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Inside the Economy: Profit Taking and the Great Transition

By November 29, 2023No Comments

This week on “Inside the Economy”, we discuss a variety of economic news. The Fed has one more meeting to round out 2023. All eyes will be on if they continue to hold rates and the impact on unemployment and inflation. In other news, the housing market experienced the lowest number of existing home sales in more than a decade. Will housing prices continue to be resilient in the higher rate environment? Tune in to learn more!

Key Takeaways:

        • Oil prices steady around $75 a barrel
        • Mortgage rates stuck in the mid 7%’s
        • Headline inflation trends lower

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

I’m Larry Howes. Thanks for joining me!

I want to talk about the profit taking that’s been going on mostly in the bond market. Trivial to some, but it’s sort of indicative of a lot of what’s going on and been bits and pieces of these great transitions that I’m starting to see that we’re all going to experience here in the next, let’s call it six months.
Some of the stuff in the numbers, nothing really dramatic. Durable goods orders are down because we went through the roof with new airplane orders last time. So they’re just adjusting. Boeing and Airbus, I mean, there, I don’t know if they’re ever going to catch up on the orders they have to catch up on, but building a lot of airplanes. They’re retiring a lot of airplanes, too, but that’s a different story.

We almost got what I would call a positive trend from the eyes of the Federal Reserve in unemployment. Boy, we went up 230. Wow, that’s a lot. That was great. But then this last one, we’re back to 209. Not a lot of drama on the job market yet, which is the last thing that brings up that we’ve talked about what happens in a rising interest rate environment.
Unemployment is still 3.9. Haven’t gotten in the fours yet. Oil is back down. Gee you’d think that’d be 110. Mortgages, they have come down a little bit. That market is working hard bringing the mortgages down. What’s happened in the bond market, very briefly is rates have been coming down here for a while. If you look at them, when yields come down, rates come down, price goes up.

So price has been going up. So a lot of these bond portfolios and mutual funds and ETFs and all that stuff have been looking better, getting better returns on the bond because the price has been up. Well, it was profit taking time because a lot of these guys have got to produce numbers by the end of the year. They got to look better, according to their peers, by the end of the year.

So they’re taking profits, putting gains in their fund to try and prepare themselves for the end of the year. It’s not bad. The trend is still kind of down, even though we really haven’t stabilized that yet. And the Federal Reserve might not be done raising rates, probably, this is unemployment. Gee. Come on, let’s get up there. Let’s get 4% unemployment. Four and a half. Let’s get some layoffs. Let’s get some of the wage an hour.

People out there slowing spending because they don’t have a job. And the duration of unemployment went up there for a little while. That’s a green line. It stabilized. It actually came down. It’s not on this chart. So the job side of things, they’re not suffering yet. I think there is going to be some corporate layoffs here. First quarter in 24. There’s also going to be a lot of factories and new buildings and new expansion and new development coming online in 2024. So layoffs someplace, they’ll just get employed somewhere else. That’s kind of where we are.
There’s been some spending and some new spending. In typical households, spending went up because they’re starting to pay their student loans. There has been a lot of comment, Gee, what happened to the $26 billion that President Biden forgave in this student loan market? Well, that money was you were never going to get that money anyway. They’ve walked away from it. They’ve abandoned it. They’re arguing that what they bought is useless or whatever the problems are in the student loan side of things.

The people that are paying their student loans, one, take it seriously, and two, a lot of them are making extra payments because they just want it out of their lives. This is like mortgage psychology in the 90s. They’re just making extra payments. Let’s get this over with. It’s fine. There is showing some stress in the spending side of things. Slight turnaround in, Gee, 30 days late, 60 days late, 90 days late. You’re actually delinquent car loans. Most of the delinquencies in car loans are with numbers, with very low credit scores. That was the boom in the used car market. It’s clearing out now.

A lot of car manufacturers, some of them are at 0% interest to get sales going again. A lot of them are not. A lot of them are just building less. A lot of them are going to adjust to the new costs of their labor. A little more automation, you can count on that. But the cars are going to slow down here for a little while. This is the only indication we have that the consumer is slowing, that general spending is slowing. And we need to see this in the process.
So the Federal Reserve knows that they’ve made money expensive enough. Housing, existing homes, sales are way down. We know some of this is inventory, but sales are way down. Not necessarily bad news, but it is impacting the mortgage market. It is impacting the housing market. It is making the multifamily market a little more attractive and more construction there. But people aren’t buying.

