Special Episode: Live from DCG’s 41st Annual Conference with Chris Low

Chris Low, Chief Economist at FHN Financial, rejoins the guys for a live appearance from DCG’s 41st Annual Balance Sheet & Model Risk Management Conference in Boston. In this comprehensive conversation, Chris expounds on the impact of tariffs and the nation’s debt on long-term interest rates, the Sahm Rule and unemployment expectations, housing market trends along with bank lending and credit implications, and answers the question of whether we have seen Jerome Powell’s last rate cut.

For more insights and ideas, visit DCG at DarlingConsulting.com or follow us on LinkedIn.

Transcript

On the Balance Sheet® S4 E6 Special Episode – “From DCG’s 41st Annual Conference with Chris Lowe”

 Transcript

 [Vinny, 00:05]

Welcome to On the Balance Sheet special episode today. We are once again joined by Chris Lowe, Chief Economist of FHN Financial. And Chris, again, will be delivering our keynote address tomorrow morning here in Boston at our 41st Annual Balance Sheet Conference. Chris, we are so thrilled to be joined by you today. I have to start it out by asking you a question: Jamie Dimon, over the weekend, talked about how he believes there could be a, I think he said, crack in the bond market. And that, at some point, our economy is going to run into some sort of crisis. He just doesn't know if it's six months or six years away. So, what would... a bond market crack look like, and are we closer to it in six months or six years? Welcome to the podcast. (laughter)

[Chris Lowe, 00:54]

Thank you. Thank you very much, Vinny, Zach, good to be here. What is a crack in the market? Well, it looks a little bit... or starts a little bit like what we're seeing now. And of course, that's why people are nervous. That's why we're on the edge of our seats. It starts with yields at the long end starting to rise as buyers are reluctant, nervous about long-term solvency issues. And we just saw the third major credit rating agency downgrade US debt. That was an eye-opener. Bond investors are always more conscious of the budget when we're in the middle of negotiating the budget. And of course, that's happening right now too. And I think what it comes down to simply is that the deficit has been growing – well, the debt has been growing at a rate that's faster than income. So, the debt is becoming harder to service over time. And the current budget, while I think if you include the tariffs, assuming they're still standing at the end of the year, the deficit actually does start to shrink and does become more manageable, particularly over the next five years. But it doesn't become completely manageable. And I think to step back to Jamie Dimon's comments, what he's getting at is the first step really needs to be Bond investors who, after all, are financing the United States and with the assumption they're going to be paid back, it's money good. They need assurance that Congress, who controls the purse actually cares and is going to set up a situation where we can take it for granted that they will, in fact, be paid back. And we're not seeing that spirit in Washington right now. 

[Vinnie, 03:02]

Yeah. Do you think, now it's interesting that I remember having adult beverage with you after our podcast a year ago, and you said, look at the level of debt is just frankly unsustainable. Do you believe, and hopefully this doesn't take us down a political rabbit hole, but do you believe that we're taking that more seriously now? Or is this just an issue that's right in front and center and we'll go back to status quo and our debt will continue to grow? 

[Chris Lowe, 03:30]

Yeah, I think we are taking it more seriously. As far as the political rabbit hole goes, there's plenty of blame to go around on both sides. Remember Trump's tax cuts in 2017? After the pandemic, we had economic growth that the economy was roaring when the third stimulus package passed. Completely unnecessary and everyone in Washington knew it. So, you know, there's bad behavior on both sides. I think what's more important is that if you go back to the 80s and the 90s, when we did the really hard things that led to budget balance in 2000, there were statesmen on both sides. Patrick Moynihan, a Democrat, and Jack Kemp on the other side, a Republican, were two, Phil Graham, another, who were at the forefront of, look, we've got to be grownups here and we need to reduce the debt. And we did by making hard decisions that required both parties. We don't have that now. There are people on both sides who are making noise about being politically or economically responsible, but they're not willing to work together and it doesn't extend to party leadership. And that's a problem. 

