August 18, 2025 • 38 mins
Paul Lane and Marc Fandetti preview Jerome Powell's upcoming speech at Jackson Hole. Strong crop of earnings ease 'investors' economic concerns. Data zigzags make Powell's upcoming speech hard to predict. Housing market craters with 56% of homes selling below asking. Experts warn of a further fall. Americans pull back from an epic credit-card binge.
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Speaker 1 (00:00):
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Speaker 2 (01:11):
Welcome to this Monday edition of the Financial Exchange. I
hope everyone had a great weekend was able to enjoy
the beautiful sunshine that we have. Paul Lane, Mark Vendetti,
and Tucker Silva here with you as we kick off
the week here. Markets remain relatively mixed, almost flat at
the moment. What we have to kick off this week,
we'll get the FED Meeting minutes. Those are going to
(01:32):
come out at two o'clock this afternoon that will recap
what was discussed in the late July meeting for the
Federal Reserve. We also have the Federal Reserve out in
Jackson Hole, Wyoming for their annual symposium, where we'll be
looking to glean anything that we can on commentary from
Jerome pal for FED policy changes. And then in terms
(01:53):
of earnings, this week, we've got a couple of major
retailers that will be kicking off the earn at the
end of the earnings and where we've got about ninety
plus percent of the S and P five hundred has
reported their Q two earnings, but we're gonna get Walmart,
Target and Low's are gonna be some of the major
retailers that will come out this week.
Speaker 3 (02:11):
Just to clarify real quick.
Speaker 4 (02:12):
Meeting minutes are Wednesday.
Speaker 3 (02:14):
Wednesday.
Speaker 2 (02:14):
It'll be really so oh I thought I saw that
they were kind out to day, so that will be Wednesday.
Speaker 3 (02:19):
We will be seeing what a.
Speaker 2 (02:22):
Jerome pal has to say out in Jackson Hole. Other
than that, it's relatively quiet in terms of economic reports.
The items that I mentioned previously are gonna be of
the major focus. The Federal Reserve won't get together for
its next meeting until mid September the sixteenth and seventeenth,
so we're not gonna see anything there. But we'll kick
(02:43):
off this show just discussing sort of what we are
looking at on the weekhead. And I want to start
with the labor market because that's one of the things
that they will be discussing in Jackson Hole symposium. Just
where we sit at the moment, we had a job
support for or the month of July that was pretty
starring in that we saw major reductions in terms of
(03:05):
the job's growth across the country. Two hundred eighty five
thousand jobs were revised off of May and June's reports,
where we saw respectively, in the mid teens of fourteen
and fifteen thousand jobs added in those months nineteen thousand
and fourteen thousand jobs for the month of May and June,
and the focus will be here. Initially, when that job's
(03:29):
report came out, there was really overwhelming sentiment that we
would see a rate cut for this September meeting. Now,
you did have an inflation report that came out recently
that was a little bit mixed. I would say that
probably not as hot as some people anticipated. But also
on the wholesale side of things, we had a producer
(03:50):
price inflation report that did skew a little bit higher
than expectations. And the labor market that we sit in
at the moment, what we're looking at is and I
was just discussing this earlier this morning with Jim Palito
on his program, where twenty twenty one and twenty twenty
two mark were times where we had this great resignation.
There was a tremendous amount of people leaving and trying
(04:12):
to find higher paying jobs. We had fifty million people
quit their jobs in twenty twenty two. That set a
record according to the Jolt Support. But now it's much
more of a sort of low fire, low higher job
market that we find ourselves in where companies aren't laying
off a tremendous amount of people. But at the same
point in time, everyone seems to be rather complacent and
(04:32):
not willing to just jump ship yet in terms of
their job mobility.
Speaker 3 (04:36):
Here.
Speaker 5 (04:37):
Yeah, I think with respect to the FED and how
it views the labor market, you have to keep in
mind what the FED does. It controls the money supply,
and it tries to target interest rates. I always started
at a very high level when we start these conversations,
but I think it's useful because most of us don't
think about this every day. So the Fed's job is
to balance the forces that push inflation up against the
(04:58):
forces that push employment down. You can think of the
FED as the economy's thermostat. When the economy gets too hot,
and that's the FED zone fault. By the way, when
the economy gets too hot, it's overstimulate. Usually it's overstimulated demand.
It has to push on the brakes or tap the
brakes to slow the economy, to slow demand, to slow
upward pressure on prices. That's why I say the FED
(05:20):
is the economy's thermostat that works most of the time.
There are crises when that analogy doesn't work. But most
of the time normal business cycles that work. So you
just keep that in mind. That's what the FED is doing.
It's trying to gauge now, the state of the labor market.
And you just ticked off a bunch of recent indicators,
some of which point to a little bit of loosening
of labor market conditions. But they were quite tight for years.
(05:41):
And arguably that quite tight. And what do I mean
by tight? Unemployment historically in the fives or the fours
was considered.
Speaker 3 (05:49):
Good, tremendous. Yeah, right.
Speaker 5 (05:51):
You would not have fretted a lot about unemployment in
the fives unless you had some reason to believe that
the economy's natural rate, so to speak, was much lower.
Questionable proposition, and I'll just leave it there. The economy,
the labor market remains quite healthy by most measures. There's
some evidence is slowing. You pointed to slowing payroll growth.
(06:11):
It slowed twenty twenty three to twenty twenty four, and
again it slowed from twenty twenty four to twenty twenty five,
but again it was breakneck, So there are reasons to
discount that. Overall unemployment, what do we have four point
two percent for the unemployment rate, which is probably the
most widely followed broad measure of labor market health. That's
(06:31):
an impressively low rate. Still, it might be on its
way up, in which case my comments will sound foolish.
But based on what we know today, the labor market
remains steady as you characterize it. It's not exciting like
it was earlier on in this expansion, but that was
not sustainable, as evidenced by the high rate of inflation.
So what is the Fed going to make of all this?
Thinking about things through the lens that they do, they
(06:54):
view inflation for which they are responsible, and don't forget
that they're not responsible for anything but inflation and unemployment.
But they probably weighed inflation a little bit more. What
is their assessment of things right now? It's probably that
the economy is running it about potential GDP growth according
to like the Atlanta Fed's GDP now, which you guys
(07:16):
talk about a lot, is a little above what like
two percent, it's like two and a half I think
now something like that. That's above the economy's potential. That's
above the speed limit of the economy, if you like.
So if that's gonna be careful and they know this.
They don't want to push too hard. If they do,
they'll they'll spark another round of high inflation. Inflation properly
measured by that, I mean, it's it's trend. What's really
(07:37):
going on remains elevated. FED knows this. It's why they
haven't eased more.
Speaker 2 (07:41):
Yeah, we're looking at the headline inflation numbers that we saw.
Would that report come out a week or two ago,
early early August together?
Speaker 3 (07:50):
Yeah? Yeah, last week? Right? Last week?
Speaker 2 (07:52):
Yeah, two point seven percent was the headline CPI figure
year over year month over month, I believe was it
point two.
Speaker 5 (08:00):
Point three for headline and point two for core?
Speaker 2 (08:02):
Right, and then core core we have running at three
three percent?
Speaker 5 (08:07):
Tuckersification, does you get paid for the market ultra?
Speaker 3 (08:11):
Last week? I don't know.
Speaker 2 (08:12):
It was totally off the grid. He was in Margueritaville.
But it's to a point where the long term target
is two percent. You know, it's been skewing, like we mentioned,
whether you look at headline or or core two seven
or or three percent. So now the focus of this
meeting will be any sort of commentary that they have
on the rate front or how they view where inflation
(08:35):
is and mark you always bring up. You know, the
long term target is two I get it, that's their
stated goal. But is it really that problematic to have
two and a half percent or three percent and.
Speaker 5 (08:46):
People expect too and you surprise them with three And
the key operative word there is surprised. That will stimulate
demand and inflation. So yeah, it is a problem if
you try to if you're a policymaker, you try to
surprise the market by printing more money than they expect.
