Inflation A Stickier Problem Than Markets Realize | Wolf Richter

Wolf Richter 0:00
inflation has continued to dish up nasty surprises. And it seems like we’re going to keep getting them. So that’s that’s the picture of inflation in terms of core, you know, it hasn’t really changed. It’s it’s high, it has stayed high. It looks like it’s got to stay high. And, and, you know, that’s one of the surprises we now have to deal with. And, and, you know, nobody knows what this is going.

Adam Taggart 0:32
Welcome to Wealthion. I’m Wealthion founder, Adam Taggart, there’s no shortage of opinions out there about where the economy is headed right now, you’ll find two equally vocal advocates for a hard landing versus a soft landing, and a growing number of folks saying there will be no landing at all, and that a new bull market lies ahead. When there were so many Voices at odds with one another, it’s useful to look closely at the data and take measure of what simply is what are the economic conditions right now telling us to do just that we welcome wolf Richter back to the program for a deep look at growth, interest rates, inflation, liquidity, employment, and many other key indicators. Wolf, thanks so much for joining us today.

Wolf Richter 1:18
Thanks for having me.

Adam Taggart 1:19
All right. Always a pleasure, Wolf. You’re coming on here on short notice I called you late yesterday, you were very, thankfully game become do this. Thank you. Number of questions for you about the lineup of topics I just mentioned. But if we could, let’s just start with the normal high level question. I’d like to ask you at the beginning of all our discussions, what’s your current assessment of the global economy and financial markets?

Wolf Richter 1:46
So I’m going to distinguish between the economy and the financial markets. So the economy is still floating on a huge sea of liquidity? And, yeah, so we’ve got global inflation, we’ve got global wage increases, we’ve got consumer spending holding up pretty well. You know, we’ve got some credit issues, those kinds of things, in terms of so the economy really globally isn’t lending. The economy is just sort of muddling through, and and largely on consumer demand. And and, yeah, that’s what we have right now, in terms of the financial markets that have some really big issues, including higher interest rates and, and quantitative tightening by central banks. And so for financial markets, this is not necessarily a good scenario.

Adam Taggart 2:43
Or Okay. All right. So we’ve got a set of a muddle through economy, and we’ve got financial markets that are facing a number of headwinds right now. You talked about sort of the strength of the consumer. I want to I want to dig into that with you in a minute here. But but let’s let’s start with inflation. It’s something that you’ve been tracking closely. You mentioned in both your answers to the economy in the financial markets, my understanding is that you see that inflation is likely to be a lot more sticky than maybe most folks are currently expecting. Can you go into why?

Wolf Richter 3:18
Yeah. So you know, this inflation has continued to dish up nasty surprises. And it seems like we’re going to keep getting them and you know, it’s supposed to come down, we had energy prices collapse. So that pushed down the overall inflation rate and food prices have started to come down a little bit. But in terms of core inflation in terms of services, now, that’s two thirds of consumer spending, and core goods, you know, it’s also durable goods have come down to a used car prices have come down, but now they’ve turned around. Yeah, they’re going back up. And new vehicle prices are now starting to tick down. So we’ve got that movement. Electronics are traditionally going down in price. And that’s just what electronics do. And so that’s on the good side, the core good side. In terms of services. Yeah, the Fed has started to divide them between services without housing and housing. So housing is part of services. And so they’ve taken that out, and they have decided late last year that housing prices that had to so housing in terms of rent, so that’s now 1/3, of CPI is rent factors, and that these rent factors are coming down, and that did come down late last year and early into this year, to some extent on the asking rent side of the equation, but they never came down in CPI, and they never never even slowed down. I mean, they had hit a new you know, record increase multi decade record. Record increase last month and, and so that’s in CPI and landlords, biggest landlords in the country have been telling us the same thing as of April, they’re getting between 6% to 8% rent increases. You know, these are the actual rents that they’re getting so on and renewals, and on new lease signings, and now we have cielo come out with its APR index for for asking rents. And that has now kicked up by the fastest rate since August last year. So that’s the third month in a row of increases. So these are the three elements that that we base our future, housing inflation on, and they now have all turned around, they’re all coming up. And, and it seems like that, that this housing factor of CPI is going to continue to rise in the six to 8% range, and is not coming down. So that’s a bad surprise. Yeah, that’s the thing that that we had thought we had, like the Fed had thought it had licked, you know, the thought that that is, this rent factors will come down. And they’ve come up with all kinds of equations to show that, and they got a little bit quiet about in the last couple of months, since I’ve seen the numbers come up to and so we’ll see how they react to that. The part that they acknowledged was sticky was the services excluding house do so that’s all other services, including insurance and repairs, and personal services and financial services and all this other stuff. And that has proven to be amazingly sticky throughout. And, you know, some of that has to do with labor, the cost of Labor’s a lot of these services are largely dominated by labor costs, such as your haircuts or or many of these other things, you know, it’s essentially labor. And so the Fed has focused on that after having brushed aside the the housing inflation, so the rent inflation are there any inflation is coming back into the picture now. So we’ve got these these two factors that are not going down, and they’re running at around the same rate that I’ve been running, and they had a red hot area, and the goods inflation has come down somewhat. And then of course, fuel prices, and energy prices have plunged and food is ticking down. So that’s, that’s a picture of inflation in terms of core, you know, it hasn’t really changed. It’s, it’s high, it has stayed high. It looks like it’s gonna stay high. And and, you know, that’s one of the surprises we now have to deal with. And, and, you know, nobody knows what this is going. But, you know, that’s the reality we’ve got right now.

