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Inside the Economy: The Next Phase in the Inflation Struggle

By October 5, 2022No Comments

This week on “Inside the Economy”, we take a thorough look at the data. Treasury yields have continued to rise as the Federal Reserve maintains their mandate to break inflation and stabilize prices. The consumer is still spending, and the job market continues to remain strong. Where will the cost of money be at the end of the year? Tune in to learn more!

Key Takeaways:

      • 2-year treasury yield is above 4%
      • 30-year mortgage rates are closing in on 7%
      • Oil continues to decline, down almost 40% YTD

Full Transcript:

Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. This time, I want to talk about consumers, US consumers and consumers around the rest of the world, and where we’re going, and the next phase of the struggle we’re having with inflation. New round of data – data is very important. The GDP, the Gross Domestic Production gives you an idea whether you’re in a recession or not. They updated the first quarter revision. We’re still down 1.6. We haven’t got another revision for the second quarter, we’re still down about 0.9. I think in some respects we’re in a recession. They won’t be able to announce it for several months, it’s okay. The third quarter data, even though there’s been some activity… It’s hard to say whether it will be more robust at all. The economy is slowing, a number of things are slowing.

Unfortunately, some of the very important things, like inflation, are still high. We’ve talked about that, even though short-term, inflation is cooling a lot. Gasoline and oil came way down. The price of gasoline is on its way down, except in California. And no impact on the inflation numbers. It has been rent, so on and so forth. More on that later. Initial jobless claims down. They don’t want the numbers to be down, they want unemployment to have higher claims and go up. And when I say they, I’m talking about the Federal Reserve. They want to start hitting the employment market, so they know they’re having an impact on the cost of money increases they’re doing. Freddy Mac came out and said, yeah, 30-year mortgage, 6.7, plus 0.9. You can’t get them that cheap, you can pay 6.7, but it’ll be a point, point and a half on top of that. Mortgages are already in the sevens, and by the time November, and certainly December is over, they’ll be in the eights. We just have to go there.

Now, here’s where people have been spending their money. Rents have been increasing dramatically. That has cooled. Home healthcare, healthcare in general, a number of other places, unexciting places, is where people have been spending their money. The fun stuff down here at the bottom, like recreation, toys, durable goods and refrigerators and so forth, that’s all down, and gasoline is well down. This is okay, but it’s not enough to have an impact on inflation yet. Savings, that’s down. We knew it was coming down. People were spending a little more, and a lot of the stimulus money is over, which brought those savings numbers way up. It still has not had much of an impact on what is in savings and checking accounts in the US. And that’s 17 trillion dollars sitting in the banks. But the savings rate, which is countered by the spending rate, spending is up, savings is down.

Bank Of America is very generous with how they… Let’s call it ‘distribute’, their own internal data. And this is about a gig economy. This is income into BOA credit cards, and you’re talking about somebody who’s got a conventional high-quality credit card from a bank, so they have a job, and they put money on their credit card, which is a little unusual. This does not include people who don’t have credit cards, people who wouldn’t put money on a credit card. Their gig economy is way up. Imagine what it really is. In fact, we’re probably at the point now where the US economy – 10-12% gig economy, and growing. It’s another reason that unemployment isn’t getting as bad as the Federal Reserve would like to see, because there are alternatives.

Used cars – still expensive. Quality used cars are hard to find, and they’re extraordinarily expensive. And a lot of people aren’t willing to wait six months for a new one, which is kind of where we are, and the manufacturers are saying ‘we’re bringing them online, but by the way, they’re gonna be a little pricy’. Well, yeah.

Homes? We’ve had sales down. This is National Association of Realtors. Unfortunately, we knew home sales were gonna go down. We really didn’t know how much, because this information includes May data, and in real estate the difference between May and August is night and day. And I don’t believe we’ll really have accurate information on what’s going on in the home market for a couple of months because we haven’t felt what’s really going on in the market when mortgages are in the sevens, and they will be in the eights. Then we’ll know where the home market is. Seasonality in home ownership and prices has been the same. This data is 30 years old. The blue is 30 years old. The green, that’s 2022. Much more robust up and down. Same seasonal trends – homes are always more expensive in the spring than they are in the fall. We had a very dramatic turnaround. They were way expensive in the spring, and now they’re coming way down in the fall. I don’t think there’s going to be way down, and there’s certainly not going to be a collapse. We won’t have a true picture until we see the data on how the mortgage market has impacted sales. Mortgages have gone up twice, more than doubled. Prices have not dropped by 50%. So, there’s something in between.

