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Inside the Economy: Tension in the System

By May 17, 2023No Comments

This week on “Inside the Economy”, we look at inflation, consumer spending, jobs, and other economic data. With a decline in consumer spending, inflation continues to lower after the most recent 0.25% increase from the FED. Job openings have decreased across a majority of industries, and with the housing market seeing low purchase and refinance activity, where do we see the job and housing market going as we move further into the second quarter? Tune in to learn about this and more!

Key Takeaways:

      • 2-year bond drops below 4%
      • Oil drops to below $70 a barrel
      • Mortgage rates remain above 6.25%

Full Transcript:

Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me.

What’s going on politically these days is sort of why I picked the topic here of the tension that’s in the system and I mean the financial system. Year and a half into rising rates. We’re still looking for some evidence of things slowing down which is why they raised the rates. Unemployment shouldn’t be at 3.4. It should be at 4. Initial claims are up a little tiny bit. Interest rates are down. They shouldn’t be. We’ll start with the inflation numbers. They have come down. Not as much as the Fed has hoped, but it’s still a pretty good number. We’re below 5. Energy has slowed. Core goods have slowed. Food has slowed. Housing has not. And as we’ve discussed several times in the past housing is the first sector that really should be impacted with rising rates. And that’s still a struggle today.

The rest of the consumer they care about their jobs but the anticipation of more layoffs, that’s slowed. There’s less announcements in the S&P 500. There’s less announcements in technology. There’s fewer if there’s going to be another change in labor whether it’s due to artificial intelligence or whatever. So, 3.4 is where we are. It’s a little bit low and initial claims have just crept up a little tiny bit. You look at some of the employment numbers saying, oh, we used to have this great job market, people stand around waiting for better jobs so on and so forth. Well, most of that was fluff. Fluff is a diplomatic term. Fluff in the information, a lot of these as you see fewer jobs available mostly in information called it technology. That was the fact that a lot of the services and a lot of the apps had 8 jobs available theoretically when there’s really only one available from the particular employers. So, they’re cleaning up that data.

Most of the changes here are more accuracy in the data little less fluff. The only thing that has changed a little bit is the government or the various governments, federal state whatever are hiring some more people back that, well, they left during COVID. They left for whatever it was. They left because states, a lot of the states including Colorado cut back on a lot of things thinking that their revenues were going to fall apart with COVID. As we know now, they in fact did not and revenues are fine. They haven’t slowed either. So, they’re hiring people back. Well, supposed to be getting rid of people not hiring people when rates are going up. People should be spending money. Well, they’re doing okay but they’re certainly not using their credit card. I mean, the actual growth in credit card spending is zero.

You look at foreclosures and we’ll talk about that in a minute. Some of the highest foreclosures and isn’t much of a number are in credit cards and it’s just gone over 4%. Still a pretty small number. Nothing where it should be. If the consumer hasn’t built themselves into a little bubble, well, they haven’t built themselves because there’s no evidence of it. The bankruptcies are kind of flat. They aren’t climbing like they should. Foreclosures are flat up a teeny tiny bit but still tiny, certainly down in the lower end of history, not where they should. Bank requirements, bank lending standards, everything that has do with how money is available to people. Those standards are up. They’re up for credit cards. They’re up for cars. Small businesses, commercial loans, everything but demand isn’t there. They’ve been cranking the lending standards thinking they’re going to get better quality loans.

Well, the problem is getting loans in the first place, because there’s not a lot of need for money. Again, that’s another problem with rates going up. The housing market like I mentioned before should be way down and being gloomy. You go in these neighborhoods and there should be a home for sale on every block. Now, for the most part there isn’t. Last month $360 or so billion dollars’ worth of new mortgages buying property. It’s an un-astonishing number for history but considering where we are in this interest rate cycle, it should be way lower and it’s not. The only thing that’s really lower is the boom in the COVID refinance market is over. People are really happy with the low rates they had. They did a refi. They got lower. They got a bunch of money. They still have a bunch of money. And they’re not refinancing anymore. Rarely do people refinance their house into a higher mortgage rate and that’s the only thing that’s really shown in these numbers.

