Welcome back everybody. Today we have the Thanksgiving edition of the Market Enthusiast podcast. My name’s Noah Brooks. I’m going to be your host today. I’m the director of Investments at Good Life and with me as always, Chris needs senior research analyst here at Good Life. Like I said, we have Thanksgiving coming up. What are you doing? You going somewhere?
Chris Needs:
I’m headed out to my mother’s family where they live out in Western Pa., so I have a nice four hour drive ahead of me.
Noah Brooks:
Yeah, the TSA has told us that they expect a boatload of people. They said this 12-day season, I don’t really know what that 12 day encompasses, but they’re expecting 30 million flyers this weekend. I’m not flying anywhere. You’re not flying anywhere, but we’re both driving, right? You’re driving four hours. I’m driving up to Long Island up to North Fork. That’s going to be a five hour drive, but they’re expecting a lot of traveling for this holiday and, of course, we have Black Friday. Right. Did you do any shopping yet?
Chris Needs:
I haven’t been, but I know my wife has. I’m getting those email notifications. So she’s been putting in some work already. I guess they’re doing some early deals so they don’t inundate all the Fed-Exes and UPSes of the world.
Noah Brooks:
Yeah, it used to be that, I mean, I can remember 15 years ago, Black Friday was such an event that you’d have Thanksgiving, we’d have 20 people over and after dinner, 8, 9 o’clock, you kind of rest a little bit. And then here locally, some stores would open at 10 or 11, even midnight and they open the doors and you would go shopping. And I feel like that’s kind of pulled back a little bit.
Chris Needs:
Yeah, I think you’re right. Have you ever gone to a Walmart at midnight on Black Friday? Right after Thanksgiving meals with your family. Let me tell you, it’s a madhouse.
Noah Brooks:
I have been to a Target at midnight.
Chris Needs:
People have their hands on things on claiming them because the deal’s not up until 1 a.m. or something. It’s a madhouse; don’t recommend to a friend.
On Cyber Sales
Noah Brooks:
But you know why maybe that that’s not happening right now? Cyber Monday.
Chris Needs:
Correct.
Noah Brooks:
Yeah, right. I mean, so you have those deals, the 75-inch television for $6.99 or something, but they run it on Amazon. They run it on Walmart.com. They run it on Best buy.com, so you don’t have to go.
Chris Needs:
Omni-channel.
Noah Brooks:
I don’t even know what that is.
Chris Needs:
You could order it online, pick up in the store.
Noah Brooks:
I thought that might be a website that I was unaware of. I wanted to write it down a little bit. Speaking of traveling, so I’m headed up to Long Island. You’re not going to be filling up your car driving, are you?
Chris Needs:
No, no. I won’t be filling up. I just got a Tesla recently, so I will be going up. I spent a total of $45 charging at home for the entire month of October 20th to November 20th.
Noah Brooks:
Is that right? More like $200 a month in gas.
Chris Needs:
I was near $400.
Noah Brooks:
Well, so one of the things that we’re looking at, obviously everybody’s talking about inflation, right? Gasoline around here is around $3.55 a gallon, which is some of the lowest it’s been after Covid. Now our local Sheetz here, which is on the east coast, they’re running some special for, what is it…
Chris Needs:
$1.99 cents per gallon for Thanksgiving.
Noah Brooks:
Yeah, but it’s the low-end stuff. It’s even lower than the normal stuff. It’s even lower than regular.
Chris Needs:
Noah with his BMW gang premium gas.
Noah Brooks:
That’s neither here nor there. But the fact of the matter is that we are experiencing disinflation. Definitely, and you see it across the board. I was asking somebody about it, what they thought, and one person happened to bring up eggs. Do you remember last year where egg prices flew?
Chris Needs:
The bird flu. Yeah, and same with turkeys. It was running through them. I saw turkey prices are down 32% year over year. They were also affected by that, and obviously chickens were as well.
On the Travel Industry
Noah Brooks:
So those may be not sticky prices. The other thing that we saw in the CPI report that came out last week was airline prices. Ticket prices were down 14% year over year. I mean that bodes pretty well for travelers, right?
Chris Needs:
Definitely.
Noah Brooks:
I think after the pandemic, I mean they had fired, not fired, but they had furloughed or laid off tons of flight attendants and captains and pilots.
Chris Needs:
Even retired planes. Threw them out in Arizona in the desert.
Noah Brooks:
Well, they’re all back online now and they’re still looking for new people. The capacity’s expanded, I don’t know if you want to say exponentially, but it’s expanded a heck of a lot. And their planes are full now. I flew last weekend; we had a client event in Portland. The plane to Vegas was full, probably for Formula One. The plane to Portland was full. The plane back from Portland to Newark was— there wasn’t a seat available.
Chris Needs:
How are those TSA checkpoints?
Noah Brooks:
Honestly, I think they have gotten much better. TSA in Newark, lickety split. TSA in Vegas? I did lose my laptop there though. That was kind of…
Chris Needs:
That’s what I was insinuating.
Noah Brooks:
Okay. Okay. I missed that. I thought you were asking a serious question, Chris. Yeah, no, lost my laptop at TSA. It didn’t go so well, but we did get it back. They were very nice, charged us a little overnight shipping rate and we got it back. But yeah, so during that trip though, what I saw in my few days on the West Coast and Las Vegas was that everything was mobbed. I mean, anywhere you go for food or drink..
