This week on “Inside the Economy”, we evaluate the outlook for the upcoming Federal Reserve meeting, the job market, housing, and global markets. The chances of a future interest rate cut by the Fed have increased – what factors have led to this change? Yields on fixed income have gone down; how might they react to another interest rate cut? We also explore U.S. manufacturing employment and consider policy shifts in the past several years like tariffs aimed at retaining jobs. Are these policies successfully bringing jobs back to the U.S.? Is the overall job market starting to tighten? Additionally, we discuss the strong momentum in U.S. markets post-election – are stocks becoming overvalued, and what could trigger a correction? Is there still an imbalance between U.S. stocks as compared to markets in other countries? Tune in to learn more!
Key Takeaways:
- 10-year bond yield at 4.17%
- Unemployment at 4.2%
- 30-year Mortgage at 6.69%
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Getting close to the end of the year now. So quick review of jobs and housing, how it affects interest rates and a lot of what’s going on globally. Some issues in Korea and Syria and those things. But quick look at the numbers. What we have here is we’re hacking our way down to 2% inflation. There has been some anticipation that we’re going to lower rates, whatever it is, the 18th of December, another week or so.
Two weeks ago last broadcast I said there was a 50-50 chance they were going to – they, meaning the Federal Reserve was going to lower rates. Well, today I tell you there’s an 80% chance they are going to lower rates. There’s been a couple of things intervene in that, not the least of which is the mortgage market and the entire bond market has already had their rally. Yields are down everywhere. Mortgages are down. They have already – that means the prices have gone up on bonds. They’ve had their rally in anticipation that the Fed is going to do just that.
Basically saying, yeah, go ahead. It doesn’t matter that much if you don’t. Yes, that’s a tiny bit of the tail wagging the dog. But we are at the point in the economy that the Federal Reserve is just refining things now. The economy doesn’t need cheaper money, it doesn’t need stimulus. We’re just matching the arithmetic with inflation. And inflation is going to get down to two. And we’ve been through this a lot.
Cost of money is going to be three and a half. It’ll probably be four and a quarter in December, three and a half by the end of next year, which is just what they want. Unemployment, we’re up to 4.2. We’ll have a super tight labor market when it gets to four and a half and it might two quarters next year.
Big part of the jobs is not whether there’s a lot of new jobs. It’s tracked mostly ISM numbers. All of those things are tracked in manufacturing. And here’s where we are in manufacturing. There’s been a lot of federal programs and international programs. Yeah, let’s get jobs back into manufacturing. Well, plays well in media. From a practical standpoint, it’s not that important. We still have low end manufacturing from China, the rest of the world, Mexico, all that kind of stuff. The actual manufacturing done here is never going to be a big thing. What part isn’t being replaced by automation is being worked out otherwise.
And yes, we’re liable to have some more longshoremen, strikes over that very subject. Don’t look for great expansive new jobs in manufacturing. Actually, if you follow the ISM numbers, this is pretty much what happened when we started adding tariffs. 2018, the first Trump administration. And then the ISM came down. This is the diffusion index. And it stayed down because its optimism and attitude, global trade shrunk a little tiny bit because all the rest of these places are going, woo, yeah, the United States is not our best customer anymore and there aren’t any other customers.
So anyway, you know the bit. ASM manufacturing is probably going to come back, but right now it’s more important that we deal with the current labor market. And what we have is people are unemployed longer, it’s easier to get gig jobs, door dash and whatever else. And there are more people that are on long-term unemployment. That seems to be very fashionable.
Labor market is still a little loose, it’s tightening up a bit more, but it’s not something that’s going to generate a recession. I think that’s pretty clear. Housing prices, they’re not going to collapse and are going to adjust down, not for the foreseeable future. They’re okay. They’re not growing out of control.
Sales are down a little tiny bit for whatever reasons, in some respects, people are still waiting, oh, why would I pay a 7% mortgage when I can get a 6.7% mortgage? Okay, that’s going to be going on. That’s just the nature of the mortgage business. And the mortgage industry is perfectly well aware of this. So they do what they can to get mortgages down lower.
And by the way, on a side subject, you know that Fannie Mae and Freddie Mac have been in a government conservatorship for the last decade due to the housing problem. Pretty good chance that next year they’re going to come out of that conservatorship. That will change the mortgage market. Not significantly, but it’ll open it up. There’ll be a lot less government intervention. Probably a good thing, just a sidebar.
Speaking of housing, and this is a very interesting subject, it’s about property and casualty insurance, homeowners insurance in California and Florida. Not a big deal here. But it is there. There’s two kinds of insurance companies. There are insurance companies. Admitted meaning they’re basically controlled by the state’s insurance commissioner, State Farm, Allstate. Those guys, all the big ones are admitted companies. They share some liability, they pay premium taxes, they do all kinds of things.
Fundamentally what they do is they make sure that legitimate property and casualty claims are paid even if the company itself has problems doing it. That’s admitted. In this case, it’s that whatever that color is, pink, fuchsia, whatever it is, those are admitted companies. So basically you go back to 2010 or so and there’s 53,000 transactions in Florida from an admitted company. Bad roof, whatever it is.
