker 3 (15:50):
I mean you could do the second best thing. I mean,
everybody knows what type of models they're using, their standard
modern macroso to speak up models of the whole economy.
If unemployment continues to trend up, and if you assume
that the so called natural rate is lower than where
we are today, and that's the natural rate doesn't exist.
(16:12):
It's theoretical. You have to infer it, and it's a
moving target. On top of all that, depending on the
assumptions you make, Mike, you can get any FED. You
can get any quote right quote FED policy out of
the out of the apparatus that they use that you
want just assume the natural rate should be lower. Just
assume the natural rate of interest. Different concepts, same idea,
(16:33):
though theoretical, you have to infer it. It balances the
economy in theory so that nothing so that there's non
inflationary but not recessionary either. You make the right assumption
about the natural rate, which the media often calls our star,
because that's what you solve for when you do the
little model. You can get any FED fud's rate you want.
Speaker 4 (16:50):
Mike, It's not helpful.
Speaker 3 (16:52):
I know I'm trying to not be helpful. I'm not
trying to annoy you, as I respect you and I
work for you. But I don't know what else to say.
You can get any assumption you want out of it.
Speaker 2 (17:01):
The next meeting for the FED occurs on January twenty eighth.
According to the Chicago Mercantile Exchange, the likelihood of a
rate cut at that next meeting, which again a little
bit more than a month out. We just had a
FED meeting last week. That's sitting around a one and
four chance of an additional FED rate cut at that meeting.
I personally, where I betting on it, I'd be betting
(17:25):
higher odds. I think, you know it obviously depends on
what you get in January. But if you were to
see a repeat increase in the unemployment rate come January,
I don't know. Everything about this FED that I have
seen is that they are pretty dubvish and have favored
lower interest rates in the face of any concerns about
the labor market. And this November report I think has
(17:47):
some things to be concerned about when it comes to
the trend in employment.
Speaker 3 (17:51):
If you look at this as a typical business cycle,
and I'm not sure you should for reasons we discussed
in the last segment coming out of COVID, labor market
got unnaturally hot. Know what happened to inflation. If you
put that PTSD that we all have from that inflation
aside for a second, and you look at this as
a typical business cycle, Like you said, you've got unemployment
going up, payrolls slowing down. Jolt data until the last
(18:16):
update was suggesting a reduction in job vacancies. Different report here,
but we got some contrary evidence at the last issue
of the report. I guess we'll see what it says
when it's next released. I guess the upshot of all
this is, if you are looking at this through traditional
business cycle goggles, Yeah, the economy seems to be slowing.
(18:38):
The FED should be cutting, right, How much depends on
your view, as I said earlier, of what the natural
rate of interest is with the natural rate of unemployment is.
These are all the inputs to the models that researchers use.
Speaker 2 (18:49):
And don't forget they have already now cut at this
point by one and a half percentage points. Yeah, that
is not insignificant, and it's been done over the course
of a year and a half. It has been a
significant amount of cutting. And they constantly talk about how
long it takes for their policy to actually affect anything.
Speaker 4 (19:03):
So will they go further? Will they not?
Speaker 2 (19:06):
Will it actually bring down mortgage rates? Hasn't so far.
All of these are reasonable questions to ask. And you know,
if they do cut rates, what does that do in
terms of sparking even more speculation in equity markets, Because
as concerned as we might be about the labor market,
we're not seeing any of that concern bleed over into equities.
Quick break when we come back full market recap with
(19:27):
Wall Street Watch. It's worse and significantly since we started talking.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch. A complete look at what's moving market so
far today right here on the Financial Exchange Radio Network.
Speaker 5 (20:00):
If it's a slightly negative territory. As Wall three reacts
to the November jobs report posted this morning. As a
result of the pause on economic data from the government
shutdown last month, sixty four thousand jobs were added, stronger
than forecasts of fifty thousand. The unemployment rate ticked higher
from four and a half percent to four point six percent.
(20:20):
Jobs data from October also revealed one hundred and five
thousand jobs were lost. Right now, the Dow is off
about four tenths of one percent, or one hundred and
eighty three points. SMP five hundred down nearly four tenths
of one percent or twenty five points lower, Nasdaq down
two tenths of one percent or forty five points lower.