Chris Needs:
Hour wait…
Noah Brooks:
Well, not an hour wait, but I’m not going to wait an hour, so I wouldn’t go to those places. But everywhere you go it’s filled and there’s just people cycling through restaurants and eateries and other retail spots. I mean, the shopping in Vegas was mobbed. The Portland airport was mobbed—the general Portland area. I wasn’t downtown, but a little bit south of downtown was really, really busy. I mean, this is anecdotal, but it doesn’t seem like there’s a recession that’s happening right now.
Chris Needs:
Yeah, Saturday night I was down in Philly as well, and it was an hour wait at the restaurant we went to. And then I went into a parking garage after we left my sister-in-law’s house and there wasn’t a spot. We started turning around like we were going to come down and someone pulled out of a spot and we were like, thank goodness we didn’t just come into this parking garage just to pay a fee. And we got a spot, thankfully. So things are booming out there. People are still spending despite what you may hear.
Noah Brooks:
Yeah, they are. And the market is kind of responding to the disinflation. And I’ll just pause there for a second and I don’t want anybody to think that I’m suggesting that prices are coming down now. There are some real volatile, volatile prices like gasoline, like the airline tickets, things like that that have come down a little bit. But food and shelter, what they call core, they’re not coming down. I mean, that doesn’t seem to be the case. So when I say disinflation, I’m not talking about deflation. Over the last 70 or 80 years, deflation has really only happened a few times. We had deflation during ‘73, ‘74 market meltdown, if you will. And then during the global financial crisis, we had obviously housing deflation.
Chris Needs:
Well, yeah, that’s something we talk about. Obviously people are so disenchanted with inflation and they expect prices to go back to 2020 or 2021. And to your point, it would be a bad thing if that happened. There would be a meltdown in the market. Earnings would collapse. You would feel the pain even though you would get your cheaper prices if that were the case.
Noah Brooks:
So prices aren’t going to go down, but the reported number that CPI came out with last Tuesday, I think it was: 3.2%, which is much lower than the 9% that we saw in June of 2022. And I’m just going to throw this out there. I think it’s important to note. When Jay Powell said that inflation was transitory, he got a lot of flack for that.
I didn’t look up the definition of the word transitory, but I think of transient, he’s always moving. They’re always moving and transitory. It’s here, but it’s not going to stay here. And here we are 18 months later, 19 months later, and it’s back down below 4, 3, 3.2 PPI, Producer price index, which measures the cost of input prices for manufacturing came out at 2.1.
On Fed Rates
Chris Needs:
Well, since we’ve saw this trend change here at the end of October, very, very end of October, we’ve started getting some really good economic data that, like you said, like PPI, you look at the unit labor costs, you look at some of the other pieces, the CPI that people have been looking at and everything is going in the right direction.
Whereas up until that point, the September numbers that we received in October weren’t necessarily indicating that everything was still looking pretty hot. But we’re starting to see some numbers the Fed can work with and that’s led to a shift in the CME Fed watch expectations of rates where at a 30% expectation of a cut in March, which I think is far too soon, I don’t know about you. But they’re also up to hundred basis points in cuts at 57%, at least a hundred basis points, by December.
Noah Brooks:
I don’t think so. By December 24th?
Chris Needs:
Yes. I don’t’ see it. Jay has told us that’s not happening. He’s told us higher for longer.
Noah Brooks:
I’m going to go back to the good data that you mentioned just a moment ago, the Federal Reserve, almost every single time when asked by reporters what it’s going to take to pause or to stop, they have said we are, what’s the word, data dependent. And we are now in getting the data, and I think they are checking the boxes, CPI, PPI, jobs slowing down, unemployment coming up, more than a half a percent, right?
Chris Needs:
Productivity up though in the midst of all that as well as with the unit labor costs going down. It was I think what was about 1.7% below expectation 0.95 expected, negative 0.8 we got, and then 4.7% productivity versus 4.1 quarter over quarter. Those are really good numbers. You’re getting the best of both worlds from the Fed.
Noah Brooks:
Yeah, so they have said really, I mean they don’t want to cause a recession, but they’re not opposed to it. They’ve told us they’re data dependent, and I think they are, right now, they’re like, these are the numbers that we needed to say that we’re done. Now they don’t want to say that they’re done. They actually came out and made a point to say, Hey, we will continue to raise if needed.
Chris Needs:
They don’t want that burn scenario where it comes roaring back if they just say they’re done and then the market’s off to the races again.
Noah Brooks:
But you think about it. When you think about the timeframe of what happened..so you have these covid lockdowns, you have everybody, I keep saying this, everybody was self actualizing. They’re quitting their jobs. They don’t want to wash dishes for $12 an hour. I don’t want to wash dishes for $12 an hour.
Businesses have to raise their starting salary to keep people and to attract new people, right?. So that causes wage inflation. Then you have the supply chain issue where it’s taking months and months and months to get stuff imported in. Not to mention the cost of those containers went up 10, in some cases, 15 fold. Those things are essentially gone.
Chris Needs:
Remember when we used to look at the ships floating outside of China? Those maps were madness.
Noah Brooks:
They’re crazy, right? At one point, I think there were over a thousand container ships floating on the east coast of China and Shanghai and nobody’s talking about that anymore. It’s not a thing. In California, they had count of how many were off of Long Beach, right? The Port of Long Beach. Probably single digits at this point. I mean it’s who’s there unloading that day, right? So those items, I mean, I don’t know. I think we came to a factor: what percentage was supply chain? What percentage was stimulus? What percentage was wage inflation?
