September 17, 2024 • 38 mins
Mike Armstrong and Marc Fandetti start off the show discussing how big of a rate cut they anticipate at the conclusion of the Fed's meeting tomorrow. Plus, will August's better-than-expected retail sales report provide any valuable information ahead of the central bank's decision? Is it a given that a rate cut will actually help the housing market? And, why both candidates continue to ignore the federal deficit.
Mark as Played
Transcript
Episode Transcript
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Speaker 1 (00:00):
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(01:06):
Face is the Financial Exchange with Mike Armstrong and Mark Fandetti.
Speaker 2 (01:13):
Good morning, Welcome back to the Financial Exchange. It is
the Tuesday of a Federal Reserve meeting. They are in
meetings today discussing policy. We will hear from Jerome Powell
tomorrow at two pm. Two pm he starts speaking to
two thirty pm he starts speaking rather and they will
be releasing three important items here. One would be the headline,
(01:37):
which is how much do they cut rates tomorrow? Which
is baked in. They will be cutting rates tomorrow almost undoubtedly.
They will be releasing their summary of economic projections this step,
and then there will also be prepared remarks and a
Q and A that Jerome Powell does, and each of
those in and of themselves are interesting pieces that you
(02:00):
give you a sense of what the Federal Reserve is thinking.
And so if you turn on any financial media today,
my guess is the only thing you will hear as
we're looking at right now from Bloomberg, the ever Source
ISI founder and chairman, for instance, saying quote, I'd be
shocked if FED doesn't cut by fifty. You'll have somebody
else on I'm sure next saying the FED would be
(02:21):
idiots to cut by fifty basis points. And I'm here
to tell you that whether it's twenty five or fifty
is probably less impactful in most people's views than their
projections about where things are and what they actually have
to say about the state of the economy, although the
fifty versus twenty five will be what gathers all the
attention and gets all the attention tomorrow afternoon.
Speaker 3 (02:45):
So why do we care well? The FED controls or
exerts a lot of control over very short term interest rates.
That's its main tool for speeding up or slowing down demand.
Speaker 2 (02:54):
Explain what you mean by very short term interest rates?
Speaker 3 (02:57):
Short term interest rates are rates onlineans say less than
a year. Think Treasury build.
Speaker 2 (03:03):
The mechanism by which they controlled them, though, is what the.
Speaker 3 (03:05):
FED controls the money supply. I think we've all heard that,
but it's hard to translate that into something meaningful. They
do that by crediting banks with more reserves or taking
reserves away. When you put the reserves into the system,
The FED allows banks to lower interest rates. Basically, the
FED funds rate is their primary policy tool. They have others,
(03:27):
but that's their main policy tool, and again they try
to control that. Though they don't control it precisely, they
can heavily influence it by expanding or contracting the money supply,
and they do that to goose or restrain demand, which
in turn puts upward or downward pressure on inflation. It
doesn't always quite work that formulaically, that mechanically, but that's
(03:50):
the general theory, and it's been tested. You might think,
why would somebody need to test that. It's common sense.
Economists spend a lot of time, particularly in the late eighties,
testing whether or not the Fed actually influence short term
interest rates, and the answers yes.
Speaker 2 (04:02):
So when we take a look at things here, like
I said, what you know, financial media is going to
pay most attention to is what actually happens with that
FED funds rate tomorrow. And as of right now with
the CME groups website not properly loading, but as of
a couple hours ago when I was looking at it,
it was pricing in about a two thirds chance of
(04:25):
a fifty basis point rate cut, which is about a
flip from where we were, say, this time last week.
Speaker 3 (04:30):
Not clear why Mike. Let me first say I asked
the question why do we care. We care because it
should translate into lower credit card interest rates, though that
will depend obviously on your credit card and credit rating
and individual in factor specific to you. Lower auto loan
rates they're tied to, like the five year treasury note,
and again that'll depend on factors specific to you.
Speaker 2 (04:52):
So eat lower saving rates It should.
Speaker 3 (04:54):
Yeah, banks will very quickly lower rates on time deposits
and CDs, but it should reverberate down the so called
yield curve. It should to the extent that it hasn't
already been priced in so to speak, to longer term treasuries.
It should result in lower interest rates right on down
the curve. So I guess that's why people listening who
(05:17):
aren't concerned about this more complex capital market impact of this,
which we'll get into, yeah, should should care. It will
affect what you pay on your loans and what you
get paid on your savings.
Speaker 2 (05:29):
So as I mentioned about a sixty now now a
sixty three percent chance of a fifty basis point rate
cut tomorrow, that's, like I said, up pretty substantially from
just a week ago when it was only a thirty
four percent chance of that fifty basis point to rate cut.
To answer your pondering of what's changed, well, I don't
think we have any more information that would lead you
(05:51):
to a fifty basis point rate cut. I think what's
changed is Nick Timros, who's you know, kind of referred
to as the mouthpiece of the walls of the federals
when they can't speak, put out a number of pieces
over the last few days alluding to a fifty basis
point rate cut. And then you also had interviews with
several former FED cheefs. Because the current FED chairs cannot
(06:11):
sit it cannot discuss anything with the media right now,
they're barred from doing so. But you did have these
others saying, hey, based on my opinion and my time
at the FED, I think the FED will cut fifty
basis points. And so that seems to be, in my view,
the only thing that's turned things around. There's been no data,
new data released on a weakening economy.
Speaker 3 (06:28):
That's what I was referring to. So this morning we
got retail sales, maybe you'll talk about that. We also
got industrial production and capacity utilization, which the FED follows closely.
In fact, they produce those statistics. Industrial production is more
or less output at the nation's minds factories exactly what
you would think. That index is at its highest level
(06:49):
of the current expansion. It's odd to me that people
are talking about a jumbo cut in light of that. Now,
you could say, that's just one statistics. One's a statistic.
Excuse me. Capacity utilization also relatively steady, not at its
high capacity utilization, as the name suggests, is the percentage
of its resources on average, that their resources that companies
(07:10):
are using. How fully employed are your machines more or less?
Also at relatively stable levels. GDP growing at a healthy
clip according to Atlanta FS GDP now, which is as
good as anybody's guess as a snapshot of where the
economy is today. Unemployment, though it's ticked up, still very
(07:30):
low by historical measures. You can go right on down
the line. It's a little odd. Financial conditions, maybe we'll
talk about those. There are various indices of so called
financial conditions looser than they were a year ago. This
is why it's odd to me. Maybe it's just me
that the Fed is talking about an emergency size or jumbo.
(07:50):
They're not calling it an emergency size, and they won't, but.
Speaker 1 (07:55):
It's a big cut.
Speaker 3 (07:55):
They prefer to move more gradually, So why other than
the market seems to want it.
Speaker 2 (08:01):
Well, play real devil's advocate here. So I agree with
you financial conditions when you look at the overall published
financial conditions index, and you know, I know everybody's got
slightly different ones, but you know, generally speaking looser than
they were previously. Markets are up near all time highs.
But you know, playing the other side of that coin,
we have seen a nearly full percentage point increase in
(08:23):
the unemployment rate. I think if you look at like,
let's look at the eighteen month low in the eighteen
month high for a moment here, I think May of
twenty twenty three got as low as three to four
and July of this year got as high as four
to three. Yeah, when you compare that to other rate
cutting cycles, you could argue that the FEDS a little
bit behind the eight ball when you look at nearly
(08:45):
a full percentage point uptick and unemployment, wouldn't you.
Speaker 3 (08:48):
Yeah, And I we talked about that earlier today. I
tried to make that point to be balanced. Well, no,
we should be fleshing it out on the air too,
because I don't. The topic of our conversation here at
Mstrong Advisory Group earlier today was is the FED behind
the curve? Right in line with the curve ahead of
the curve? This is the perennial, by the way, question,
during the tightening or loosening phase of the cycle. Is
(09:09):
the FED too early, too late? Just right? We won't
know for a long time, and even then people will
argue about it. But of course you're right. My unemployment
has gone up the back of my mind, though I'm
left asking was it unnaturally low? Unusually unnaturally low? To
begin with? Is the low fours about right? Given what
I'll call the structure of the economy, Is that the
(09:30):
right so called natural rate, the rate that doesn't put
upward pressure on inflation. That's the magic figure that the
FED is trying to calibrate all of its decision towards.