(20:40):
Russell two thousand is off a quarter percent. Tenure Treasur
reeled down two basis points at four point one sixty
one percent, and crude oil down nearly three percent lower,
trading just above fifty five dollars a barrel. Ford said
it expects about nineteen and a half billion dollars in
charges as it scales back it's electric vehicle ambitions and
(21:02):
ships focus to gas powered in hybrid vehicles. Ford stock
is dipping. Meanwhile, Pfiser issued a twenty twenty six ergings
guidance that came in below analysts expectations. The pharma giant
also reaffirmed its twenty twenty five outlook. Pfiser shares are
down over four percent at the moment. Elsewhere, Craft Heines
(21:22):
announced former Kelenova CEO Steve K. Hillane will take over
as its chief executive next year as the company prepares
to separate into two publicly traded entities. Craft is up
by over one percent. Roku down by one percent despite
Morgan Stanley double upgrading the streaming platform stock to overweight
(21:44):
from underweight, citing its second half revenue growth in solid
execution on deepening streaming partnerships. PayPal shares are up modestly
after the payments company said it filed an application to
establish PayPal Bank that would focus on granting loans and
offering savings accounts to small businesses. And after today's clothes,
(22:05):
we'll see earnings from home builder lenaar Holdings. I'm Tucker Silvan.
That is Wall Street Watch, and remember you can watch
the show live every day on our YouTube page. We'll
breaking business news and all of our content is also archived,
so if you want to go back and see an
interview or discussion about a specific topic, it's all there
with the click of a button. Just search the Financial
(22:28):
Exchange on YouTube and hit that subscribe button.
Speaker 2 (22:32):
Don't tell them that do it. I don't want to
be proven wrong once a week. Leive me this stupid thing,
Mike said two years ago.
Speaker 5 (22:39):
Yeah, it's exactly what you can where you can do.
Speaker 2 (22:43):
Oh boy, on one of my favorite radio programs that
hasn't been on here for a good twenty years, used
to have a segment called Stump the Chumps, where they
would you give somebody car advice and then bring that
person on like two years later to prove them how
wrong they were.
Speaker 4 (22:56):
Maybe we should be doing that.
Speaker 5 (22:57):
Yeah, we've been around plenty of times.
Speaker 4 (23:00):
Yeah, interesting stuff.
Speaker 2 (23:01):
Productivity is about to slump that that wouldn't be good, Mark.
Let's talk about productivity before we get into the whole
AI arms race and how it's going to change all
of our.
Speaker 4 (23:11):
Lives for the better. It's tough for me to argue
that any.
Speaker 2 (23:18):
I guess you know, growth metric matters a lot more
than productivity, and I want to talk about why.
Speaker 3 (23:24):
The equivalent of standard of living, So.
Speaker 2 (23:26):
Yeah, let's talk about that. How does productivity equate to
bettering standard of living?
Speaker 3 (23:31):
It's the only way that real wages, that what you
get paid goes up. And this makes sense if you're
not more productive if and the literal definition is output
per hour, So if you're not doing more year after year,
don't expect your real wages to go up. I think
we all know that as employees. It applies to the
economy as a whole as well. So it is the
(23:53):
key to growing living standards over time.
Speaker 2 (23:55):
When the printing press came around and you no longer
had to pay a bunch of you know, monks to write,
you know, write script down over and over again, or
however you paid to do that back in the day,
productivity went up because you could use the printing press
and print a whole bunch more books and that person
then operating the printing press got compensated more. And you know,
(24:16):
the guy that used to manually write spreadsheets down at
the uh the Boston Fidelity office back in the nineteen
seventies was made more productive by the advent of the computer,
who could then run Excel spreadsheets, and then the Internet.
Why okay, so obviously that leads to more output a
(24:38):
more output person, which allows hypothetically for that person to
be paid more, or for profits to grow, or in
the US case both, Why does the author effectively argue that, hey,
you know, productivity is about to follow you can you
tell me?
Speaker 3 (24:54):
Mike, I'm sorry, I don't have the answers.
Speaker 4 (24:57):
Basically that it's been it's been, you know, doing a
reed for radio show today.
Speaker 3 (25:02):
Ologies.
Speaker 2 (25:04):
The argument has basically been that we have since twenty
twenty three seen a big productivity gain, and historically, once
you get to that level, it's unlikely to continue. Since
twenty twenty three, labor productivity gains have been pacing it
nearly twice the longer term rate, which has been you know,
(25:26):
one and a half to two percent since nineteen sixty
and since then we've been you know, running at three
point three percent pace, probably due to a number of factors,
once again the weird COVID aftershocks.
Speaker 4 (25:38):
That we've all been feeling.
Speaker 2 (25:40):
And so the argument is, hey, there's no technology that's
going to save us here. Even if AI is everything
that it's dreamed up to be, it usually takes a
little while for it all to come into play and
actually have effects on productivity. It doesn't happen overnight, is
their argument.
Speaker 3 (25:57):
Yeah, that's absolutely true. Any technology, from railroads to electrification
and all the knock on benefits took decades to permeate,
to seep into all types of economic activity and show
up in the show up in growth in the sense
that it matters living standards.
Speaker 2 (26:17):
Let's take true the Internet as an example here, so
as we came to use it really got invented in
the late nineties and early two thousands, and I want
to think through in our minds, like how long it
took for companies to kind of harness the power of
that and build profitable businesses because it was not overnight.