Adam Taggart 7:42
Okay. And this was sort of why I mentioned in the introduction here, people have lots of opinions and forecasts and where things should happen. But not all the things are playing out according to script. And we just have to look at what is happening right now. And what I hear you saying is inflation is surprisingly sticky. On the services side, and I actually want to give you credit, because one of the last times you were on this channel was say back in like the fall, you were you were pretty loudly ringing the inflation and services bell at that point in time. And that’s certainly proven to be the case. And you as you said, people were sort of bifurcating services into housing, and everything else. And the Fed was saying everything else looks like it’s kind of sticky ish. But we think housing is going to come down there maybe not saying that as loudly now because the data is not heading in that direction right now. So we’ve got this, this really stubborn, sticky part of CPI here in services. So it gets first off for the Fed, you know, you have to look at that and say, well, then our job’s not done. Right. And you know, the other day, just yesterday, we had Bullard from the Fed come out and say, Hey, I think we need more than one rate hike, we probably need to right. And Powell has long been saying, hey, you know, rate cuts aren’t even on my radar, you know, for this year, not exactly sure when I’m gonna pause, but when I do my plan is to hold it there through the rest of the year. This certainly seems to say yeah, he’s gonna need to do that. And who knows, maybe he decides he needs to, you know, hype things up even more a little bit to compensate for the stubbornness of this. So do you expect this data here on inflation to indeed be a propellant of the Fed to continue to be hawkish here, maybe more hawkish was certainly more hawkish than the markets expecting because right now, the markets still pricing in rate cuts this year.

Wolf Richter 9:41
So the market will be a problem talking about the Federal Funds Futures market. The short term Treasury market is actually pricing in a rate hike.

Adam Taggart 9:54
Okay. Yes, I was talking about the Fed Funds Futures market but yeah,

Wolf Richter 9:57
so I mean, there’s different ends of it and It looks like the long term market is pricing in all kinds of scenarios that are not really not not are in the picture right now. So, yeah, I mean, the Fed is also caught. And if we hadn’t had this banking issue, the Fed would have probably comfortably hike two more times 25 basis points, like Paulette said, now we’ve got this banking issue. So we’ve got a few banks that collapsed. That collapsed, not because credit is bad credit is good, but because the high higher yields have pushed down the values of the securities that are holding, and even though the securities have pristine securities, yeah, the market values have dropped. And so these banks have gotten in trouble with that, and that will bank runs. And, you know, banking system is by nature, by definition, fragile, two bank runs. And so we’ve had some of those, and that took some of the banks down. And so the Fed is sort of caught in that. And I don’t think they want to trigger a broader financial crisis. So they’re going to have to be there, they’re going to be cognizant of that risk. And so, you know, they may it, I think that there is a chance, I mean, they left the door wide open for a rate hike, or a pause for either one at the next meeting. And when that they purposefully abstained from making any kind of assessment which way they might go, so that it might go either up or stay flat at the next meeting. And if they stay flat, I might go up at an at a later meeting. And so these stories are dangerous half and they have not given any probability of which way they’re gonna go. But, you know, there are risks involved now, with hiking rates further, and the risks are having to do with the financial system, and the risk involved with hiking risks, with hiking rates not enough and those risks associated with inflation. And so this is a very fine line to treat. And I’m glad I’m not mosey and have to deal with this. You know, I think that a good case can be made that one more rate hike and and then keep it there and let the economy adjust, let the banks adjust, let the banks deal with the balance sheets. And, you know, we’ve had this inflation for a while there are lags and, you know, I think a good argument can be made that it’s, it’s alright, to wait, you know, dirt dirt to hide one more 25 basis points without getting pushed to the top range to the five and a half percent and, and then just keep it there. And then when inflation starts hit second big wave, which, you know, the last time we had inflation like this, we have three big waves. And with interest rates that were much higher, we’re talking about the 1970s, early 1980s. And so if you get this kind of scenario where we have one big wave, and then inflation tapers off a little bit, and then we’ll get the next big wave, you know, then the Fed can hike some more based on that, but I think a rate cut would just be completely irresponsible right now, and that would just unleash inflation. And and I think the Fed is aware that

Adam Taggart 13:32
they’re sorry, you said a rate cut would be? Yeah, well, yeah. And, you know, to house credit, you know, he has been trying to dispel every, every rumor about that. So do just curious asked me to speculate here. You know, when one party is wrong, either Powell or the Fed funds rate future market right now, which one do you think is wrong? Sounds like we think maybe the market is gonna, when

Wolf Richter 13:59
you look at the there’s some interesting charts out there. Of the Fed Funds, futures market predictions of the federal funds rate, and then versus actual. And you see these kind of funny lines that go off like spaghetti in all the wrong directions, right? Because they consistently in both directions, get it wrong. And it it is funny to look at these charts, and then to take them seriously. Yeah, because whatever reason they have for betting this way, you know, it’s not how it turns out. And in most cases,

Adam Taggart 14:43
yeah. And that’s very much been true this year. Right. I mean, there were lots of talks at the beginning of the year of, you know, fed pivot not that long ago, they were expecting the first rate cut to happen in June. You know, we’re we’re almost a week away and that doesn’t seem like it’s going to be possible at all here. Okay, so you know, there may be there may be some sort of market, you know, repricing ahead when the market sort of says, you know, like, we’re not going to get those, you know, several cuts that we’ve been projecting, we’re currently projecting so far for the rest of the year. Let me ask you a couple questions around this. So you mentioned in your first answer, that the economy was floating on this huge sea of liquidity, and I have had several discussions on this channel of light where people experts have been saying, Yeah, you know, like, if you think about the stimulus that was shoved into the economy is sort of a pig being shoved into the the Python, it takes time to pass through the snake, where maybe learning that that pig was substantially bigger than folks really even imagined that the time and it’s just still sloshing around and supporting things. And even though the spigots got turned off over a year ago now, yeah, there’s just a lot more in there than than folks imagined, right? Love to hear you’re kind of nodding as I’m saying that. So I’d love to hear if you agree with that assessment or not. But also, I’ve been hearing sort of cross currents, or differences of opinion, where there’s a lot that’s going on right now that that is conducive to draining liquidity. You know, we’ve got TQT, we’ve got these higher interest rates, we’ve got the tightening bank lending standards, etc. But then I am hearing that liquidity is back on the rise by some other people’s measures. And, you know, focusing in on that, as you know, some of the bank rescue the the new funding vehicles that were created, China opening up and easing on its balance sheet. So do you have a bead right now as to whether liquidity is whatever state it’s in, however much there is? Is it rising right now? Or is it heading right now?

