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Inside the Economy: Households, Commercial Real Estate, and the Dollar

By March 6, 2024No Comments

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This week on “Inside the Economy”, we assess household net worth and assets, commercial real estate, and the Dollar. The U.S. consumer has a strong balance sheet; specifically, with checking and savings. What does that mean for overall market exposure? The trade-weighted dollar continues to drive upwards and proving to still be a strong dollar. What does a strong dollar mean on the global scale? Tune in to learn more!


Key Takeaways:

        • 10-year bond rate is steady at 4.25%
        • U.S. GDP at 3.2% in Q4 of 2023
        • U.S. Fed Trade-Weighted Broad Dollar Index at 121

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

I’m Larry Howes. Thanks for joining me!

Theme today is we’re just starting to feel the impact of all these rate increases. What is going on? And it’s been a year and a half since the Fed started raising rates wisely. We’re just going through the cycle that this increased cost of money is supposed to start.

Generally, the cycle is you slowdown in real estate, you slowdown in jobs, which slows down in consumer spending, which slows inflation, and then there’s a recovery and everything starts coming back to normal.

Well, after all this time and all this grief, as we’ll talk about today, we’re just starting to see a slowdown in real estate. GDP was updated. We’re still in the fourth quarter. Last year is still in the mid 3s, which is great. Unemployment is still 3.7. Initial jobless claims are down again. There are not any problems in the job market. In fact, globally, we’ve returned to the employment figures we had before the, we’ll call it COVID, I’m not supposed to call it the Chinese flu, but the global job market is back where it was. It has recovered. So we don’t have a problem there.

And if you look at all of the yields, the 30 year treasury, the 10 year treasury, the 3 year, the 2 year, the 3 month, they have probably peaked. We’ve gone through a cycle where they’re up last year and a half. They have probably peaked, plateaued. They are stabilizing now. And the mortgage market is doing everything they can to keep mortgages out of the sevens. We talked a year and a half ago that mortgages could go into the eights, but that marketplace really never let that happen.

So where we are now is waiting for the Federal Reserve to do something to make money cheaper. But I know this is kind of a mind numbingly boring slide, but this is basically the ten-year US treasury, the moniker of financial health. Globally, since about 1980, we have been in a cycle of lowering inflation, and this is the yield of the 10 year treasury and cheaper money for 40 years, varying political cycles, varying reasons, little issues, even a couple of good time recessions and bubbles.

We don’t have any of that right now. What we have is a federal reserve that, in my opinion, finally has the character to take us out of that trend, pull the yield way up where it kind of belongs, and then shift back into a better cycle. I’ll talk about how this has affected the dollar later, but this is, as we pointed out in the investment committee meeting, this is where inflation has gone low. This is where the cost of money has gone very low.

This is globalization. Since China joined the World Trade Organization about 1990, this is globalization. Cheap money makes it easy for people to invest in. China, Singapore, Vietnam, India, all over the place. Cheap money. We’re changing that.

You look at a household and it came about from this. This is household net worth. The black line up there at the top has got us household net worth. Yeah, it’s about $120,000,000,000,000. Not bad. That has not changed much. Liabilities down there in the bottom, that’s not a real scientific number, but it’s close. And the blue here is IRAs, pension plans, money in the stock market. It’s a lot of money. The green you’re familiar with because the green is, well, there’s the checking accounts down there in the bottom, that’s several trillion dollars. There is equity in the home there, the dark green, the light green. That’s just the cash side of things. That’s the financial side of things. About 92 trillion. Not bad.

And the bubble up there at the top is the stimulus money that came out for COVID, which has been corrected, transferred under the corporate side for the most part. But we’re back to a trend, and this trend, by the way, which is the slope going up, is a little steeper than it is sustainable. The growth in this has to slow and the Federal Reserve is going to do the best they can to do that.

And fundamentally they’re doing a fine job. The point here is this is not an overall consumer that’s having problems. This is not a consumer that has a bubble or worried about paying their bills. This is a consumer that’s in pretty good shape that is more concerned about convenience and a number of other things. They are not impacted by this increase in cost of money yet. You’ve seen this before. New home sales are down because the mortgage rate is up. It’s going to correct a little bit. But what you would normally see in a real estate market is huge drops in price.

There’s no evidence that’s going to happen. The price of these homes is very reflective of what it costs to build a new one or replace it, and there aren’t that many there. And as rates come down, meaning, wow, they came out, mortgages came out of sevens, and now in their high sixes and adjusting to the sixes, they’re going to have to work on affordability and money and income to qualify because I don’t think there’s going to be a big market correction.