I'm oversimplifying a little bit here, but the way monetary
policy works is by surprising people. If an increase in
(09:08):
the money supply and therefore inflation is expected, it's not
an influence demand. People price it in so to speak,
it's unanticipated Monetary shocks is a sort of technical way
to describe it, but in plain English. When the Fed
prints more money than people were expecting, think about it.
You see you're a producer, your company, you see your
demand go up? Do you increase prices? Is it a relative?
Speaker 3 (09:33):
Are people? Excuse me?
Speaker 5 (09:34):
Are people moving or people's preferences changed? Are they buying
more of what you sell because they want it more,
like it more? Or is that just inflation. You may
not know. I'm getting a little bit into economic theory here,
but it's just useful to keep in mind that the
FED can influence demand in the short term by surprising people.
I'm oversimplifying a bit. It's actually that plus the fact
(09:56):
that not all prices adjust in the short term, so
they flood the economy with not everybody changes their prices away.
The flooded money goes at first into demand and then
eventually into prices, and the FED has a problem to
fix down the road. This is a little bit ourcane
and you have to think about it. It's not intuitive,
but this is the framework the FED operates in.
Speaker 3 (10:15):
Well.
Speaker 2 (10:16):
Also, they're constantly monitoring the supply chained side. But I'm
not saying that they could do anything about it, but
they have to. And that's what we're looking in the
fall here potentially is would we see any impact from
tariffs on inflation is and that is why the FED
has been in this limbo stage for the last several
months where they have been really hesitant to make any
(10:36):
rate cuts because they've been waiting for inflationary impact from tariffs.
To this point, we haven't seen it. There's arguments to
be made that it's delayed and we will see in
the fall. There's other arguments that perhaps it's not going
to be as strong as once was anticipated, and that's
really what we need to monitor you.
Speaker 5 (10:55):
I don't want to downplay the Fed's handling of so
called supply shocks. Tariffs are example. Oil price spikes are
an example, like when OPEC embargoes US. There are positive
supply shocks to productivity unexpectedly goes up like it did
in the late nineties, that helps push inflation down. The
Fed's going to make a decision as to whether or
not to If it's an adverse supply shock, like an
oil price shock, do we accommodate it, which they did
(11:17):
in the seventies that resulted in inflation expectations going up,
which created more problems in terms of inflation control. Their
job is really really hard, which is why politicians need
to We're not going to learn this lesson the easy way. Unfortunately,
politicians should back off and let them do their job
in an objective, almost technocratic way. But that's not the
(11:38):
world we live in right now.
Speaker 2 (11:39):
We're going to take a quick break here on the
finished exchange. When we come back, I want to talk
about earning season. It's wrapping up here shortly. We want
to talk about what we've seen and what we can
anticipate over the course of the next week. That's right
here on the Financial Exchange.
Speaker 6 (11:52):
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Speaker 4 (12:17):
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Speaker 2 (12:49):
Earning season is coming to a close throughout this week
will be sort of the last major earnings reports that
we'll see from the S and P five hundred kontenency
and overall, it's been a pretty good earning season. We've
seen that profit has grown twelve percent in Q two,
up from a year earlier, and beating a lot of
expectations out there. The one caveat to that is a
(13:12):
lot of the earnings growth that we're seeing is consolidated
within two industries. It's the technology sector and the communications
services sector, which they kind of overlap one another.
Speaker 3 (13:23):
It's the big the big.
Speaker 2 (13:25):
Group you know, fang or whoever you want to call them,
whatever nickname you want to use, that is really dominated.
It's the the Amazons, the facebooks, the Microsofts, the the
Googles that are really seeing a tremendous amount of earnings growth.
All of their earnings came in quite strong. You know, Facebook,
for example, saw a twenty two percent jump in revenue.
(13:45):
You had Microsoft come in with some strong numbers as well.
Speaker 3 (13:50):
And if you look at just the.
Speaker 2 (13:53):
Earnings growth from the S and P five hundred, two
thirds of it is from those companies that I just
spoke about. They are the ones that are really powering
a lot of the earnings growth that we've seen and
also spending a tremendous amount of money in terms of
capax in order to prop up some other sectors of
business out there. The all surge and data center spending
(14:16):
has really helped propel companies in some of the companies
in the utility space like gia, Vernova and others out there.
The eighty five billion of CAPEX that Microsoft will spend
is more than the annual revenue of about ninety two
percent of the S and P five hundred companies, So
it's it's significant, and it's peers are spending a significant
(14:36):
amount too. Microsoft and Facebook are spending thirty percent of
their revenue on CAPAX. So I wonder Mark, just you know,
we sit at a point in time now where you
had discussed off air that there's concerns about bubble popping up.
In some of the financial pieces that we read, we
are seeing that price to earnings ratios are are very high,
(14:59):
and a lot lot of it the earnings growth that
we're seeing is consolid in one sector. Just how you
view sort of the earning season that we've just gone
through here.
Speaker 5 (15:07):
Well, like you said, through the end of the second quarter,
earnings year over year were up. Profits that is up
about twelve percent. Stock prices over the same period up
a little over fourteen percent, so you sure as heck
better have had high earnings growth over that period. Stocks
were expecting that and more if you just look at
(15:28):
that twelve month period, which is a little bit selective,
but to me, it's still telling you only buy a
stock because you expect it at some point to pay
high dividends, or to expect or you expect the company
to buy back stock and return some of your investment
to you in the forms of higher capital gains over time,
(15:49):
which of course you've got to sell to realize. My
point is earnings are the whole game, and stocks right now,
as you noted Paul, by virtually any measure, our priced
at record highs relative to earnings, and by any measure,
I mean no matter how you want to measure earnings,
whether you want to look at the last twelve months,
whether you want to look at the expected next twelve
(16:10):
month earnings performance, whether you want to look at something
longer term. There are measures that look at the last
ten years worth of earnings, take an average of those,
and the reason for that is that business cycle affects
the ups and downs of the economy, even when it's expanding,
can distort the trend in earnings by any of those measures,
trailing twelve month forward PEES, the cyclically adjusted so to speak, PE,
(16:32):
which looks at that ten year average earnings relative to
prices prices, and they're in the numerator. I just reversed it,
but you know what I'm getting at. By any measure,
stocks are very richly priced, so you better have aigh
earnings growth. The result if you don't could be a
reduction in valuations, which is diplomatic a delicate way of saying,
(16:56):
a big fall in prices. You hope it's orderly. You
hope Suppose earnings don't meet investor expectations. One possibilities that
prices just kind of stay where they are and earnings
grow modestly over time. That would cause valuations to return
to more typical levels, which would require, by say, twelve
month forward PE standards, a ten to twenty percent decline
(17:18):
in stock prices. You hope that doesn't happen. You hope
it's rather earnings growing slowly and stock price is staying static. Unfortunately,
adjustments are usually abrupt, like when you would overinflate something.
Sometimes you're able to disinflate whatever the object is you
overinflated in an orderly manner. Other times that thing just pops,
which is where the bubble analogy comes from.
Speaker 2 (17:39):
I think when you're looking forward here. The other thing
that's at play is, as I mentioned, earnings growth has
been consolidated in some of these companies that I mentioned before,
they've also just had a very strong run in their
traditional lines of businesses. At the same time, they're spending
billions of dollars in capex to develop out their AI capabilities.
One of the things that is mentioned in this Wall
(18:01):
Street Journal piece that could be a deterrent for the
economy and the markets specific to these big companies is
that if there are traditional lines of businesses slow down.
So if Microsoft's you know, cloud business or Facebook's you know,
advertising revenue that it generates from its social media networks
slows down on the backs of them spending at these
higher levels, then the market could be set up for a,
(18:25):
you know, a setback if that is to be the case.
The the other piece is that there's been tremendous tailwind
for spending out on data centers and anya, and that
doesn't really look like it's slowing. You'd be hard pressed
to make that argument in any way, shape or form
with the billions of dollars companies are plowing into it.
