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Inside the Economy: Labor & Interest Rates

By November 15, 2023No Comments

This week on “Inside the Economy”, we discuss labor and interest rates. With jobless claims and unemployment remaining relatively stable, how have hourly earnings changed since the pandemic and what does this mean for the labor market as we look ahead? As interest rates have risen from previous multi year lows, what does a higher interest rate environment look like for housing, commercial real estate, and U.S. loans? Tune in to learn about this and more!

Key Takeaways:

        • Oil touches $80
        • Unemployment rate at 3.9%
        • 30-year mortgages above 7.5%

Full Transcript:
Welcome to another edition of Inside the Economy!

I’m Larry Howes. Thanks for joining me!

Want to talk about immigrant labor as opposed to migrant labor. There is a difference. And just towards the middle here, we’ll talk about the Quigley effect, which has an impact on the real estate market. Start with the numbers. Specifically, Iran and Russia both really wanted to see the price of oil go way up.

I know they were targeting like 121, 125 because they make some money there, even with the restrictions that Iran has to sell on their oil. I’ll sell it to Russia or somebody else. But oil never did go up. In fact, it came down. It’s down in the 80s now. It was in the 70s for a little while. Price of gasoline is down. The world has changed. The control that a lot of these OPEC producers have over the oil market is dwindling every day. United States is still the number one producer of petroleum will be as long as they want to be. And everybody’s getting in the oil business, anyway.

There’s an amazing lack of difference between, if you look at the chart between the economy today and the economy a year ago, the only real difference is inflation is half what it was. The impacts of the Federal Reserve raising rates are slowly working into the system, which is good. It’s not everything, but the interest rates are a piece of the puzzle. Everything else, the job market, so on and so forth, is pretty much where it was. Mortgage rates even came down a little bit.

Want to fundamentally know why? This is since 2020. This is the cost of things, mostly wage an hour. Since 2020, everything is up 20%. That’s not going to retreat. United Auto Workers, all of that stuff, wage an hour, all of those salaries, so on and so forth. Bit up to compensate for the inflation that we put in the system when we put the $4 trillion in. Very wisely for COVID, this is the result. The growth in wage and hour, so on and so forth is not going to continue at the same pace.

And as I’ve mentioned before, most of the people on the wage and hours side of things are already a little bit behind. They just don’t know it yet. An integral part of the wage and hour labor market is this. This is the immigrant workers part of the Republican Party. And Congress right now is really angry at whoever is in charge of homeland security. They’re trying to impeach him because he lost control of the Mexican border.

Well, that’s been known to happen. And two, that’s where most of these immigrant workers came from. They’re coming back. Their jobs went away during COVID or they were invited to leave or they wanted to leave. Whatever the reason, they went away by the tens of thousands. No, now they’ve come back. They need to. They’re back and they’re assimilating into the labor market. They’re waiting tables, they’re putting on roofs, they’re all that stuff. All they need to. That’s going to stabilize wages.

Immigrant workers are critically important to the US. As most of you know, rents have started the process of adjusting. Over here, the dark side is new units and you see them all over Denver. The multifamily units, very important. We haven’t really started on the low income multifamily yet, but we’ll have to.

The blue over here is the, well, let’s call it correction in the rental rates. Places like Boise and Austin and all those that were just ridiculous are adjusting back and they’re going to adjust back a little more, not more than about 10% because the buildings were expensive and rent is not going to adjust way down fundamentally because the Federal Reserve is not going to make the same mistake that we have done in the past, keep lowering rates until money is free because it’s a political expediency.

I don’t think they’re going to do that. Some consumers are starting to feel the pinch of the cost of money and the cost of living. This is a study out of the New York Fed saying people, oh, people with student loans and other debt, homeowners, whatever it is, auto debt, whatever it is, they’re starting to get a little behind.

Whatever the political issues are with the student loan debt, it’s still a debt. And they’re starting to get up a tiny bit past this historical average. You get 4%, four and a quarter percent people behind in their credit cards. It’s the first time that consumers really started to show the costs of some of this. And it will slow spending down, probably in time for somebody’s Christmas.

Mortgages, their decline in the last several months has been, well, they’re expensive now and the marketplace is a little shocked. So even at 7.2 or 7.5, whatever this example is from the rest of the mortgage declined, the demand declined for whatever reason.

Well, it’s not negative equity. This is kind of a very indicative chart of what the real estate market is not like now. It’s not like the 2008 and 9 when you know what was going on. There’s a lot of equity in these homes. There’s a lot of homes that have no debt on them at all. They’re worth a lot of money. That market hasn’t adjusted a lot. They are important.

It’s indicative of John Quigley, a school teacher at UC Berkeley, kind of made an observation of a phenomenon. Let’s call 1978. Pretty good mortgage back in those days. For those of us that remember that 9%, anything in single digits back in the 70s was a pretty good mortgage. Well, by 81, mortgages were 18.