But all of those things are really dissipating at the moment. There’s no supply chain. Wage inflation has come down relatively dramatically. It’s not back to pre-Covid levels, but it is significantly lower. All of those items contribute to inflation and they really are settled back down. So I think history books may look at Jay Powell’s wording of his transitory statement, and I think they could agree with that at some point.
Chris Needs:
It doesn’t look so egregious now, certainly. But I think he would admit that it was stickier than even he thought it would be. I think he would admit that.
Noah Brooks:
Did you see him the other day? He cursed at the protestor.
Chris Needs:
No.
Noah Brooks:
Jay Powell. I kind of like that guy. I don’t know. Some people don’t like him, but I….
Chris Needs:
A deadhead. He’s a fun guy.
Noah Brooks:
Yeah, he seems all right to me. So what else are we seeing?
Chris Needs:
That strong trend change. I mean the market really has jumped here in November. So I mean that’s the first thing.
Noah Brooks:
November to date, we are up about 8.5%. And year to date on the S&P 500 up, I think it was 18.5%. So November came roaring back. Small caps climbed 5% themselves last week when the market was only up I think 2%.
Chris Needs:
And they were up 7% that week of October 30th through November 3rd. A huge week, huge bounce off of oversold conditions. That was much welcomed.
Noah Brooks:
Yeah, absolutely. Now, there are still some people that are questioning, and these may be perma bears, but they’re questioning, is it a dead cat bounce? Is it a short covering and a bear market?
Chris Needs:
We do talk about those short covering rallies a lot. I mean, the most vicious days up happen to be in bear markets we find. So, I mean, it’s yet to be seen, but the economic data is certainly putting some credence and support behind those moves.
Noah Brooks:
This is thanksgiving week, kind of a dull week. What’s the old adage? Never short of dull market. So maybe we get something really going here. I just want to go back to transitory and inflation for a little bit. I’m not a big prognosticator, but I think that there’s a good chance that the Fed could be done.
They probably, being data dependent, they probably think themselves that they’re done. If I could put words in their mouth, which I’m going to do. But they reserve the right, if inflation starts ratcheting back up again, they’re going to reserve the right to do it again. But we have this lag. I mean, the old line from Milton Friedman monetary policy affects economic activity with long and variable lags.
Chris Needs:
That number is attributed around 18 months is what we hear. I think most common.
Noah Brooks:
Yeah, mean. So 18 months ago, what does that bring us to Chris?
Chris Needs:
Pretty darn near zero. I mean, we moved up that fast.
Noah Brooks:
It was quick. So there could be a scenario where they have to lower, I guess. I don’t think that’s going to play out, but long and variable lags. I mean, we’re just seeing the effects in the economy. Financial conditions are tightening. There’s no question about it.
One of the things that I’m starting to see now, you might’ve seen it, Ford is now offering some 0% financing on a few of their vehicles and 2.6 on some of them. Not on the F-150, guys. I know everybody wants to go buy an F-150. Not on that, but on some of their maybe lesser selling vehicles, they’re offering that. I mean, that’s the first time that we’ve seen that since pre-Covid.
Chris Needs:
Yeah. I mean, in terms of different credit conditions that we haven’t seen in a while, with these rates higher, one thing I noticed when I was going to buy that car was that my bank, Wells Fargo, doesn’t offer direct loans anymore. They only do indirect, which I thought was kind of zstrange. And they’ve also pulled out of mortgage lending markets as well for direct mortgage loans.
Two things that I think certainly show a tightening in credit, and to your point, I think the Fed is leaning towards being done. I think they see what’s on the horizon, and I think low tenths of a percent GDP, or maybe one or two scattered around negative, I think that’s the base case. A lot of the managers we listen to on a weekly basis, and the fund managers we talk to all the time, everyone seems to have at least a mild recession or a growth recession pegged.
And I think the Fed sees that and hears that too. So I definitely think I’m leaning towards that opinion as well that they’re done. They just don’t want to be backed in a corner and say they’re done, obviously.
On Mortgages
Noah Brooks:
Yeah, no question about it. One thing that we didn’t talk about was mortgages. The average 30-year mortgage this week is in close to 7.5, I think it’s 7.44 at the close of business on Friday. And you and I have this talk a lot. We talk to a lot of people. The fact that my parents’ first mortgage in 1981 was 14% or something like that. You can’t compare those two. Their first mortgage was for, I don’t know, $28,000 or something. The mortgages now are not, you can’t buy a $30,000 house.
Chris Needs:
The price of a home compared to the inflation of wages–you compare the inflation of those two things and they’re not equal.
Noah Brooks:
And I mean obviously after Covid house prices went nutty. The median price of a house, the data came out yesterday, I think was around $380,000, the median price. And if you are a new first time home buyer coming out of school, even working a reasonably good job, to go buy a close to $400,000 house, that’s 7.5. That is going to take a lot of your income.
Chris Needs:
That is a tall task.
Noah Brooks:
And with financial conditions tightening, meaning banks may be closing in on their lending a little bit, it is going to be more and more difficult. And so when we talk about a recession, what do we need? We need two quarters of negative GDP growth. Now we had that back in 2022.
Chris Needs:
But we were seeing 200,000 plus jobs per month gained.