Well, the debt ceiling is something of an issue. It’s an issue everywhere. I’m sorry some people are feeling bad about that. Secretary Janet Yellen was out on the media this past weekend the last couple of weeks, basically saying. And I don’t mean any real disrespect, but it’s like Auntie Janet saying you kids shouldn’t be playing in the street because it’s dangerous. And I hope somebody doesn’t get run over. Well, that’s where we are today. The President and I guess Speaker of the House. They’re still chatting. They’re still trying to do whatever it is they do. The triggering event here is Mister Biden has got to go deal with the G7 in Japan. And I’m sure he doesn’t want to sit there and have 6 other members say, Gee Mister President, are your checks going to bounce?

All of these countries, Japan included, own a lot of treasuries and this game that they’re playing is just that but it is embarrassing and it’s holding things back. Actually one of the biggest things that’s holding it back is what’s going on with the banks. We know that’s a result of increased rates. We know that we’ve been through all that and uninsured deposits. Silicon Valley and the other banks looking to bill to the FDIC is looking at about $15 billion. Right now, the total fund, there’s $125, $130-billion. I mean, the fund is fine. They’ll get that money back from the 9 big huge banks, the two big to fail banks, that won’t be a problem but what they’re looking at is there has been a shake in confidence. There are some commercial loans that are in question right now. If you, let’s say own an office building in St Louis. It doesn’t mean it’s the hottest commodity on the market right now. So, there’s some commercial loans are in question. There’re commercial loans and that’s really the Baylor wick of the regional banks not the real big ones.

So, the issues with that will inspire the FDIC and you can count on it that the FDIC is going to start mergers. Whether it’s voluntary mergers or not. The FDIC is going to say well we wonder about you a little bit so what we’re going to do is merge you with another one. Yay. Here’s your new boss kind of thing. It’s about 4,700 banks out there and that’s half what there was 30 years ago and we could go half again. The regulator, the FDIC, and most of you know, I think the FDIC is an excellent regulator. They aren’t going to fool with it. They are going to make these banks as secure as possible and get confidence back from the consumers. One of the issues is the FDIC has asked for another $100-billion-dollar line of credit to help fund this fund. Because they’re probably not going to go back to a low limit uninsured. That’s a different subject, but the $250,000 limit will probably be well either increased or eliminated altogether. So, the FDIC wants more money in the fund easy to do. Treasury can’t act, treasury can’t move. None of the other things.

So, just for humor and this was very humorous to the people, and I mean that sarcastically, very humorous to the people in investment committee this morning. This is what’s known as a Credit Default Swap. A credit default swap is basically something you’d buy in anticipation of a credit or in this case a government, the United States government, defaulting on their debt. I mean a credit default swap right now in Argentina is pretty expensive because they are going to default again. But right now, you go out and buy a credit default swap on United States to go buy gold or whatever. It’s very expensive, very expensive because they’re worried about that. Actually, it cost more to buy a credit default swap on the United States than it does Mexico, Greece, or Brazil. That’s kind of where we are. Finance humor.

Finally, this is bad news and it doesn’t seem to get a lot of press. The fires in Canada aren’t just bad. They’re not far away from horrible. They spread and it’s very dry. In fact, the whole west coast of that part of the coast is probably 15, 20 degrees warmer than it should be. These are never good. They’re always destructive in property in all kinds of things and it’s around their oil sand feels which is extremely important to Canada and specifically Alberta. We should watch these and see what can happen, but the only country we really import oil from since the United States is still the largest generator of oil is Canada. So, and it would hurt them a lot if this gets worse or this entire summer is as bad a fire season as it was predicted to be last year. I hope not. This is bad news.

Well, that’s all there is. Please I hope that people will feel there isn’t much drama going on the market. There really isn’t a lot of drama. It’s political. I think there’s a reasonable chance this whole debt limit thing will be resolved this week. President has got to go to Japan and he can’t sit there with a little dunce cap on. As always send in a question long Thanks for joining me.

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