(26:40):
I think through some of the biggest companies in the
world today. Right, Maybe Microsoft isn't a great example here,
but let's take Facebook first, Facebook accounts I think got
created in two thousand and four, four to five years
after the creation of the Internet. Uber didn't exist until
two thousand and nine. Google really started getting it. I
(27:01):
don't even know when Google went public, but you know,
it started to really gain some traction in the mid
to late two thousands, and that is, you know, a
pretty recent event.
Speaker 4 (27:13):
It took a.
Speaker 2 (27:13):
Good decade for two thousand and four on Google was
founded in No. Four or when publican I went public
went public and four. So my point would be it
took quite a long time, even with a technology as
recent as the Internet, for companies to come about and
monetize it. And that's the point that I've been making
to folks when I speak to them, is you can
believe that AI is the most incredible generational transformation technology
(27:38):
that we've seen in our lifetimes.
Speaker 4 (27:40):
I'm not sure I buy.
Speaker 2 (27:41):
The argument, but unless you also buy that it is
so different this time that is going to be monetized
faster than any technology in history, then we've got some
pain coming.
Speaker 3 (27:53):
Yeah. So, in terms of computer it's just the IT revolution.
Mainframe computers became available in the nineteen sixties. Desktops of
the seventies and eighties. Throughout those decades, partly for other reasons,
productivity slowed, potential economic growth slowed. Eventually, we had a
little productivity boom from nineteen ninety six to two thousand
(28:13):
and four, if you just look at the jump in
the series, But even that petered out. So it took
decades for computers to make their way into the productivity statistics,
and it wasn't very long lasting. If you look at
if you want to see this all encapsulated in one series,
just look at the trend. Just look at GDP, you
can google it, look at its trend, and you'll see
(28:35):
that there was no There was a brief jump in
the mid nineties, just like there was a jump in
the fifties and sixties. The slope of the line increased,
indicating an increased growth rate if you look at it
the right way. But none of this stuff, is my point,
is changed the trend in growth. Bless you. None of
this stuff changed the trend in growth and standard of living.
(28:56):
So unless AI, however, you wanted to find that turn,
it's got to be different, different than every other technology,
including those on which it's piggybacking. You mean to tell
me AI is going to be, and it may be,
but I think the burden is on the person making
the claim, or making the investment, or trying to make
the investment with your money, that it's going to be
(29:17):
more revolutionary, more trend changing than electrification and all the
knock on benefits than the IT revolution, which took decades
and was relatively short lived in terms of its change
in the trend. I think that's a pretty optimistic claim.
I'm not saying it won't turn out to be the case.
I know by the way stocks are priced as if
it's going to be the case, so it had better.
Speaker 2 (29:37):
Let's take a quick break when we come back. I
want to take a temporary break from our AI obsession
and I want to go over to the Twin Cities
who have a pretty interesting case study in rent control,
which the state of Massachusetts is now considering. Quick break,
We're talking rent control next on the Financial Exchange.
Speaker 1 (29:56):
Miss any of the show. Catch up and you're convenience
by visiting Financial lik Change show dot com and clicking
the on demand icon, where you'll find all of our
interviews in full showers. This is your home for the
latest business and financial news in New England and around
the country. This is the Financial Exchange Radio Network. This
is your home for the most comprehensive coverage of the
(30:18):
economy and the trends on Wall Street. This is the
Financial Exchange Radio Network.
Speaker 2 (30:33):
This year, in the state of Massa Choose Commonwealth of Massachusetts,
petitioners successfully cleared an initial hurder by submitting over one
hundred and twenty four thousand signatures on a rent control
ballot initiative. The national political landscape and as far as
I'm concerned, seems to be well economically, it seems to
(30:55):
be talks of affordability, right like that seems to be
dominating every election, every narrative that we're hearing. It dominated
the New York City mayoral elections, It dominated pretty much
every other election that's happening.
Speaker 4 (31:07):
And I'm guessing that's what's going.
Speaker 2 (31:09):
To dominate the midterms in twenty twenty six as well.
The President's talking about it, Democrats are talking about Republicans
are talking about it. And so therefore I wouldn't be
surprised if nationally we're going to be having more of
these debates around rent control. And so while Street journal
I had no idea that this actually had happened a
(31:31):
few years ago, and they go over to Minnesota and
talk about the cities of Minneapolis and Saint Paul. If
you're not familiar with the geography of Minneapolis and Saint Paul,
go take a look. They're basically the same city, divided
by the Mississippi River, and they have different legislatures and
different policies and enacted different ones. And so this is
(31:51):
one I will admit for a moment here that this
is not a statistical analysis that they've done.
Speaker 3 (31:56):
It's better. It's what a research you will call a
natural ext It's like getting twins and subjecting one to
humiliation and really tough parenting and taking a totally different
style with the other and then finding.