Wolf Richter 16:52
Well, in terms of just the US market, so liquidity in the US markets, I mean, you got Japan still doing QE, you know, and you got on the outside, yeah, you got Europe, they’ve taken a trillion dollars, more than a trillion dollars off the balance sheet, the ECB has, you know, so they have trained over a trillion via the loans that they’ve taken back. And so you’ve got these kinds of things, but just in the United States, just isolated, there, they’re really two things going on. One is the liquidity drain or QT. And, and, and the other is, so that’s kind of long term liquidity that they’re taking out, but we had a short term on have a short term liquidity increase. And and part of that has to do with the government checking account, you know, the TGA, the Treasury general account at the New York Fed that the government, you know, they’re they’re running out of money. So they threw down this account, they used to be half a trillion dollars worth of dollars in it. And that has not entered the economy, because the, you know, this account is now drained down to just a few 10s of billions and, and so that’s short term liquidity. And as soon as the debt ceiling gets raised, the government will replenish its checking account and that liquidity, so they’ll have to issue bonds to do that, and sell those bonds. And so I’ll take investor cash and put that into their savings account. And so that will so right now, we’ve got that effect. So that’s a liquidity increase right now, until the debt ceiling is raised. We’ve had the bank bailout, that’s a short term liquidity, some of it never went anywhere, like the FDIC money, that’s the bulk of it, you know, that never went anywhere. But some of the other things did enter the markets. And but it’s these are not huge amount. I mean, the big thing is that the Treasury general account is half a trillion dollars that was drained into the economy. I mean, just look at the chart, it just drained out, you know, and it entered that cash enter the economy. And normally, the Treasury Department would keep that account roughly level by by spending the money and getting new tax receipts and, and issuing new bonds. Just keep it roughly flat, and they just got the tax receipts, but they’re not getting the new the new bond issuance. So they’re rolling over because we’re at the ceiling, and I can’t wait to see it, they can’t do it anymore. They can’t increase their outstanding bonds. So I mean, that’s a half a trillion dollars, that short term Android the economy, you know, and so in that respect, we’ve you know, that and then plus some amount from the bank bailouts the small amount so we’ve had the short term liquidity injection into the economy and that will come out very quickly and some of the bank bailout money already has to pretty good extent come out.

Adam Taggart 19:53
Okay, and let me let me also just try to understand to some people say hey, you know, there’s the inflation Reduction Act and there’s the are components of that spending that’s being done this year? Is that money entering the economy? Is that available to be spent? Or is the fact that the Treasury is having to trade drain the TGA? Is that the source of all government spending right now?

Wolf Richter 20:15
Yeah. So right now, in terms of liquidity, the government can’t really add liquidity to the economy right now. I mean, but before we did, yeah. So until a couple of months ago, it did. And so the inflation we’re now seeing today is or in April, is in response to things that happened a while before then. And yeah, and so the government deficit spending, it’s very stimulative to inflation. And that enters the economy directly the fed the Feds liquidity measures, enter the markets, you know, then eventually the economy. But you know, the government spending itself definitely spending itself is, is very stimulative to inflation in the economy. And it can work pretty quickly. I mean, if you give people and we’ve seen in the stimulus era, you know, to give people a bunch of free money, and they go out and spend it the goods prices spike. Yeah, so that doesn’t happen over a two year time, crazy time span, there’s no lag. It’s just like, happens to the next month, and two months later, yeah, you see the price spikes. And we had that. And right now, that’s sort of the tap sort of turn off. But that will continue. Once the debt ceiling is raised. Yeah.

Adam Taggart 21:25
So okay, so let’s assume that that ceilings gonna get raised, which I think everybody can get will after, you know, some drama, knock on wood, knock on wood, but yeah, it’s it’s nobody, you know, comes out a winner, if any, it just it’s not gonna happen. But so debt ceiling gets raised, I’ve seen estimates that the Treasury general account, you know, then needs to refill itself to the tune of, I think, like $700 billion. It’s a lot of money. So that would be a liquidity drain, as you mentioned, but also maybe that does enable some of the deficit spending from the fiscal stimulus programs that were already approved, you know, inflation Reduction Act, just start flowing again, on a net basis, you know, are you do you think liquidity will tighten as the year goes on? Or increase or stay roughly where it is?

Unknown Speaker 22:21
Now, it will tighten.

Adam Taggart 22:23
Okay. And then that economic growth and market prices, right. I’m sorry, that will have an impact on our economic growth and market prices, right.

Wolf Richter 22:35
Definitely market prices. The economic growth relationship is a little bit more tenuous. But asset prices for sure. And and then the credit issues, you know, so then you have commercial real estate right now they have to roll over a lot of their debt coming up. And if liquidity tight, and stuff gets even more expensive, more difficult to do. So yeah, that has some impact on the economy, but it has a much bigger impact on on asset prices on on prices of the debt that’s involved, when it’s defaulting. And on the prices of the properties and those kinds of things. So Well, I think it will have bigger impact that way, then on on the consumer based economy.

Adam Taggart 23:24
Okay. I do want to talk more about your thoughts on on impact on markets. But let’s let’s stay on the economy side for a moment. So you said maybe it’s little bit more tenuous, but but tightening, tightening liquidity isn’t a stimulant to the economy, we’ll say that. And as we just talked about, you know, rates are now fed funds rate is over 5%. Right. And that may be going higher, and qt is going to be continuing. So, even if we don’t get more rate hikes this year, what’s your level of concern of just staying at this this level of cost of capital for the economy potentially, for the rest of this year? You know, from from a something breaks standpoint, right? I mean, can can this economy that was so habituated to observe world, you know, for much of the past decade, can it can it really sustain at 5%? Or, you know, are we going to, are we going to start to see some some big stumbles and die offs and sectors of the economy that are too over leveraged? And

Wolf Richter 24:36
yeah, I mean, this is one of the amazing things and if you had asked me a year ago, and I think we had some kind of a conversation like this a year ago, and maybe I said 4% inflation was baked in and, and the financial markets would have a hard time dealing with it, but with the feds reaction to 4% inflation, you know, and and the economy will probably get through it and now Got it in meantime, we had double the rate of inflation. Yeah. It’s only gotten a lot worse than predicted. And, and, and yet the economy and financial markets are down and that down quite a bit. But yeah, the economy 2001.