But ultimately you're going to need to see a return
(18:45):
on that invested capital. And you know, as much as
chat GBT is a a fantastic you know, chatbot to use,
and they're continuing to innovate, and there are competitors out
there that are that are doing the same, Ultimately it
needs to lead to productivity growth and it leads needs
to lead to revenue growth. And I think the jury
(19:05):
is still very early on those things. And if you
have any loss in momentum in that capac expenditure cycle
that I'm talking about, that could lead to a slowdown
in many sectors of business that have benefited from just
a tremendous amount of money being pumped into it so
frequently over the course of the last year or two.
Speaker 3 (19:23):
We're gonna take a quick break here, but when we.
Speaker 2 (19:25):
Come back, we're gonna have Wall Street Match and much
more here on the Financial Exchange.
Speaker 7 (19:29):
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Speaker 6 (19:45):
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Speaker 1 (19:53):
Time now for.
Speaker 6 (19:54):
Wall Street Watch a complete look at what's moving market
so far today right here on the Financial Exchange Radio Network.
Speaker 4 (20:03):
Markets are mostly quiet as Wall Street readies for the
final significant batch of second quarter earnings due out this week,
with retailers including Home Depot, Low's, Target, and Walmart to
gauge the status of the consumer. Attention will also shift
back to the FED this week, with July meeting minutes
due out Wednesday afternoon and FED Chairman Jerome Powell slated
(20:26):
to speak from Jackson Hole on Friday. Right now, the
Dow is off by only twenty seven points, SMP five
hundred is down one point, and the Nasdaq is down
by two points. Russell two thousands up by three tenths
of one percent, Tenure Treasury reeled at four point three
two eight percent, and crude oil down over half a
(20:47):
percent lower, trading at sixty two dollars and forty two
cents a barrel shares, and Novo nor disc rising nearly
five percent after the company's we go. The obesity drug
was granted accelerated approval from the FDA for the treatment
of a serious liver disease. Meanwhile, Bloomberg reporting that Thomas
Bravo is in talks to acquire human resources management software
(21:11):
provider day Force. Day Force shares are surging twenty seven
percent on that news. Elsewhere, according to The Times in London,
Tesla is now offering discounts of up to forty percent
on leased vehicles in the country as sales slip. However,
Tesla's stock is up nearly one percent at the moment.
(21:33):
Terror Wolf shares are jumping seventeen percent following news that
alphabets Google will lift its investment in the bitcoin minor
in AI company to around three point two billion dollars.
Soho House shares are climbing fifteen percent after a group
of investors led by MCR Hotels announced that it is
(21:53):
planning to take Soho House private in a two point
seven billion dollar deal. In cyber security company Palo Alto
Networks will post their quarterly results after today's closing bell.
I'm Tucker Silvan. That is Wall Street Watch.
Speaker 2 (22:10):
As I mentioned earlier in the program, Jerome Powell will
conduct his annual speech in Jackson Hole, Wyoming. This is
an opportunity for him to give further commentary on the
Federal Reserve and where they feel economic policy will shift,
and also look back and recap some mistakes that he
may have made or just adjustments to long term federal
(22:33):
reserve policy.
Speaker 3 (22:33):
In general.
Speaker 2 (22:34):
This will be his very likely last annual speech that
he will give at Jackson Hole as his term is
set to expire in May of this year. And what
will really be in focus this week in terms of
what we will be looking for on the policy front,
is any indications that he has on the Fed's view
(22:55):
of the labor market, where inflation sits, and where they
could possibly take monetary policy. Specifically, will there be rate
cuts later in the month of September when they get
back together again on September sixteenth. At the moment looking
this morning, according to CME futures, there was a pretty
(23:15):
high probability there was about an eighty three percent probability
that we would see a rate cut for that September
seventeenth meeting. So any information that we get that will
really be the focus that we'll see here, as well
as digesting the FED meeting minutes set to come out
on Wednesday afternoon.
Speaker 5 (23:36):
Yeah, we covered this at the top at the top
of the last hour, so I won't rehash my The
FED is the economy is their mistat routine, but it
is useful to keep that analogy in mind. It tries
to cool the economy down when it overheats as a
result of the FED having overheated it printing too much
money at an earlier stage of the business cycle, and
similar lay, the FED has to anticipate slowdowns, which it
(23:57):
seems to be in the mode of doing now. Because
monetary policy a fancy way of saying printing money to
target the federal funds rate their policy tool. Monetary policy
works with very long legs, sometimes a couple, sometimes several quarters,
so they have to anticipate. On top of that, we
don't even know what the economy is doing right now.
All these so called data points that we get, they're noisy,
(24:21):
and I don't use that term casually. It has very
specific meaning. What happens month to month isn't necessarily indicative
of the underlying trend. So the inflation number we got
last week point three percent for headline inflation, I think
it was Godfred, but I looked that up after not
knowing it in the last segment. But I didn't point
three percent. You annualize that you get three and a
half or so percent, Is this a problem?
Speaker 3 (24:42):
Well, maybe maybe not.
Speaker 5 (24:43):
It could be noise. There are other measures that suggest, though,
that underlying inflation is somewhere in that range. The FED
knows this. The Fed's also thinking, though, what's the labor
market going to look like in three to six months.
If it slows further, that could put a brake on
the inflation process, indeed result the economy slowing too much,
pushing the economy into so called recession. So the FED
(25:05):
is dealing with imperfect information about the present, trying to make,
in turn predictions about the future.
Speaker 3 (25:11):
Their jobs.
Speaker 5 (25:12):
As I indicated, I'm not defending what they've watched in
the past. I'm simply trying to point out their job
is incredibly hard, when you think about it from that
point of view.
Speaker 3 (25:20):
Really challenging.
Speaker 2 (25:21):
Yeah, So inflation in the labor market, those are the
two prior priorities of the FED. Where we sit on
those fronts right now, Like we've talked about before on
the program, we're in a spot where inflation is higher
than their intended target. But I would not characterize it
as overly concerning at the moment. A labor market that
is weakening, but by historical standards, isn't in that bad
(25:43):
of a place.
Speaker 5 (25:44):
Did you see the You probably didn't last week because
you weren't here, But the University of Michigan released their
consumer survey talked to.
Speaker 2 (25:53):
You were to hear either I was, whereas everybody.
Speaker 5 (25:56):
Yeah, damn it, I was barely here last week, So
I really don't know what I'm talking about. Inflation expect
Let me just cut to the chase and say, inflation
expectations are on the rise. They're significantly higher than they
were a year ago. They jumped up in April, came
down a bit. They've since sort of settled, but in
the mid single digits. This is dangerous territory. When people
expect high inflation, they demand higher wages if they've got
(26:19):
the clout to do so. Firms ask for higher prices
if they feel like consumers will continue to buy at
the pace they were buying at iev it doesn't alienate customers.
So the FED is also I bring this up because
I didn't bring it up in the last segment, but
it's a critical part of the inflation process. According to
the models the FED uses, inflation expectations are high. This
(26:40):
is something the FED has to manage. It's not part
of their dual mandate, but it directly relates to it,
and it's something they can control through their speeches and
to an extent through their actions.
Speaker 2 (26:51):
Kevin Warsh is the potential replacement for FED Chairman Jerome Powell.
He's a former FED governor. A recently he was quoted
in discussing the idea of shrinking the Fed's balance sheet
in order to use that as a fulcrum to lower
down short term interest rates. So as Mark has mentioned
(27:14):
the FED controls the money supply, he had mentioned that
perhaps by tightening that money supply that would allow for
further interest rate cuts in and Mark, I'll kick it
to you to kind of your two cents on this,
but also probably try and keep this as high levels, not.
Speaker 5 (27:34):
An expert there, asset purchases and quantitatis. It gets harry fast.
Speaker 3 (27:38):
It gets Harry fast.
Speaker 2 (27:39):
So maybe much like myself, summarize it for a five
year old for listeners out there, because this does get
a little tricky monetary policy in general, and his view.
