WEBVTT - At the Money: What Data Matters and What Doesn't

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<v Speaker 1>Somebody stuff.

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<v Speaker 2>Tail stalls. When it comes to the economy, it seems

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<v Speaker 2>like everybody has an opinion about what's going to happen next.

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<v Speaker 2>Are we getting a recession? Can we execute a soft landing?

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<v Speaker 2>Is the FED about to cut rates or are they

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<v Speaker 2>standing pat And what about inflation? Has it stabilized in

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<v Speaker 2>bottom or is it about to pick up again. The

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<v Speaker 2>answer to these questions are mostly just opinions guesses from

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<v Speaker 2>folks with rather questionable track records. As it turns out,

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<v Speaker 2>you can cut through all of this confusing noise and

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<v Speaker 2>let the economic data tell you its own story. I'm

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<v Speaker 2>Barry Riddelts and on today's edition of At the Money,

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<v Speaker 2>we are going to discuss how to allow economic data

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<v Speaker 2>to reveal itself to you without the guestwork, opinions or

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<v Speaker 2>the usual pundit pontifications. To help us unpack all of

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<v Speaker 2>this and what it means for your portfolio, let's bring

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<v Speaker 2>in Bill McBride. He runs Calculated Risk. Bill has used

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<v Speaker 2>economic data to create opinion free analysis of the economy

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<v Speaker 2>over the past two decades, and he has accurately identified booms, busts, bubbles,

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<v Speaker 2>and recoveries in real time and at major turning points,

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<v Speaker 2>including the Great Financial Crisis and its subsequent housing bottom

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<v Speaker 2>and recovery. So Bill, let's just start with economic data.

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<v Speaker 2>Typically it's noisy most of the time, not especially meaningful.

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<v Speaker 2>How do you identify what data series to follow and

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<v Speaker 2>which releases are important?

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<v Speaker 3>Well, there's several major releases on the Employment Report, the

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<v Speaker 3>GDP report, and since my major focus is on the

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<v Speaker 3>housing market, is also housing starts and new home sales.

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<v Speaker 3>But I follow quite a few other data releases, mostly

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<v Speaker 3>just to see if something's not tracking what you kind

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<v Speaker 3>of expect. And it's really kind of the surprises that

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<v Speaker 3>change your views or brings you, you know, insights into

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<v Speaker 3>what's actually changing in the economy.

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<v Speaker 2>So it sounds like you're paying the most attention nonfarm payrolls,

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<v Speaker 2>which comes out every month, GDP which comes out quarterly,

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<v Speaker 2>and then housing sales and new home starts, both of

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<v Speaker 2>which are monthly. Do I have that right?

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<v Speaker 1>That's correct? I think those are the major releases to follow.

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<v Speaker 2>Do you think those have the most predictive value as

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<v Speaker 2>to what happens next?

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<v Speaker 3>Well, I think the Employment Report actually tells you the

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<v Speaker 3>best what's happening now. The GDP report tends to you

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<v Speaker 3>know it's quarterly's it gets heavily revised. The unemployment rate

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<v Speaker 3>is monthly, and so you know when the unemployment rates

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<v Speaker 3>at three to nine that the economy is in pretty

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<v Speaker 3>good shape.

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<v Speaker 1>New home sales and housing starts do have some predictive value.

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<v Speaker 3>Not always, but generally, if new home sales and housing

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<v Speaker 3>starts are increasing, the economy is going to be fine

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<v Speaker 3>for the next few years. If they decrease sharply, there's

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<v Speaker 3>a potential for a recession. But it's not you know,

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<v Speaker 3>no model is perfect. We saw a number of major

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<v Speaker 3>economists get fooled by the inverted yield curve and the

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<v Speaker 3>sharp drop in housing starts and new home sales that

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<v Speaker 3>were related to the pandemic and that so you always

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<v Speaker 3>have to take everything with a grain of salt.

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<v Speaker 1>But I think those there is some predicted value in

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<v Speaker 1>housing starts.

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<v Speaker 2>I like the concept of GDP unemployment in housing starts

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<v Speaker 2>as past, present and future really gives you the broad

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<v Speaker 2>range of what's going on. But let's talk about the

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<v Speaker 2>flips out of that. What do you think people in

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<v Speaker 2>both investors and economists pay too much attention to and

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<v Speaker 2>what data series perhaps should they be spending less time with.