Adam Taggart 25:13
They are. Yeah,

Wolf Richter 25:17
they look at a long term chart, you know, you see the rallies and the sell offs. Yeah. But so in terms of the economy, it has continued to surprise me how well it actually is adjusting to these higher interest rates in now, how are consumers are adjusting to this higher interest rates. And the housing market has reacted pretty dramatically to it in terms of sales volume, it’s just plunged. Prices really haven’t come down that much. They’ve come down many places, but they haven’t class by any measure. But the actual economy that goes through the measures that go into our GDP are counting which housing doesn’t get, but so the measures that go into GDP accounting, they have held up, you know, and that’s, that’s consumers, and it’s business spending. And, you know, that’s government spending, obviously, government spending has surged. Yeah, and, and 5% are no 5%, you know, they’ve just muddled along. And and consumers, I think, have gotten used to these, these higher inflation rates are making more money. So their income has come up, they’re spending more money. You’ve got also, yeah, that’s something people don’t often think about a really talked about, you’ve got about $20 trillion in short term income products out there. So savings products, short term Treasury securities, or money market funds. And they they went from essentially paying close to 0%, a year and a half or two years ago, to paying over 5%. Now. And so you figure that out on $20 trillion, you have a 5% interest income. And a lot of people that invest in these products are retirees, and that spending every time with an interesting couple, and they’re writing about it, I have a lot of these people on my website in the comments, and they’re excited about it. Yeah. So you have you have the stimulus, from the higher interest rates, going against the, you know, the slowdown that is supposed to be affected by higher interest rates. And of course, that stimulus effects from the higher interest rates, it’s a lot smaller than the opposite effect from higher interest rates, but it is there. And suddenly, you’ve got all these people out there spending this money, they’re going into restaurants, and they’re making $10,000 a year more than they used to, and, and they’re spending that $10,000. And they’re happy to spend it and, and they’re excited about it. And so, yeah, that’s in part why consumer spending overall has held up pretty well. And and, you know,

Adam Taggart 27:57
Can I chime in on that just for a second? So I hear you and to a certain extent, yes, that is what’s happening. You know, yes, wages have gone up real wages, though, we’re still negative, right? So they’re still losing ground to inflation. And you look at consumer debt, right, where when folks were getting stimulus checks and stuff in the mail, you know, tax breaks, forbearance, all that type of stuff. They were spending that money like drunken sailors in a lot of ways, but but also they were paying down debt, which was nice to see. But that those days are over, we’ve rocketed back to record debt levels. Consumer revolving credit, in most cases now has record high interest rates on it. So I have heard the argument made that, you know, basically, people haven’t necessarily shifted their purchasing behavior that much yet, as a result, but they’ve shifted the financing of that purchasing behavior, and they’re just putting it more and more, you know, on the credit card and revolving debt and that that obviously, isn’t sustainable, you get to a point of saturation at some point. So is it really a sign of a consumer who’s out there excited to spend or a consumer that has to spend because prices are higher, and they’re just putting it on whatever funding vehicle they can find at this point?

Wolf Richter 29:26
So let me talk a little bit about credit card debt here. My favorite thing? Yes, consumers run about $5 trillion a year through their credit cards. So every time they go out and pay for something they pay with a credit card, because it’s electronic payment method, not a borrowing method, but a payment method. So people went on a traveling bench this year. Yeah. Now out there everywhere. I mean, anywhere in San Francisco, Europe, anywhere you go. It’s just packed. People travel Americans travel. And so they charged all this on the credit cards because that’s how you By plane tickets, yeah, that’s how you make hotel reservations. That’s how you pay for restaurants. And so anytime there’s a travel search, your your credit card balances jump because people put, use their credit cards to pay for this expense. And then so the credit card balances are taken at the end of the month. And then two weeks later, when the due date comes, most of these people are paying off their credit card balances to zero, never pay the interest. So the the we don’t in our data, we don’t distinguish between non interest bearing and interest bearing credit card balances, we don’t have that data, where we get to see is the total amount that is now outstanding on credit cards, and a lot of it is not interest bearing and then some of it is. And so when you look at the total amount of spending $5 trillion V on credit cards, and then the credit card balance is about 1 trillion. And you know, then you can see two weeks later, a big portion of the new charges get paid off. And the increase is it’s only the increase, you know, that shows increased spending. And it may not show increased borrowing. Yeah, so we have this travel surge in the first quarter. And the first from weather continued in April, it’s continuing in May, I mean, I’ve had people go to your seminars, you know, even though it’s part of it’s close to flooding, and all this kind of stuff, you know, I managed to pack there in May. And so all that gets charged and credit cards, and most of that almost all of it gets paid off. When the bills come due, you know, people you get paid a percent and a half or 2% cashback on your credit cards. People love that, you know, they don’t pay 30% interest on it, they collect cash, you know, they get one and a half or 2%. And so that when we talk about credit card balances people need to keep in mind, it’s a payment method. It’s the primary payment method in the United States for consumers. And it’s a very tertiary borrowing method, the biggest barring method are home mortgages, you know, and people went out to refinance their mortgages during the low interest rate era. And they they’re sitting on 100 cash out refinances. And you know, they’re sitting $120,000, in cash. That’s a big barring method. And they did that they don’t do it anymore, that’s over. And the consumers barge or buy cars. So you know, we see that and that’s gotten very expensive. Now car prices have gone up and low rates have gone up. And so buying a new car and financing it, suddenly you’re looking at $1,000 payment. And so that’s gotten very expensive. And yeah, there are concerns about that. But in terms of the credit cards, I don’t see that, you know, what I see is a big spending binge, by consumers that used to credit cards to go travel. And that’s that’s been the case this so far. They said it’s revenge travel, we have a term for it revenge travel. Yeah. And yeah, we still are locked up for so long. And people finally want to go to Europe, and they want to go everywhere. And and, and so they’re they’re doing the spending. And that’s what you see on the balance. Yeah, somebody goes to Europe spends it on the credit card, that spending actually takes place in Europe, the tickets they buy here, but the hotel reservations, and those kinds of things are paid in Europe. And so that spending actually boosts the European economy, you know, but the credit card balances show up here. And then the next month, I pay it off. And, and you know, so it’s a very confusing picture of these credit cards. And I don’t see anything alarming in it, because we know we have this travel boom, and it’s garnished, it’s going to be paid with credit cards, and nearly all of it, and then the majority, the vast majority of that gets paid off the following month, but the balance is keeps showing up because the balance of taking it month and and so the current month spending shows up in those balances and then get paid off and then the next month’s spending show up in the next month balances. And so I don’t think I don’t see that as alarming. At this point. The default rates for for credit cards are still near historic lows. The collections are at historic lows, bankruptcies are at historic lows. So, you know, we we found that these things have come up a tiny little bit. But when you look at a long term chart, you know, they’re still very low. And so I don’t see any stress overall in the credit card segment. Of course, there are subprime rated consumers that now been cut off that can can’t buy a car anymore. You know, there are some people that are over the heads in their credit card. So on an individual basis, you have some issues, but in terms of the overall economy and consumer demand, I don’t see that credit card, yet as as credit card debt interest bearing debt as being being an issue.