Speaker 5 (27:48):
Yeah, I mean what Warsh's view in this case doesn't
make any sense. He's not an economist. I think it's
important to keep that in mind. When he was appointed
to the board, he was frankly viewed as a lightweight,
and this is why I have misgivings about him. Although
I agree that the FED probably a betted asset bubble
aided in a bedded asset bubbles in the past, his prescription,
at least up until right now when he's angling for
(28:11):
the FED share position, his prescription has always been raised
interest rates focus entirely on inflation, which I like. I
don't think it's necessarily a bad thing to have a
FED chair who is overly concerned, who puts more weight
on inflation that they than they do on unemployment. That's
arguably a good quality to have in a FED chair.
The problem is he's done a point eighty since he
learned that Trump was considering making him FED share, So
(28:34):
I wonder about his character. Frankly, I also think he's
an economic bliteweight. He doesn't have a graduate degree. He
probably can't read a paper in economics. I don't mean
to sound snooty, but you have to have training to
do it. It's hard, it takes years. He doesn't know
how to do that, so I worry about his he
regularly criticizes FED models. I don't think he's ever I
don't think he'd know how to solve one. So I
(28:55):
think it's a I think nominating. Having someone at the
helm of the FED who doesn't fully understand what FED
staff is presenting to him is potentially gets us into
the same types of problems that we had with Powell
early on, where he seemed to lack a firm load
star and it led to the high inflation arguably that
(29:16):
we got to an extent during to an extent it,
let I should say, to the high inflation that we
got in the early stages of COVID. In this case,
he's way off long term asset purchases. Shrinking that part
of the FED so called balance sheet will not shrink
the money supply unless he's talking about broader measures of money.
But he doesn't say so there. This is where his
technical deficiencies come into play. It would not necessarily allow
(29:38):
the FED to lower short term interest rates. What he's
saying makes very little economic sense, and I think that's
the point that Dudley makes in the article that you
reference from Bloomberg.
Speaker 2 (29:47):
Sure, we're going to take a quick break here on
the finished sixteenes. But when we come back or when
we're talking about the housing market, it's been a very
slow housing market and there's some concerns out there that
that could slow down the economy. We're going to break
that down right after this break here on the Financial Exchange.
Speaker 1 (30:04):
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Speaker 6 (30:17):
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Speaker 1 (30:22):
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Speaker 2 (30:27):
This coming back from the break here, I want to
talk a little bit about the housing market. According to
data from redfin home Prices, our home sales have fallen
to their lowest level since twenty twelve. That's for the
(30:49):
period from April to June, which is typically the hottest
stretch in terms of buying and selling. That was according
to the New New York Post, but they cited data
from redfinn. If you look at the housing market in general,
it's really hard to point to anything that would be
a positive catalyst for the sector. In general, Housing inventories
have risen significantly. They're up to their pre pandemic levels
(31:14):
in many states throughout the country. And we're also seeing
that fifty six percent of homes through the month of
May had sold for less than their asking price. If
you look at specific areas the market, again, all of
this is regional. There are places in the Florida area
that we've seen prices dip pretty significantly, transaction volume, sales
(31:36):
volume in Miami has dropped, Naples has seen price decreases.
Then you have areas of Texas and other parts of
the country where you're seeing some declines in prices and
then inventories as well on the new home construction side
of things.
Speaker 3 (31:51):
So you have.
Speaker 2 (31:53):
Interest rates that have sat really on the thirty year
fixed mortgage right in around that seven percent level. There
isn't at this moment at least any reason to see
that those will come down significantly. You are seeing the
price growth that we had seen, which had just been
so rapid. I mean, prices have been up forty or
fifty percent from back where they were in the beginning
(32:15):
of COVID. Those have have moderated quite a bit. And
the reason that we talk about this on the program
is not only because it's it's an area of interest,
but also because there is a tremendous amount of the
US economy that is benefited from housing activity. It really
accounts for a tremendous amount of acroundic growth. Think of
(32:37):
all the industries that when you buy a house are touched,
when you're you know, landscaping and you know things within
the home. There's a tremendous amount of impact there. And
so we sit at a point in time where it
just is is unclear mark if you could really have
any sort of uptick here. Even though prices are coming down,
which is we've all wanted for a long period of time,
(33:00):
there are not a tremendous amount of barers.
Speaker 3 (33:01):
Looking to snap up these listings.
Speaker 5 (33:04):
No, And you could argue that, well, lower interest rates
might help, But if rates go down on the long
end it's probably because of concerns about economic growth, then
that might not be So there might be other things
happening in the economy that put a damper on demand,
and that would of course cause prices to go down,
but not for reasons that we would celebrate. And all
(33:27):
roads to me come back to that. You have to
think about the market as composed of two parts, supply
and demand. You can't just look at supply. You have
to look at what's happening on the demand side. Demand
has been feverish, supply has it's always sort of unresponsive
in the short term. Maybe it's exceptionally rigid in this
(33:48):
cycle because we're bumping up against zoning, local decisions, zoning
and other decisions that were made decades ago that are
hindering the expansion that could rest respond to the increased demand. Look,
what I'm saying here is that the cure, if you
think we need one for the frenetic housing market, is
(34:09):
probably an economic slowdown or worse. And that's not a
cure that anybody, any responsible you know, economist, research or whatever,
would would prescribe. I don't I don't really know the
answer here, or if.
Speaker 2 (34:25):
Yeah, one, we need one. It's affordability is an issue.
One last stat here, bank rate did in an analysis
of the fifty largest metro areas, and they determined that
renting is cheaper than buying on average or seeing you know,
the mortgage payments are higher in those areas and renting
is a better deal. So there's no immediate fix to
(34:45):
the affordability issues that we're running into in the housing
market here.
Speaker 4 (34:48):
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Speaker 2 (36:09):
Credit card spending is pairing back a little bit a
piece here from the Wall Street Journal. Americans pull back
from an epic credit card binge. Now, the frustration that
I have with the credit card story is that oftentimes
a lot of these news publications will cite that balances
on Americans credit cards collectively have surged over a trillion
(36:30):
dollars if you adjust for inflation. First of all, a
trillion sounds like a really big number. I get it,
and I know why Wall Street Journal and other news
publications use it, because it definitely sticks out of you.
But if you adjust for inflation, those balances aren't as
daunting as you would think from a historical perspective. Really,
what you focus on most here is delinquencies, and those
(36:54):
have been ticking up, not to a level that is
of great paramount concern, But now you do have Americans
at least slowing down the pace that they're spending on
their credit cards. And part of that could be certainly
because you have average credit card interest rates sitting around
twenty two percent, there's a lot more debit card spend
that we're seeing rather than credit card spend, it seems
(37:16):
like recently here at least.
Speaker 5 (37:17):
Yeah, you know, when you do adjust it for inflation,
And I'm using the CPI here to deflate large bank
consumer credit card balances. It's a database available on the
Federal Reserve Economic Database website. Anybody can do what I
just did here. It's very simple credit card balances. And
I'm just talking about absolute terms here and I'm talking
real terms, So adjusted for inflation, are no higher. And
(37:40):
again this is just a large bank consumer credit card figure,
no higher than they were at the peak of the
last cycle, when the economy was pretty much firing on
all cylinders. I'm looking at Q four to twenty nineteen.
It's same as it is today. Q four the latest
in this series, Q four tw twenty four. So we've
missed a little bit of economic activity. And of course
it's a percentage of the economy. In real terms, they'd
(38:02):
be smaller, be real economy is bigger. So if we
were writing this, we could put a very different spin
on that conclusion. I'm not saying it's not a problem.
I'm not saying people aren't stretched, and if real wages
haven't kept up, that's problematic.
Speaker 2 (38:15):
That's all the time that we have for the first
hour here in the Financial Exchange.
Speaker 3 (38:18):
But stick with us for the second hour.
Speaker 2 (38:19):
We've got a lot of earnings to preview and much
much more to discuss on the economy that's right after
this break here in the Financial Exchange.
