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[0] 2020 was a year marked by persistent inflation, skyrocketing costs in overall economic instability.
[1] Now as recession looms over 2023, many Americans are asking what comes next and how they can protect their own personal finances.
[2] For this episode of Morning Wire, senior editor Cabot Phillips sits down with Kenny Polkari, market strategist and managing partner of Case Capital Advisors, for a conversation about where the economy is heading in 2023 and how Americans can prepare.
[3] I'm DailyWire Editor -in -Chief John Bickley with Georgia Howe.
[4] It's January 22nd, and this is your Sunday edition of Morning Wire.
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[11] Text Wire to 9 -9 -8 -98 -t today.
[12] Hi, everyone.
[13] I'm Cabot Phillips with Morning Wire.
[14] We're joined today in studio by a familiar voice for many of our listeners.
[15] That's Kenny Polkari.
[16] Kenny, great to have you with us.
[17] Thanks for having me. It's always a pleasure when I come to Music City.
[18] So looking ahead to the economic outlook for 2023, what's some reason for optimism?
[19] And we'll start with the positive first.
[20] Well, so the reason for optimism is we will get through this, right?
[21] And at the recession, while I already think we're in it, and I think it's kind of a rolling recession, so I think it's going to start to improve in the second half of the end.
[22] Now, that's going to depend upon what we hear from the macro data and whether or not inflation is responding the way that they wanted to respond.
[23] Look, we were as high as 9 .1 % in the summer of 2022.
[24] Now, as of last week, we're down at 5 .7%.
[25] That's great.
[26] That 3 .5 or 4 % move was really the fluff, but we're still at 5 .7%.
[27] They want to get to 2%.
[28] That next 3 .5 % or 4 % move to get us there, that's going to be the meat and potatoes.
[29] That's where it's going to be difficult for the Fed to get us to.
[30] And that's why I think they're going to continue to continue to push on raising rates.
[31] Maybe not at 75 basis point increments, but 25 basis point increments, if you continue to do it, will continue to add pressure.
[32] And that's what I think people need to worry about.
[33] You mentioned the upcoming Fed meeting, just to make sure our audience understands why the Fed is continuing to raise rates.
[34] Can you walk them through what their goal is?
[35] Right.
[36] So the goal is to have price stability, really, right?
[37] Full employment and price stability.
[38] Well, right now we've got full employment.
[39] We've got upward pressure on wages, which is now creating a wage price spiral type of inflation, which is exactly what it was back in 79, 80, and 81, which then forced Paul Volga, who was Fed chair at the time, to force rates much, much higher than inflation to start.
[40] stall the economy, put it into a two -year recession, which was ugly.
[41] There are analysts or economists going, oh, no, the Fed's going to pivot.
[42] The Fed is not going to pivot in 2023.
[43] Look, 20203 is an off year.
[44] It's not an election year.
[45] So if the Fed needs to really do something drastic, this is the year to do it because there's no election.
[46] 2024 starts the presidential election cycle.
[47] They don't want to have the economy into, you know, a complete tailspin during the presidential election.
[48] It will be a mess.
[49] So I think what they're going to do is force it.
[50] They're going force the pain in 2023.
[51] And then in 2024, as per Jay Powell, that's when he expects to start to see, to start to see the Fed begin to ease back, right, to try to restimulate the economy and bring it back from what they suspect is going to be a difficult time.
[52] So in the meantime, is there a chance that consumers just simply hit a wall where they say if retailers keep raising prices, we're just not going to be able to keep buying these products, and then that sort of brings prices down?
[53] I think we're approaching that in certain parts of, in certain parts of the economy.
[54] I think people are starting to pull back and not do and maybe not go out to dinner as much.
[55] I mean, have you been out to, have you been out to a restaurant recently?
[56] I mean, you go out to dinner just at two of you, and it's in the, by the time you get the bill, it's sky high, because they end up having to pay dishwashers $30 an hour, and they can't even hire them at $30 an hour.
[57] And so it's becoming very, very difficult and expensive.
[58] So, yes, I think there is a point, and I think we're fast approaching it.
[59] And I think you're starting to hear that from some of the banks that consumers are starting to get tired.
[60] Shifting gears to a part of the economy we've talked quite a bit about on the show.
[61] What are you hearing from the housing market?
[62] Listen, housing is very sensitive to mortgage rates, right?
[63] Interest rates.
[64] Most people in this country buy a house with a mortgage.
[65] And so therefore, mortgage rates, as they've ticked up, have put pressure on housing.
[66] And so, you know, if you bought a $600 ,000 house at a 3 % mortgage a year and a half ago, you were paying $2 ,000, $2 ,084 a month.
[67] Today, if you buy a house that's $590 ,000 or $600 ,000, and you're paying 7%, your mortgage is now closer to $3 ,100 a month.
[68] And that's just the house.
[69] That's not the taxes.
[70] That's not the maintenance.
[71] That's not everything that goes along with it.
[72] So I suspect that as the Fed is raising rates this year, that we're going to see mortgage rates continue to tick up.
[73] I think right now they're about 6 .5%.
[74] They were a little bit higher than 7 % kind of in the late fall.
[75] they've ticked back a little bit on the idea that the Fed is going to pivot and cut rates.
[76] Fed's not pivoting and cutting rates, at least not this year.
[77] So I think mortgage rate's going to continue to tick up and that's going to continue to put pressure on housing.
[78] And look, let's not kid ourselves.
[79] There was a lot of fluff in housing prices.
[80] We saw how they went up astronomical.
[81] And so some of that fluff has already been taken out, but there's more to go.
[82] I want to get back to something you talked about earlier.
[83] That's earning season.