Adam Taggart 34:42
Okay. And maybe what triggered all this was my comment about credit cards and thanks for clarifying your deep knowledge of what’s going on there. To my list of things of concerns. I also should have mentioned the savings rates gone down substantially. where I’m going with all this is Let me ask this question. How concerned are you about the state of the consumer right now based upon the data? You see, because what you were saying earlier kind of almost was painting a rosy picture. Maybe you have a rosy picture. I don’t know. I just wanted to clarify for folks. How concerned are you if at all about the American consumers?

Wolf Richter 35:17
I mean, I look at the spending that people do in San Francisco, and this place is hopping in San Francisco. Last 80,000 people we know this place is hopping, you know, it’s consumers from all over the place, come here, and they throw money around, like there’s no tomorrow. And I’m seeing that, you know, I’m seeing it in the data, too. Yeah. So on an inflation adjusted spending, consumer spending has been strong, relatively strong, you know. And so part of that, maybe it’s because gasoline prices have come down. So people are spending more money on other stuff. Yeah, I don’t know what all this stuff comes from. And that’s a big question, what are consumers to get this money, some of it has come from pay raises, very tight labor market, the biggest pay raises in 40 years, some of it has come from the monies that were handed down in the pandemic that’s sitting on the sidelines, still, some of its coming from the refinancings of mortgages. So you’ve got all these issues, now we have the retiree spending the interest income. So all these things are coming together, and I’m not seeing a consumer weakness in the data right now. I mean, it’s surprising, it’s just every month I look at it, like, it’s got to come that got to slow down and not slowing down, you know, the consumers, they want to enjoy the life and and they’re out there spending and traveling, going to restaurants and doing stuff and, and you know, it just every month, I looked at the state, I think, good Lord, I’m in there. When are these drunken sailors are gonna finally get sober? And you know, it just hasn’t happened yet.

Adam Taggart 36:48
All right, well, this goes back to what I said in the introduction, which is that everybody looks at the data and has all sorts of projections of where it’s going to go and what’s for sure going to happen next. And when you have so many people doing so many different things, it’s best sometimes just to look at what is right. And that’s what you’re doing. You’re just saying, hey, look, yeah, you might be wondering when these drunken sailors are going to stop, but right now, they’re still spending it at high levels. So one thing that could, that would have a materially impact on the current status quo is what happens with earnings. And what happens with employment. Right. So if if the tightening or whatever factors, you know, that could continue to slow economic growth, contract economic growth, that really starts showing up in lower corporate earnings, and therefore companies can afford to hire less people. And we’ve, we’ve read a lot about the layoffs this year. I know from our brief chat yesterday and scheduling this call. You think that the layoffs, the current status of layoffs has maybe been oversold. That being said, we’ve had at least in tech, we’ve had more more layoffs this year than we had all last year. So it’s not nothing. But if we got to a point where people were losing their jobs or had real enough people who were losing their jobs or had fear of losing their jobs, that would probably start constricting spending, and that could change things real quick. So what’s your Outlook right now on both earnings and unemployment, given the data that you’re saying?

Wolf Richter 38:22
Yeah, so the Yeah, the layoff announcements we see in the media, they’re all global layoff announcements of planned layoffs, you know, and so what’s actually happening in the United States may be somewhat different. But the main figure there is to keep in mind, not the layoff, that really matters in terms of the economy, you know, it’s how long it takes for these laid off people to find a new job. And it layoffs per se aren’t a problem. If these people then within a week or two find a new job, or they may already have a job lined up by the time they leave, you know, and the always layoffs, we look at the numbers, you know, every every month or there we’ve got like 1.8 million discharges and layoffs every month at the at historic low levels. That’s just how it is. It’s a regular trend in the labor force, not just layoffs, but discharges and layoffs all combined in that’s just normal. That’s how people get fired for all kinds of reasons, or they get laid off because a company specific issue arises and in those kinds of things, and that’s when it rises and then the newly laid off people or five people can’t find a job. That’s when you have unemployment go up. And and that really hasn’t happened yet. Yeah, the people that were laid off, were absorbed by other companies relatively quickly, and a lot of them already had jobs lined up. And before they left the hotel only got the next gig and some of this switch from tech and social media to industrial companies. They’ve been really trying hard to get tech talent and they were out competed by the tech and social media companies. And, you know, the auto industry is is, is transitioning to evey development and production. And so that’s high tech stuff that and they need all kinds of software, software, it’s hardware engineers, it’s all kinds of things. Yeah. Yeah. And so, yeah, huge amounts of, of development work needs to be done there. And they’ve been trying to hire people to do this. And they’ve Caterpillar, all these other companies out the oil industry, the oil industry is hugely high tech, you know, and, and that’s, that’s probably the biggest export industry we have in the United States. And, and, you know, they were out competed. And so if, if I’m a laid off Google employee has a job offer from one of these other industrial companies. They’re, they’re not going to get to an $80,000 like they got a Google maybe they only get $180,000 a year. Yeah. So they have to make that shift. And I know people who have done it, and then they get another offer from somebody else from Facebook, a big deal, like these companies are laying off. But they’re they’re also hiring still, you know, it’s not like they’re, they’re not hiring, you know. And so, yeah, there’s this churn now going on, and maybe the super highly paid tech and social media jobs are sort of fading out a little bit. And, and some of the lesser companies can hire some of us and telling the overall numbers, that’s what we’ve seen, you know, the laid off employees aren’t laid off at all. Yeah, they get new jobs. And and that’s what we have right now. And, you know, we see these layoff announcements and and then when you check with the people that got laid off, oh, he’s already working over there again, you know, and thanks, jobs went over there. Yeah. And so, yeah, for the, for the labor market, to loosen up, for the number of unemployed to go up, what has to happen is that the companies across the board, slow the hiring, and they’ve, you know, this small companies have a huge problem hiring new employees always have I mean, it’s always tough for, for small companies to hire people that just can’t compete. And so they’re, they’re under pressure. And, you know, in the data right now, from whenever I look, wherever I look at, you know, look at the California Warren filings. So these are the required filings that companies have to post with the Labor Department with a state labor department, and we see the layoffs are not very big, you know, and then the, by the time the one filing is filed, you know, a lot of times he’s employees or he got jobs somewhere else. And, and so we don’t see him as unemployed. And, you know, for the labor market to loosen, what will have to happen is that these unemployed people will have a harder time finding a job, that it will take them longer instead of two weeks. So looking for three months, you know, and then the number of unemployed will go up, and we’ll see. We’ll see the wage pressures update and in, but, I mean, that’s in the future. I’m not seeing that, you know, I just, you know, I don’t see any data on that.