Speaker 3 (38:25):
Stick with us.
The Financial Exchange is produced by Money Matters Radio and
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Speaker 2 (01:11):
Welcome to this Monday edition of the Financial Exchange. I
hope everyone had a great weekend was able to enjoy
the beautiful sunshine that we have. Paul Lane, Mark Vendetti,
and Tucker Silva here with you as we kick off
the week here. Markets remain relatively mixed, almost flat at
the moment. What we have to kick off this week,
we'll get the FED Meeting minutes. Those are going to
(01:32):
come out at two o'clock this afternoon that will recap
what was discussed in the late July meeting for the
Federal Reserve. We also have the Federal Reserve out in
Jackson Hole, Wyoming for their annual symposium, where we'll be
looking to glean anything that we can on commentary from
Jerome pal for FED policy changes. And then in terms
(01:53):
of earnings, this week, we've got a couple of major
retailers that will be kicking off the earn at the
end of the earnings and where we've got about ninety
plus percent of the S and P five hundred has
reported their Q two earnings, but we're gonna get Walmart,
Target and Low's are gonna be some of the major
retailers that will come out this week.
Speaker 3 (02:11):
Just to clarify real quick.
Speaker 4 (02:12):
Meeting minutes are Wednesday.
Speaker 3 (02:14):
Wednesday.
Speaker 2 (02:14):
It'll be really so oh I thought I saw that
they were kind out to day, so that will be Wednesday.
Speaker 3 (02:19):
We will be seeing what a.
Speaker 2 (02:22):
Jerome pal has to say out in Jackson Hole. Other
than that, it's relatively quiet in terms of economic reports.
The items that I mentioned previously are gonna be of
the major focus. The Federal Reserve won't get together for
its next meeting until mid September the sixteenth and seventeenth,
so we're not gonna see anything there. But we'll kick
(02:43):
off this show just discussing sort of what we are
looking at on the weekhead. And I want to start
with the labor market because that's one of the things
that they will be discussing in Jackson Hole symposium. Just
where we sit at the moment, we had a job
support for or the month of July that was pretty
starring in that we saw major reductions in terms of
(03:05):
the job's growth across the country. Two hundred eighty five
thousand jobs were revised off of May and June's reports,
where we saw respectively, in the mid teens of fourteen
and fifteen thousand jobs added in those months nineteen thousand
and fourteen thousand jobs for the month of May and June,
and the focus will be here. Initially, when that job's
(03:29):
report came out, there was really overwhelming sentiment that we
would see a rate cut for this September meeting. Now,
you did have an inflation report that came out recently
that was a little bit mixed. I would say that
probably not as hot as some people anticipated. But also
on the wholesale side of things, we had a producer
(03:50):
price inflation report that did skew a little bit higher
than expectations. And the labor market that we sit in
at the moment, what we're looking at is and I
was just discussing this earlier this morning with Jim Palito
on his program, where twenty twenty one and twenty twenty
two mark were times where we had this great resignation.
There was a tremendous amount of people leaving and trying
(04:12):
to find higher paying jobs. We had fifty million people
quit their jobs in twenty twenty two. That set a
record according to the Jolt Support. But now it's much
more of a sort of low fire, low higher job
market that we find ourselves in where companies aren't laying
off a tremendous amount of people. But at the same
point in time, everyone seems to be rather complacent and
(04:32):
not willing to just jump ship yet in terms of
their job mobility.
Speaker 3 (04:36):
Here.
Speaker 5 (04:37):
Yeah, I think with respect to the FED and how
it views the labor market, you have to keep in
mind what the FED does. It controls the money supply,
and it tries to target interest rates. I always started
at a very high level when we start these conversations,
but I think it's useful because most of us don't
think about this every day. So the Fed's job is
to balance the forces that push inflation up against the
(04:58):
forces that push employment down. You can think of the
FED as the economy's thermostat. When the economy gets too hot,
and that's the FED zone fault. By the way, when
the economy gets too hot, it's overstimulate. Usually it's overstimulated demand.
It has to push on the brakes or tap the
brakes to slow the economy, to slow demand, to slow
upward pressure on prices. That's why I say the FED
(05:20):
is the economy's thermostat that works most of the time.
There are crises when that analogy doesn't work. But most
of the time normal business cycles that work. So you
just keep that in mind. That's what the FED is doing.
It's trying to gauge now, the state of the labor market.
And you just ticked off a bunch of recent indicators,
some of which point to a little bit of loosening
of labor market conditions. But they were quite tight for years.
(05:41):
And arguably that quite tight. And what do I mean
by tight? Unemployment historically in the fives or the fours
was considered.
Speaker 3 (05:49):
Good, tremendous. Yeah, right.
Speaker 5 (05:51):
You would not have fretted a lot about unemployment in
the fives unless you had some reason to believe that
the economy's natural rate, so to speak, was much lower.
Questionable proposition, and I'll just leave it there. The economy,
the labor market remains quite healthy by most measures. There's
some evidence is slowing. You pointed to slowing payroll growth.
(06:11):
It slowed twenty twenty three to twenty twenty four, and
again it slowed from twenty twenty four to twenty twenty five,
but again it was breakneck, So there are reasons to
discount that. Overall unemployment, what do we have four point
two percent for the unemployment rate, which is probably the
most widely followed broad measure of labor market health. That's
(06:31):
an impressively low rate. Still, it might be on its
way up, in which case my comments will sound foolish.
But based on what we know today, the labor market
remains steady as you characterize it. It's not exciting like
it was earlier on in this expansion, but that was
not sustainable, as evidenced by the high rate of inflation.
So what is the Fed going to make of all this?
Thinking about things through the lens that they do, they
(06:54):
view inflation for which they are responsible, and don't forget
that they're not responsible for anything but inflation and unemployment.
But they probably weighed inflation a little bit more. What
is their assessment of things right now? It's probably that
the economy is running it about potential GDP growth according
to like the Atlanta Fed's GDP now, which you guys
(07:16):
talk about a lot, is a little above what like
two percent, it's like two and a half I think
now something like that. That's above the economy's potential. That's
above the speed limit of the economy, if you like.
So if that's gonna be careful and they know this.
They don't want to push too hard. If they do,
they'll they'll spark another round of high inflation. Inflation properly
measured by that, I mean, it's it's trend. What's really
(07:37):
going on remains elevated. FED knows this. It's why they
haven't eased more.
Speaker 2 (07:41):
Yeah, we're looking at the headline inflation numbers that we saw.
Would that report come out a week or two ago,
early early August together?
Speaker 3 (07:50):
Yeah? Yeah, last week? Right? Last week?
Speaker 2 (07:52):
Yeah, two point seven percent was the headline CPI figure
year over year month over month, I believe was it
point two.
Speaker 5 (08:00):
Point three for headline and point two for core?
Speaker 2 (08:02):
Right, and then core core we have running at three
three percent?
Speaker 5 (08:07):
Tuckersification, does you get paid for the market ultra?
Speaker 3 (08:11):
Last week? I don't know.
Speaker 2 (08:12):
It was totally off the grid. He was in Margueritaville.
But it's to a point where the long term target
is two percent. You know, it's been skewing, like we mentioned,
whether you look at headline or or core two seven
or or three percent. So now the focus of this
meeting will be any sort of commentary that they have
on the rate front or how they view where inflation
(08:35):
is and mark you always bring up. You know, the
long term target is two I get it, that's their
stated goal. But is it really that problematic to have
two and a half percent or three percent and.
Speaker 5 (08:46):
People expect too and you surprise them with three And
the key operative word there is surprised. That will stimulate
demand and inflation. So yeah, it is a problem if
you try to if you're a policymaker, you try to
surprise the market by printing more money than they expect.
I'm oversimplifying a little bit here, but the way monetary
policy works is by surprising people. If an increase in
(09:08):
the money supply and therefore inflation is expected, it's not
an influence demand. People price it in so to speak,
it's unanticipated Monetary shocks is a sort of technical way
to describe it, but in plain English. When the Fed
prints more money than people were expecting, think about it.