What is the so called natural or neutral rate of interest,
natural rate of unemployment? Where would the economy rest, even
though it never really rests, if it wasn't being buffeted
(09:50):
by big shocks in either direction? Nobody knows the answer
to that. I just again find it curious that conditions
are so accommodating yet the FED is considering a jumbo
rate cut. What's the risk of that, well, a reigniting
of inflation. They apparently think the risk of increased unemployment,
more rises and unemployment as awkward as that as I
(10:11):
just phrased that, you know what I mean, and a
GDP slow down. They apparently think the risks of that
are greater than inflation reigniting. That's the obvious interpretation.
Speaker 2 (10:19):
Jobs we're seeing if they go fifty, that's the obvious conclusion.
If they go fifty. Let's take a quick break. When
we come back, I want to touch on that data
point that we got this morning at eight thirty, which
at least in part seems to be driving markets a
little bit higher. We'll discuss retail sales next. On the
Financial Exchange.
Speaker 1 (10:36):
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Keep it here all morning long on the Financial Exchange
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Speaker 4 (10:45):
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Speaker 2 (11:22):
Did you know what happens in ninety nine days?
Speaker 1 (11:25):
Uh?
Speaker 2 (11:27):
What Christmas? So let's talk retail sales. How appropriate would
that be? I had no idea it was one hundred
days Tillchristmas? Yes, really, yeah, but my wife got emails
from like every retailer that she subscribes to letting her
know that there's only one hundred days till Christmas. So
get on in here and you know, start making your purchases,
and you know, to be fair. Retailers at this point
(11:47):
in time are either already stocked up or in the
process of stalking up for the holiday shopping season, which
will presumably kick in right after Halloween. I'm guessing November
first is when we'll start in Christmas trees at home depot,
but you know, somewhere around.
Speaker 4 (12:02):
Probably before that. Honestly, yeah, it might.
Speaker 2 (12:05):
Be, might be. So taking a look here, we did
get a government report on retail sales this this morning
at eight thirty, and expectations here were for a decline
of zero point two percent. Now, this is a volatile series.
It does bounce all over the place, but what actually
happened was a zero point one percent increase in monthly
retail sales data. And you know, maybe part of what's
(12:27):
driving the market up today with you know, the combined
expectation of a fifty bases point rate cut with sales
in the retail sector, which drives the bulk of this
US economy moving upwards. In particular, there's thirteen categories that
they that they look at here, and the leader was
on e commerce merchant sales, which posted a solid one
(12:49):
point four percent gain. Others such as electronics, appliances, clothing,
and furniture all did fall, but nonetheless you did see
a reason big uptick and a bit of a beat
compared to the expectations for retail sales. Again, I don't
know what to make of this in particular mark other
than it speaks to what you're talking about, which is
(13:12):
there aren't a ton of signs that that financial conditions
are incredibly weak.
Speaker 3 (13:17):
I'm laughing because it gets bewildering people. We're relatively immersed
in this stuff because it moves capital markets, and that
matters for our clients. So we have to stay tuned
and we need to explain it or describe it. We
don't profess to know why, we just describe. Economists don't
agree on why. They still don't agree on what caused
the Great Depression. Okay, this is an ongoing debate. It's
(13:40):
not as lively as it used to be. The folks
that really care are a little older, but they still disagree.
Great Recession not even close to being settled. So my
point is we care because these things matter to people
that buystocks and bonds traders, and it matters therefore to
our clients. I'm sorry for being philosophical, but it's just
(14:01):
the way I'm feeling about all this data right now.
Some people would put this number into their model. Others
will wait for the personal consumption expenditures figure, which we
get in about a week and a half. There are
many measures of how much people are spending, and like
you said, Mike, it matters because that's most in an
accounting sense, that's most of gross domestic product or GDP,
(14:21):
but it's not generally the thing that moves the most
during contractions, during recessions, that's inventories. That's why I went
back to industrial production and capacity utilization a little bit earlier.
The health of the business sector specifically, there are no
warning signs there at all. There are few warning signs
with respect to the health of the consumer, though there's
(14:42):
plenty of hand ringing about debt levels and stuff like that.
Probably justifiably, I'm just not seeing to go back to
the point that we started the show with today, or
at the point I was trying to make anyway, that
it's not at all clear that the economy is meaningfully
slowing enough, that is to warrant what would be emergency
the action on the part of the Fed to stimulate
(15:02):
the economy. And they would say, we're not trying to
stimulate the economy. These cuts won't take effect for months
and months, maybe quarters. I would argue, the psychological effect
will be as we're seeing in markets, yeah, which have
a wealth effect. Your stocks go up, you spend money.
It sounds a little flaky to be worried about again
inflation reigniting. So I hesitate to voice that concern too
(15:25):
much because everybody, virtually everybody's in the other camp. But
imagine if it did. That's that's that's a rhetorical.
Speaker 2 (15:34):
Yeah, imagine if it did, would be the worst possible.
Speaker 3 (15:36):
Economy is not slowing, it's not even stalling, just lost
a little bit of altitude maybe, as evidenced by the
rise in unemployment, but it's about to pick up again.
We simply don't know.
Speaker 2 (15:48):
By the way that you know, I have to acknowledge
too that I don't think that there's any indication that
retail sales are any sort of leading indicator about the economy.
I pointed out that, hey, stocks might be moving on this,
and that that may well be true. But taking a look,
for instance, at retail sales going through the Great Recession,
you didn't see any significant drop off there until maybe
(16:08):
fall of two thousand and eight, when that thing was
already well baked in terms of a recession. So I
would not consider retail sales one. We're looking at last
month's data on retail sales. Two, My guess would be
that the average American just keeps on spending right until
they lose their job, And so I don't know that
retail sales are going to be any sort of indicator
of anything other than what got spent last month and
(16:29):
did people still have a job in order to be
able to spend.
Speaker 3 (16:31):
Yeah, that's good point too. Some of the things we
talk about are leading indicators because they tend to lead GDP.
Others are coincident. They tend to move in the same
period as GDP. Industrial production that I mentioned earlier, capacity utilization,
I mentioned earlier, retail sales, those are more or less coincident.
Others are lagging. Unemployment, rear view mirror. If you think
(16:51):
about when companies make decisions versus when they hire, there's
a big lag there. So I think it's important that
we qualify these numbers that we talk about from time
to time with whether they matter for the present, whether
they are predictive to some extent, or whether their rear view,
whether they're backward looking.
Speaker 2 (17:10):
There is one group of people that seem to agree
with you, Mark. The editorial board of the Wall Street
Journal does have a peace out today saying that hey,
you know, the inflation story could still be there and
making a lot of the same arguments that I think
you are in this at this point in time, saying, look,
you know, monetary mistakes on the way up made them
(17:30):
late to the game, and are they too willing to
cut rates on the way down? And I know you
agree with them on the way up. I don't disagree either,
you know what I'm just saying.
Speaker 3 (17:41):
I'm just saying they made a choice. Was it the
wrong choice? I don't know the elector It's pretty pod
so you could argue that, on its face is evidence
that the FED made the wrong choice.
Speaker 2 (17:51):
Yes, it seemed like the wrong choice, right, I'm.
Speaker 3 (17:55):
Torn on this, I admit. Then again, what if the
FED had started tightening much sooner and faster, and unemployment,
instead of going down to three point five, had stayed
around four point five to five. This is the trade off.
There's always if you just take one thing away from
the financial exchange, it's at least today. I won't speak
for you and Chuck, there's a trade off in the
(18:15):
short term between inflation and unemployment. The FED is constantly
trying to balance these two things. I won't go so
far as to say they're in perfect tension, because that
sounds too precise, But the FED is always thinking do
we want to keep demand where it is today? Do
we want to goose it? Do we need to restrain it?
Can we tolerate a little more inflation? Do we need
(18:35):
to rein it in.
Speaker 2 (18:37):
Do you you speak FED speak a little bit more
than I do. Do you see their current? I know
I have ten seconds, But do you see them as
taking a victory lap right now on the soft landing?
Because I'm not detecting that from the way they're speaking,
the way that Federal Reserve members are speaking, the way
that Drone Palall speaking seems to be very much worthy
of the risks now. But a lot of criticism the
FED right now seems to be coming from a place
(18:59):
of taking this victory lap like they already achieved the
soft landing. I'm not seeing that from anywhere other than
Treasury Secretary Janet Yellen, who's no longer part of the FED.