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<v Speaker 3>I think probably the one people should ignore the most

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<v Speaker 3>is anything doing with sentiment.

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<v Speaker 1>M it's more of an opinion.

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<v Speaker 3>Especially in the last decade or two, we've we've we've

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<v Speaker 3>seen a real a political tinge to it, so, especially

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<v Speaker 3>especially on the conservative side, when there's a Democratic president

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<v Speaker 3>that the economy is terrible to many Republicans, uh and

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<v Speaker 3>their Democrats. Is a little bit the same way that

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<v Speaker 3>there are some surveys that that's all it does is

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<v Speaker 3>really tell you who's president?

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<v Speaker 1>Right?

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<v Speaker 2>Right? Is That's that's fascinating. I always find it amusing

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<v Speaker 2>when you look at certain models that have a survey component.

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<v Speaker 2>Owner's equivalent rent What do you think you can rent

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<v Speaker 2>your house for? Always kind of cracks me up. And

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<v Speaker 2>the one that really I couldn't agree with you more

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<v Speaker 2>about ignoring sentiment is the Federal Reserve asking ordinary people

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<v Speaker 2>where do you think inflation is going to be in

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<v Speaker 2>five years? I can't imagine a more useless question than that.

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<v Speaker 3>There's probably a little value tobout, but I understand what

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<v Speaker 3>you're saying.

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<v Speaker 1>Sentiment in general is hard to measure.

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<v Speaker 2>So let's talk a little bit about inflation. Are there

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<v Speaker 2>things that you pay close attention to rent, food, fuel,

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<v Speaker 2>mortgage rates. What are you looking at when you want

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<v Speaker 2>to figure out what's happening in the world of inflation.

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<v Speaker 3>You know, inflation is especially interesting topic right now, obviously

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<v Speaker 3>because it impacts what the Fed's going to do, which

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<v Speaker 3>impacts interest rates. Part of the problem is we had

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<v Speaker 3>a huge surge in rent related to household firmation, really

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<v Speaker 3>mostly in twenty twenty one, but going into twenty twenty

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<v Speaker 3>two and now asking rents are basically flat year over

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<v Speaker 3>year and have been for some time now.

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<v Speaker 1>But the measure of rents.

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<v Speaker 3>That go into CPI and PCEE, they include renewals, which

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<v Speaker 3>they should. You know, the people that are getting in

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<v Speaker 3>renewals are still catching up to the fact that the

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<v Speaker 3>rent surged a year or two years ago. But this

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<v Speaker 3>is a key point is monetary policy cannot impact what

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<v Speaker 3>happened to rents two years ago. It can only impact

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<v Speaker 3>what's happening today. So you know, there's a different people

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<v Speaker 3>that sometimes renders say to me, well, wait, my rent

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<v Speaker 3>still going up. Yeah, that's because it's a renewal and

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<v Speaker 3>monetary policy doesn't impact that at all. So when you

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<v Speaker 3>look at the CPI reports for the last few months, the.

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<v Speaker 1>Government's reporting.

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<v Speaker 3>One of the sentences in there has been a fifty

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<v Speaker 3>is related to rents or something close to that of

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<v Speaker 3>the of the CPI increase. So what I've been doing

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<v Speaker 3>is I've been taking rents out of the inflation to

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<v Speaker 3>see where we're at, and we're much closer, and for

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<v Speaker 3>several months we were at the Fed's target. So this

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<v Speaker 3>is this is a little balancing act for the Fed

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<v Speaker 3>is how much should they look at rents and how

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<v Speaker 3>much should they exclude it from what they're what they're doing.

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<v Speaker 2>Let's talk real estate. There's so many different elements that

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<v Speaker 2>go into residential housing. It's people's incomes, what mortgage rates

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<v Speaker 2>are at local housing supply, and the aforementioned rentals. What

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<v Speaker 2>do you watch most closely in this area? What do

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<v Speaker 2>you think people should be watching that perhaps they're not.