You see you're a producer, your company, you see your
demand go up? Do you increase prices? Is it a relative?
Speaker 3 (09:33):
Are people? Excuse me?
Speaker 5 (09:34):
Are people moving or people's preferences changed? Are they buying
more of what you sell because they want it more,
like it more? Or is that just inflation. You may
not know. I'm getting a little bit into economic theory here,
but it's just useful to keep in mind that the
FED can influence demand in the short term by surprising people.
I'm oversimplifying a bit. It's actually that plus the fact
(09:56):
that not all prices adjust in the short term, so
they flood the economy with not everybody changes their prices away.
The flooded money goes at first into demand and then
eventually into prices, and the FED has a problem to
fix down the road. This is a little bit ourcane
and you have to think about it. It's not intuitive,
but this is the framework the FED operates in.
Speaker 3 (10:15):
Well.
Speaker 2 (10:16):
Also, they're constantly monitoring the supply chained side. But I'm
not saying that they could do anything about it, but
they have to. And that's what we're looking in the
fall here potentially is would we see any impact from
tariffs on inflation is and that is why the FED
has been in this limbo stage for the last several
months where they have been really hesitant to make any
(10:36):
rate cuts because they've been waiting for inflationary impact from tariffs.
To this point, we haven't seen it. There's arguments to
be made that it's delayed and we will see in
the fall. There's other arguments that perhaps it's not going
to be as strong as once was anticipated, and that's
really what we need to monitor you.
Speaker 5 (10:55):
I don't want to downplay the Fed's handling of so
called supply shocks. Tariffs are example. Oil price spikes are
an example, like when OPEC embargoes US. There are positive
supply shocks to productivity unexpectedly goes up like it did
in the late nineties, that helps push inflation down. The
Fed's going to make a decision as to whether or
not to If it's an adverse supply shock, like an
oil price shock, do we accommodate it, which they did
(11:17):
in the seventies that resulted in inflation expectations going up,
which created more problems in terms of inflation control. Their
job is really really hard, which is why politicians need
to We're not going to learn this lesson the easy way. Unfortunately,
politicians should back off and let them do their job
in an objective, almost technocratic way. But that's not the
(11:38):
world we live in right now.
Speaker 2 (11:39):
We're going to take a quick break here on the
finished exchange. When we come back, I want to talk
about earning season. It's wrapping up here shortly. We want
to talk about what we've seen and what we can
anticipate over the course of the next week. That's right
here on the Financial Exchange.
Speaker 6 (11:52):
Right after this break, Tara Fever is in high gear.
We've got the latest on what might be next and
how long it might last. Only here on the Financial
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Speaker 4 (12:17):
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Speaker 2 (12:49):
Earning season is coming to a close throughout this week
will be sort of the last major earnings reports that
we'll see from the S and P five hundred kontenency
and overall, it's been a pretty good earning season. We've
seen that profit has grown twelve percent in Q two,
up from a year earlier, and beating a lot of
expectations out there. The one caveat to that is a
(13:12):
lot of the earnings growth that we're seeing is consolidated
within two industries. It's the technology sector and the communications
services sector, which they kind of overlap one another.
Speaker 3 (13:23):
It's the big the big.
Speaker 2 (13:25):
Group you know, fang or whoever you want to call them,
whatever nickname you want to use, that is really dominated.
It's the the Amazons, the facebooks, the Microsofts, the the
Googles that are really seeing a tremendous amount of earnings growth.
All of their earnings came in quite strong. You know, Facebook,
for example, saw a twenty two percent jump in revenue.
(13:45):
You had Microsoft come in with some strong numbers as well.
Speaker 3 (13:50):
And if you look at just the.
Speaker 2 (13:53):
Earnings growth from the S and P five hundred, two
thirds of it is from those companies that I just
spoke about. They are the ones that are really powering
a lot of the earnings growth that we've seen and
also spending a tremendous amount of money in terms of
capax in order to prop up some other sectors of
business out there. The all surge and data center spending
(14:16):
has really helped propel companies in some of the companies
in the utility space like gia, Vernova and others out there.
The eighty five billion of CAPEX that Microsoft will spend
is more than the annual revenue of about ninety two
percent of the S and P five hundred companies, So
it's it's significant, and it's peers are spending a significant
(14:36):
amount too. Microsoft and Facebook are spending thirty percent of
their revenue on CAPAX. So I wonder Mark, just you know,
we sit at a point in time now where you
had discussed off air that there's concerns about bubble popping up.
In some of the financial pieces that we read, we
are seeing that price to earnings ratios are are very high,
(14:59):
and a lot lot of it the earnings growth that
we're seeing is consolid in one sector. Just how you
view sort of the earning season that we've just gone
through here.
Speaker 5 (15:07):
Well, like you said, through the end of the second quarter,
earnings year over year were up. Profits that is up
about twelve percent. Stock prices over the same period up
a little over fourteen percent, so you sure as heck
better have had high earnings growth over that period. Stocks
were expecting that and more if you just look at
(15:28):
that twelve month period, which is a little bit selective,
but to me, it's still telling you only buy a
stock because you expect it at some point to pay
high dividends, or to expect or you expect the company
to buy back stock and return some of your investment
to you in the forms of higher capital gains over time,
(15:49):
which of course you've got to sell to realize. My
point is earnings are the whole game, and stocks right now,
as you noted Paul, by virtually any measure, our priced
at record highs relative to earnings, and by any measure,
I mean no matter how you want to measure earnings,
whether you want to look at the last twelve months,
whether you want to look at the expected next twelve
(16:10):
month earnings performance, whether you want to look at something
longer term. There are measures that look at the last
ten years worth of earnings, take an average of those,
and the reason for that is that business cycle affects
the ups and downs of the economy, even when it's expanding,
can distort the trend in earnings by any of those measures,
trailing twelve month forward PEES, the cyclically adjusted so to speak, PE,
(16:32):
which looks at that ten year average earnings relative to
prices prices, and they're in the numerator. I just reversed it,
but you know what I'm getting at. By any measure,
stocks are very richly priced, so you better have aigh
earnings growth. The result if you don't could be a
reduction in valuations, which is diplomatic a delicate way of saying,
(16:56):
a big fall in prices. You hope it's orderly. You
hope Suppose earnings don't meet investor expectations. One possibilities that
prices just kind of stay where they are and earnings
grow modestly over time. That would cause valuations to return
to more typical levels, which would require, by say, twelve
month forward PE standards, a ten to twenty percent decline
(17:18):
in stock prices. You hope that doesn't happen. You hope
it's rather earnings growing slowly and stock price is staying static. Unfortunately,
adjustments are usually abrupt, like when you would overinflate something.
Sometimes you're able to disinflate whatever the object is you
overinflated in an orderly manner. Other times that thing just pops,
which is where the bubble analogy comes from.
Speaker 2 (17:39):
I think when you're looking forward here. The other thing
that's at play is, as I mentioned, earnings growth has
been consolidated in some of these companies that I mentioned before,
they've also just had a very strong run in their
traditional lines of businesses. At the same time, they're spending
billions of dollars in capex to develop out their AI capabilities.
One of the things that is mentioned in this Wall
(18:01):
Street Journal piece that could be a deterrent for the
economy and the markets specific to these big companies is
that if there are traditional lines of businesses slow down.
So if Microsoft's you know, cloud business or Facebook's you know,
advertising revenue that it generates from its social media networks
slows down on the backs of them spending at these
higher levels, then the market could be set up for a,
(18:25):
you know, a setback if that is to be the case.
The the other piece is that there's been tremendous tailwind
for spending out on data centers and anya, and that
doesn't really look like it's slowing. You'd be hard pressed
to make that argument in any way, shape or form
with the billions of dollars companies are plowing into it.