Noah Brooks:
Absolutely. But it is possible. Now, if I do my math right, residential housing represents about 4.5 to 5% of GDP. So if there is a housing recession—because there’s not enough inventory, and there’s not enough being built because we’ve been under-building after the global financial crisis, and, of course, 7.5% mortgages—that is going to show up in GDP data, no question about it.
Everybody asks, well, how do you get to the soft landing? Well, maybe that soft landing is you have a point off of GDP because of housing that’s not selling. You have a point off of GDP for tertiary stuff around housing. And GDP comes down. But we don’t go into a crisis mode like 2008 or after the .com bubble and 2000, 2001. Maybe that’s how we get a soft landing.
Chris Needs:
It’s very possible. I mean, what’s your definition of a soft landing? That’s just another thing. The Greenspan, vague term, the talking heads say it on TV all the time. But what does it actually mean? Can we assign numbers to that term?
Noah Brooks:
I’m going to throw that back at you. What’s your definition of a soft landing?
Chris Needs:
In our current scenario, I would say we’re looking at below 5% unemployment, so maybe 4.5, 4.6% unemployment and two very minor negative quarters on GDP. So maybe negative 0.2, negative 0.3 or negative 0.1, negative 0.3, something like that. The Q3 numbers that just came out from this year, 4.9%. That’s a huge number.
That’s going to be a tough hurdle to eclipse next year. And to your point, the slowdown in housing—that we’re seeing in the Zillow prices that has the long lag in the CPI—maybe that’s going to come into effect and really keep us below that number next year.
Noah Brooks:
I would tend to agree with you on the unemployment. If we need two quarters of negative GDP growth and you need unemployment to rise, I think it’s definitely possible that we could get that. But we have this recency bias that the last recession that we went through was terrible. In mid 2009, early 2009, you were thinking you were going to go to a bank to an ATM and it may not give you any money.
That’s not going to happen. That’s not in the cards at the moment. I’m not saying it could never happen, but that’s not in the cards. My idea of the soft landing is that there’s a mild increase in unemployment and there is a mild decrease in GDP like you just mentioned. I think it’s possible that we get there because of housing—not the same way 2008 was, but because of housing slowdown.
Chris Needs:
Yeah, totally. I hear you a hundred percent. Some people who I listen to or the talking online, they think a soft landing is no recession at all. They think a soft landing is equivalent to a no landing. So I wonder what their no landing is like.
Noah Brooks:
The no landing is the market goes up and we don’t have any job loss, right? I mean, that’s what a no landing is.
Chris Needs:
Yeah.
Noah Brooks:
Just one note on housing. This kind of goes along with my positioning here, but mortgage affordability, the worst it’s been, and one thing that we’re seeing that is actually trying to help mortgage affordability is you’re seeing builders building smaller houses. So the numbers that I’ve seen going back 15 years or so, the average square footage of a house in the United States was something like 2,600 square feet back 15 years ago, and the newest number that came out says it’s less than 2100. So locally here we have builders doing three bed, two and a half bath that are under 2000 square feet.
Chris Needs:
So no Thanksgiving dinner in this new house?
Noah Brooks:
They’ve gotten rid of the dining rooms. I mean, who uses a formal dining room anymore? It’s kitchen bar.
Chris Needs:
Matriarch and patriarch. Go to their house. Don’t come to my house.
Noah Brooks:
Well, that’s what you’re doing this weekend, right?
Chris Needs:
Yep.
Noah Brooks:
Where are you going?
Chris Needs:
My grandmother has passed away—and my grandfather. We’re going to their house and having sort of a last hurrah at their house.
Noah Brooks:
Without them.
Chris Needs:
Without them, yep. My aunt has moved into the house, so we’re going to visit all them obviously.
Looking Ahead
Noah Brooks:
On that note, why don’t we wrap up. Here’s where we are. We have disinflation that’s happening. We talked about prices coming down or prices settling down. And then we talked about some of the other prices that are slowing down their increase. We have CPI coming in at 3.2. We have PPI coming in at 2.1. I think the Federal Reserve is checking those boxes.
I’m not going to guarantee it, we don’t do that around here, but I’m going to say that the Federal Reserve is probably done raising rates, and that’s what everybody’s been looking for. They don’t want to announce that, as you mentioned, because if everybody knows they’re done then you have this buying beforehand in anticipation of that. But I think they’re done. We’re up 18.5 %, but if we just grind here for a little bit, maybe we end up 15, maybe we end up 21, that would still be a decent year, right?
Chris Needs:
Yeah. Post midterm years are historically very strong and surprisingly a year that good in the S&P 500 would actually be a down year if you’re looking at the presidential cycle after a midterm. Averages, I think, it’s around 33%.
Noah Brooks:
Of stuff we didn’t talk about. We’ll get to that on the next one. We didn’t talk about anything geopolitical? We know Russia and Israel…
Chris Needs:
But she came to America. Everything’s okay.
Noah Brooks:
We’ll see how that plays out. And then they called him a dictator. I don’t know. We’ll talk about that next time.
Chris Needs:
Did you see Anthony Andy Blinken’s face when he said that. Oh my.
Noah Brooks:
So hey, it’s Thanksgiving week. Thank you so much for joining us, for listening to us. We really appreciate it. I’m Noah Brooks, Director of Investments at Good Life and with me as always is Chris Needs. I hope you have a wonderful thanksgiving and look forward to seeing you next time. Thanks so much. Have a great thanksgiving.
Chris Needs:
Happy Thanksgiving.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Good Life’s Investment team keeps you up to date with timely market insights and updates to help you navigate the investment landscape.