That’s kind of the downside of how this market is going. We’re just starting to see now, and this is first mortgages on single family homes. This was really kind of an anomaly during the Chinese flu. It has started to correct. We’re starting to see traditional delinquencies and traditional beginnings of foreclosures on single family homes. They’re pretty rare, generally. Weird financial reasons cause that. But the weird part, the freak show of it is rapidly changing also, you see it over here in multifamily, which has gone way up.

And these are Freddie Mac loans, not necessarily the best lenders. And it’s not a lot of the new ones, especially in Denver, being built that look like Swedish condos. It’s a lot of older, traditional multifamily homes that are a little expensive. So on and so forth. Foreclosures are going way up. Stress in the real estate market. And this is the commercial side, a lot of rumors, oh, commercial property is going to collapse. People aren’t going back to the office, all that stuff. Well, don’t bet the farm on that.

Commercial foreclosures are going up. Most of this is in California, and I don’t want to point the finger, but most of this is in Oakland, which is having a different kind of problem. And San Francisco, don’t discount the ability of a lot of these commercial property owners to adjust. Refinance, re-shift, repurpose, reuse. Like I said before, they’re not stupid. And that market is not going to collapse and drag a bunch of banks down.

S&P 500. Yeah, it looks great. Up eight whatever percent it is on the year. That’s fine. It’s a little bit ahead of itself. Not bad. It’s just a little bit ahead of itself. We haven’t gotten great earnings yet. That’s just coming. We’ve talked several times. Second quarter, we’ll start seeing a lot of better earnings. The glory of, gee, we’re manufacturing semiconductors.

Isn’t that great? That’ll wear off, but we’ll get earnings. We’ll get more factories coming online. The ISM number at the beginning indicated that US factories have basically been in not a slump, but sort of stagnation for 16 months. That is not showing signs of improving, nor should it. We haven’t gone through job layoffs in big numbers yet. We haven’t gone through consumer spending slowing down.

We haven’t gone through a lot of things. It will come and don’t anticipate. I guess you can quote me on this. Don’t anticipate much in the way of the Fed lowering rates this year. Today I’d tell you they’ll lower a quarter of a point, 25 basis points, third quarter. That is probably it for this year. Anything else? It’s just not there. There’s no mathematics that supports it yet.

A couple of questions here. Gee, why is the federal government having a kind of damaging deficit spending, which is a trend right now, and that’s going to continue right now? I certainly don’t want to get into politics, but of the two people that nobody wants that are running, either one of them, of the popular runners that might get reelected are going to do pretty much the same thing in different ways. Over here on the right, that’s basically the bars for the Tax cut Job act, which has a huge piece of legislation that allows stimulus money in the system that’s looking to be renewed in 25.

Yes, that’s going to be an issue during this campaign. And one of the first things the new whoever it is gets to do it is very prone for federal deficit spending, which is very prone to, they have got to bring some of these tax cuts back and make their revenues look better. I said before, we’re going to have to have tax increases out of this. They just haven’t started yet, but they will.

And finally, several questions on, gee, why is the dollar getting stronger and what does that mean? Well, it doesn’t mean a lot unless you’re a US tourist. And again, it makes, what all US tourists should have is a roll of $5 bills, makes them even more valuable. Even in Turkey, their inflation, I think this morning was 70%. It’s worse than that in a lot of other places. A $5 bill feeds a family of four for about three days in Turkey, a week in India, it’s important. It’s the value of having a real strong currency. If you get out there and use it, you just have to be inspired to go to these places to spread that money around.

A strong dollar. And we have a strong dollar again because our rates are up and it looks like we’ve got some deficit spending problems. But the currency is clearly the global reserve currency, the global fiat currency, the global everything, and there’s no number two. The euro has taken another little hit. The problems with Hungary and a few other places, the dollar is going to remain strong and it’s kind of good for us, even though it doesn’t mean anything for most consumers.

It just means in how we deal with the rest of the world, whoever gets elected, the one that we have now is probably going to be interested in more stimulus, just domestic stimulus, loan forgiveness and whatnot. Good or bad. That doesn’t mean anything how important the dollar is.

The other one will probably do more isolationist, which will make the dollar even stronger, which simply makes it harder on the rest of the world for them to recover, for them to build stuff for us cheaper than we can build it for ourselves. Well, you know the drill there.

Okay. Well, it’s not bad news. It’s very predictable. I think it’s relatively good news that real estate is starting to, well, at least slow down a little bit. I don’t know how consumer spending is going to slow down, but we should see it by this summer. I hope there aren’t huge job layoffs, but there has to be something to get unemployment. At least four and a quarter. Four and a half is probably too much to hope for.

But anyway, as always, send questions along to and I’d be happy to deal with them.

Thanks for joining me!

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