Speaker 3 (19:08):
Yeah, they seem to be erring on the side of
avoiding a growth slowdown or worse. I'm not detecting any
obnoxiously triumphalist rhetoric from the FED. We'll see.
Speaker 2 (19:19):
Let's take a quick break Wall Street watch next.
Speaker 1 (19:32):
Like us on Facebook and follow us on Twitter, act
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 markets so far
today right here on the Financial Exchange Radio Network.
Speaker 4 (19:53):
Markets are in the green today as Wallstreet reacts to
August retail sales data unveiled earlier this morning, where we
tail sales climb zero point one percent last month, better
than estimates of a zero point two percent decline. And
of course, the Fed begins their two day monetary policy
meeting today or an announcement on interest rates will follow
(20:14):
tomorrow afternoon at two o'clock. Right now, the Dow is
up by about a half a percent, or one hundred
and eighty one points, SMP five hundred is up by
half a percent or twenty seven points, and the Nasdaq
up by three quarters of a percent or one hundred
and thirty five points. Russell two thousand up over one
percent so far today, ten You're Treasure reeled up by
(20:36):
two basis points at three point sixty four percent, and
crude oil up again today another one and a half percent,
trading just above seventy one dollars a barrel. Intel shares
jumping by four and a half percent after the struggling
chip maker announced it would reduce more costs It will
create a separate entity for its foundry business that will
(20:57):
allow the unit to have its own board and raise
outside funding Separately. Intel also agreed to a multi billion
dollar agreement with Amazon's cloud computing arm. Meanwhile, Microsoft up
by one and a half percent after the tech giant
said it would hike its dividend by nearly eleven percent
and begin a new stock buyback program of up to
(21:17):
sixty billion dollars. Elsewhere, Meta Platforms came to terms with
ray bandmaker Esselor Luxotica, extending the Facebook and Instagram parent
companies venture into smart Iewear. That stock is up by
about a third of a percent. And Flutter Entertainment, parent
company to online sports betting company fan Duel, announced it
(21:38):
will acquire Italian gambling companies sny Tech from Playtech and
a deal valued at nearly two point six billion dollars.
Flutter shares are currently up by three percent. I'm Tucker
Silva and that's Wall Street.
Speaker 2 (21:52):
Watch Tucker before today. Have you ever heard of what
was those company's named fly Tech Snakes? No? The answer
is my wutter sny tech and play tech. Sure, yes,
I'm just I'm impressed that you've managed to rattle all
that off with the straight face.
Speaker 1 (22:07):
That was.
Speaker 2 (22:07):
That was pretty good. Yeah, I didn't even know if
i'd pronounce some pres. You could have made up all out.
You could have made up all of those and I
would have had no idea.
Speaker 4 (22:16):
Flutter tech.
Speaker 2 (22:17):
I would encourage you to do that every once in
a while, just to see if anyone, just to see
if I'm paying attention. Keep you on your toes.
Speaker 3 (22:23):
He was having a stroke.
Speaker 2 (22:24):
I didn't know what.
Speaker 3 (22:26):
I thought it was gibberish, but he's a young guy.
I figured he would recover fast, so I didn't call anybody.
Speaker 2 (22:32):
I just blacked out what happened.
Speaker 3 (22:35):
It was brilliant, tuck se NBC's on the phone. They
want you today. Uh.
Speaker 2 (22:41):
According to Mortgage News Daily, in October of last year,
specifically October nineteenth of last year, you had the thirty
year fixed rate mortgage hit a cycle high of eight
point zero three percent. That's the that's the average new
mortgage that was being issued on October nineteenth, eight point
zero three percent. We are now almost two full full
(23:02):
percentage points off that high. We're sitting as of yesterday,
according to that same source, at a thirty year fixed
rate mortgage of six point one two percent and a
little bit of discount. For instance, if you're to do
a fifteen year fixed at five point six percent, I
would just logically kind of expect here that, hey, if
(23:22):
you were to tell me in the fall of last
year that mortgage rates were about to drop by almost
a full two percentage points, that you'd see an uptick
in housing demand, maybe more home sales, maybe more lines
out the door for open houses. And we've kind of
been continuing to buck that trend in what has been,
(23:43):
you know, kind of perpetually strange housing market over the
last few years, and I struggle to get at the
psychology of it.
Speaker 4 (23:51):
Do all.
Speaker 2 (23:52):
According to Altis Research, Mike Simonson comes on the show,
every once in a while, you're seeing more and more
home sellers that are just withdrawing their listings, saying, you know,
we have this home for sale but not getting the
price that we want, so rather than lowering, we're just
gonna take it off the market. And you, I don't know,
continue to have this mismatch of number of sellers and
(24:15):
interested buyers right now, it's not resulting in price declines
where you know, the sales that are going through are
continuing to hit new records, but this continued mismatch, and
it makes me just kind of wonder is there a
magic interest rate at which buyers become interested in again?
Is it just a long and steady, you know, pace
(24:39):
at which finally these homes do eventually get sold, or
or you know, is there some We've talked about the
self fulfilling prophecies of believing that prices are going to
go up or go down. And if you are a
buyer out there who just has this fundamental belief that
rates will eventually go down, does it it becomes some
(25:00):
sort of interesting self fulfilling prophecy where yeah, home purchases
just don't go through because everybody expects the cost of
transacting to go down in the future.
Speaker 3 (25:09):
My answer to your questions are yes, no, yes, maybe, yes,
and no.
Speaker 2 (25:12):
I did ask a lot of questions there, thank you
a bunch of loaded.
Speaker 3 (25:16):
Now I might you ask all great questions, and a
lot of them I know are just rhetorical. Two things
come to mind, and again I'm feeling a little maybe
philosophical today. One is you can't hold everything else constant
when you give an opinion. This is a common This
distinguishes forgive me for sounding a little snooty, but this
distinguishes professionals from like armchair types. Yep, they say insurance
(25:38):
will come down, it's gonna be good for housing, thanks
a lot. You know, my cocker spaniel could have told
me that it's It's just not very deep. It's impossible
to say what the effect of something will be because
in your mind you're holding everything else constant. It's partial economy,
or if you want to get really fancy, partial equilibrium,
as an economist likes to say. Thinking you can can't
(26:00):
hold everything else constant, it would seem to make sense
that if interest rates come down, yes, the demand for
home should pick up.
Speaker 2 (26:06):
But what's happening on maybe the supply of homes.
Speaker 3 (26:09):
But the demand and the supply are both movings. You
don't keep the supply curve constant when you move the
demand curve. This is what makes the analysis challenging. So
just make a general point that you can't hold everything else.
If an analysis holds everything else or conclusion, I should say,
holds everything else constant. It's probably not very reliable. That's frustrating,
I know, but it's just too hard to say. And
(26:30):
the other thing that keeps coming to mind for me
is that the housing market really broke during the Great
Recession when a large number of home builders just went
out of business. They've since reconstituted themselves, most have, but
that change their mentality, I think permanently. They're not building
recklessly and as a result, we've got these supply issues.
(26:53):
This coupled with stubborn local regulations, which by the way,
I would defend in my own area, want multi family
housing cropping up everywhere.
Speaker 1 (27:02):
Either.
Speaker 2 (27:04):
Proud nimbi across the town.
Speaker 3 (27:05):
I am. I admit it. I don't want and I
defy anybody to tell me. You know that they genuinely
that they do want multi family housing all over the
place because they feel bad for other people. Blowney. I
like the quality of living in my neighborhood. I don't
want it to change. That's why I bought there. All
that said, again, housing market broke fundamentally changed in O
eight and it's still I don't know for covering is
(27:28):
the right word, but still evolving maybe is a better word.
Speaker 2 (27:32):
Yeah, And the breakage there to be clear what you know.
We can debate what cause did, what the effects were,
but I mean one of the effects was pretty clearly
that we produced significantly fewer homes in the decade following
the Great Recession compared to every six million.
Speaker 3 (27:49):
Too many going into.
Speaker 2 (27:50):
It, I have. But even if you go take a
look at decades before that, right, if you go take
a look at, you know, home construction in the twenty
tens decade compared to the nineteen nineties or other peers
as the time, to my knowledge, we still pretty significantly
underdeveloped homes during that twenty ten decade compared to almost
any normalized period of home construction in the United st.