But ultimately you're going to need to see a return
(18:45):
on that invested capital. And you know, as much as
chat GBT is a a fantastic you know, chatbot to use,
and they're continuing to innovate, and there are competitors out
there that are that are doing the same, Ultimately it
needs to lead to productivity growth and it leads needs
to lead to revenue growth. And I think the jury
(19:05):
is still very early on those things. And if you
have any loss in momentum in that capac expenditure cycle
that I'm talking about, that could lead to a slowdown
in many sectors of business that have benefited from just
a tremendous amount of money being pumped into it so
frequently over the course of the last year or two.
Speaker 3 (19:23):
We're gonna take a quick break here, but when we.
Speaker 2 (19:25):
Come back, we're gonna have Wall Street Match and much
more here on the Financial Exchange.
Speaker 7 (19:29):
Stick with us, Like us on Facebook and follow us
on Twitter at TFE show.
Speaker 6 (19:45):
Breaking business news is always first right here on the
Financial Exchange Radio Network.
Speaker 1 (19:53):
Time now for.
Speaker 6 (19:54):
Wall Street Watch a complete look at what's moving market
so far today right here on the Financial Exchange Radio Network.
Speaker 4 (20:03):
Markets are mostly quiet as Wall Street readies for the
final significant batch of second quarter earnings due out this week,
with retailers including Home Depot, Low's, Target, and Walmart to
gauge the status of the consumer. Attention will also shift
back to the FED this week, with July meeting minutes
due out Wednesday afternoon and FED Chairman Jerome Powell slated
(20:26):
to speak from Jackson Hole on Friday. Right now, the
Dow is off by only twenty seven points, SMP five
hundred is down one point, and the Nasdaq is down
by two points. Russell two thousands up by three tenths
of one percent, Tenure Treasury reeled at four point three
two eight percent, and crude oil down over half a
(20:47):
percent lower, trading at sixty two dollars and forty two
cents a barrel shares, and Novo nor disc rising nearly
five percent after the company's we go. The obesity drug
was granted accelerated approval from the FDA for the treatment
of a serious liver disease. Meanwhile, Bloomberg reporting that Thomas
Bravo is in talks to acquire human resources management software
(21:11):
provider day Force. Day Force shares are surging twenty seven
percent on that news. Elsewhere, according to The Times in London,
Tesla is now offering discounts of up to forty percent
on leased vehicles in the country as sales slip. However,
Tesla's stock is up nearly one percent at the moment.
(21:33):
Terror Wolf shares are jumping seventeen percent following news that
alphabets Google will lift its investment in the bitcoin minor
in AI company to around three point two billion dollars.
Soho House shares are climbing fifteen percent after a group
of investors led by MCR Hotels announced that it is
(21:53):
planning to take Soho House private in a two point
seven billion dollar deal. In cyber security company Palo Alto
Networks will post their quarterly results after today's closing bell.
I'm Tucker Silvan. That is Wall Street Watch.
Speaker 2 (22:10):
As I mentioned earlier in the program, Jerome Powell will
conduct his annual speech in Jackson Hole, Wyoming. This is
an opportunity for him to give further commentary on the
Federal Reserve and where they feel economic policy will shift,
and also look back and recap some mistakes that he
may have made or just adjustments to long term federal
(22:33):
reserve policy.
Speaker 3 (22:33):
In general.
Speaker 2 (22:34):
This will be his very likely last annual speech that
he will give at Jackson Hole as his term is
set to expire in May of this year. And what
will really be in focus this week in terms of
what we will be looking for on the policy front,
is any indications that he has on the Fed's view
(22:55):
of the labor market, where inflation sits, and where they
could possibly take monetary policy. Specifically, will there be rate
cuts later in the month of September when they get
back together again on September sixteenth. At the moment looking
this morning, according to CME futures, there was a pretty
(23:15):
high probability there was about an eighty three percent probability
that we would see a rate cut for that September
seventeenth meeting. So any information that we get that will
really be the focus that we'll see here, as well
as digesting the FED meeting minutes set to come out
on Wednesday afternoon.
Speaker 5 (23:36):
Yeah, we covered this at the top at the top
of the last hour, so I won't rehash my The
FED is the economy is their mistat routine, but it
is useful to keep that analogy in mind. It tries
to cool the economy down when it overheats as a
result of the FED having overheated it printing too much
money at an earlier stage of the business cycle, and
similar lay, the FED has to anticipate slowdowns, which it
(23:57):
seems to be in the mode of doing now. Because
monetary policy a fancy way of saying printing money to
target the federal funds rate their policy tool. Monetary policy
works with very long legs, sometimes a couple, sometimes several quarters,
so they have to anticipate. On top of that, we
don't even know what the economy is doing right now.
All these so called data points that we get, they're noisy,
(24:21):
and I don't use that term casually. It has very
specific meaning. What happens month to month isn't necessarily indicative
of the underlying trend. So the inflation number we got
last week point three percent for headline inflation, I think
it was Godfred, but I looked that up after not
knowing it in the last segment. But I didn't point
three percent. You annualize that you get three and a
half or so percent, Is this a problem?
Speaker 3 (24:42):
Well, maybe maybe not.
Speaker 5 (24:43):
It could be noise. There are other measures that suggest, though,
that underlying inflation is somewhere in that range. The FED
knows this. The Fed's also thinking, though, what's the labor
market going to look like in three to six months.
If it slows further, that could put a brake on
the inflation process, indeed result the economy slowing too much,
pushing the economy into so called recession. So the FED
(25:05):
is dealing with imperfect information about the present, trying to make,
in turn predictions about the future.
Speaker 3 (25:11):
Their jobs.
Speaker 5 (25:12):
As I indicated, I'm not defending what they've watched in
the past. I'm simply trying to point out their job
is incredibly hard, when you think about it from that
point of view.
Speaker 3 (25:20):
Really challenging.
Speaker 2 (25:21):
Yeah, So inflation in the labor market, those are the
two prior priorities of the FED. Where we sit on
those fronts right now, Like we've talked about before on
the program, we're in a spot where inflation is higher
than their intended target. But I would not characterize it
as overly concerning at the moment. A labor market that
is weakening, but by historical standards, isn't in that bad
(25:43):
of a place.
Speaker 5 (25:44):
Did you see the You probably didn't last week because
you weren't here, But the University of Michigan released their
consumer survey talked to.
Speaker 2 (25:53):
You were to hear either I was, whereas everybody.
Speaker 5 (25:56):
Yeah, damn it, I was barely here last week, So
I really don't know what I'm talking about. Inflation expect
Let me just cut to the chase and say, inflation
expectations are on the rise. They're significantly higher than they
were a year ago. They jumped up in April, came
down a bit. They've since sort of settled, but in
the mid single digits. This is dangerous territory. When people
expect high inflation, they demand higher wages if they've got
(26:19):
the clout to do so. Firms ask for higher prices
if they feel like consumers will continue to buy at
the pace they were buying at iev it doesn't alienate customers.
So the FED is also I bring this up because
I didn't bring it up in the last segment, but
it's a critical part of the inflation process. According to
the models the FED uses, inflation expectations are high. This
(26:40):
is something the FED has to manage. It's not part
of their dual mandate, but it directly relates to it,
and it's something they can control through their speeches and
to an extent through their actions.
Speaker 2 (26:51):
Kevin Warsh is the potential replacement for FED Chairman Jerome Powell.
He's a former FED governor. A recently he was quoted
in discussing the idea of shrinking the Fed's balance sheet
in order to use that as a fulcrum to lower
down short term interest rates. So as Mark has mentioned
(27:14):
the FED controls the money supply, he had mentioned that
perhaps by tightening that money supply that would allow for
further interest rate cuts in and Mark, I'll kick it
to you to kind of your two cents on this,
but also probably try and keep this as high levels, not.
Speaker 5 (27:34):
An expert there, asset purchases and quantitatis. It gets harry fast.
Speaker 3 (27:38):
It gets Harry fast.
Speaker 2 (27:39):
So maybe much like myself, summarize it for a five
year old for listeners out there, because this does get
a little tricky monetary policy in general, and his view.