Adam Taggart 43:21
All right, and the data we are seeing on initial jobless claims, both initial and continuing, is ticking up, you know, it clearly seemed to have bottomed in around September of last year. It is ticking up, it’s still down, much closer to historic lows than it is, you know, anything that’s super concerning yet. So the trajectory isn’t super positive, but the absolute value is still pretty low. So you’re, you’re not too worried about that yet, I would guess.

Wolf Richter 43:54
Yeah, I mean, the the Indicative factor here is the people that are on the continuous unemployment rolls. So we see that it takes what that means it takes a look. So when that starts ticking up from historic lows, which he did, like he said, when that starts ticking up, it means that it takes a little longer on average for them to find a job. Yeah, and so that’s, that’s a sign that it’s still near historic lows, but it just takes a little longer than it did before. They don’t they’re not immediately absorbed. And so but it’s still so low, you know that I you know, it hasn’t normalized to the good times levels yet. So it’s we’re still below that.

Adam Taggart 44:42
Okay, so let me ask you two questions on the unemployment rate. One is what what level would it needs to rise to get your attention as okay? You know, something’s changing here.

Wolf Richter 44:56
So in terms of the initial unemployment finding, and when that’s done That’s a good real time indicator because it comes out weekly and it’s very volatile. It goes all over the place one week doesn’t really matter. But you can really sort of see if there’s a flood of people getting laid off. Yeah. And generally, so this big change, it’s not the weather, it’s 220,000 versus 250,000 mean that that kind of fluctuation doesn’t really matter. I think what matters is when it hits 350 400,000, week after week, after week, now you’re seeing a fairly significant increase in layoffs, that actually become layoffs, or people actually filing for unemployment insurance. And yeah, that’s that kind of hints. So when you get to the 400,000 level, that kind of hints at recessionary layoff levels. And then the other thing is, we want to look at the continued unemployment, to see how long it takes people to get a new job. And when that starts shooting up, it means that not only people are getting laid off in larger numbers, but also companies are not hiring them as fast as they did before. And so now, now, when when we see these to go up like that, I think the labor market would show it would be a sign that the labor market is weakening enough to where we can see maybe a recessionary environment. And, you know, I expected that to happen already. And and, you know, when we first started reading about the layoff last last summer, you know, I’ve been watching this and and it seems like okay, okay, these people that there should be showing up and, and yeah, the 5000 people that got laid off at Twitter. Yeah. Why are they why are they working somewhere else? Yeah, so we, we, it’s just, it’s been One surprise after another on this. And part of that has to do with, you know, it’s tech talent. And there’s not a lot of it. And there’s a lot of demand for it. And other companies have been shortchanged on that. And so they’re picking up some of these. And, you know, it at some point, you know, we’re gonna get that, but I just don’t see it yet.

Adam Taggart 47:12
Okay, so this is yet another pot that you’ve been watching, that’s just refusing to boil so far at this point in time. I do want to say it is more than tech at this point, just because I follow the layoff trackers a lot. You’ve been able to see since the beginning of the year, there are more and more industries that are announcing job freezes or layoffs or whatnot. But but your overall point still holds which is to just it’s not at a level that’s enough to to impact the overall numbers on unemployment. When other unemployment number question for you, which is lucky knows the Fed is looking at the same data that you are right, and they’re seeing stubbornly high services inflation. They’re seeing at consumers hanging in there. And they’re seeing job markets still doing great, right, by these numbers. And so to them, that gives them like a lot of runway to say, yeah, we can continue to be really hawkish here, right. Like we’re we gotta go after inflation. Nothing seems to be catastrophically failing right now. So let’s, let’s continue to be aggressive, right? What unemployment level? Would the Fed beat? Do you think the Fed would begin to say, alright, you know, we were kind of trading off in our employment mandate for the inflation killing mandate of price stability mandate, but now we got to bring the two into balance, because because we’re now getting worried about the unemployment situation, that 5% is higher.