Prices are down too, and people aren’t buying. This is competition between existing homes and new homes. The new home developers are in a position to buy down the rate on a mortgage. That makes these things more attractive. New homes doing okay. Existing ones, yeah, not so much.
Part of that trend is this. This is the percentage of homes that are mortgage free. The darker the color, the more percentage it is. Interestingly enough, the homes that more than 50% of the homes or more are in Mississippi and West Virginia. That is very indicative of a trend that a lot of these families largest, most valuable asset they have is the family home. It doesn’t have a mortgage on it, nor would they ever sell it.

This is Europe the last hundred years. This is the asset that people live in. It goes on through generations. This money is out of the system, mortgage paid off. There’s no more economics involved in these homes at all, unless they were to sell it. Then it takes a little money. But right now it’s just neutral. This is $13 trillion or so. Don’t hold me to that number. Not 13 trillion, that money has left the system. It’s not floating around. It’s just stuff sitting around with an estimated value under the assumption the owners would ever sell it. And that’s another trend. They’re just hanging on to this stuff.

The S&P 500 and the rest of the stock market. Oh, they’ve been doing fine the last couple of weeks. There’s fewer things to worry about. The confidence that the Fed is done has switched to, Gee, when do you think they’re going to start lowering rates? Even though I’ll tell you today, it’s well into 2024, maybe the end of the year, but we really aren’t at earnings yet.
That’s going to be first quarter next year, maybe in the second quarter, when earnings are really going to bounce back. And they’re not going to bounce back like they have because spending, with a little luck, will slow. This is sort of a technical, and it wasn’t even a question. I’m just going to answer it anyway.

Is the ten year really where it belongs right now? And I’ll throw this out here. Those of you that don’t understand what a ten year breakeven point is, you really shouldn’t. It’s a very complex combination of some algorithms. What inflation is, what the yield is, so on and so forth. But the ten year specifically has been way behind its break even for quite a while, last couple of years, rates are going up, having to deal with inflation. The ten year goes up a little bit, not as much, but it’s still behind in its actual value. But we just got there a little while ago.

That was a reason for some profit taking. That was a reason for some confidence in the bond market. That was a reason for, I think it’s pretty well understood that next year is going to be a good year in the bond market, be okay in the stock market, but the bond market should have a good year. Most of the drama is over, and what they’re looking at is at some point rates will start coming down, and then all these positions will look great. They’ll go long, they’ll look great. They’ll have a good year.

A couple of questions. There’s always some questions on this. Okay. How many foreign entities own US Treasuries? The actual number has been going up. It just isn’t as concentrated in China and Japan as it has been which are the red and the blue. Japan, well, they’re just sort of hanging on. You can tell that their impact of their demographics and aging population is showing.
Go to any village in Japan and see the empty houses. They’re empty because the people died and the houses are just growing weeds. There’s nobody to buy them. That’s the nature. And China can’t buy more. And they’re hanging desperately onto what they have because it’s the only real economic asset they have.

The Yuan, the Renminbi, the Chinese Yuan wouldn’t collapse, but it would drop like a rock if they sold all their Treasuries. There is nothing backing their currency up. Certainly isn’t real estate or some of those beautiful bridges they built or the empty office buildings. It’s the treasuries. They have to hang on to those to support their currency. And they’re going to in the future, everything else, you know, the orange down here is the Federal Reserve Holding Treasuries, holding Treasuries on behalf of banks holding Treasuries because they put $4 trillion in the system for COVID. Okay?

Then there’s the accounting Gee Social Security has treasuries and Medicare has treasuries. And then there’s everybody else. It’s everybody else’s assets, liability to the US treasury assets for everybody else. There’s the pension plans, there’s insurance companies, there’s state and local governments, all kinds of things. And the foreign ownership, which is going up because all the rest of these countries need the treasuries too.

Argentina is going to be adopting the dollar. They need to because their currency is useless anyway. Always questions about Treasuries. Don’t worry about them. Don’t think that, oh, if China and Japan sell the Treasuries, the bond market will collapse. No, it won’t. Treasury would just give them their money back and they can do what they want with it. They would have a problem with their own currencies, which would drop. It wouldn’t take the treasury market two days to recover from that, anyway.

Fundamentally, the equity market is fine. It’s not going to start a rally yet. There’s no reason to. We’ll probably get a little correction before the end of the year, sometime in the first quarter when we start getting better earnings. It’ll start on a rally. The bond market will probably do well after they make some adjustments for the end of the year. Then they’ll start in the year. Pretty optimistic.

There’ll be a lot of new issues. There’ll be a lot of munis, a lot of new corporates. They’ll be absorbed into the market. Well, that’s enough for now. I appreciate you joining me, as always, questions, and I do like them. Just send them along to Info@shjwealthadvisors and I’m happy to deal with it.

Well, thanks for joining me!

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