This week on “Inside the Economy”, we discuss the consumer, markets, expectations, and the cost of money. Total retail sales exceeded $700 Billion in October. Are these high sales due to the upcoming holiday season? Have credit card debt delinquencies increased as a result of higher consumer spending? House prices have yet to retreat, despite higher mortgage rates. How much inventory is available for new home purchases? As for the markets, they continue to reach new record highs. According to the Price-to-Earnings (P/E) ratio, is the market currently overvalued or undervalued? Has the gap between U.S. and international securities widened? Tune in to learn more!
Key Takeaways:
- U.S. Head CPI is 2.6 (YOY)
- Total Retail Sales in October at $718.9B
- Median Single-Family Sale Price in October at $412.2k
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
To talk about the consumer, some expectations in the marketplace, how things are being viewed with the political changes and the new administration coming into town and the cost of money. What has happened in the last couple of weeks is basically there’s some fear that inflation might be heating up again. Numbers are up a teeny tiny bit. It’s not heating up again.
Unemployment, initial unemployment claims are down. They’re very low. However, the ongoing claims, people that have been on unemployment for a couple of years are up. In fact, they’re the highest level. It’s like 1.3 million or something like that. Ongoing, still up and growing. Initial not bad. Unemployment still 4.1. All the rest of the interest rates, everything went up.
Go back even to September. Mortgages, 30 year mortgage is up 3/4 of a percentage point from where it was in a decreasing interest rate environment. Well, a couple of things have happened. One of the things that has happened is two weeks ago there was probably a 95% chance that we were going to get a quarter point reduction in interest rates here in December 18th.
I tell you today the chances of that happening are 50, 50 and dropping. We still might get a little easing of rates here in December, but if we do, that’s certainly going to curtail the likelihood of a whole bunch of aggressive rates in 2025.
The economy is not needing money. The economy is not needing to be stimulated by money. The economy is not needed really to be stimulated by anything because a lot of stuff is very evident of what’s going on in the economy right now.
First of all, retail sales up again. This is not housing. Some of this is inflation. But this is a confident consumer. They’re not overspending on their credit cards. We’ve talked about that. What was it, 720 billion just in October. It’s not Christmas stuff, that’s just stuff. Not a lot of new household startups, which is a big part of that, but certainly enough to keep things going.
And we’ve talked years ago that recessions and big corrections in the system start and end with housing. When COVID hit us, we thought we were going to have some problems. There were some big changes in the price of housing because people were moving to the countryside. Well, you know the reason.
But that market has not corrected. That market is not backed up or certainly not falling apart. There’s not a lot of inventory of single family homes for sale, but the prices aren’t backing down. Median price across the country, 420, something like that. Even California, who was really gross and really try to adjust things. They’re up about 9%. The housing market is not going to come apart. In fact, it’s just moving forward.
This is M2. This is the money in the system. This is the money in banks. This is the money in checking accounts. This is the money in CDs, little IRAs, KIOs, that kind of stuff. It’s $20 trillion. The total federal debt market is about 28 trillion, and most of it’s here in cash. That’s not a poor country. That’s not an economy that needs stimulus. They’re doing just fine. It’s simply a matter of what they do with it.
Inflation made a couple of little tiny little corrections. You know, headline went up a teeny tiny bit. Core about the same. Nothing dramatic. It is an integral part of what’s going on. Inflation is kind of cooling, but we’ve shifted over into the deficit spending side of the government, which is pretty much the only substantive generator of inflation right now.
We’re kind of reached where we ought to be. Kind of an interesting chart, but if you go back to 2019, all the way over there on the left, you see the white line. That’s the Fed Fund’s target rate. That’s where it should be, above. Inflation looks okay now. Things start coming apart when COVID comes along and inflation takes off for a variety of reasons, biggest one being the $4 trillion we put in the economy. But they do nothing with the cost of money. Fed funds just stay the same, just sort of talking about it.
Well, once they start creeping up, then Fed funds is well above where inflation is, and it certainly is now. So we’re at about 4.5% for fed funds. We might be at four and a quarter on December 18th. We might stay at four and a half on December 19th. Right now, it’s not really important that we do. But ultimately, where Fed funds ought to be is still about three and a quarter with inflation at 2. When that gets there, it’s going to depend on what Congress does with the deficit spending that the government has been doing.
Remember, we are at 8% of the total budget at the end of 2024 Fiscal. I think that’s September. 8% in deficit spending. We can live with four, but it’s way too high. So the new administration will get some revenue from tariffs, not a lot. It’s going to have to come from spending cuts on the government side.
Equity markets, yay!!! They’re anticipating a lot of things. This is fine. The Dow’s done fine. Everybody’s had great years. We’re about 10% overvalued, maybe 12% overvalued. We’re not there with earnings. We’re there with enthusiasm and some expectations. This needs to correct. Frankly, if they don’t lower rates on December 18th and they just sort of kind of leave it alone, the market will correct before the end of the year, 10%, 12%, or it’ll correct tomorrow or the first quarter of 2025. It doesn’t really matter. It’s not going to come apart. It’s not going to have a huge correction. It needs to get back down where we are, earnings wise.
The forward price earnings ratio, PE ratio is a little high. In fact, it’s a whole standard deviation high. It is a great indicator of we are overvalued. We’re overvalued enough that the market can come back down and do a great job staying where it was, cut about 10%, 12% off. It’s only a question of whether it happens before the end of the year or not.
However, according to the rest of the world, what is happening is considering the amount of money in the US and the amount of money the rest of the world has in the US, their stock markets, and actually the bad news, Germany is a very good indicator here. There’s a lot more layoffs going on in Germany right now that they’re just finally disclosing. They’re also learning if you’re nothing but an export economy like China, things can be bad when your number one customer either puts tariffs on things, makes your stuff more expensive, or just stops buying from it. Or you better build it here like the German car industry. You better build it here if you want to sell it here.
The global equity markets are down. It’s not likely that they’re going to recover here significantly in the near future. There’s not a lot of positive reasons to do that. Money is still floating around. And the dollar, though, having eased a little tiny bit here recently, is still beating the world over the head with how strong it is. It’s kind of too bad, but it’s just that you have the dollar, which is the world’s reserve currency, at a pretty high interest rate and it might stay up there for a while. So the dollar’s strong.
Well, there was a question about food production, which almost was a big thing in 2022, late 21. But the world lucked out. We got a little rain. India got some rain. The drought in Brazil wasn’t as bad, so on and so forth. Even the US farmer. But you know, what’s farmers income look like? How have they been doing? They’ve been doing fine. That’s important. This is just American agriculture.
And frankly, of all the places in the country that have done the best for agricultural prices, you know, price of a section of land and so on and so forth. Actually, it’s Kansas. They’ve really done a great turnaround in selling their stuff. And agriculture in America is doing just fine.
Well, that’s all for now. There isn’t anything dramatic. There isn’t any bad news. It’s going to be an interesting situation here in December. See what they do with the cost of money. Send questions along at info@shjwealthadvisors. And I appreciate you joining me!