[84] For those who aren't aware, what is earning season and what are you expecting to see this quarter?
[85] I like to call it the beauty pageant, right?
[86] It happens every quarter and companies come out and they reveal how much money they made or didn't make the past quarter.
[87] And then they give guidance on what they suspect it's going to be like for the next, at least the next quarter, if not for the next two quarters.
[88] And what's really important about earnings season is not so much the earnings, because the earnings are history.
[89] They're done.
[90] They're there, right?
[91] They are what they are.
[92] What's really important about earnings season and what's more important as we move into 2023 is really the full.
[93] guidance that the companies give, that the C -Suite gives about what the environment looks like.
[94] What does it look like for this company, for this industry going forward?
[95] And that's really a telltale sign about what they think is going to happen in the economy.
[96] So the banks have already started reporting.
[97] But what was very interesting is what they did about their loan loss reserve account.
[98] Loan loss reserves is the bank saying to you, we're putting all this money aside because we expect that there's going to be credit defaults going forward because of an economic slowdown, because of higher interest rates.
[99] People are going to default on their mortgages.
[100] Who's going to lose a job?
[101] Can't pay that price anymore.
[102] And so therefore, the banks told you we are increasing the loan loss reserve account because we expect this to get more difficult.
[103] So that's the thing.
[104] Those are the kinds of comments that you want to hear or that you don't want to hear, but you're listening for from these CEOs because that tells you what they're thinking and how they're preparing.
[105] So now we're going to hear from the tech industry.
[106] We're going to hear from health care.
[107] We're going to hear from, you know, the energy industry.
[108] They're all going to start telling you, now, they're not loan loss reserves accounts, but what they'll be specific to every industry, where they think this is going and how, you know, that may affect their business.
[109] And that's kind of what's going to drive the sentiment, uh, over the next, you know, certainly over the next month during, during this earning season.
[110] We had a story recently talking about the record amounts of household debt in America right now.
[111] Just how is that going to impact the economy more broadly moving forward?
[112] Well, listen, household debt is very funny because if it's revolving debt like Bloomingdale's and Nordstroms and, you know, Ann Pell or whatever, that's those, do you have you ever looked at your statement to really see what those, what those companies are charging you?
[113] It's 18, 19, 20 percent is what is what the annual interest rate that, I mean, it's usurious, right?
[114] How they get away with it is beyond me. But as people start to rack up debt and they're not paying off those credit cards every month, those interest charges continue to accumulate.
[115] and they accumulate faster.
[116] And then you talk about an economic slowdown.
[117] You talk about, you know, the husband or the wife losing their job or getting paired back and earning less money.
[118] Suddenly, you know, you can feel the walls caving in around you.
[119] And then you start talking about something that I don't think people are talking enough about is adjustable rate mortgages have once again become very popular.
[120] And so when those adjustments happen, you know, you go in for a low teaser rate, the same way you did in 2003, four, five, before all important.
[121] in 2007, 8, 9, when all those adjustable rates came due, when the rate suddenly changes, again, you're found with a much higher rate, maybe you're not prepared for it, maybe you lost your job, and so that's going to, that's going to create a problem.
[122] Now, I'm not trying to paint this doomsday scenario.
[123] You'll ask me a question, what does it mean?
[124] Here's what it means.
[125] Now, if the economy doesn't fall into recession, if we don't go into a deep economic slump, then people will be able to pay those bills.
[126] They may not be able to do everything they want, so they'll pull back on vacation.
[127] and they're not going to buy a new outfit or they're not going to go out to dinner so many times.
[128] But if it gets bad, if the recession is deeper than what they want you to believe, then you can expect to start to see headlines like that.
[129] All right.
[130] We've thrown a lot of you, Kenny.
[131] We'll give you one more from out of left field.
[132] The newly Republican -controlled House is trying to pass a measure that would abolish the IRS and implement a new flat consumption tax.
[133] It's not really that likely to get a vote on the Senate floor, but what do you make of that move?
[134] So listen, I think that's a great idea.
[135] because I think the tax code is way too convoluted.
[136] I think there's way too many loopholes that a lot of people can take advantage of and others don't have access to or can't take advantage of, right?
[137] So I'm all for kind of a flat tax, right?
[138] Just everyone, here's it, here's the number.
[139] No more deductions, here's the number, here's the flat tax.
[140] The problem with that is, though, once you do the flat tax, then Congress will find a way to spend more money and then that flat tax rate keeps going up and then there's no deduction against it, right?
[141] So that's the other side.
[142] Not your point, it'll never happen, right?
[143] But I do hope that they take away the funding for the 87 ,000 new IRS agents that they want to hire to go after guys like you and me, you know, that represent middle class or upper class America versus, you know, trying to draw more money out of us versus going to where close the loopholes where they should be drawing money out of, you know, businesses or high net worth, I mean, ultra high net worth individuals.
[144] All right.
[145] A lot to get to on the economy this year.
[146] many Americans will be watching very closely.
[147] Kenny, thanks for coming in.
[148] You're very welcome.
[149] Listen, I've got to tell you, what a great beard you have, by the way.
[150] That's a perfect beard.
[151] It's coming in.
[152] I appreciate that.
[153] It'll come in white like mine.
[154] Just give you something a couple of years.
[155] Kenny, I appreciate it.
[156] That's Kenny Polkari, market strategist and managing partner of case capital advisors.
[157] That was Daily Wire Senior Editor, Cabot Phillips.
[158] And this has been a Sunday edition of Morning Wire.
[159] Well, that's all the time we've got this morning.
[160] Thanks for waking up with us.
[161] We'll be back tomorrow with the news you need to know.
[162] From all of us here at MorningWire, we hope you're enjoying the show.
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