Wolf Richter 48:42
Yeah, I mean, they’re probably will talk about the unemployment rate, per se. Yeah. So maybe 5% Maybe 5% used to be pretty low. Historically. Yeah. And 6% used to be okay. And and they’ll be talking about the initial unemployment claims. So when they’re starting to hit 350 400,400 50,000 that range, and they’ll be talking about the continued unemployment insurance claims and when they go over two and a half million, something like that. You know, they don’t talk about the number of unemployed when that when that rises by a million or two from their current level. So that’d be looking at those kinds of things. And they’ll generally sort of move together you know, it’s not like they’re contradict each other constantly. I mean, there’s some ups and downs, but they sort of tend to move together and and then from Yeah, the employment that the labor market viewed from from different aspects And, you know, there’s some contradictions occasionally, but not a lot, I mean, just generally moves together. And so they’re looking at the different data points, they’ll say the same thing. And they say, yeah, the labor market is loosening, we have more people getting laid off, it takes them longer to find a new job. They’re starting to claim unemployment insurance and more and more of them. And in and now we’ve got a million of them doing that and more than before, and so at some point, they’re going to wait for that, to see if it doesn’t just suddenly shoot up. And then pandemic, where we have 20 million people getting laid off in a two week time span, you know, that was very unique, generally, they take six months, or maybe a year for for the labor market to weaken like that. And so they have some time and to see how that impacts services, inflation, and, you know, and and so, I mean, I mean, that they’ll be pretty explicit about that. But, you know, that’s, it’s not happening so far. So, yeah, that I mean, the labor market is still tight. And, and everybody’s surprised by it, and, you know, it. You know, it may be that these interest rates are just not enough to really cause the labor market to land, you know, it makes us remain tight at these interest rates, and the other those turn going on and the shifts going on, and, and some of the job openings, a lot of the job openings disappear, but there’s still plenty of them. And, yeah, so we may have this kind of scenario, or the labor market is pretty, pretty reasonable, you know, people getting laid off, but not too long after that to find new jobs and, and 5% interest rates that didn’t work done is the scenario, the hire, people getting paid more in that vein worked into the scenario, and people spent more, so companies are kind of happy with that. And that’s the scenario I see. That’s the most probable scenario I see. Right now. You know, the economy, the labor market, everyone’s getting used with these to these interest rates and those turn and their shifts. And and there’s some really exciting things going on today, you know, and, yeah, that’s what it looks like to me.

Adam Taggart 52:16
All right. So I’m going to ask this, because you said this is the most probable Outlook, you have given the reader the data. And I’m also, again, I want to, I want to thank you for being just focused on what the data is telling you, versus being colored by some sort of narrative or bias. Let me ask you, does that make sense to you? Like, can we have taken an economy that was used to almost zero interest rates, your cost of capital, and just crank the dial up as fast and as hard as we have here? And be able to say, yeah, we can still keep, you know, the same number of people employed, no problem, you know, same number of companies are going to exist, you know, we’re all going to pretty much just behave the same way we were behaving before.

Wolf Richter 53:03
When we when we had the pandemic stimulus wash over the land, in 2020. And I call it the weirdest economy ever. Because it just everything got perverted. Everything I knew about the economy got perverted, and started

Adam Taggart 53:20
around. You. And I have had conversations long before about how things were already in the QE and everything, but it got hyper perverted. Yeah.

Wolf Richter 53:28
And it continues, and now it’s going a little bit the other way. But yeah, you look at all of these elements, and you just scratch your head. And, and so that your question whether it makes sense to me, no, it doesn’t make sense to me. I mean, it stopped making sense a long time ago. And And now some of that is unwinding in ways that don’t make sense to me. And, but yeah, that’s what we’re looking at. And, and it’s, it’s just a really weird economy to half and, and, you know, the only explanation I have is that, you know, we have all this stimulus and all this fiscal spending and all, you know, people taking cash out of their mortgages, and all this stuff is coming together, you know, and, and it’s producing these strange results. Well, we’ve got you know, we’ve got banks blowing up. We’ve got a really tight labor market, we’ve got consumer spending, we’ve got higher pay races, you know, we’ve got all these kind of things that shouldn’t shouldn’t be together and in the 80s, higher rates, yeah. And now it doesn’t make sense to me. That’s my short answer.

Adam Taggart 54:37
Okay. Well, hopefully that makes a few people feel like they’re just not crazy. Trying to follow the logic of what you’re you’re laying out for us as what the numbers are doing. All right, well, look, we are getting near short on time here. So I want to kind of get good a lightning round on some things. So banks, The banking system right now, you live out here, as do I in the Bay Area? You know, we’ve seen the fall of Silicon Valley Bank and first republic Bank, which, you know, we’ve seen for years is look to is great, super strong local banks. How concerned are you about the banking system in general and any further fallout from the failures that we’ve seen?

Wolf Richter 55:24
Well, we’re going to get more bank failures, I’m pretty sure that we always have bank fast, there were only a few years, over the past 40 years, we haven’t had any bank failures. And two of those years were during the pandemic, when everybody was awash with money. So bank failures are kind of normal. And we’re going to get those, I don’t think we’re going to get any kind of major collapse of the banking system or any of these things. I think banks are going to struggle making money, I think they’re going to have to cut back on dividends and share buybacks, those banks that did them. I think we’re gonna lose something, some medium sized banks and small banks. You know, but overall, I think the system will continue to function more or less properly.

Adam Taggart 56:11
Okay. All right. So it’s so good to see more failures, but it’s going to be relatively orderly, you’re not that worried about a cascade of failures, that kind of gets beyond the authorities control to

Wolf Richter 56:24
it. Let me just throw in the one factor during the financial crisis, we had a completely different issue that we don’t have now, we may get it, but we don’t have it now. And that at that time, that credit was going bad. So the loans were going back, and people were defaulting on the mortgages. Yeah, now we have pristine assets. So Treasury securities and government backed mortgage backed securities, losing market value due to high interest rates, but if you hold them to maturity, you’re gonna get face value, you’re gonna get a bar. Yeah, yeah. So now we have a problem on that on on on a different level, that trigger deposit runs. And this is very different than the financial crisis. And, and it has a similar effect, but it’s a different causes. And so looking back into history, you know, we get the asset price deterioration, due to higher interest rates, and we get the deposit ones, generally followed by credit problems. That’s a second wave, you know, so that’s when you get the defaults in commercial real estate and residential mortgages and auto loans, all kinds of stuff. You know, that’s the second wave. We don’t see any sign of that yet. But if we get the technical if that happened before, so during the SNL crisis in the 1980s, yeah, we had the same kind of scenario. And then then the credit started going sour on our housing bust and oil and gas bust. Yeah. And so, yeah, looking at the data right now, that’s what we’ve we’ve got this wave one, and it’s, it’s not catastrophic. You know, it’s it has to do with with asset prices due to interest rates. That’s not per se, a huge issue. The huge issue would be a deterioration, a significant deterioration in the credit. Yeah. And so that’s the thing that I’m looking out to for. Get that, yeah.

Adam Taggart 58:22
Okay. But But I mean, you can look out and see the huge exposure that the smaller banks have to the commercial real estate market, and how crappy that market is right now. I mean, I know you follow the auto market and delinquencies are rising there. I mean, how worried are you about that wave to it? I’ve talked to some people that say, that’s a big coming, you know, big incoming injury to the banking system.