Table of Contents
On Thanksgiving Plans
Noah Brooks:
Welcome back everybody. Today we have the Thanksgiving edition of the Market Enthusiast podcast. My name’s Noah Brooks. I’m going to be your host today. I’m the director of Investments at Good Life and with me as always, Chris needs senior research analyst here at Good Life. Like I said, we have Thanksgiving coming up. What are you doing? You going somewhere?
Chris Needs:
I’m headed out to my mother’s family where they live out in Western Pa., so I have a nice four hour drive ahead of me.
Noah Brooks:
Yeah, the TSA has told us that they expect a boatload of people. They said this 12-day season, I don’t really know what that 12 day encompasses, but they’re expecting 30 million flyers this weekend. I’m not flying anywhere. You’re not flying anywhere, but we’re both driving, right? You’re driving four hours. I’m driving up to Long Island up to North Fork. That’s going to be a five hour drive, but they’re expecting a lot of traveling for this holiday and, of course, we have Black Friday. Right. Did you do any shopping yet?
Chris Needs:
I haven’t been, but I know my wife has. I’m getting those email notifications. So she’s been putting in some work already. I guess they’re doing some early deals so they don’t inundate all the Fed-Exes and UPSes of the world.
Noah Brooks:
Yeah, it used to be that, I mean, I can remember 15 years ago, Black Friday was such an event that you’d have Thanksgiving, we’d have 20 people over and after dinner, 8, 9 o’clock, you kind of rest a little bit. And then here locally, some stores would open at 10 or 11, even midnight and they open the doors and you would go shopping. And I feel like that’s kind of pulled back a little bit.
Chris Needs:
Yeah, I think you’re right. Have you ever gone to a Walmart at midnight on Black Friday? Right after Thanksgiving meals with your family. Let me tell you, it’s a madhouse.
Noah Brooks:
I have been to a Target at midnight.
Chris Needs:
People have their hands on things on claiming them because the deal’s not up until 1 a.m. or something. It’s a madhouse; don’t recommend to a friend.
On Cyber Sales
Noah Brooks:
But you know why maybe that that’s not happening right now? Cyber Monday.
Chris Needs:
Correct.
Noah Brooks:
Yeah, right. I mean, so you have those deals, the 75-inch television for $6.99 or something, but they run it on Amazon. They run it on Walmart.com. They run it on Best buy.com, so you don’t have to go.
Chris Needs:
Omni-channel.
Noah Brooks:
I don’t even know what that is.
Chris Needs:
You could order it online, pick up in the store.
Noah Brooks:
I thought that might be a website that I was unaware of. I wanted to write it down a little bit. Speaking of traveling, so I’m headed up to Long Island. You’re not going to be filling up your car driving, are you?
Chris Needs:
No, no. I won’t be filling up. I just got a Tesla recently, so I will be going up. I spent a total of $45 charging at home for the entire month of October 20th to November 20th.
Noah Brooks:
Is that right? More like $200 a month in gas.
Chris Needs:
I was near $400.
Noah Brooks:
Well, so one of the things that we’re looking at, obviously everybody’s talking about inflation, right? Gasoline around here is around $3.55 a gallon, which is some of the lowest it’s been after Covid. Now our local Sheetz here, which is on the east coast, they’re running some special for, what is it…
Chris Needs:
$1.99 cents per gallon for Thanksgiving.
Noah Brooks:
Yeah, but it’s the low-end stuff. It’s even lower than the normal stuff. It’s even lower than regular.
Chris Needs:
Noah with his BMW gang premium gas.
Noah Brooks:
That’s neither here nor there. But the fact of the matter is that we are experiencing disinflation. Definitely, and you see it across the board. I was asking somebody about it, what they thought, and one person happened to bring up eggs. Do you remember last year where egg prices flew?
Chris Needs:
The bird flu. Yeah, and same with turkeys. It was running through them. I saw turkey prices are down 32% year over year. They were also affected by that, and obviously chickens were as well.
On the Travel Industry
Noah Brooks:
So those may be not sticky prices. The other thing that we saw in the CPI report that came out last week was airline prices. Ticket prices were down 14% year over year. I mean that bodes pretty well for travelers, right?
Chris Needs:
Definitely.
Noah Brooks:
I think after the pandemic, I mean they had fired, not fired, but they had furloughed or laid off tons of flight attendants and captains and pilots.
Chris Needs:
Even retired planes. Threw them out in Arizona in the desert.
Noah Brooks:
Well, they’re all back online now and they’re still looking for new people. The capacity’s expanded, I don’t know if you want to say exponentially, but it’s expanded a heck of a lot. And their planes are full now. I flew last weekend; we had a client event in Portland. The plane to Vegas was full, probably for Formula One. The plane to Portland was full. The plane back from Portland to Newark was— there wasn’t a seat available.
Chris Needs:
How are those TSA checkpoints?
Noah Brooks:
Honestly, I think they have gotten much better. TSA in Newark, lickety split. TSA in Vegas? I did lose my laptop there though. That was kind of…
Chris Needs:
That’s what I was insinuating.
Noah Brooks:
Okay. Okay. I missed that. I thought you were asking a serious question, Chris. Yeah, no, lost my laptop at TSA. It didn’t go so well, but we did get it back. They were very nice, charged us a little overnight shipping rate and we got it back. But yeah, so during that trip though, what I saw in my few days on the West Coast and Las Vegas was that everything was mobbed. I mean, anywhere you go for food or drink..
