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Inside the Economy: Much Ado About Nothing

This week on “Inside the Economy”, we look at income, housing and other economic data. ISM manufacturing data ticked up a bit, while GDP estimates for Q1 came in lower. The Federal Reserve is expected to raise rates 0.25% this month as inflation numbers continue to stay above 5%. What will it take to fight inflation and avoid a recession? Tune in to learn about this and more!

Key Takeaways:

      • 3-month T-Bill above 5%
      • Oil drops to below $75 per barrel
      • Mortgage rates still above 6.25%

Full Transcript:

Welcome to another edition of Inside the Economy!

I’m Larry Howes. Thanks for joining me!

Not to seem like a spoiler alert, there’s not a lot to talk about going on right now. But much ado about nothing is very accurate in what’s going on in the economy at this point. There’s been some increase in durable goods orders, which is nice. It’s all aircraft. Unemployment hasn’t changed three and a half. Initial claims, not very dramatic. Here we are, year and a third into a pretty aggressive interest rate environment and nothing has really changed.

Kind of the theme today, you look at disposable personal income. This is an important number, long calculation to come up with this number, but it is increasing. We’re coming up on $16 trillion of personal income in the US. Well, that means a lot of things. One, that the consumer is not suffering. Consumer is kind of spending not very aggressively, but they’re still outspending, supporting everything. Compensation, people in the wage and hours side of the economy went through a couple of years worth of 4 or 5% increases, which is good for them. It’s helped pay some rent. It has helped move them forward.

Most of them still don’t know that they’re behind inflation wise. A lot of the costs that have built into this economy aren’t going to reverse housing, is not going to reverse rents. They’ve stabilized back to their old patterns. They’re just higher than they were. The cost of the inflation that we have endured and are enduring a little bit now isn’t going away. Housing prices. Well, the growth in prices is zero. Okay? That doesn’t mean that the prices have come down 15%.

Very aggressive markets like Boise, Idaho and Austin, Texas, who led the pack in prices going up are leading the pack going down. When Boise looks in the last quarter and they said, oh, they’re down 11%. That does not change the fact how much they were up over the two years, three years when mortgages were basically 3%. Those prices are still going to stay because people are still moving there number of sales, okay? It has not collapsed. Rarely does it collapse and it hasn’t whatever is in the inventory, which isn’t a lot these days, the properties are selling.
The housing market, which always leads into recessions and these corrections is not collapsing. It’s not even in particularly bad shape. The market’s pretty much indicative of that. Since November last year, the S&P 500 and the Nasdaq and all those have been basically going sideways. Up fundamentally, but sideways based on earnings not necessarily their outcome or anticipation of what’s going on in the economy or growth in the economy. It’s just moving along, waiting for something exciting to happen.

Factory orders. Well, they’ve slowed durable goods. Yeah, it’s a good number. Three and a half. All airplanes, they’ll be delivered in two years. Immediate factory orders down a little bit, slowed a little bit, not a lot. Nothing like 2020, 2019. But manufacturing is slowing a little bit. ISM number up in the numbers. Up a teeny tiny bit. Not in expansion territory yet, but up a little bit. Interestingly enough, the leading economic index, the LEI, is none of those things. It’s not particularly leading.

It has some economic data and it really isn’t an index. But historically the LEI has always had bad numbers. When we’re in a recession, it’s great. Oh, things are bad. So the leading economic index is down. Well, this is the first time since the 60s that all the components in the LEI are all down. And we’re not in a recession. We’re clearly not in a recession right now. We’re in kind of a slowdown.

It’ll be interesting to see where this data goes if we actually see a recession sometime in the next two years. Look at where portfolios are fundamentally investing. When all these numbers are up, this means that everybody’s very equity heavy. They own stocks, sure. Now they’re shifting into bonds. They’re buying bonds or buying short term bonds. You look at the three month bonds paying 5%.

There’s a lot of purchases going on for that kind of bond market right now. That’s why money markets are in the fives, some of them in the fives. But fundamentally, the bond market has likely decided that this interest rate cycle has peaked. We’re going to get a quarter of a point, 25 basis points on Wednesday. I think there’s very little doubt about that.

Some people are calling that a once and done. It’s a poor analogy, but they’re probably done. Even if they raise again, they’re done. Rates have peaked. We didn’t get the kind of damage in the economy that we wanted. You can get a mortgage in the low sevens. It should be two percentage points higher than that to slow the market. But it’s just not happening. That’s not bad news.

It’s just this inflation is going to be a little persistent. We’re going to go up to where we are now. Cost of money right now is five, so they’ll make it five and a quarter on Wednesday. They should probably stay there all year, probably will be all year. The markets are anticipating and they’re making wagers on when the FED is going to lower rates. I hope they don’t this year. There’s really no reason we have to squeeze this inflation down to two and we’re a ways away.

A couple of interesting questions. So obviously there’s some fear that there’s a banking crisis, and we’ve talked about this. There isn’t a banking crisis compared what’s going on here’s sort of an interesting analogy. This is back in 80s when WAMU and all of those banks, all those lenders went under because of bad loans. They had a lot of real estate loans out there with no income. Boy, you know the story. Three banks over here now, which is almost the same amount of failure, they didn’t have that problem. They had huge Silicon Valley and First Republic and Signature had huge deposits, gigantic uninsured deposits, lot of money in the bank.

They made the mistake of instead of putting that money into loans, good loans, not bad loans that they could adjust, they could control, have a real asset. They bought Treasuries, mortgage portfolios, asset backs, all kinds of things that didn’t react well when the interest rates went up. We’ve been through that. So those of you who remember the old savings and loan days, it’s always bad for a bank to buy long and sell short.

You have to manage the liabilities to your assets. You put a 30 year mortgage on a house because it’s going to last more than 30 years, that’s reasonable. You don’t put a 30 year mortgage on a car that’s going to be junk in seven. So these three banks were buying ten year Treasuries because back in those days that’s the only way they could get any earnings at all and they were 2. 10 year treasuries for a liability that basically had a duration of overnight.

These people could pull their money out at any time, which is what they started doing. So they had to sell these assets that were down, so on and so forth. Then you get the problem as it turns out, and there’s going to be way too much discussion on what went on here with the FDIC and everybody else. But clearly the problem really wasn’t necessarily bad judgment on the banks. That was in the bag. It’s the power of a cell phone and people communicating with each other saying, well, I’m a little worried about this bank. So it starts so much for the bank.

Another issue that came up and as it turns out, our clients are a pretty smart bunch. We had a piece of input from one, those of you that know, Karlton Childress in the office said, well this college thing is changing a little bit. This guy says he’d rather put $200,000 into his daughter’s business than send her to college. That’s big. And this household survey is kind of indicative of that. This is age groups that say, well, college education really did a lot for me.

I’m in that group that says, oh yeah, it was everything. Interestingly enough, it’s not a big number down to the 18 to 25s who are either in college or thinking about it right now. We’re going to see some changes in that industry. If we’re running a college or we’re running DU or something like that, you got to rethink what you’re doing and what you’re charging for. You’re going to run out of a market.

So that’s pretty much it. Increased interest rates, Wednesday fine, interest cycle is probably over. Yes. And there’s nothing else happening. There is no drama. The economy should be in much worse shape than it is after aggressive raising cycle. We’re just not there yet. Well, more to come. As always, if you have any questions, send them along to and I’d be happy to deal with it.

Thanks for joining me!

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