Wolf Richter 58:46
So the banking system has changed a lot in the sense that a lot of these loans were sold off to investors. So mortgage backed securities are now majority of the majority by the taxpayer, and they’re held by investors don’t they’re so these mortgages, mortgages off the books of the banks. And banks hold some mortgages. A lot of times to focus on good mortgages and but the whole time Yeah, but the majority are with investors, commercial mortgage backed securities, mortgage REITs, private equity firms, they’re holding all of the commercial real estate debt, the big ones that have blown up so far that I’ve looked at all the office tower debts that have blown up so far, the apartment buildings, those kind of things. Yeah, they’re not with banks, they’re with investors.

Adam Taggart 59:39
And would you would you add pension funds to that list?

Wolf Richter 59:42
Yeah. Pension funds. life insurers, private equity firms. I mean, the whole the whole batch, everybody but banks, and bond funds too big into the hands that people have in the portfolio. And so that’s why a lot One of the risks was not the banking system. Yeah, the worst loans were securitized and sold off. You know, that’s what we’ve seen so far. The stuff that’s blown up or sold off by banks to was securitized and sold off to investors. And so there will be a lot of pain. Yeah, but it’s equity holders. And it’s it’s a debt holders in the privates in among investors. You know, that’s what the paint has said, so far, not not the banks. And I mean, I’m expecting the banks to eventually get hit by that. But what we haven’t seen that yet, you know, it has hit investors. And yeah, so the banking system is in a different situation, it’s got this problem with the Russians and the asset prices. Yeah, and that’s a significant issue. And it’s a big problem. And if the Fed drives up interest rates higher, it’s gonna be a much bigger problem, you know, but the credit part really, and we’re talking about investors in the market, you know, that’s where that will hit, they won’t hit the bank, they will hit the investors to biggest park. And so that’s, that’s where that’s shifting to, I think,

Adam Taggart 1:01:03
all right, boy, so want to target that thread more with you. But I are gonna have to leave it for next time. I’ve got one last sort of topical question for you. And then we’ll wrap it up. So you, I think he did a pretty good job of not diving into housing in depth with you in this interview, and you had asked me to, to try to not do that. Because you’ve done a lot of interviews recently about that, of course, you write about it all the time at your excellent website, wall. street.com. But I would be remiss if I just didn’t ask as we wrap up here, is there anything about the state of the housing market that you want to make our viewers aware of as we conclude this conversation?

Wolf Richter 1:01:45
Well, it’s spring selling season, and even during the housing bust prices rose during spring selling season. So don’t Don’t be sidetracked by that. Yeah, mortgage rates are right around 7%. Now, and that hasn’t changed. And so we’re back up to where we were in November. And yeah, I think housing is going to be Yeah, last time, it took five years to play out, you know, people are used to cryptos changing price overnight. You know, housing doesn’t, doesn’t do that. I think this is, this is a situation where, you know, we have to count in years, not in days and weeks and months.

Adam Taggart 1:02:27
Okay, for folks that maybe haven’t been following you super closely. When you talk about it taking years, you’re talking about a price correction,

Wolf Richter 1:02:34
correct? Right. Right. Right. And housing is very slow moving. So just because it didn’t go down last month, or just because they went up last month, or did something last month, doesn’t mean that that’s the long term trend, you know, and and, yeah, so it just, it just takes forever in housing, and we’re not used to it. And we That’s why housing makes so much sense when you look back at many years. But when you’re in it, and you try to look forward, you know, it doesn’t make a lot of sense, because it’s just so slow moving.

Adam Taggart 1:03:06
Okay. And last question on this part, but just to help people take away to put housing into context with everything else we talked about. If you measure the correction that you anticipate is in process now from 2021, highs, whatever, May 2022. Highs whenever most of these markets hit their all time high. By the time it’s over, would you would you categorize the expected correction as mild, moderate or severe? Do you think it’ll be? Oh, gosh, I was trying to be kind by not asking you for a percentage. So

Wolf Richter 1:03:42
yeah. It’s gonna be more than mildly out. There’s another thing pulling in and we’ve got bigger inflation than we had before. So if that exists long enough, yeah, it will, it will slow down that price decline. And, but it could be moderate to severe, I think.

Adam Taggart 1:04:06
Okay. All right. Thanks. All right. Well, look, in wrapping up. Last question for your walk, which is for folks that have really enjoyed this conversation, and maybe some it was their first time listening to you in depth. where can folks go to learn more about you and your work?

Wolf Richter 1:04:19
Wolf street.com. So it’s free, there’s no paywall, nothing to sign up all about business, finance and money. And we have a vibrant, well behaved, reasonably well behaved sort of reasonably well behaved comment section. And lots of good information in the comments t. So wall street.com. All right, great.

Adam Taggart 1:04:42
Well, look, as we wrap up here, I just want to remind folks, as I do every week, there’s a lot going on right now and that wolf has done a great job of dissecting us for us here can be really hard for the average person to figure out how to navigate through this environment in terms of Protecting and growing their financial wealth. It’s why we highly recommend you work under the guidance of a professional financial advisor who can be your navigator through this process. My one recommendation strong recommendation is that you work with one that takes into account the macro issues that wolf and I’ve talked about here, if you have a good one who’s doing that for you, they’re building a customized portfolio plan for you and executing it for you. Great, you should stick with them. But if you don’t, or if you’d like a second opinion from one who does, feel free to schedule a free consultation with the financial advisors endorsed by Wealthion, just go to wealthion.com Fill out the short form there only takes you a couple of seconds. And these consultations totally free don’t cost anything. There’s no commitment to work with these advisors. They just do this as a public service to help as many people as possible positioned prudently for what may lie ahead. Wolf, this has been great. I really hope you can come back on the program again soon. Folks if you’d like to see that. And thank wolf for his appearance here. Please do us a favor support this channel by liking this video, and then clicking on the red subscribe button below. As well as that little bell icon right next to it. Wolf, buddy. It’s always a pleasure. Thanks so much for coming on again today and Kiana. All right, everybody else thanks so much for watching.

Transcribed by https://otter.ai