Well, after a couple of hurricanes, 2018, there’s 155,000. Okay, so the admitted companies start going, well, I don’t think we want to do business anymore. We’re not going to cover this, we’re canceling that, we’re reducing this, so on and so forth. So all their activities start dropping. And the people in Florida, especially somebody who’s got a mortgage, they have to have insurance on it or they get foreclosed on.
So the white line there is the advent of the non admitted insurance company. And boy, is that racket. They don’t have the liability, they don’t have the government oversight, they don’t have the assets, they don’t have deals to make sure their policies get paid. Any problems, they just come into counties that the admitted companies don’t deal with. Let’s call one. Well, it’s north of Dade county in Florida. They’ve moved in there. The typical homeowners policy now is 12,000 bucks. They just say 12,000 bucks and I’ll give you homeowners insurance and you can keep your mortgage. That’s a racket, kind of like Bitcoin.
It’s part of the optimism that’s going on and some of the problems that the shared risks of things like hurricanes are starting to wear themselves out. And if you have a home or more specifically a mortgage in a place that has floods and hurricanes, you may be on your own here pretty soon.
The S&P 500, all the stock markets here domestically are doing great. We were overvalued a couple of weeks ago. We’re more overvalued now. We’re over about 15%. The market is going to correct. The only issue is will it before the end of the year or not.
If the Fed lowers their rates here next week, the market rally might keep going till the end of the year. If for some reason there’s about a 20% chance they won’t lower rates, 20% chance they won’t. The stock market will correct that day and it’s overvalued by about 15%. So if it corrects 15%, don’t be surprised. It’s not bad news. It’s ahead of itself. Some people would call that, oh, pulling profits in from 2025. No, it’s just too optimistic.
There was a question about, well, how much really does the US have an impact on global equities, on the investment environment, the entire world? Well, there isn’t a number two. The United States was over half of the entire global equity market 10 years ago. Now it’s two thirds and growing. The money is here, the banks are here, the investment companies are here. People invest here in US industry, US properties, US optimism, US everything.
Very, very distant is Japan. Very distant Japan, kind of a drop in the bucket. They have a lot of money in their stock market because it supports those big employment, family colossus businesses, you know, Toyota, those guys and all their interlinking pension plans. The UK, all the rest of them, they just drop off the list.
The United States is here. The United States is here because it has good total returns on their markets for years, because they have earnings for years. You have a company here, it does well, it makes money. That’s kind of important, some places, the rest of the world is not important. It’s just important to have a sign on the building. Well, around here we want you to make money. And that’s becoming kind of a track record thing.
Fundamentally, when you look at it. I always look at domestic demand. It’s all about domestic demand. If your own economy is being supported by your own people, that’s a good thing. And this isn’t really reflective of the numbers, it’s reflective of a percentage of growth. And Japan has tried to maintain their domestic demand. The UK has tried real hard to maintain their domestic demand.
The important one is the euro, that’s a green one down there. It’s not doing much at all. The euro is an important zone, supposed to be a very important currency. And that whole bunch of countries bound together should fundamentally be doing better. They’re not. It’s going to take a while to recover from that. And I think with the issues going on in France right now and the UK and Spain, they’re finally realizing the cost of a lot of that free immigration. They’re going to have to do something about it. I don’t know what it’s going to be, but economic growth isn’t one of them.
Fundamentally, you have to look at Germany to find out what’s going on in the EU and this is the number of companies that are going under. Germany also has a lot of family conglomerations of manufacturing and travel and banking and a number of other things. And when things slow like the entire auto industry, their really only growth engine the last decade has been cars in China. Well, that’s come to a screeching halt. So they’re not doing well. So they’re going to be getting rid of people and closing businesses. They have to.
I don’t think Germany is going to be in recession through 2025, but it’s certainly not going anywhere else. So. And neither is Europe, for that matter. And the rest of it kind of drops off in significance.
Finally, tariffs have really been in the media a lot. This is countries that export to the United States. You notice Canada and Mexico, they’re very important that they sell their stuff to the US because it’s important for everybody to sell stuff to the US. But Canada and Mexico especially, remember, don’t get involved in the media debates of somebody saying, oh, well, we’re going to put a tariff on Mexican goods. And then the Mexican president says, well, we’re going to put a tariff on your goods.
A tariff is basically a tax on the buying side. So if you put a tariff on Canadian lumber, which they’re not going to like, but it costs the consumer, not Canadians, they may lose a little business because their stuff is a little more expensive. But anyway, Canada and Mexico, they’re going to negotiate their own deals. And don’t worry about the tariffs on the rest of the world because it doesn’t really matter. They all need the US and they know it.
Okay, well, I’ll summarize. Everything that’s going on right now is fundamental optimism with a lot of money. Be interesting to see when the market corrects. And it’s kind of a fascination whether the Fed lowers rates or not. It really isn’t that important. Thought I’d never say that in 40 years in this industry.
Anyway, send questions along at info@shjwealthadvisors.com and I’m happy to deal with it!
Thanks for joining me!