And Mr. Quigley, Dr. Quigley noticed, oh, some people have real cheap mortgages compared to what it is today and still have some value in the house. So they have no incentive to sell or move because they can’t, well, replace the value, what he started to call the wealth effect that they have now.

Yay! Thanks, John. Here’s where we are today. Very similar. We’re not going to discuss the wealth effect because we’ll be here for 2 hours, but here is where a lot of people are, and these are mostly mortgages. Twos, threes, fours, huge amounts of numbers. And all the way over here on the far side, here is where the current market is now. A not well-meaning lender or a person that doesn’t have huge numbers in their credit rating. Well, they’re paying eight and a half, nine. You’re starting to see debt over nine build up on the far side.

So this whole side of the real estate market is technically locked up, and that’s where the term the Quigley effect came from. The media jumped all over that. Oh, these people are locked up because they’re looking at what they have and they look at what they’re paying for it, if they have a mortgage at all, and they go, yeah, well, why would I get rid of this?
That is not going to change for the foreseeable future, certainly the next year. It’s not reasonable that the Federal Reserve is going to lower rates. I give you a 10% chance they’ll lower rates at all in the next year. There’s no reason to. They have to get rid of the last of the inflation, and they’re in no hurry.

Everybody has to adjust to the cost of money now, and we’re five and a quarter. They’re not going to let mortgages; I don’t believe today they’re never going to let mortgages out of the fives. I don’t think they’re going to let mortgages lower than the fives, because then we’re just right back in to where we were, and we have to sort of dig out of a hole the deficit discussion about the federal government. Boy, do I not want to get into that or this political arena going forward, we’ll be spending a trillion dollars a year on the, quote, federal debt.

Well, as we know, treasury pays interest on the money out in the system. They always have. It’s the foundation of what’s going on in the world. And you’re looking at an asset that has gotten a lot of bad publicity recently. Here it is, commercial real estate. You think they can’t pay their bills. They got way too much debt. They actually have very low debt. There’s been a lot of changes in that marketplace. They’re not stupid. They’re looking for financing elsewhere. Or they didn’t have any debt. Or the people are coming in and saying, we’ll buy the whole thing and take it off your hands and repurpose it. Well, that’s what you do.

It has been a positive side of the stock market. We had another little rally up 6% there for a little while, kind of like we did back in June. It’s more of a technical rally based upon where earnings are, which are okay. It’s not the beginning of another great bull market. We probably won’t see positive earnings growth, reported positive earnings growth till the first quarter next year. Yay! Then that’ll start. But don’t anticipate the Fed lowering rates until then.

When we put the $4 trillion in the system again, wisely for COVID, this is what it did to M2, and we’ve talked about M2 before. M2 is the total supply of money out there. That’s the really important factor to inflation is how much currency you have. Well, we threw a lot of currency in the system and a lot more after that with some incentives and so on and so forth.
Now the Federal Reserve in the last, let’s call it seven months has been doing the very delicate but most important part of the whole inflation battle is pulling that money out of the system. I mentioned a couple of years ago. Well, that $4 trillion we put in, that’s going to have to come out because it does not fit into the economic model at all. That 6% trend is very important for a $23 trillion economy.

And anyway, the real battle for inflation is here. They are moving slowly. When things roll off in their assets, they just take that money out of the system. They don’t want to take it too fast because it’ll spook the markets international and the bond market. And the bond market has kind of rallied, meaning rates have come down because we’re seeing, yeah, they’re doing a good job with that. They’re slowly pulling the money out. Yeah, we’re not going to create another crisis. Thank you!

Stock market. Yeah. It’s great to have these little rallies. Makes people feel better. It isn’t the rally yet. It’s just hanging in there until we start seeing some substantive improvement. American manufacturing is still building stuff. They’re still building factories. They’re still moving here. They’re moving in some respects out of China. They’re moving all over the place. They’re building stuff out. We’re not going to see the impact on the earnings until next year. That’s when we’ll start seeing some robust numbers.

And specifically, speaking about China, had a couple of questions. Gee, are they having a problem? So on and so forth? Well, fundamentally, yes, they have a problem. They lost their number one customer. And the impact of losing your number one customer makes everybody else sensitive to your number one customer. That’s the United States.

So the first time, basically ever, this is indicative of very important part of an economy, the foreign direct investment on the balance of payments. We don’t want to get in the technicalities of it. This is the first time the foreign direct investment went negative, meaning people are leaving and they’re not coming back. That marketplace and the growth, and it was mostly the growth the Chinese were counting on.

Now their 15 years are over, they’re going to have to readjust and figure out how to feed all those people some other way. Same thing India is having to do right now. So China is really not on our investment horizon for the foreseeable future. Okay, well, that’s enough. Thanks for joining me. I appreciate it. And always deal with these questions. Just send them along to and I’ll be happy to deal with it.

Thanks for joining me!

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