Morning Wire XX
[0] In September, the Bureau of Labor Statistics released a stronger -than -expected jobs report for August, followed by a strong consumer spending report for September last week.
[1] These surprising findings seem to fly in the face of persistent inflation and widespread economic malaise.
[2] In this episode, we speak with an expert about the puzzling economic landscape, the outlook for housing, and what Americans can expect this coming fiscal year.
[3] I'm Georgia Howe with Daily Wire editor -in -chief John Bickley.
[4] It's Saturday, October 21st, and this is an extra edition of Morning Wire.
[5] Part of this interview aired earlier this week, but the following is the full discussion.
[6] Joining me to discuss is managing partner of Case Capital Advisors, Kenny Polkari.
[7] Kenny, thanks so much for coming on.
[8] It's a pleasure to be here.
[9] So let's start with the big picture.
[10] Are we in a recession?
[11] Did we escape it?
[12] Or is one still coming?
[13] No, so we're not in it.
[14] Actually, you know, you could say that we were in a rolling one, but officially we have not been in it.
[15] The government hasn't declared one, so officially you have to say we're not in it.
[16] Is it coming?
[17] Yes, I do believe it's coming, although the government has done a very good job of pushing it off.
[18] And they've done that by, you know, plenty of money supply, keeping everything settled.
[19] Although you have to ask the question, is it really settled?
[20] Look what's happening to interest rates.
[21] Certainly over the last couple of weeks, interest rates have spiked higher.
[22] And that's just setting us up for what I think is going to end up being a more difficult economic time ahead.
[23] And so I suspect now that the recession is probably going to start, or at least it's going to feel like it's coming towards the end of this year, very early next year.
[24] And how would that affect everyday Americans?
[25] Well, look, it's got to be tough, right?
[26] You'll see unemployment spike, spike higher, and you'll see people losing their jobs.
[27] You'll see inflation will continue to be a problem on people's paychecks.
[28] And so therefore, it's just going to get more difficult.
[29] Interest rates will go up, mortgage rates will go up, housing will come under some pressure.
[30] So there'll be economic malaise across the specter.
[31] Now, where does inflation stand right now?
[32] And can you go over some of the recent numbers?
[33] Yeah, so inflation has come down.
[34] Let's be fair.
[35] Inflation has come down, right?
[36] It spiked to a high of 9 .4 % about a year ago.
[37] It has been steadily coming down.
[38] But the fact is that inflation still exists.
[39] So prices continue to go up just at a slower pace, right?
[40] There's a difference between deflation and disinflation.
[41] Deflation is when they actually start to go negative.
[42] We haven't gotten there.
[43] disinflation is when the pace of price increases just starts to slow, which is where we are now.
[44] I think the latest CPI number was 3 .7%, which was a tad bit higher than what they had expected, which, again, is not good because that just suggests that inflation is starting to rear its ugly head again and could potentially start to push its way higher.
[45] And for a lot of people who may be listening to this, you know, the last time this really happened was 40 years ago back in the late 70s, early 80s, when the Fed prematurely paused because they thought they had killed inflation only to find in the months that followed that inflation started to rear its ugly head and start to go upward again.
[46] And that's when Paul Volcker, who was then Fed chair, had to really jam rates much higher to slow the economy down and sent the economy into a two -year, very deep recession.
[47] Am I calling for that this time?
[48] No, I don't think it's going to that bad.
[49] But I do think that the feds aren't done raising rate.
[50] I think they're going to be forced with the realization that inflation is remaining very sticky.
[51] And it's on the stuff we need, right?
[52] So they can say all they want that the price of used cars have come down and the price of computers have come down.
[53] That's great.
[54] You can't eat a used car.
[55] You can't eat a computer.
[56] But you need food.
[57] You need energy.
[58] You need utilities.
[59] You need health care.
[60] Those are all the things that continue to increase in price.
[61] And those are the things that are going to impact the everyday consumer.
[62] Now, you mentioned deflation.
[63] Do you think it's possible that we could see some of these prices coming down or are we just going to have to wait for wages to catch up?
[64] Well, that's a very interesting question because what will happen now is, that people are used to these higher prices, right?
[65] And so if wages catch up, this will then become the norm, right?
[66] This will be just what prices are, but everyone will be making a little bit more money, and so therefore it will become the norm.
[67] Do I see prices deflating, actually turning much lower?