Speaker 4 (32:10):
Out which which ones worked better.
Speaker 3 (32:11):
I don't know why I cite that as an example,
but twin studies are an example. There's sort of natural.
You take advantage of these.
Speaker 2 (32:17):
And it's pretty close to you can get because you
know what, there's not a big difference in whether patterns
or or employment or anything else.
Speaker 3 (32:25):
It's in every way it's a beautiful natural experiment.
Speaker 2 (32:28):
And so what happened here. In twenty twenty two, Saint
Paul passed a series of rules when it came to
rent control, largely passing a law that said the Ordnance
capped annual rant increases at three percent for most apartments,
even empty ones, and did not adjust that for inflation
(32:49):
twenty twenty two, by the way of some of the
worst inflation we have seen in five decades, and then
Minneapolis did not. And so what have we learned in
the couple of years since that enactment.
Speaker 4 (33:02):
One we can look at rents.
Speaker 2 (33:05):
According to co Star, the average rent in Minneapolis over
the course of two years rose to one thousand, five
hundred and six dollars a month, which is a seven
ten percent average increase. According to that co Star reading,
that is pretty much pretty substantially lower than the national
average of three point three percent, and is less than
(33:27):
half the rent increase in Saint Paul, Minnesota, who enacted
rent control, which saw average growth of one point eight
percent during that period. The other unsurprising and yet interesting
piece is the pace of multifamily building permits in Minneapolis
compared Mint to Saint Paul. Prior to this enactment, Saint
(33:47):
Paul was running much higher than Minneapolis. After the enactment
of rent control, the multi family permitting in Minneapolis soared
to well above what Saint Paul was experiencing. To say
that it's still early in the game, I'm willing to
say that you should look at this a decade from
now too, although Saint Paul is now rolling back some
of their rent control because it was a pretty stupid idea.
(34:09):
It looks like, but this is the exact stuff we're
going to be. I promise you this will not be
the last city in the country to consider enacting something
along now.
Speaker 3 (34:19):
Dumb dumb ideas never die. I mean, economist, we know
for yeah it's true because people stop reading or nobody's
done a TikTok where they wrap about rent control, so
millennials don't understand the issue, right, economists have known for
a long time. It discourages new construction.
Speaker 4 (34:34):
The reason I know anything about Hamilton.
Speaker 3 (34:38):
Discourages new construction. Why would you build if your profits
are going to be limited? Landlords will convert rental units
to I'm just reciting which I by the way, I'm
taking off Gemini. They cite scholarly sources, so I know
this is probably this is a good summary, but AI
is a good tool for quick summaries. Like this, when
you forget what the literature says. They talk about converting
(35:00):
mental units to other uses, absolutely spot on reducing quality
and maintenance. Why would you do any more than the
bare minimum legally required if you were a landlord, if
your profits are capped.
Speaker 2 (35:09):
Also, just psychologically, if I know that I cannot rent,
increase my rent by more than three percent, I'm going
to increase it by three percent every year.
Speaker 3 (35:17):
And you're going to do as little as possible units
compliant with code.
Speaker 2 (35:21):
And if I have to wait a little while to
find a new tenant, that's okay, because I know that
if demand turns around and I should be able to
raise rent by ten percent, but I'm capped to three percent,
I won't be able to see.
Speaker 3 (35:31):
Rent Controls are as dumb as tariffs. Anyone who's ever
looked at them says they reduce this. They do the
opposite of what it is you are trying to do.
And why we insist on shooting ourselves in the foot
when the evidence of past shots to the foot is
playing for anybody who can, as I did in this
case as Gemini, to find some scholarly recent scholarly studies.
(35:52):
And by the way, the difference in rents in this
study proves nothing because they're not controlling for other factors.
There may be something that happened in Saint Paul, or
something unique that some unique demography that these two cities,
the twin cities, don't They aren't twins in every respect,
I guess, is what I'm saying. So, like you said,
it's going to take a few years and a few
actual studies that can hold other factors constant. But it
(36:12):
is suggestive and it is consistent with what every study
that's ever looked at rent control has found.
Speaker 4 (36:19):
So good luck Masschest's voters.
Speaker 5 (36:21):
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Speaker 2 (37:35):
As we head towards the top of the hour, here
we've got all three major US indicies in negative territory,
although NASDAK is attempting to stage a comeback as we
speak now flat for the day, but the S and
P five hundred off about fifteen points one fifth of
one percent now off ninety five points percentage wise, the
exact same as the SMP five hundred and when we
(37:57):
take a look around at some other markets. Here price
of a barrel of oil dropping another three percent today,
down to fifty five bucks per barrel. We've got a
whole lot more to cover on the second hour of
the Financial Exchange, including Ford's nineteen and a half billion
dollar charge on their ev business.
Speaker 4 (38:15):
Stay tuned, folks,
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