Speaker 3 (28:09):
So, yeah, the right way to answer that question, and
I can't do it here in real time. We look
at the okay, look at the old trend and then
see where we were relative. It's not hard to do,
but I can't do it in thirty seconds. I don't know,
but I suspect you're probably right. We're below trend. If
the excess hadn't happened and the Great Recession hadn't happened,
we'd probably have more homes right now. We built too much,
(28:31):
said differently in the twenty in the two thousands, and
then overcompensated in the opposite direction.
Speaker 2 (28:36):
So I mean, why it all matters? Aside from those
you know, there's thousands probably you know people listening right
now who want to be in a home, want to
buy a new home, home, might want to sell and
buy a home. But one of the big reasons that
matters in my mind too, is that the idea with
lowering interest rates is that it stimulates economic activity compared
to higher interest rates. And we have this example here
(29:00):
where we've seen rates decline by two percentage points. It
wasn't the FEDS doing it was market related. But if
the interest rate on mortgages has declined by almost two
full percentage points, and I don't think you can really
look at any of the data in the economic in
the real estate world and say, oh yeah, look at
all this additional activity that was generated via lower interest rates.
(29:22):
And so I just I question, Okay, is it because
we haven't hit that magic number yet and if the
FED keeps going we will eventually get to that magic
accumulation of economic activity in housing? Or do we need
to be substantially lower on thirty year fix before that
activity tax up. I don't think anybody knows.
Speaker 3 (29:41):
I think you had the answer right off the top
of this segment, which is the supply side. People selling
is changing its behavior is the same time as the
demand side. So if you did your little supply and
demand curve like a good you know, housing economists, they're
both wiggling around. Find the intersection. People remember this exercise
from int econ you find the intersection. They call that equilibrium. Ooh,
(30:03):
we've got the price. Yeah, yeah, right, But it's if
they're if both curves are moving around, it's I'm oversimplifying,
but that's how I'm looking at this, and I think
and you made this point early on.
Speaker 2 (30:14):
So let's take a quick break. When we come back,
I want to talk a little bit further about that
question of lower interest rates. When and where will we
see it pick up economic activity? Will we or is
it just a you know, a potentially false narrative. There
quick break, We'll be covering that next on The Financial Exchange.
Speaker 1 (30:30):
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Speaker 3 (30:57):
Mark.
Speaker 2 (30:58):
We crossed a grizzly benchmark the other day. Some of
all US federal deficits just pass twenty eight trillion dollars,
nearly one hundred percent of GDP. If Congress does nothing
over the next decade, then total debt, just with regular
current spending and tax levels are estimated to climb by
(31:18):
another twenty two trillion dollars through twenty thirty four. We
aren't hearing much of this disgust, and I think the
Wall Street Journal sums it up pretty well without the
other seven pages of articles. Both candidates were parts of
administrations that produced growing deficits, and neither is likely to
reverse that trend if elected. I guess the question that
(31:42):
I would have is why do neither party seem see
it as a winning strategy for getting votes.
Speaker 3 (31:50):
Well, austerity doesn't sell. You've got to because spending or
raising taxes, both of which probably need to be done,
definitely need to be done to get this deficit and
debt underkid. So, deficit is the yearly short fall. Debt
is the cumulative yearly shortfall. Sorry for spelling those terms out,
(32:12):
but we throw them out there. And we had luxury
thinking about this every day. Maybe some people don't. So anyway, Mike,
it's pain. Pain doesn't sell. The last guy to impose
it effectively was George HW did in nineteen ninety and
he got raked over the calls for it, you know,
Pat Buchanan challenged him, arguably helped cost him the election,
but he started fiscally responsible tax cuts, tax increases, spending cuts.
(32:37):
Clinton continued that, and we ended up with the surplus
by in the end of the decade due to both
George HW and Clinton. They were kind of courageous.
Speaker 2 (32:44):
There have been other deficit hawks. I mean, Paul Ryan
arguably was his.
Speaker 3 (32:49):
Record is abysmal, but passed yeah in terms of rhetorics.
So you're right. So the Republican Party from Yeah, but
then they got in, once their guy got in power,
and I refer to Donald Trump, it was spending like
there was no tomorrow and he So this is the
tragedy of me to me of the modern Republican Party.
I know it's going to rankle a lot of you,
(33:09):
but nobody's more fiscally conservative than I am. And it
bothers me that I don't have a fiscally conservative choice.
But to answer the question, Mike. I think the obvious
response is because it wouldn't be popular to propose spending cuts.
I would also tax increases, right.
Speaker 2 (33:25):
I would also say that some of the rhetoric around
it of hey, if we raise our death sits to
if we if we increase this to twenty eight trillion dollars,
then the entire United States society will fall apart. We've
consistently shown that that hasn't been true. Well, we haven't
found that, we haven't found the magic number that does
make it.
Speaker 3 (33:41):
At some point, it will put severe upward pressure on
interest rates.
Speaker 2 (33:44):
But I think that that's also part of the failure here,
is that the rhetoric has been so strong that, oh,
if you keep this up, it's going to all come
crumbling down, and so far it hasn't. And that's been
a I guess, a pretty good argument in the quiver
of why why would you have proposed for depth, you know,
austeria during eight or at any point over the last decade,
because we've increased spending, increased deficits, and economy sense is.
Speaker 3 (34:07):
An okay, oh eight we needed it. I know you
weren't asking me, but sure we needed it. The economy
was in shambles. There's an argument for the government to
spend because recessions can leave deep wounds that take years
to heal. I'm not saying I like the way Obama
handled it, but you know what I mean. That's an
argument recarpment spending did it in the early nineteen eighties,
which Reagan did. Cut taxes, increased spending, really got the
(34:29):
economy going. Should have brought deficits in more. We didn't,
but we got our act together in the nineties. It's
it's a tragedy that we are where we are in
that neither party is fiscally responsible.
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Speaker 2 (35:45):
Mark. I want to do a bit of a kind
of a rapid fire here because it's been four years
since rates were cut and I want to actually try
and lay out some of the results of this type
of thing. So let let's start with the basics. Rates
get cut, uh, Deposit rates at banks result down mortgage
(36:08):
rates Hmm.
Speaker 3 (36:10):
It's tough to say because they are tied to the
ten year treasury, which has already come down a lot
in yield, and it depends on other economic forces too.
All l sqel exactly what I said you should not
ever do earlier. All l s equal might down, but
I could also see them going up a little bit.
Speaker 2 (36:24):
Yeah, I would say, I would say unclear, yes, yeah.
Speaker 3 (36:27):
Credit card rates down, all SQL bond prices which bond?
Speaker 2 (36:32):
Yeah, sure, yeah, that's the term bills.
Speaker 3 (36:36):
Medium term notes are long term bonds. Which are you
talking about?
Speaker 2 (36:39):
Let let's start with I guess what's the average out there,
which would be somewhere in the six to eight years
down for.
Speaker 3 (36:44):
No reason to be a blockhead contrary and here, Yeah,
on average, rates should come down.
Speaker 2 (36:48):
And prices of bonds therefore prices go up.
Speaker 3 (36:51):
That's the mechanism.
Speaker 2 (36:52):
Yeah. Uh consumer spending, Oh.
Speaker 3 (36:56):
Too hard to say. It depends on broader economic business spending. Also,
I was just looking at investment. When the FED cuts
and the economic backdrop matters a lot, you should not
make an allse equal statement there.
Speaker 2 (37:06):
Yeah, I think you know. My point here is that
I have gotten questions like, well, should I wait until
the FED cuts rates to go get a mortgage or
should I buy bonds because I think that the FED
is about to cut rates. And the answer is, if
you're thinking about it, it's probably already baked in with
some of that stuff. There are a few items like
CD rates, like money market.
Speaker 3 (37:25):
Rates that yeah, you lock those today.
Speaker 2 (37:27):
Yeah, But there are others that aren't likely to move.
And I think that's an important distinction, and I guess
they've already practically speaking. Just think about it this way.
If you are a business that is planning on spending
twenty million dollars to build a new factory, a half
a percent change in the rate that you're able to
borrow at, if it even changes that much, is not
(37:48):
likely to sway your decision one way or the other.