Speaker 5 (27:48):
Yeah, I mean what Warsh's view in this case doesn't
make any sense. He's not an economist. I think it's
important to keep that in mind. When he was appointed
to the board, he was frankly viewed as a lightweight,
and this is why I have misgivings about him. Although
I agree that the FED probably a betted asset bubble
aided in a bedded asset bubbles in the past, his prescription,
at least up until right now when he's angling for
(28:11):
the FED share position, his prescription has always been raised
interest rates focus entirely on inflation, which I like. I
don't think it's necessarily a bad thing to have a
FED chair who is overly concerned, who puts more weight
on inflation that they than they do on unemployment. That's
arguably a good quality to have in a FED chair.
The problem is he's done a point eighty since he
learned that Trump was considering making him FED share, So
(28:34):
I wonder about his character. Frankly, I also think he's
an economic bliteweight. He doesn't have a graduate degree. He
probably can't read a paper in economics. I don't mean
to sound snooty, but you have to have training to
do it. It's hard, it takes years. He doesn't know
how to do that, so I worry about his he
regularly criticizes FED models. I don't think he's ever I
don't think he'd know how to solve one. So I
(28:55):
think it's a I think nominating. Having someone at the
helm of the FED who doesn't fully understand what FED
staff is presenting to him is potentially gets us into
the same types of problems that we had with Powell
early on, where he seemed to lack a firm load
star and it led to the high inflation arguably that
(29:16):
we got to an extent during to an extent it,
let I should say, to the high inflation that we
got in the early stages of COVID. In this case,
he's way off long term asset purchases. Shrinking that part
of the FED so called balance sheet will not shrink
the money supply unless he's talking about broader measures of money.
But he doesn't say so there. This is where his
technical deficiencies come into play. It would not necessarily allow
(29:38):
the FED to lower short term interest rates. What he's
saying makes very little economic sense, and I think that's
the point that Dudley makes in the article that you
reference from Bloomberg.
Speaker 2 (29:47):
Sure, we're going to take a quick break here on
the finished sixteenes. But when we come back or when
we're talking about the housing market, it's been a very
slow housing market and there's some concerns out there that
that could slow down the economy. We're going to break
that down right after this break here on the Financial Exchange.
Speaker 1 (30:04):
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Speaker 6 (30:17):
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Speaker 1 (30:22):
This is the Financial Exchange Radio Network.
Speaker 2 (30:27):
This coming back from the break here, I want to
talk a little bit about the housing market. According to
data from redfin home Prices, our home sales have fallen
to their lowest level since twenty twelve. That's for the
(30:49):
period from April to June, which is typically the hottest
stretch in terms of buying and selling. That was according
to the New New York Post, but they cited data
from redfinn. If you look at the housing market in general,
it's really hard to point to anything that would be
a positive catalyst for the sector. In general, Housing inventories
have risen significantly. They're up to their pre pandemic levels
(31:14):
in many states throughout the country. And we're also seeing
that fifty six percent of homes through the month of
May had sold for less than their asking price. If
you look at specific areas the market, again, all of
this is regional. There are places in the Florida area
that we've seen prices dip pretty significantly, transaction volume, sales
(31:36):
volume in Miami has dropped, Naples has seen price decreases.
Then you have areas of Texas and other parts of
the country where you're seeing some declines in prices and
then inventories as well on the new home construction side
of things.
Speaker 3 (31:51):
So you have.
Speaker 2 (31:53):
Interest rates that have sat really on the thirty year
fixed mortgage right in around that seven percent level. There
isn't at this moment at least any reason to see
that those will come down significantly. You are seeing the
price growth that we had seen, which had just been
so rapid. I mean, prices have been up forty or
fifty percent from back where they were in the beginning
(32:15):
of COVID. Those have have moderated quite a bit. And
the reason that we talk about this on the program
is not only because it's it's an area of interest,
but also because there is a tremendous amount of the
US economy that is benefited from housing activity. It really
accounts for a tremendous amount of acroundic growth. Think of
(32:37):
all the industries that when you buy a house are touched,
when you're you know, landscaping and you know things within
the home. There's a tremendous amount of impact there. And
so we sit at a point in time where it
just is is unclear mark if you could really have
any sort of uptick here. Even though prices are coming down,
which is we've all wanted for a long period of time,
(33:00):
there are not a tremendous amount of barers.
Speaker 3 (33:01):
Looking to snap up these listings.
Speaker 5 (33:04):
No, And you could argue that, well, lower interest rates
might help, But if rates go down on the long
end it's probably because of concerns about economic growth, then
that might not be So there might be other things
happening in the economy that put a damper on demand,
and that would of course cause prices to go down,
but not for reasons that we would celebrate. And all
(33:27):
roads to me come back to that. You have to
think about the market as composed of two parts, supply
and demand. You can't just look at supply. You have
to look at what's happening on the demand side. Demand
has been feverish, supply has it's always sort of unresponsive
in the short term. Maybe it's exceptionally rigid in this
(33:48):
cycle because we're bumping up against zoning, local decisions, zoning
and other decisions that were made decades ago that are
hindering the expansion that could rest respond to the increased demand. Look,
what I'm saying here is that the cure, if you
think we need one for the frenetic housing market, is
(34:09):
probably an economic slowdown or worse. And that's not a
cure that anybody, any responsible you know, economist, research or whatever,
would would prescribe. I don't I don't really know the
answer here, or if.
Speaker 2 (34:25):
Yeah, one, we need one. It's affordability is an issue.
One last stat here, bank rate did in an analysis
of the fifty largest metro areas, and they determined that
renting is cheaper than buying on average or seeing you know,
the mortgage payments are higher in those areas and renting
is a better deal. So there's no immediate fix to
(34:45):
the affordability issues that we're running into in the housing
market here.
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Speaker 2 (36:09):
Credit card spending is pairing back a little bit a
piece here from the Wall Street Journal. Americans pull back
from an epic credit card binge. Now, the frustration that
I have with the credit card story is that oftentimes
a lot of these news publications will cite that balances
on Americans credit cards collectively have surged over a trillion
(36:30):
dollars if you adjust for inflation. First of all, a
trillion sounds like a really big number. I get it,
and I know why Wall Street Journal and other news
publications use it, because it definitely sticks out of you.
But if you adjust for inflation, those balances aren't as
daunting as you would think from a historical perspective. Really,
what you focus on most here is delinquencies, and those
(36:54):
have been ticking up, not to a level that is
of great paramount concern, But now you do have Americans
at least slowing down the pace that they're spending on
their credit cards. And part of that could be certainly
because you have average credit card interest rates sitting around
twenty two percent, there's a lot more debit card spend
that we're seeing rather than credit card spend, it seems
(37:16):
like recently here at least.
Speaker 5 (37:17):
Yeah, you know, when you do adjust it for inflation,
And I'm using the CPI here to deflate large bank
consumer credit card balances. It's a database available on the
Federal Reserve Economic Database website. Anybody can do what I
just did here. It's very simple credit card balances. And
I'm just talking about absolute terms here and I'm talking
real terms, So adjusted for inflation, are no higher. And
(37:40):
again this is just a large bank consumer credit card figure,
no higher than they were at the peak of the
last cycle, when the economy was pretty much firing on
all cylinders. I'm looking at Q four to twenty nineteen.
It's same as it is today. Q four the latest
in this series, Q four tw twenty four. So we've
missed a little bit of economic activity. And of course
it's a percentage of the economy. In real terms, they'd
(38:02):
be smaller, be real economy is bigger. So if we
were writing this, we could put a very different spin
on that conclusion. I'm not saying it's not a problem.
I'm not saying people aren't stretched, and if real wages
haven't kept up, that's problematic.
Speaker 2 (38:15):
That's all the time that we have for the first
hour here in the Financial Exchange.
Speaker 3 (38:18):
But stick with us for the second hour.
Speaker 2 (38:19):
We've got a lot of earnings to preview and much
much more to discuss on the economy that's right after
this break here in the Financial Exchange.
Speaker 3 (38:25):
Stick with us.
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