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<v Speaker 3>I think the key to watch is inventory. That's you know,

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<v Speaker 3>it's a there is supply and demand. We still have

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<v Speaker 3>pretty good demographics. We have a large cohort in the

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<v Speaker 3>home buying age group in their thirties. On the flip side,

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<v Speaker 3>the inventory, of course has been very low, but it's

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<v Speaker 3>starting to increase. It's still pretty thirty percent below kind

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<v Speaker 3>of a normal level. Since sales are down so much,

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<v Speaker 3>I've been looking more at months of supply, and that

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<v Speaker 3>is probably going to get back to twenty nineteen levels

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<v Speaker 3>later this year, and that says that house prices will

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<v Speaker 3>basically be flat to only up slightly by the end

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<v Speaker 3>of the year.

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<v Speaker 1>I think so.

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<v Speaker 2>In twenty twenty two and twenty twenty three, just about

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<v Speaker 2>every economist out there was looking for a recession. You

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<v Speaker 2>were not, And you got it right. What were you

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<v Speaker 2>seeing that told you we recession was not imminent when

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<v Speaker 2>everybody else seemed to be stuck on the inverted yield curve?

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<v Speaker 1>Yeah?

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<v Speaker 3>Well, you know, there were several economic analysts who didn't

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<v Speaker 3>think there would be a recession. Claudia Sami, who you've

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<v Speaker 3>interviewed recently, Yon Hotsuits, Goldman Sachs chief economists who everybody

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<v Speaker 3>should read if they get a chance. In twenty twenty two,

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<v Speaker 3>I didn't see there was no reason.

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<v Speaker 1>To expect a recession at all.

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<v Speaker 3>In twenty twenty three that you started seeing some signs

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<v Speaker 3>of a possibility. The Federal Reserve staff was even predicting

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<v Speaker 3>a recession in twenty twenty three. So, but I mean,

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<v Speaker 3>the key things that people were looking at was the

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<v Speaker 3>inverted YO curve, which is still inverted, and the fact

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<v Speaker 3>that housing starts dropped off pretty sharply. But what they

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<v Speaker 3>weren't looking at was other parts of pandemic economics.

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<v Speaker 1>If you will.

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<v Speaker 3>Auto sales had been really depressed because of supply issues,

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<v Speaker 3>and so that meant auto sales were going to pick

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<v Speaker 3>up in twenty twenty three, which they did, and there

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<v Speaker 3>were other parts of the economy that had similar things

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<v Speaker 3>were the supply issues were going to start easing up

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<v Speaker 3>from the pandemic. So if you factored in pandemic economics,

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<v Speaker 3>I thought was saying, hey, we need to watch, but

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<v Speaker 3>I don't think we're going to have a recession, and

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<v Speaker 3>we didn't.

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<v Speaker 2>So given all of the above, if investors want to

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<v Speaker 2>focus on one or two data series to give them

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<v Speaker 2>some idea of where we are and where we're going,

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<v Speaker 2>what two data series should they be paying attention to

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<v Speaker 2>over the next few years.

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<v Speaker 3>Unemployment rate and the payroll report is critical. What's important

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<v Speaker 3>over time changes. Yes, there's times when the weekly unemployment

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<v Speaker 3>claims is very important. That's important when you really do

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<v Speaker 3>think that there's a possibility of a recession, But that

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<v Speaker 3>only matters in that particular situation. Probably the most important

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<v Speaker 3>thing is the inflation reports and being able to look

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<v Speaker 3>at them, look at them with taking the rents out

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<v Speaker 3>to kind of get a feel for what's happening, So

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<v Speaker 3>you know, I would definitely be following both of the

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<v Speaker 3>inflation reports CPI and the PCE report wrap up.

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<v Speaker 2>Investors should realize they don't need to follow every data release,

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<v Speaker 2>every news report, every economic announcement that comes out, but

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<v Speaker 2>you should be aware of where we are in the cycle,

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<v Speaker 2>when we're closer to a recession, when things are in

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<v Speaker 2>danger of slowing down. The weekly new unemployment claims are

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<v Speaker 2>worth tracking, but in the meantime, you should be watching

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<v Speaker 2>unemployment rates, you should be watching housing starts, and lastly,

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<v Speaker 2>you should be paying attention to both CPI and PCE

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<v Speaker 2>reports to give you a sense of when the FED

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<v Speaker 2>or if the FED is going to cut or stay

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<v Speaker 2>pat I'm Barry Retolts and this is Bloomberg's at the

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<v Speaker 2>Money to Tail Store to Tail Ustall