It's based on the overall economy. We got to take
quick break, but a lot more to cover. In the
second hour. We will be right back on the financial
Exchang
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(01:06):
Face is the Financial Exchange with Mike Armstrong and Mark Fandetti.
Speaker 2 (01:13):
Good morning, Welcome back to the Financial Exchange. It is
the Tuesday of a Federal Reserve meeting. They are in
meetings today discussing policy. We will hear from Jerome Powell
tomorrow at two pm. Two pm he starts speaking to
two thirty pm he starts speaking rather and they will
be releasing three important items here. One would be the headline,
(01:37):
which is how much do they cut rates tomorrow? Which
is baked in. They will be cutting rates tomorrow almost undoubtedly.
They will be releasing their summary of economic projections this step,
and then there will also be prepared remarks and a
Q and A that Jerome Powell does, and each of
those in and of themselves are interesting pieces that you
(02:00):
give you a sense of what the Federal Reserve is thinking.
And so if you turn on any financial media today,
my guess is the only thing you will hear as
we're looking at right now from Bloomberg, the ever Source
ISI founder and chairman, for instance, saying quote, I'd be
shocked if FED doesn't cut by fifty. You'll have somebody
else on I'm sure next saying the FED would be
(02:21):
idiots to cut by fifty basis points. And I'm here
to tell you that whether it's twenty five or fifty
is probably less impactful in most people's views than their
projections about where things are and what they actually have
to say about the state of the economy, although the
fifty versus twenty five will be what gathers all the
attention and gets all the attention tomorrow afternoon.
Speaker 3 (02:45):
So why do we care well? The FED controls or
exerts a lot of control over very short term interest rates.
That's its main tool for speeding up or slowing down demand.
Speaker 2 (02:54):
Explain what you mean by very short term interest rates?
Speaker 3 (02:57):
Short term interest rates are rates onlineans say less than
a year. Think Treasury build.
Speaker 2 (03:03):
The mechanism by which they controlled them, though, is what the.
Speaker 3 (03:05):
FED controls the money supply. I think we've all heard that,
but it's hard to translate that into something meaningful. They
do that by crediting banks with more reserves or taking
reserves away. When you put the reserves into the system,
The FED allows banks to lower interest rates. Basically, the
FED funds rate is their primary policy tool. They have others,
(03:27):
but that's their main policy tool, and again they try
to control that. Though they don't control it precisely, they
can heavily influence it by expanding or contracting the money supply,
and they do that to goose or restrain demand, which
in turn puts upward or downward pressure on inflation. It
doesn't always quite work that formulaically, that mechanically, but that's
(03:50):
the general theory, and it's been tested. You might think,
why would somebody need to test that. It's common sense.
Economists spend a lot of time, particularly in the late eighties,
testing whether or not the Fed actually influence short term
interest rates, and the answers yes.
Speaker 2 (04:02):
So when we take a look at things here, like
I said, what you know, financial media is going to
pay most attention to is what actually happens with that
FED funds rate tomorrow. And as of right now with
the CME groups website not properly loading, but as of
a couple hours ago when I was looking at it,
it was pricing in about a two thirds chance of
(04:25):
a fifty basis point rate cut, which is about a
flip from where we were, say, this time last week.
Speaker 3 (04:30):
Not clear why Mike. Let me first say I asked
the question why do we care. We care because it
should translate into lower credit card interest rates, though that
will depend obviously on your credit card and credit rating
and individual in factor specific to you. Lower auto loan
rates they're tied to, like the five year treasury note,
and again that'll depend on factors specific to you.
Speaker 2 (04:52):
So eat lower saving rates It should.
Speaker 3 (04:54):
Yeah, banks will very quickly lower rates on time deposits
and CDs, but it should reverberate down the so called
yield curve. It should to the extent that it hasn't
already been priced in so to speak, to longer term treasuries.
It should result in lower interest rates right on down
the curve. So I guess that's why people listening who
(05:17):
aren't concerned about this more complex capital market impact of this,
which we'll get into, yeah, should should care. It will
affect what you pay on your loans and what you
get paid on your savings.
Speaker 2 (05:29):
So as I mentioned about a sixty now now a
sixty three percent chance of a fifty basis point rate
cut tomorrow, that's, like I said, up pretty substantially from
just a week ago when it was only a thirty
four percent chance of that fifty basis point to rate cut.
To answer your pondering of what's changed, well, I don't
think we have any more information that would lead you
(05:51):
to a fifty basis point rate cut. I think what's
changed is Nick Timros, who's you know, kind of referred
to as the mouthpiece of the walls of the federals
when they can't speak, put out a number of pieces
over the last few days alluding to a fifty basis
point rate cut. And then you also had interviews with
several former FED cheefs. Because the current FED chairs cannot
(06:11):
sit it cannot discuss anything with the media right now,
they're barred from doing so. But you did have these
others saying, hey, based on my opinion and my time
at the FED, I think the FED will cut fifty
basis points. And so that seems to be, in my view,
the only thing that's turned things around. There's been no data,
new data released on a weakening economy.
Speaker 3 (06:28):
That's what I was referring to. So this morning we
got retail sales, maybe you'll talk about that. We also
got industrial production and capacity utilization, which the FED follows closely.
In fact, they produce those statistics. Industrial production is more
or less output at the nation's minds factories exactly what
you would think. That index is at its highest level
(06:49):
of the current expansion. It's odd to me that people
are talking about a jumbo cut in light of that. Now,
you could say, that's just one statistics. One's a statistic.
Excuse me. Capacity utilization also relatively steady, not at its
high capacity utilization, as the name suggests, is the percentage
of its resources on average, that their resources that companies
(07:10):
are using. How fully employed are your machines more or less?
Also at relatively stable levels. GDP growing at a healthy
clip according to Atlanta FS GDP now, which is as
good as anybody's guess as a snapshot of where the
economy is today. Unemployment, though it's ticked up, still very
(07:30):
low by historical measures. You can go right on down
the line. It's a little odd. Financial conditions, maybe we'll
talk about those. There are various indices of so called
financial conditions looser than they were a year ago. This
is why it's odd to me. Maybe it's just me
that the Fed is talking about an emergency size or jumbo.
(07:50):
They're not calling it an emergency size, and they won't, but.
Speaker 1 (07:55):
It's a big cut.
Speaker 3 (07:55):
They prefer to move more gradually, So why other than
the market seems to want it.
Speaker 2 (08:01):
Well, play real devil's advocate here. So I agree with
you financial conditions when you look at the overall published
financial conditions index, and you know, I know everybody's got
slightly different ones, but you know, generally speaking looser than
they were previously. Markets are up near all time highs.
But you know, playing the other side of that coin,
we have seen a nearly full percentage point increase in
(08:23):
the unemployment rate. I think if you look at like,
let's look at the eighteen month low in the eighteen
month high for a moment here, I think May of
twenty twenty three got as low as three to four
and July of this year got as high as four
to three. Yeah, when you compare that to other rate
cutting cycles, you could argue that the FEDS a little
bit behind the eight ball when you look at nearly
(08:45):
a full percentage point uptick and unemployment, wouldn't you.
Speaker 3 (08:48):
Yeah, And I we talked about that earlier today. I
tried to make that point to be balanced. Well, no,
we should be fleshing it out on the air too,
because I don't. The topic of our conversation here at
Mstrong Advisory Group earlier today was is the FED behind
the curve? Right in line with the curve ahead of
the curve? This is the perennial, by the way, question,
during the tightening or loosening phase of the cycle. Is
(09:09):
the FED too early, too late? Just right? We won't
know for a long time, and even then people will
argue about it. But of course you're right. My unemployment
has gone up the back of my mind, though I'm
left asking was it unnaturally low? Unusually unnaturally low? To
begin with? Is the low fours about right? Given what
I'll call the structure of the economy, Is that the
(09:30):
right so called natural rate, the rate that doesn't put
upward pressure on inflation. That's the magic figure that the
FED is trying to calibrate all of its decision towards.
What is the so called natural or neutral rate of interest,
natural rate of unemployment? Where would the economy rest, even
though it never really rests, if it wasn't being buffeted
(09:50):
by big shocks in either direction? Nobody knows the answer
to that. I just again find it curious that conditions
are so accommodating yet the FED is considering a jumbo
rate cut. What's the risk of that, well, a reigniting
of inflation. They apparently think the risk of increased unemployment,
more rises and unemployment as awkward as that as I
(10:11):
just phrased that, you know what I mean, and a
GDP slow down. They apparently think the risks of that
are greater than inflation reigniting. That's the obvious interpretation.