[68] I don't see that happening unless we run into a recession that's going to be deep like it was back in the late 70s, early 80s, where you saw suddenly demand plummet and deflation take hold.
[69] because I don't see that coming, I think what we're going to get is this inflation that just settles in at these elevated prices, which will become the norm, and then if wages catch up, then we'll be on that same flat foot again.
[70] One exception to that might be the housing market.
[71] Are housing prices going to come down as a result of these interest rates?
[72] The housing prices have to come down.
[73] It's just a math problem, right?
[74] As interest rates go up, they become unaffordable for the everyday person.
[75] And so in order for that to balance out, the price has to come down.
[76] I think we're starting to see that.
[77] Mortgage rates now, 30 -year conventional money is running at about 7 .5, 7 .6%.
[78] If you want a jumbo loan, you're already paying over 8%.
[79] Look, I thought it was going to be 7 % where we're going to start to see it.
[80] In fact, they've done a good job of kind of that not happening.
[81] But if rates approach 8%, and by the way, based on what's happened in the bond market over the last, even the last week, that does suggest that we could see 8 % mortgage rates relatively soon.
[82] And I think that's going to be the event that then causes buyers to really back off and become much more patient.
[83] And sellers are going to have to recognize that if they need to sell their house, they're going to have to be much more realistic in terms of the price they expect to get.
[84] And yes, that's when you'll see prices start to come in.
[85] Now, I recently read somewhere that the cost of housing is out of reach for Americans in 99 % of counties in America.
[86] How do we even get to that situation and how do we get out of it?
[87] Well, the way you're going to get out of it is that prices are going to suddenly come in, right?
[88] They're going to start to deflate.
[89] The other thing is, you know, you own your house, you're attached to your house, emotionally attached.
[90] So you think your house is worth potentially more than it is in this current environment.
[91] But don't forget, two years ago, when rates were 3%, they were 10 people trying to buy your house.
[92] And so the price went up, one up and up.
[93] So you think that that's still the case.
[94] That, in fact, is not the case.
[95] You can put your house on the market now at a ridiculous price.
[96] You don't get any lookers.
[97] And you're going to have the reality of what's going to be.
[98] be affordable is what's going to hit these sellers, right?
[99] The buyers are already starting to feel, look, I can't do this.
[100] I can't pay that price.
[101] I can only afford to pay here if you want to sell it to me. I'm happy to buy it.
[102] And ultimately, that's the reality check that has to happen.
[103] And it's got to come from the sellers, right?
[104] And as more and more people get a little bit anxious that they need to sell the house and they want to sell the house, it'll be like anything.
[105] It'll be supplying demand.
[106] Suddenly, there'll be more houses for sale.
[107] Biers will have their pick of the litter, and you'll see prices adjust.
[108] Now, retail sales, sword and September.
[109] There's also a hiring surge in August.
[110] Those are some of the indicators I know Wall Street types like to look at.
[111] What do those indicators tell you?
[112] So it's very interesting.
[113] Let's talk about the hiring surge.
[114] You know, we were expecting 150 ,000 new jobs on the first Friday when they report that number.
[115] In fact, came out at 350.
[116] Do you realize that 150 jobs were part -time jobs?
[117] They weren't full -time jobs.
[118] They were part -time jobs.
[119] Now, does that mean that people are now going out getting two jobs because they have a full -time job?
[120] Now they're getting a part -time job.
[121] Just to keep up, I would suggest that is the answer, right?
[122] That the part -time jobs saw an increase because people are trying to struggle ahead.
[123] Your other part of the question was...
[124] So we had the hiring surges and then retail sales.
[125] Okay, so retail sales came out yesterday.
[126] So we were looking for up two tents.
[127] It came in and up seven -tenths.
[128] And they were going, oh, look at how great the consumer is.
[129] The consumer is so strong.
[130] Let me tell you something.
[131] The consumer is spending more money, but they're actually buying less because of what inflation has done.
[132] So you're going to go out.
[133] you're spending $10 or $20 more at the grocery store every time you go, or you're spending $10 more to fill up your car.
[134] You didn't buy more gas.
[135] You bought the same 16 gallons of gas.
[136] But because you paid more, it appears as if you're spending more.
[137] Well, in fact, you are spending more, but you're not buying more.
[138] And that's the issue.
[139] And so I think yesterday's number, while they kept talking about, look how strong the consumers.
[140] I actually think that that's a falsehood.
[141] I know about you.
