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

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<v Speaker 1>Somebody pasta stoff TAA stars.

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<v Speaker 2>When it comes to the economy, it seems like everybody

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

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<v Speaker 2>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 3>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 know,

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

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<v Speaker 3>and so you know when the unemployment rates at three

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<v Speaker 3>to nine that the economy is in pretty good shape.

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<v Speaker 3>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. But

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<v Speaker 3>I think those there is some predicted value in housing starts.

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<v Speaker 2>I like the concept of GDP unemployment and 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>flip side 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. 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>the 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, 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 to bat, but I understand

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<v Speaker 3>what you're saying. 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. But the

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<v Speaker 3>measure of rents that go into CPI and PCEE, they

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<v Speaker 3>include renewals, which they should. You know, the people that

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<v Speaker 3>are getting in renewals are still catching up to the

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<v Speaker 3>fact that the rent surged a year or two years ago.

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<v Speaker 3>But this is a key point is monetary policy cannot

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

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<v Speaker 3>only impact what's happening today. And today rents are basically

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<v Speaker 3>flat asking rents, so you know, there's a different people

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<v Speaker 3>Sometimes renders say to me, well, wait, my rent still

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<v Speaker 3>going up. Yeah, but 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,

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<v Speaker 3>the Governments reporting, one of the sentences in there has

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<v Speaker 3>been a fifty percent is related to rents or something

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<v Speaker 3>close to that of the of the CPI increase. So

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<v Speaker 3>what I've been doing is I've and taking rents out

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<v Speaker 3>of the inflation measures to see where we're at, and

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<v Speaker 3>we're much closer, and for several months we were at

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<v Speaker 3>the Fed's target. So this is this is a little

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<v Speaker 3>balancing act for the Fed is how much should they

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

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<v Speaker 3>from what they're what they're doing now. Very recently, in

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<v Speaker 3>the last two or three months, we've seen services pick

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<v Speaker 3>up a little again, and so that is concerning. But

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<v Speaker 3>still if you look at the like the Cleveland Fed

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<v Speaker 3>immediate CPI, I think it was close to four percent

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<v Speaker 3>last month or annualized, but if you take out rents,

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<v Speaker 3>it was under two percent, so to the to the

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<v Speaker 3>Fed's target. So this is this is really one of

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<v Speaker 3>the key areas on inflation that I'm looking at.

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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>there is supply and demand. We still have pretty good demographics.

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<v Speaker 3>We have a large cohort in the home buying age

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<v Speaker 3>group in their thirties. On the flip side, the inventory,

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<v Speaker 3>of course has been very low, but it's starting to increase.

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<v Speaker 3>It's still pretty thirty percent below kind of a normal level.

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<v Speaker 3>But since sales are down so much, I've been looking

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<v Speaker 3>more at months of supply and that is probably going

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<v Speaker 3>to get back to twenty nineteen levels later this year,

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<v Speaker 3>and that says that house prices will basically be flat

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<v Speaker 3>to only up slightly by the end of the year.

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<v Speaker 3>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 recession was not imminent when everybody

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

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<v Speaker 3>Yeah? Well, you know, there were several economic analysts who

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<v Speaker 3>didn't think there would be a recession. Claudia sam and

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<v Speaker 3>who you've interviewed recently, Yan Hotsuits, Goldman Sachs chief economists

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<v Speaker 3>who everybody should read if they get a chance. In

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<v Speaker 3>twenty twenty two, I didn't see there was no reason

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<v Speaker 3>to expect a recession at all. In twenty twenty three

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<v Speaker 3>that you started seeing some signs of a possibility. The

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<v Speaker 3>Federal Reserve staff was even predicting a recession in twenty

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<v Speaker 3>twenty three. So but I mean, the key things that

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<v Speaker 3>people were looking at was the inverted YO curve, which

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<v Speaker 3>is still inverted, and the fact that housing starts dropped

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<v Speaker 3>off pretty sharply. But what they weren't looking at was

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<v Speaker 3>other parts of pandemic economics, if you will. Auto sales

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<v Speaker 3>had been really depressed because of supply issues, and so

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<v Speaker 3>that meant auto sales were going to pick up in

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<v Speaker 3>twenty twenty three, which they did, and there were other

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

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

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<v Speaker 3>So if you factored in pandemic economics, I was saying, hey,

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<v Speaker 3>we need to watch, but I don't think we're going

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<v Speaker 3>to have a recession, And 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 the

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<v Speaker 3>unemployment claims is very important. That's not now. That's important

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<v Speaker 3>when you really do think that there's a possibility of

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<v Speaker 3>a recession, if that really starts climbing sharply, that's probably

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<v Speaker 3>your key indicator. But that only matters in that particular situation.

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<v Speaker 3>Right now, probably the most important thing is the inflation

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<v Speaker 3>reports and being able to look at him look at

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<v Speaker 3>them with taking the rents out to kind of get

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<v Speaker 3>a feel for what's happening because of this unusual thing

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<v Speaker 3>that just happened with rents. So you know, I would

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<v Speaker 3>definitely be following both of the inflation reports CPI and

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<v Speaker 3>the PCEE report.

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<v Speaker 2>So to wrap up, investors should realize they don't need

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<v Speaker 2>to follow every data release, every news report, every economic

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<v Speaker 2>announcement that comes out, but you should be aware of

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<v Speaker 2>where we are in the cycle. When we're closer to

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<v Speaker 2>a recession when things are in danger of slowing down.

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<v Speaker 2>The weekly new unemployment claims are worth tracking, but in

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<v Speaker 2>the meantime you should be watching unemployment rates, you should

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

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<v Speaker 2>attention to both CPI and PCE reports to give you

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<v Speaker 2>a sense of when the FED or if the FED

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<v Speaker 2>is going to cut or stay Pat. I'm Barry Retolts

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<v Speaker 2>and this is Bloomberg's at the Money Star