Speaker 2 (10:19):
Jobs we're seeing if they go fifty, that's the obvious conclusion.
If they go fifty. Let's take a quick break. When
we come back, I want to touch on that data
point that we got this morning at eight thirty, which
at least in part seems to be driving markets a
little bit higher. We'll discuss retail sales next. On the
Financial Exchange.
Speaker 1 (10:36):
There's only one show that follows well Street's continued volatility.
Keep it here all morning long on the Financial Exchange
Radio Network.
Speaker 4 (10:45):
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Speaker 2 (11:22):
Did you know what happens in ninety nine days?
Speaker 1 (11:25):
Uh?
Speaker 2 (11:27):
What Christmas? So let's talk retail sales. How appropriate would
that be? I had no idea it was one hundred
days Tillchristmas? Yes, really, yeah, but my wife got emails
from like every retailer that she subscribes to letting her
know that there's only one hundred days till Christmas. So
get on in here and you know, start making your purchases,
and you know, to be fair. Retailers at this point
(11:47):
in time are either already stocked up or in the
process of stalking up for the holiday shopping season, which
will presumably kick in right after Halloween. I'm guessing November
first is when we'll start in Christmas trees at home depot,
but you know, somewhere around.
Speaker 4 (12:02):
Probably before that. Honestly, yeah, it might.
Speaker 2 (12:05):
Be, might be. So taking a look here, we did
get a government report on retail sales this this morning
at eight thirty, and expectations here were for a decline
of zero point two percent. Now, this is a volatile series.
It does bounce all over the place, but what actually
happened was a zero point one percent increase in monthly
retail sales data. And you know, maybe part of what's
(12:27):
driving the market up today with you know, the combined
expectation of a fifty bases point rate cut with sales
in the retail sector, which drives the bulk of this
US economy moving upwards. In particular, there's thirteen categories that
they that they look at here, and the leader was
on e commerce merchant sales, which posted a solid one
(12:49):
point four percent gain. Others such as electronics, appliances, clothing,
and furniture all did fall, but nonetheless you did see
a reason big uptick and a bit of a beat
compared to the expectations for retail sales. Again, I don't
know what to make of this in particular mark other
than it speaks to what you're talking about, which is
(13:12):
there aren't a ton of signs that that financial conditions
are incredibly weak.
Speaker 3 (13:17):
I'm laughing because it gets bewildering people. We're relatively immersed
in this stuff because it moves capital markets, and that
matters for our clients. So we have to stay tuned
and we need to explain it or describe it. We
don't profess to know why, we just describe. Economists don't
agree on why. They still don't agree on what caused
the Great Depression. Okay, this is an ongoing debate. It's
(13:40):
not as lively as it used to be. The folks
that really care are a little older, but they still disagree.
Great Recession not even close to being settled. So my
point is we care because these things matter to people
that buystocks and bonds traders, and it matters therefore to
our clients. I'm sorry for being philosophical, but it's just
(14:01):
the way I'm feeling about all this data right now.
Some people would put this number into their model. Others
will wait for the personal consumption expenditures figure, which we
get in about a week and a half. There are
many measures of how much people are spending, and like
you said, Mike, it matters because that's most in an
accounting sense, that's most of gross domestic product or GDP,
(14:21):
but it's not generally the thing that moves the most
during contractions, during recessions, that's inventories. That's why I went
back to industrial production and capacity utilization a little bit earlier.
The health of the business sector specifically, there are no
warning signs there at all. There are few warning signs
with respect to the health of the consumer, though there's
(14:42):
plenty of hand ringing about debt levels and stuff like that.
Probably justifiably, I'm just not seeing to go back to
the point that we started the show with today, or
at the point I was trying to make anyway, that
it's not at all clear that the economy is meaningfully
slowing enough, that is to warrant what would be emergency
the action on the part of the Fed to stimulate
(15:02):
the economy. And they would say, we're not trying to
stimulate the economy. These cuts won't take effect for months
and months, maybe quarters. I would argue, the psychological effect
will be as we're seeing in markets, yeah, which have
a wealth effect. Your stocks go up, you spend money.
It sounds a little flaky to be worried about again
inflation reigniting. So I hesitate to voice that concern too
(15:25):
much because everybody, virtually everybody's in the other camp. But
imagine if it did. That's that's that's a rhetorical.
Speaker 2 (15:34):
Yeah, imagine if it did, would be the worst possible.
Speaker 3 (15:36):
Economy is not slowing, it's not even stalling, just lost
a little bit of altitude maybe, as evidenced by the
rise in unemployment, but it's about to pick up again.
We simply don't know.
Speaker 2 (15:48):
By the way that you know, I have to acknowledge
too that I don't think that there's any indication that
retail sales are any sort of leading indicator about the economy.
I pointed out that, hey, stocks might be moving on this,
and that that may well be true. But taking a look,
for instance, at retail sales going through the Great Recession,
you didn't see any significant drop off there until maybe
(16:08):
fall of two thousand and eight, when that thing was
already well baked in terms of a recession. So I
would not consider retail sales one. We're looking at last
month's data on retail sales. Two, My guess would be
that the average American just keeps on spending right until
they lose their job, And so I don't know that
retail sales are going to be any sort of indicator
of anything other than what got spent last month and
(16:29):
did people still have a job in order to be
able to spend.
Speaker 3 (16:31):
Yeah, that's good point too. Some of the things we
talk about are leading indicators because they tend to lead GDP.
Others are coincident. They tend to move in the same
period as GDP. Industrial production that I mentioned earlier, capacity utilization,
I mentioned earlier, retail sales, those are more or less coincident.
Others are lagging. Unemployment, rear view mirror. If you think
(16:51):
about when companies make decisions versus when they hire, there's
a big lag there. So I think it's important that
we qualify these numbers that we talk about from time
to time with whether they matter for the present, whether
they are predictive to some extent, or whether their rear view,
whether they're backward looking.
Speaker 2 (17:10):
There is one group of people that seem to agree
with you, Mark. The editorial board of the Wall Street
Journal does have a peace out today saying that hey,
you know, the inflation story could still be there and
making a lot of the same arguments that I think
you are in this at this point in time, saying, look,
you know, monetary mistakes on the way up made them
(17:30):
late to the game, and are they too willing to
cut rates on the way down? And I know you
agree with them on the way up. I don't disagree either,
you know what I'm just saying.
Speaker 3 (17:41):
I'm just saying they made a choice. Was it the
wrong choice? I don't know the elector It's pretty pod
so you could argue that, on its face is evidence
that the FED made the wrong choice.
Speaker 2 (17:51):
Yes, it seemed like the wrong choice, right, I'm.
Speaker 3 (17:55):
Torn on this, I admit. Then again, what if the
FED had started tightening much sooner and faster, and unemployment,
instead of going down to three point five, had stayed
around four point five to five. This is the trade off.
There's always if you just take one thing away from
the financial exchange, it's at least today. I won't speak
for you and Chuck, there's a trade off in the
(18:15):
short term between inflation and unemployment. The FED is constantly
trying to balance these two things. I won't go so
far as to say they're in perfect tension, because that
sounds too precise, But the FED is always thinking do
we want to keep demand where it is today? Do
we want to goose it? Do we need to restrain it?
Can we tolerate a little more inflation? Do we need
(18:35):
to rein it in.
Speaker 2 (18:37):
Do you you speak FED speak a little bit more
than I do. Do you see their current? I know
I have ten seconds, But do you see them as
taking a victory lap right now on the soft landing?
Because I'm not detecting that from the way they're speaking,
the way that Federal Reserve members are speaking, the way
that Drone Palall speaking seems to be very much worthy
of the risks now. But a lot of criticism the
FED right now seems to be coming from a place
(18:59):
of taking this victory lap like they already achieved the
soft landing. I'm not seeing that from anywhere other than
Treasury Secretary Janet Yellen, who's no longer part of the FED.
Speaker 3 (19:08):
Yeah, they seem to be erring on the side of
avoiding a growth slowdown or worse. I'm not detecting any
obnoxiously triumphalist rhetoric from the FED. We'll see.