Chris Needs:
Hour wait…
Noah Brooks:
Well, not an hour wait, but I’m not going to wait an hour, so I wouldn’t go to those places. But everywhere you go it’s filled and there’s just people cycling through restaurants and eateries and other retail spots. I mean, the shopping in Vegas was mobbed. The Portland airport was mobbed—the general Portland area. I wasn’t downtown, but a little bit south of downtown was really, really busy. I mean, this is anecdotal, but it doesn’t seem like there’s a recession that’s happening right now.
Chris Needs:
Yeah, Saturday night I was down in Philly as well, and it was an hour wait at the restaurant we went to. And then I went into a parking garage after we left my sister-in-law’s house and there wasn’t a spot. We started turning around like we were going to come down and someone pulled out of a spot and we were like, thank goodness we didn’t just come into this parking garage just to pay a fee. And we got a spot, thankfully. So things are booming out there. People are still spending despite what you may hear.
Noah Brooks:
Yeah, they are. And the market is kind of responding to the disinflation. And I’ll just pause there for a second and I don’t want anybody to think that I’m suggesting that prices are coming down now. There are some real volatile, volatile prices like gasoline, like the airline tickets, things like that that have come down a little bit. But food and shelter, what they call core, they’re not coming down. I mean, that doesn’t seem to be the case. So when I say disinflation, I’m not talking about deflation. Over the last 70 or 80 years, deflation has really only happened a few times. We had deflation during ‘73, ‘74 market meltdown, if you will. And then during the global financial crisis, we had obviously housing deflation.
Chris Needs:
Well, yeah, that’s something we talk about. Obviously people are so disenchanted with inflation and they expect prices to go back to 2020 or 2021. And to your point, it would be a bad thing if that happened. There would be a meltdown in the market. Earnings would collapse. You would feel the pain even though you would get your cheaper prices if that were the case.
Noah Brooks:
So prices aren’t going to go down, but the reported number that CPI came out with last Tuesday, I think it was: 3.2%, which is much lower than the 9% that we saw in June of 2022. And I’m just going to throw this out there. I think it’s important to note. When Jay Powell said that inflation was transitory, he got a lot of flack for that.
I didn’t look up the definition of the word transitory, but I think of transient, he’s always moving. They’re always moving and transitory. It’s here, but it’s not going to stay here. And here we are 18 months later, 19 months later, and it’s back down below 4, 3, 3.2 PPI, Producer price index, which measures the cost of input prices for manufacturing came out at 2.1.
On Fed Rates
Chris Needs:
Well, since we’ve saw this trend change here at the end of October, very, very end of October, we’ve started getting some really good economic data that, like you said, like PPI, you look at the unit labor costs, you look at some of the other pieces, the CPI that people have been looking at and everything is going in the right direction.
Whereas up until that point, the September numbers that we received in October weren’t necessarily indicating that everything was still looking pretty hot. But we’re starting to see some numbers the Fed can work with and that’s led to a shift in the CME Fed watch expectations of rates where at a 30% expectation of a cut in March, which I think is far too soon, I don’t know about you. But they’re also up to hundred basis points in cuts at 57%, at least a hundred basis points, by December.
Noah Brooks:
I don’t think so. By December 24th?
Chris Needs:
Yes. I don’t’ see it. Jay has told us that’s not happening. He’s told us higher for longer.
Noah Brooks:
I’m going to go back to the good data that you mentioned just a moment ago, the Federal Reserve, almost every single time when asked by reporters what it’s going to take to pause or to stop, they have said we are, what’s the word, data dependent. And we are now in getting the data, and I think they are checking the boxes, CPI, PPI, jobs slowing down, unemployment coming up, more than a half a percent, right?
Chris Needs:
Productivity up though in the midst of all that as well as with the unit labor costs going down. It was I think what was about 1.7% below expectation 0.95 expected, negative 0.8 we got, and then 4.7% productivity versus 4.1 quarter over quarter. Those are really good numbers. You’re getting the best of both worlds from the Fed.
Noah Brooks:
Yeah, so they have said really, I mean they don’t want to cause a recession, but they’re not opposed to it. They’ve told us they’re data dependent, and I think they are, right now, they’re like, these are the numbers that we needed to say that we’re done. Now they don’t want to say that they’re done. They actually came out and made a point to say, Hey, we will continue to raise if needed.
Chris Needs:
They don’t want that burn scenario where it comes roaring back if they just say they’re done and then the market’s off to the races again.
Noah Brooks:
But you think about it. When you think about the timeframe of what happened..so you have these covid lockdowns, you have everybody, I keep saying this, everybody was self actualizing. They’re quitting their jobs. They don’t want to wash dishes for $12 an hour. I don’t want to wash dishes for $12 an hour.
Businesses have to raise their starting salary to keep people and to attract new people, right?. So that causes wage inflation. Then you have the supply chain issue where it’s taking months and months and months to get stuff imported in. Not to mention the cost of those containers went up 10, in some cases, 15 fold. Those things are essentially gone.
Chris Needs:
Remember when we used to look at the ships floating outside of China? Those maps were madness.
Noah Brooks:
They’re crazy, right? At one point, I think there were over a thousand container ships floating on the east coast of China and Shanghai and nobody’s talking about that anymore. It’s not a thing. In California, they had count of how many were off of Long Beach, right? The Port of Long Beach. Probably single digits at this point. I mean it’s who’s there unloading that day, right? So those items, I mean, I don’t know. I think we came to a factor: what percentage was supply chain? What percentage was stimulus? What percentage was wage inflation?