[142] I'm not necessarily buying any more, but I feel like I'm spending more money.
[143] just trying to buy the stuff we need, right?
[144] The support of family.
[145] Although the one exception to that might be the miscellaneous store retailers, that's things like office supplies, florists, gift shops, those were up 3%.
[146] So any...
[147] Yeah, you know, that was a curious number.
[148] And I didn't, I haven't been able to really figure that out, the miscellaneous stuff, you know.
[149] I was it, I was trying to think, okay, is it the holiday?
[150] It's not really the holiday yet, although we're coming at this season.
[151] It was a Valentine's Day.
[152] It was a Valentine's Day, so why the uptick and things like that?
[153] I, for one, cannot explain that.
[154] Okay, so how long do you think this level of spending can go on?
[155] It sounds like you kind of answered that, that we're stuck with it because of the prices.
[156] We've also seen reports from the Wall Street Journal that credit card debt has hit $1 trillion.
[157] What's going to happen when all those bills come due?
[158] Well, so that's another problem.
[159] First of all, the credit card debt is hitting such high levels because people are using credit cards to pay their bills, to stay on top of it, right?
[160] Some people use their credit cards to buy food every day or every week.
[161] But what's going to happen is because you know credit card rates are revolving.
[162] credit, right?
[163] Every time interest rates go up, the rate on revolving credit cards go up, right?
[164] Some of these cards are charging you 25, even 30%.
[165] And if you're a day late, or if you don't pay the minimum, the rate goes up again on you.
[166] And so what's going to happen?
[167] And you're starting to see that in, we heard from the banks this week, what they've done with their loan lost reserve account.
[168] That means they are putting aside money in a loan lost reserve account to make up for what they suspect is going to be tougher times ahead.
[169] So defaults.
[170] people are not going to pay their credit card loans.
[171] They're not going to pay their mortgages.
[172] They're not going to pay their auto loans.
[173] You're already starting to see that in auto loans, right?
[174] And so ultimately what's going to happen, and American Express is coming out on Friday, their earnings are coming on Friday.
[175] It's going to be very interesting to hear what they say about credit card defaults, right?
[176] Same will be true of Visa.
[177] Same will be true of MasterCard.
[178] When they report over the next couple of weeks, people should be listening to what they're saying about credit defaults because that's going to suggest what they're seeing, you know, two, three, four months out about the consumer, the health of the consumer, and the ability of the consumer to be able to pay those cards.
[179] All right.
[180] Last question.
[181] Wall Street investors, traders, and generally don't like chaos.
[182] But we're seeing a lot of chaos globally.
[183] We have the war breaking out in the Middle East.
[184] How do you expect that this is going to affect things like oil prices, stocks, even just the economy overall?
[185] So that's exactly true.
[186] The market doesn't like uncertainty.
[187] Chaos is certainly uncertain, right?
[188] Now we've got this new war in the Middle East.
[189] And so it provides short -term chaos because the markets get anxious and nervous.
[190] And that's what's happening.
[191] We've seen it happen last week when it first broke out.
[192] You saw it happen again when the level of battle heated up.
[193] Again, we saw the markets back off.
[194] We saw interest rates jack up because the safety trade people are afraid of stocks.
[195] So there's pressure on stocks.
[196] But typically what investors should know is that the chaos from geopolitical stuff rarely prices stocks in the long term.
[197] They create short -term chaos and they make you very nervous.
[198] But that's actually, if you're a long -term investment, that actually becomes an opportunity, because good names get whacked.
[199] Names like Apple and Amazon and Microsoft, people go, oh my God, I want my money.
[200] And so they sell these good names and they take the money and they put it somewhere else.
[201] The fact is, it's Apple and it's Microsoft and it's Amazon.
[202] And I hate to say, I don't want to sound as if I'm insensitive to the geopolitical events.
[203] But the truth is, in the long term, those geopolitical events do not price stocks.
[204] And so what I would say to people is that as long as you've got a well -diversified portfolio and you've got names in your portfolio that you like, you bought them for a reason.
[205] The fundamentals have not changed.
[206] But if the stock backs off because of the anxiety and the chaos, that actually provides a longer term opportunity.
[207] All right.
[208] Well, Kenny, it was great to have you in studio today.
[209] It's a pleasure to be here.
[210] That was managing partner of Case Capital Advisors, Kenny Polkari.
[211] And this has been an extra edition of Morning Wire.