Speaker 2 (19:19):
Let's take a quick break Wall Street watch next.
Speaker 1 (19:32):
Like us on Facebook and follow us on Twitter, act
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 markets so far
today right here on the Financial Exchange Radio Network.
Speaker 4 (19:53):
Markets are in the green today as Wallstreet reacts to
August retail sales data unveiled earlier this morning, where we
tail sales climb zero point one percent last month, better
than estimates of a zero point two percent decline. And
of course, the Fed begins their two day monetary policy
meeting today or an announcement on interest rates will follow
(20:14):
tomorrow afternoon at two o'clock. Right now, the Dow is
up by about a half a percent, or one hundred
and eighty one points, SMP five hundred is up by
half a percent or twenty seven points, and the Nasdaq
up by three quarters of a percent or one hundred
and thirty five points. Russell two thousand up over one
percent so far today, ten You're Treasure reeled up by
(20:36):
two basis points at three point sixty four percent, and
crude oil up again today another one and a half percent,
trading just above seventy one dollars a barrel. Intel shares
jumping by four and a half percent after the struggling
chip maker announced it would reduce more costs It will
create a separate entity for its foundry business that will
(20:57):
allow the unit to have its own board and raise
outside funding Separately. Intel also agreed to a multi billion
dollar agreement with Amazon's cloud computing arm. Meanwhile, Microsoft up
by one and a half percent after the tech giant
said it would hike its dividend by nearly eleven percent
and begin a new stock buyback program of up to
(21:17):
sixty billion dollars. Elsewhere, Meta Platforms came to terms with
ray bandmaker Esselor Luxotica, extending the Facebook and Instagram parent
companies venture into smart Iewear. That stock is up by
about a third of a percent. And Flutter Entertainment, parent
company to online sports betting company fan Duel, announced it
(21:38):
will acquire Italian gambling companies sny Tech from Playtech and
a deal valued at nearly two point six billion dollars.
Flutter shares are currently up by three percent. I'm Tucker
Silva and that's Wall Street.
Speaker 2 (21:52):
Watch Tucker before today. Have you ever heard of what
was those company's named fly Tech Snakes? No? The answer
is my wutter sny tech and play tech. Sure, yes,
I'm just I'm impressed that you've managed to rattle all
that off with the straight face.
Speaker 1 (22:07):
That was.
Speaker 2 (22:07):
That was pretty good. Yeah, I didn't even know if
i'd pronounce some pres. You could have made up all out.
You could have made up all of those and I
would have had no idea.
Speaker 4 (22:16):
Flutter tech.
Speaker 2 (22:17):
I would encourage you to do that every once in
a while, just to see if anyone, just to see
if I'm paying attention. Keep you on your toes.
Speaker 3 (22:23):
He was having a stroke.
Speaker 2 (22:24):
I didn't know what.
Speaker 3 (22:26):
I thought it was gibberish, but he's a young guy.
I figured he would recover fast, so I didn't call anybody.
Speaker 2 (22:32):
I just blacked out what happened.
Speaker 3 (22:35):
It was brilliant, tuck se NBC's on the phone. They
want you today. Uh.
Speaker 2 (22:41):
According to Mortgage News Daily, in October of last year,
specifically October nineteenth of last year, you had the thirty
year fixed rate mortgage hit a cycle high of eight
point zero three percent. That's the that's the average new
mortgage that was being issued on October nineteenth, eight point
zero three percent. We are now almost two full full
(23:02):
percentage points off that high. We're sitting as of yesterday,
according to that same source, at a thirty year fixed
rate mortgage of six point one two percent and a
little bit of discount. For instance, if you're to do
a fifteen year fixed at five point six percent, I
would just logically kind of expect here that, hey, if
(23:22):
you were to tell me in the fall of last
year that mortgage rates were about to drop by almost
a full two percentage points, that you'd see an uptick
in housing demand, maybe more home sales, maybe more lines
out the door for open houses. And we've kind of
been continuing to buck that trend in what has been,
(23:43):
you know, kind of perpetually strange housing market over the
last few years, and I struggle to get at the
psychology of it.
Speaker 4 (23:51):
Do all.
Speaker 2 (23:52):
According to Altis Research, Mike Simonson comes on the show,
every once in a while, you're seeing more and more
home sellers that are just withdrawing their listings, saying, you know,
we have this home for sale but not getting the
price that we want, so rather than lowering, we're just
gonna take it off the market. And you, I don't know,
continue to have this mismatch of number of sellers and
(24:15):
interested buyers right now, it's not resulting in price declines
where you know, the sales that are going through are
continuing to hit new records, but this continued mismatch, and
it makes me just kind of wonder is there a
magic interest rate at which buyers become interested in again?
Is it just a long and steady, you know, pace
(24:39):
at which finally these homes do eventually get sold, or
or you know, is there some We've talked about the
self fulfilling prophecies of believing that prices are going to
go up or go down. And if you are a
buyer out there who just has this fundamental belief that
rates will eventually go down, does it it becomes some
(25:00):
sort of interesting self fulfilling prophecy where yeah, home purchases
just don't go through because everybody expects the cost of
transacting to go down in the future.
Speaker 3 (25:09):
My answer to your questions are yes, no, yes, maybe, yes,
and no.
Speaker 2 (25:12):
I did ask a lot of questions there, thank you
a bunch of loaded.
Speaker 3 (25:16):
Now I might you ask all great questions, and a
lot of them I know are just rhetorical. Two things
come to mind, and again I'm feeling a little maybe
philosophical today. One is you can't hold everything else constant
when you give an opinion. This is a common This
distinguishes forgive me for sounding a little snooty, but this
distinguishes professionals from like armchair types. Yep, they say insurance
(25:38):
will come down, it's gonna be good for housing, thanks
a lot. You know, my cocker spaniel could have told
me that it's It's just not very deep. It's impossible
to say what the effect of something will be because
in your mind you're holding everything else constant. It's partial economy,
or if you want to get really fancy, partial equilibrium,
as an economist likes to say. Thinking you can can't
(26:00):
hold everything else constant, it would seem to make sense
that if interest rates come down, yes, the demand for
home should pick up.
Speaker 2 (26:06):
But what's happening on maybe the supply of homes.
Speaker 3 (26:09):
But the demand and the supply are both movings. You
don't keep the supply curve constant when you move the
demand curve. This is what makes the analysis challenging. So
just make a general point that you can't hold everything else.
If an analysis holds everything else or conclusion, I should say,
holds everything else constant. It's probably not very reliable. That's frustrating,
I know, but it's just too hard to say. And
(26:30):
the other thing that keeps coming to mind for me
is that the housing market really broke during the Great
Recession when a large number of home builders just went
out of business. They've since reconstituted themselves, most have, but
that change their mentality, I think permanently. They're not building
recklessly and as a result, we've got these supply issues.
(26:53):
This coupled with stubborn local regulations, which by the way,
I would defend in my own area, want multi family
housing cropping up everywhere.
Speaker 1 (27:02):
Either.
Speaker 2 (27:04):
Proud nimbi across the town.
Speaker 3 (27:05):
I am. I admit it. I don't want and I
defy anybody to tell me. You know that they genuinely
that they do want multi family housing all over the
place because they feel bad for other people. Blowney. I
like the quality of living in my neighborhood. I don't
want it to change. That's why I bought there. All
that said, again, housing market broke fundamentally changed in O
eight and it's still I don't know for covering is
(27:28):
the right word, but still evolving maybe is a better word.
Speaker 2 (27:32):
Yeah, And the breakage there to be clear what you know.
We can debate what cause did, what the effects were,
but I mean one of the effects was pretty clearly
that we produced significantly fewer homes in the decade following
the Great Recession compared to every six million.
Speaker 3 (27:49):
Too many going into.
Speaker 2 (27:50):
It, I have. But even if you go take a
look at decades before that, right, if you go take
a look at, you know, home construction in the twenty
tens decade compared to the nineteen nineties or other peers
as the time, to my knowledge, we still pretty significantly
underdeveloped homes during that twenty ten decade compared to almost
any normalized period of home construction in the United st.