But all of those things are really dissipating at the moment. There’s no supply chain. Wage inflation has come down relatively dramatically. It’s not back to pre-Covid levels, but it is significantly lower. All of those items contribute to inflation and they really are settled back down. So I think history books may look at Jay Powell’s wording of his transitory statement, and I think they could agree with that at some point.
Chris Needs:
It doesn’t look so egregious now, certainly. But I think he would admit that it was stickier than even he thought it would be. I think he would admit that.
Noah Brooks:
Did you see him the other day? He cursed at the protestor.
Chris Needs:
No.
Noah Brooks:
Jay Powell. I kind of like that guy. I don’t know. Some people don’t like him, but I….
Chris Needs:
A deadhead. He’s a fun guy.
Noah Brooks:
Yeah, he seems all right to me. So what else are we seeing?
Chris Needs:
That strong trend change. I mean the market really has jumped here in November. So I mean that’s the first thing.
Noah Brooks:
November to date, we are up about 8.5%. And year to date on the S&P 500 up, I think it was 18.5%. So November came roaring back. Small caps climbed 5% themselves last week when the market was only up I think 2%.
Chris Needs:
And they were up 7% that week of October 30th through November 3rd. A huge week, huge bounce off of oversold conditions. That was much welcomed.
Noah Brooks:
Yeah, absolutely. Now, there are still some people that are questioning, and these may be perma bears, but they’re questioning, is it a dead cat bounce? Is it a short covering and a bear market?
Chris Needs:
We do talk about those short covering rallies a lot. I mean, the most vicious days up happen to be in bear markets we find. So, I mean, it’s yet to be seen, but the economic data is certainly putting some credence and support behind those moves.
Noah Brooks:
This is thanksgiving week, kind of a dull week. What’s the old adage? Never short of dull market. So maybe we get something really going here. I just want to go back to transitory and inflation for a little bit. I’m not a big prognosticator, but I think that there’s a good chance that the Fed could be done.
They probably, being data dependent, they probably think themselves that they’re done. If I could put words in their mouth, which I’m going to do. But they reserve the right, if inflation starts ratcheting back up again, they’re going to reserve the right to do it again. But we have this lag. I mean, the old line from Milton Friedman monetary policy affects economic activity with long and variable lags.
Chris Needs:
That number is attributed around 18 months is what we hear. I think most common.
Noah Brooks:
Yeah, mean. So 18 months ago, what does that bring us to Chris?
Chris Needs:
Pretty darn near zero. I mean, we moved up that fast.
Noah Brooks:
It was quick. So there could be a scenario where they have to lower, I guess. I don’t think that’s going to play out, but long and variable lags. I mean, we’re just seeing the effects in the economy. Financial conditions are tightening. There’s no question about it.
One of the things that I’m starting to see now, you might’ve seen it, Ford is now offering some 0% financing on a few of their vehicles and 2.6 on some of them. Not on the F-150, guys. I know everybody wants to go buy an F-150. Not on that, but on some of their maybe lesser selling vehicles, they’re offering that. I mean, that’s the first time that we’ve seen that since pre-Covid.
Chris Needs:
Yeah. I mean, in terms of different credit conditions that we haven’t seen in a while, with these rates higher, one thing I noticed when I was going to buy that car was that my bank, Wells Fargo, doesn’t offer direct loans anymore. They only do indirect, which I thought was kind of zstrange. And they’ve also pulled out of mortgage lending markets as well for direct mortgage loans.
Two things that I think certainly show a tightening in credit, and to your point, I think the Fed is leaning towards being done. I think they see what’s on the horizon, and I think low tenths of a percent GDP, or maybe one or two scattered around negative, I think that’s the base case. A lot of the managers we listen to on a weekly basis, and the fund managers we talk to all the time, everyone seems to have at least a mild recession or a growth recession pegged.
And I think the Fed sees that and hears that too. So I definitely think I’m leaning towards that opinion as well that they’re done. They just don’t want to be backed in a corner and say they’re done, obviously.
On Mortgages
Noah Brooks:
Yeah, no question about it. One thing that we didn’t talk about was mortgages. The average 30-year mortgage this week is in close to 7.5, I think it’s 7.44 at the close of business on Friday. And you and I have this talk a lot. We talk to a lot of people. The fact that my parents’ first mortgage in 1981 was 14% or something like that. You can’t compare those two. Their first mortgage was for, I don’t know, $28,000 or something. The mortgages now are not, you can’t buy a $30,000 house.
Chris Needs:
The price of a home compared to the inflation of wages–you compare the inflation of those two things and they’re not equal.
Noah Brooks:
And I mean obviously after Covid house prices went nutty. The median price of a house, the data came out yesterday, I think was around $380,000, the median price. And if you are a new first time home buyer coming out of school, even working a reasonably good job, to go buy a close to $400,000 house, that’s 7.5. That is going to take a lot of your income.
Chris Needs:
That is a tall task.
Noah Brooks:
And with financial conditions tightening, meaning banks may be closing in on their lending a little bit, it is going to be more and more difficult. And so when we talk about a recession, what do we need? We need two quarters of negative GDP growth. Now we had that back in 2022.
Chris Needs:
But we were seeing 200,000 plus jobs per month gained.
