This week on “Inside the Economy”, we discuss housing, the Federal Reserve interest and Federal funds rate, and the Consumer Price Index (CPI). The Federal funds rate is currently higher than all main U.S. inflation measures. Is the cost of money greater than inflation by design? In other news, per the CPI Primary Shelter measure, rents continue to come down. However, mortgage interest as a percent of disposable income increased slightly. How does that compare to non-mortgage interest such as credit cards and auto loans? If there is a recession, would housing be the driver? Tune in to learn more!
Key Takeaways:
- 10 yr. bond at 4.2%
- Industrial Production Output Index at 104.0 in June
- U.S. Core CPI at 3.3 (YOY)
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Talk about a little commercial real estate. It seems to be popular in the media and what’s going on basically with the markets, which, well, in light of some of the political issues going on right now, fundamentally on the economic side of things, interest rates have come down.
There’s a lot of anticipation that the Federal Reserve is going to lower in September, which we’ve been talking about for quite a while. But rates are starting to come down as that becomes closer and the likelihood increases.
There’s no other drama any place. The housing market still holding up. Commercial real estate. We’ll talk about that in detail. New jobless claims, not bad. 243, 4.1 on unemployment. It’s just not so bad. And oil keeps coming down.
Here’s where we are, fundamentally here’s where we are. All of the colors up there are all the various iterations of consumer price index. The CPI, the sticky CPI isn’t on there, but I ignore that anyway. Black line. It’s a cost of money. That’s where the Federal Reserve is. That’s where we are. Call it five and a quarter, five and a half, whatever.
This is the way things are supposed to be. The cost of money needs to be more than inflation. Inflation comes down to two. Cost of money should be 3.5, something like that. We’ve got the ratio right, and that ratio has been backwards for a long time. The Federal Reserve is perfectly aware of this. When they start lowering, they’re not going to go very far. There’s nothing that suggests they’re going to go very far.
So, this ratio, how the cost of money fed funds relates to consumer price index, is going to be paramount and more important than it has been in a long time. And that’s good. The big thing in the housing market, primary rent, primary shelter CPI, it has peaked, and it is fading with interest. It’s fading.
There’s very little out there that says it would drive it back up. Rent is coming down. All of the forces that would make the housing market not really unaffordable. It’s expensive, but it’s not unaffordable. Making the housing market work.
All of those forces are diminishing. Personal interest rate, other than mortgage rate is a factor to some people. A lot of this spike is basically an increase in the quality of the data. Not that people have picked up a lot of debt on the side. Some, not a lot. This isn’t bad historically. It’s still a very low number.
There is some moves into little higher delinquencies, which we’ve talked about. Mortgages, lines of credit, that kind of stuff. Still very low, not historically low, but right down where they should be. Credit cards, auto loans, they’re picking up a little bit. The media has really said, oh, there’s all kinds of new repossessions out there because people can’t pay their debts.
Well, no, the numbers aren’t out of skew. The numbers have normalized. Of the 1.2 million repossessions that happen every year, that’s still nothing compared to what sales, new and used are. So that’s not really an issue either.
Here are the markets, like we mentioned before, the equity markets, S&P 500 is the black, the Dow down there in the red and the blues. Nasdaq, they were doing great. They needed to have a little correction. Well, we’ve had a little correction. There wasn’t much drama. It just sort of happened quick because we got a little bit ahead of earnings. This isn’t a bubble either. In fact, you look at the volatility in the equity markets and there isn’t any volatility. We don’t have a lot of drama. I don’t think there’s a lot of places for most of the traders to go and hide. They just have to wait for something to happen.
Industrial production in the United States, as boring as this is, it’s important, is the fundamentals of the US economy. And industrial production is fine. You look at some bad news, like in Boeing that have had some problems here recently, and right now they don’t have any room to park the planes they have that they haven’t delivered yet. Industrial production is okay.
As a matter of fact, new businesses are still doing well. This was almost an anomaly during COVID. This isn’t just scented candles. It’s just nontraditional brick and mortar businesses, technology service businesses, that kind of thing. They are growing. They are diversifying and spreading around geographically, not just moving out of San Francisco and LA. I mean, they’re spreading everywhere. And new business adds breadth to the economy and that is clearly happening.
Question or two on, gee, isn’t it costing a lot of money since interest rates have come up to pay our national debt, the $26 trillion or whatever it is? Well, yeah, yeah. It’s about, it’s over a trillion dollars a year. A non-discretionary part of the budget is the interest on the debt, and that’s where we are. In fact, the interest on the debt is more than we pay for defense.
Now some people are going to view that as bad, but I will remind you that all this trillion plus dollars, 1.1 trillion that goes into your money market, the reserves of your bank, your pension plan, the reserves in all the insurance companies, the reserves in the banks all over the world, that trillion dollars is extremely important part of the economy. It’s just something that’s non-negotiable in the federal budget negotiations. We have to pay that. Just like Social Security.
Well, Social Security, we’re about 10% of GDP. There’s 67 million people in various iterations of Social Security and Medicare and Medicaid. Very efficient money, very important money. It supports the entire rural healthcare industry.
Not negotiable real estate market problems. Well, these are the big cities with large real estate loan problems. And you’ll notice there’s not a lot of going on in California and San Francisco and LA because there’s not a lot of debt that’s still floating out there in the books. This is maybe problem loans. Denver’s got a good one there too.
But you look at the past due non-accrual loans in trouble, there just isn’t much. There’s no drama here yet. We’re looking for problems but that whole industry is solving their own problems. Between private equity taking out deals and things being paid off, whatever they’re. They are not going to create a problem on the side that’s going to come after the banks.
Question about gee, is the United States really paying more wages than anybody else? Just about wage an hour. People in the US still, they make about 72,000 a year. Doesn’t seem like much. It used to be a big number, but for the rest of the world it’s way more than the rest of the world.
There’s also been a lot in the media about oh, China’s having to sell all its securities because they’re worried about the US economy. No, China isn’t selling their securities because they’re worried about the US economy. China is selling all these securities, not really a new record because they need the money. They need to get back in. The flooding has been horrible all over China. I can’t imagine what that’s going to cost, to what degree they put it back, but they need their money.
And if you look at this trend you can see there’s a lot of purchases of U.S. long term securities when they still had their number one customer. Since that changed around COVID time, you notice there’s a lot more selling.
Well, there’s a reason for that one. They’re not getting that many new dollars in. And two, they need the money. Real estate owned by internationals, real estate purchases by foreigners, I love that, is way down. Well, for two reasons. Real estate relatively is extremely expensive in the US, mostly because the dollar is so strong. You come from any other currency. It takes a lot of your currency to get into a dollar. And considering where prices are now, it’s just rapidly very unaffordable if you have to transition into the dollar.
In fact, the only groups that are able to do it is Canadians, which is standard. But those that can get out of China and Mexico, well, they do it because they want quality assets, the rest of them. That’s the first time I’ve seen Cuba or Colombia on this list. But they’re trying. It’s just too expensive.
So quick wrap up. The Fed’s going to lower in September. Doesn’t matter what’s going on in the political arena, they’re going to lower. They’re just not going to lower that much. We’ll have a great rally in the bond market. I don’t think it’s going to last.
The equity market is still waiting for earnings. We’re not waiting to clean up a bubble or a mess any place. We’re still just working through the summer, waiting for the fall.
Thanks for joining me. As always, send it along to info@shjwealthadvisors.com and I’m happy to deal with any questions, and we’ll see you next time.