Speaker 3 (28:09):
So, yeah, the right way to answer that question, and
I can't do it here in real time. We look
at the okay, look at the old trend and then
see where we were relative. It's not hard to do,
but I can't do it in thirty seconds. I don't know,
but I suspect you're probably right. We're below trend. If
the excess hadn't happened and the Great Recession hadn't happened,
we'd probably have more homes right now. We built too much,
(28:31):
said differently in the twenty in the two thousands, and
then overcompensated in the opposite direction.
Speaker 2 (28:36):
So I mean, why it all matters? Aside from those
you know, there's thousands probably you know people listening right
now who want to be in a home, want to
buy a new home, home, might want to sell and
buy a home. But one of the big reasons that
matters in my mind too, is that the idea with
lowering interest rates is that it stimulates economic activity compared
to higher interest rates. And we have this example here
(29:00):
where we've seen rates decline by two percentage points. It
wasn't the FEDS doing it was market related. But if
the interest rate on mortgages has declined by almost two
full percentage points, and I don't think you can really
look at any of the data in the economic in
the real estate world and say, oh yeah, look at
all this additional activity that was generated via lower interest rates.
(29:22):
And so I just I question, Okay, is it because
we haven't hit that magic number yet and if the
FED keeps going we will eventually get to that magic
accumulation of economic activity in housing? Or do we need
to be substantially lower on thirty year fix before that
activity tax up. I don't think anybody knows.
Speaker 3 (29:41):
I think you had the answer right off the top
of this segment, which is the supply side. People selling
is changing its behavior is the same time as the
demand side. So if you did your little supply and
demand curve like a good you know, housing economists, they're
both wiggling around. Find the intersection. People remember this exercise
from int econ you find the intersection. They call that equilibrium. Ooh,
(30:03):
we've got the price. Yeah, yeah, right, But it's if
they're if both curves are moving around, it's I'm oversimplifying,
but that's how I'm looking at this, and I think
and you made this point early on.
Speaker 2 (30:14):
So let's take a quick break. When we come back,
I want to talk a little bit further about that
question of lower interest rates. When and where will we
see it pick up economic activity? Will we or is
it just a you know, a potentially false narrative. There
quick break, We'll be covering that next on The Financial Exchange.
Speaker 1 (30:30):
Miss any of the show. The Financial Exchange Show podcast
is available on Apple, Spotify, and iHeartRadio. Hit the subscribe
button and leave us a five star review. This is
the Financial Exchange Radio network.
Speaker 3 (30:57):
Mark.
Speaker 2 (30:58):
We crossed a grizzly benchmark the other day. Some of
all US federal deficits just pass twenty eight trillion dollars,
nearly one hundred percent of GDP. If Congress does nothing
over the next decade, then total debt, just with regular
current spending and tax levels are estimated to climb by
(31:18):
another twenty two trillion dollars through twenty thirty four. We
aren't hearing much of this disgust, and I think the
Wall Street Journal sums it up pretty well without the
other seven pages of articles. Both candidates were parts of
administrations that produced growing deficits, and neither is likely to
reverse that trend if elected. I guess the question that
(31:42):
I would have is why do neither party seem see
it as a winning strategy for getting votes.
Speaker 3 (31:50):
Well, austerity doesn't sell. You've got to because spending or
raising taxes, both of which probably need to be done,
definitely need to be done to get this deficit and
debt underkid. So, deficit is the yearly short fall. Debt
is the cumulative yearly shortfall. Sorry for spelling those terms out,
(32:12):
but we throw them out there. And we had luxury
thinking about this every day. Maybe some people don't. So anyway, Mike,
it's pain. Pain doesn't sell. The last guy to impose
it effectively was George HW did in nineteen ninety and
he got raked over the calls for it, you know,
Pat Buchanan challenged him, arguably helped cost him the election,
but he started fiscally responsible tax cuts, tax increases, spending cuts.
(32:37):
Clinton continued that, and we ended up with the surplus
by in the end of the decade due to both
George HW and Clinton. They were kind of courageous.
Speaker 2 (32:44):
There have been other deficit hawks. I mean, Paul Ryan
arguably was his.
Speaker 3 (32:49):
Record is abysmal, but passed yeah in terms of rhetorics.
So you're right. So the Republican Party from Yeah, but
then they got in, once their guy got in power,
and I refer to Donald Trump, it was spending like
there was no tomorrow and he So this is the
tragedy of me to me of the modern Republican Party.
I know it's going to rankle a lot of you,
(33:09):
but nobody's more fiscally conservative than I am. And it
bothers me that I don't have a fiscally conservative choice.
But to answer the question, Mike. I think the obvious
response is because it wouldn't be popular to propose spending cuts.
I would also tax increases, right.
Speaker 2 (33:25):
I would also say that some of the rhetoric around
it of hey, if we raise our death sits to
if we if we increase this to twenty eight trillion dollars,
then the entire United States society will fall apart. We've
consistently shown that that hasn't been true. Well, we haven't
found that, we haven't found the magic number that does
make it.
Speaker 3 (33:41):
At some point, it will put severe upward pressure on
interest rates.
Speaker 2 (33:44):
But I think that that's also part of the failure here,
is that the rhetoric has been so strong that, oh,
if you keep this up, it's going to all come
crumbling down, and so far it hasn't. And that's been
a I guess, a pretty good argument in the quiver
of why why would you have proposed for depth, you know,
austeria during eight or at any point over the last decade,
because we've increased spending, increased deficits, and economy sense is.
Speaker 3 (34:07):
An okay, oh eight we needed it. I know you
weren't asking me, but sure we needed it. The economy
was in shambles. There's an argument for the government to
spend because recessions can leave deep wounds that take years
to heal. I'm not saying I like the way Obama
handled it, but you know what I mean. That's an
argument recarpment spending did it in the early nineteen eighties,
which Reagan did. Cut taxes, increased spending, really got the
(34:29):
economy going. Should have brought deficits in more. We didn't,
but we got our act together in the nineties. It's
it's a tragedy that we are where we are in
that neither party is fiscally responsible.
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Speaker 2 (35:45):
Mark. I want to do a bit of a kind
of a rapid fire here because it's been four years
since rates were cut and I want to actually try
and lay out some of the results of this type
of thing. So let let's start with the basics. Rates
get cut, uh, Deposit rates at banks result down mortgage
(36:08):
rates Hmm.
Speaker 3 (36:10):
It's tough to say because they are tied to the
ten year treasury, which has already come down a lot
in yield, and it depends on other economic forces too.
All l sqel exactly what I said you should not
ever do earlier. All l s equal might down, but
I could also see them going up a little bit.
Speaker 2 (36:24):
Yeah, I would say, I would say unclear, yes, yeah.
Speaker 3 (36:27):
Credit card rates down, all SQL bond prices which bond?
Speaker 2 (36:32):
Yeah, sure, yeah, that's the term bills.
Speaker 3 (36:36):
Medium term notes are long term bonds. Which are you
talking about?
Speaker 2 (36:39):
Let let's start with I guess what's the average out there,
which would be somewhere in the six to eight years
down for.
Speaker 3 (36:44):
No reason to be a blockhead contrary and here, Yeah,
on average, rates should come down.
Speaker 2 (36:48):
And prices of bonds therefore prices go up.
Speaker 3 (36:51):
That's the mechanism.
Speaker 2 (36:52):
Yeah. Uh consumer spending, Oh.
Speaker 3 (36:56):
Too hard to say. It depends on broader economic business spending. Also,
I was just looking at investment. When the FED cuts
and the economic backdrop matters a lot, you should not
make an allse equal statement there.
Speaker 2 (37:06):
Yeah, I think you know. My point here is that
I have gotten questions like, well, should I wait until
the FED cuts rates to go get a mortgage or
should I buy bonds because I think that the FED
is about to cut rates. And the answer is, if
you're thinking about it, it's probably already baked in with
some of that stuff. There are a few items like
CD rates, like money market.
Speaker 3 (37:25):
Rates that yeah, you lock those today.
Speaker 2 (37:27):
Yeah, But there are others that aren't likely to move.
And I think that's an important distinction, and I guess
they've already practically speaking. Just think about it this way.
If you are a business that is planning on spending
twenty million dollars to build a new factory, a half
a percent change in the rate that you're able to
borrow at, if it even changes that much, is not
(37:48):
likely to sway your decision one way or the other.
It's based on the overall economy. We got to take
quick break, but a lot more to cover. In the
second hour. We will be right back on the financial
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