Noah Brooks:
Absolutely. But it is possible. Now, if I do my math right, residential housing represents about 4.5 to 5% of GDP. So if there is a housing recession—because there’s not enough inventory, and there’s not enough being built because we’ve been under-building after the global financial crisis, and, of course, 7.5% mortgages—that is going to show up in GDP data, no question about it.
Everybody asks, well, how do you get to the soft landing? Well, maybe that soft landing is you have a point off of GDP because of housing that’s not selling. You have a point off of GDP for tertiary stuff around housing. And GDP comes down. But we don’t go into a crisis mode like 2008 or after the .com bubble and 2000, 2001. Maybe that’s how we get a soft landing.
Chris Needs:
It’s very possible. I mean, what’s your definition of a soft landing? That’s just another thing. The Greenspan, vague term, the talking heads say it on TV all the time. But what does it actually mean? Can we assign numbers to that term?
Noah Brooks:
I’m going to throw that back at you. What’s your definition of a soft landing?
Chris Needs:
In our current scenario, I would say we’re looking at below 5% unemployment, so maybe 4.5, 4.6% unemployment and two very minor negative quarters on GDP. So maybe negative 0.2, negative 0.3 or negative 0.1, negative 0.3, something like that. The Q3 numbers that just came out from this year, 4.9%. That’s a huge number.
That’s going to be a tough hurdle to eclipse next year. And to your point, the slowdown in housing—that we’re seeing in the Zillow prices that has the long lag in the CPI—maybe that’s going to come into effect and really keep us below that number next year.
Noah Brooks:
I would tend to agree with you on the unemployment. If we need two quarters of negative GDP growth and you need unemployment to rise, I think it’s definitely possible that we could get that. But we have this recency bias that the last recession that we went through was terrible. In mid 2009, early 2009, you were thinking you were going to go to a bank to an ATM and it may not give you any money.
That’s not going to happen. That’s not in the cards at the moment. I’m not saying it could never happen, but that’s not in the cards. My idea of the soft landing is that there’s a mild increase in unemployment and there is a mild decrease in GDP like you just mentioned. I think it’s possible that we get there because of housing—not the same way 2008 was, but because of housing slowdown.
Chris Needs:
Yeah, totally. I hear you a hundred percent. Some people who I listen to or the talking online, they think a soft landing is no recession at all. They think a soft landing is equivalent to a no landing. So I wonder what their no landing is like.
Noah Brooks:
The no landing is the market goes up and we don’t have any job loss, right? I mean, that’s what a no landing is.
Chris Needs:
Yeah.
Noah Brooks:
Just one note on housing. This kind of goes along with my positioning here, but mortgage affordability, the worst it’s been, and one thing that we’re seeing that is actually trying to help mortgage affordability is you’re seeing builders building smaller houses. So the numbers that I’ve seen going back 15 years or so, the average square footage of a house in the United States was something like 2,600 square feet back 15 years ago, and the newest number that came out says it’s less than 2100. So locally here we have builders doing three bed, two and a half bath that are under 2000 square feet.
Chris Needs:
So no Thanksgiving dinner in this new house?
Noah Brooks:
They’ve gotten rid of the dining rooms. I mean, who uses a formal dining room anymore? It’s kitchen bar.
Chris Needs:
Matriarch and patriarch. Go to their house. Don’t come to my house.
Noah Brooks:
Well, that’s what you’re doing this weekend, right?
Chris Needs:
Yep.
Noah Brooks:
Where are you going?
Chris Needs:
My grandmother has passed away—and my grandfather. We’re going to their house and having sort of a last hurrah at their house.
Noah Brooks:
Without them.
Chris Needs:
Without them, yep. My aunt has moved into the house, so we’re going to visit all them obviously.
Looking Ahead
Noah Brooks:
On that note, why don’t we wrap up. Here’s where we are. We have disinflation that’s happening. We talked about prices coming down or prices settling down. And then we talked about some of the other prices that are slowing down their increase. We have CPI coming in at 3.2. We have PPI coming in at 2.1. I think the Federal Reserve is checking those boxes.
I’m not going to guarantee it, we don’t do that around here, but I’m going to say that the Federal Reserve is probably done raising rates, and that’s what everybody’s been looking for. They don’t want to announce that, as you mentioned, because if everybody knows they’re done then you have this buying beforehand in anticipation of that. But I think they’re done. We’re up 18.5 %, but if we just grind here for a little bit, maybe we end up 15, maybe we end up 21, that would still be a decent year, right?
Chris Needs:
Yeah. Post midterm years are historically very strong and surprisingly a year that good in the S&P 500 would actually be a down year if you’re looking at the presidential cycle after a midterm. Averages, I think, it’s around 33%.
Noah Brooks:
Of stuff we didn’t talk about. We’ll get to that on the next one. We didn’t talk about anything geopolitical? We know Russia and Israel…
Chris Needs:
But she came to America. Everything’s okay.
Noah Brooks:
We’ll see how that plays out. And then they called him a dictator. I don’t know. We’ll talk about that next time.
Chris Needs:
Did you see Anthony Andy Blinken’s face when he said that. Oh my.
Noah Brooks:
So hey, it’s Thanksgiving week. Thank you so much for joining us, for listening to us. We really appreciate it. I’m Noah Brooks, Director of Investments at Good Life and with me as always is Chris Needs. I hope you have a wonderful thanksgiving and look forward to seeing you next time. Thanks so much. Have a great thanksgiving.
Chris Needs:
Happy Thanksgiving.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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