ISM numbers came out, down 50.9. I mentioned several times, the ISM, the Institute of Supply Management. Anything above 50 is an expansion territory, below 50 is obviously in contraction. And we’ve had some low numbers. We were down in the 30s in 2008. Well, it’s headed down. It’ll be interesting to see how far it goes. Obviously it’s part of the inflation battle, partly to get industry to slow. If industry slows, they put people out on the marketplace, and so forth. Right now, corporate America, they’re doing pretty well. This is the delinquencies on junk bonds. They’re on the floor. They’re not even at 1%. Corporate America still has lots of money, and very manageable debt. It’s going to take a lot to get them to slow down if the consumer just maintains its own pace. And I’m talking about the US consumer here.

On a slightly different subject – in some respects, this is some questions I’ve had. Border security basically put out a report saying we’ve had a lot of encounters with people at the Mexican border, but there are now more others than everybody else. What border protection calls ‘encounters of other’, that’s not Mexican or Central America, it’s somebody else. So, the others include, as you might imagine, there’s a fair amount of Asians and Ukrainians in that whole area. There’s a fair amount of Brazilians. And now there’s some more Cubans that are growing a little bit discouraged with the revolution. So, that border has always been a way into the US, it’s getting more robust. It’s not just the traditional. The other – and they don’t disclose who the other are – we’re just gonna have to see, but they will be entering the workforce.

Internationally, things are not looking good for anybody. Not even Canada. The US consumer has money. The US consumer isn’t worried about heating their homes. The US consumer is a lot of things, but the rest of the world, they have more significant problems. We’ll talk about food in a minute. But everybody else has grown more dependent on the US, that has a very strong currency, which makes it harder on them. Great Britain has really done some monumentally stupid things in the last couple of months. Yeah, that’s it, try and tax the few that contribute into the economy even more, and the reaction is that they almost had a gilt collapse. Gilt is a term they use for British bonds. We call them treasuries, they call them gilts. They dropped like a rock. Basically, you’d say, looking at the spreads here, that the credit worthiness of England is worse than Greece or Italy. Not good news. They’re gonna try and fix that, but the damage is already done, and they’re gonna have a cold winter. The rest of Europe – cold winter. It’s just gonna take a little while.

Somebody asked, what’s the carbon footprint on cryptocurrency? It turns out that Bitcoin has a worse carbon footprint than beef. It’s not nearly as bad as coal, but frankly, if you put electric cars, and replaced every car in America with an electric car, you probably wouldn’t reduce the CO2 in the atmosphere, because that’s what China puts out in a month. Their emissions are growing, they’re getting worse. They have to keep themselves warm, and it’s with coal – relatively low-quality coal. So, it’s going to be bad for the environment here for a little while.
Finally, in the past, I’ve spoken about the fundamentals of what it takes to keep people rolling in this society. Well, steel, concrete, plastic, and ammonia. Ammonia, of course, fertilizer for food. You need the fertilizer… We only have natural growing capacity for about four billion people, and we’re coming up on eight, so we need fertilizer. Those of you who probably weren’t aware that there is an ammonia pipeline, and interestingly enough, it runs the length and breadth of the parts of Ukraine that Russia has claimed. We don’t know what the future of that pipeline is. It ends in Odessa. But that is the hub of where a lot of relatively inexpensive fertilizer used to be, as well as grain exports. Well, fertilizer has gone up 400%. Food – 250%. It hasn’t had an impact yet, but we’re just starting the second round. The last nine months have been what’s been in storage. We’ll see what’s stored in the future.

There’s a lot of conversation that we’re having food problem in Africa. It’s hard to get through the noise between the organizations that are raising money and the warlord business. They’re trying to get in the energy business. And that’s bad news for OPEC. Across the Red Sea, OPEC is looking at oil coming down rapidly. It was 78 last week. Up in the low 80s right now. Part and parcel because, one, we’re drilling a lot of holes, and pretty soon we’re gonna be up to our lower lips in natural gas. But if Africa gets into the energy business in a serious way, it’s gonna have a big impact on energy everywhere.

Now, finally, what we have right now is what the Federal Reserve is going to do here in November. It’s November 2nd, the next meeting. Cost of money right now is three and a quarter. They’ve been, and have mentioned that 4% is their target number, which is a good number. That’s mortgages in the sixes, that’s inflation at two, that’s 2% in your money market, so on and so forth. One and a half in your money market. Well, they’re talking more now, which isn’t good. We don’t want to see them raise three quarters of a percent, 75 basis points, in November. That would take us from three and a quarter to four. That would be viewed by the marketplace as a bad thing. That would probably have a very unpleasant reaction. If we get half a percent, or even less – much better. That extends the pain out, it gives the opportunity for the data to come in, because we wait for the data. Right now, that’s sort of the goal.

Thanks for joining me, there will be more later. Data-dependent, of course. And if you have some questions, send them along, I’m happy to deal with them. Thanks for joining me.


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