[Zach, 04:50]

Chris, do you think that in relation to the bond market moving around after April was it, second and from then until now, Are the tariffs the biggest issue? Is it the actual debt? Are there other things that we should be looking at or thinking to in terms of key influencers in that term structure of interest rates or just where that curve might be heading? 

[Chris, 05:15]

Tariffs are a huge issue, but it's also – I think the way it's being reported isn't very helpful. It's not useful. No one's doing math. So, when you look at the University of Michigan, they do that monthly survey of consumer expectations. And you see year ahead inflation expectations are 7.3%. And 5 to 10 years from now, so long term, inflation expectations, 4.5%. You know, where does that fear come from? And of course, it comes from opening the paper and reading or listening to the radio or watching the news. And what you hear over and over again is these tariffs are huge. They're going to hammer consumers. But there's no numbers. And if you do the math. We consume $22 trillion worth of goods and services in a year. We import $3 trillion. And the tariffs right now are 12%. So, $3 trillion is 13% of $22 trillion, rather. So, 13% multiplied by 12%, you see how you don't get to 7.5% inflation. It just doesn't work that way. So, I think... The tariffs, in fact, if they stay near current levels, we have an eight and a quarter percent sales tax in New York. I don't see anyone swooning over that, you know. And by the way, inflation in New York City is the same as it is everywhere else in the country. It's a tax. It goes into place. If you buy a pair of Nike sneakers, though, remember, it's not the hundred and twenty bucks that you pay for the sneaker that's being taxed. It's the $10 that Nike pays to bring it in from Malaysia. So it's not that 58% ultimate tariff that Trump wants on Malaysian goods. Well, that's $5.80, really, in terms of how it affects the consumer. I think... We've almost reached the hysteria level, and it's in the market, it's in the economy, and we're going to be fine. What I'm watching that I'm maybe a little more worried about, I think the two big issues, one is immigration. which is being reported as a social story, but not as an economic story. But 85% of labor force growth the last two years was immigrant labor. So, we're going to have to find a way to replace that if we're going to continue to grow employment as fast as we are. And then the other one is the budget itself. And you know, I hate the fact that there's a tax increase on foreign corporate earnings, for example, that's being misreported. The Medicare cuts are being reported as a draconian grab from the poor when actually what we're doing is we're just resetting the Medicaid rules back to what they were before the pandemic. These really aren't the dramatic, devastating changes that... they're being reported to be. And I think what ends up happening is it just makes Congress even more reluctant to cut. And they're not cutting in places like the military budget, for example, where there's tons of wasted money that they ought to be going after

[Zach, 08:48]

Chris, speaking to the inflation comments, too, I know Jerome Powell, I believe, in March used the T word. 

[Vinnie, 08:54]

Yeah, transitory.

[Zach, 08:55]

He used it. I think he pulled it back a little bit. But do you think the Fed, whether or not the tariffs are inflationary or not, do you think they're more focused in the near term here on inflation and making sure that doesn't go too far one way or the other? Or is it the employment side? Is it a combination? They have the dual mandates. I'm just curious your thoughts on what they're looking at. 

[Chris Lowe, 09:16]

Definitely inflation. No question. And I think the best way to describe it Scott Besant, when he was talking about the China tariffs and why they had to have that pause, we were at 145 percent. They were at 125 percent. And, you know, the way he described it with tariffs at that level, it's effectively a trade embargo. Right. So, there won't be any Chinese goods coming in. And already the shipping was shutting down. There isn't a service company, a manufacturer in the United States that doesn't use at least some Chinese parts, materials or goods. So, it would have had a devastating economic impact. but it would have been a supply shock, right? And this was the big lesson from the pandemic. If you don't have enough stuff, what the fed can do is they can make things less expensive if they cut interest rates it's cheaper to buy a car cheaper to buy a house you got more money left over to buy gas and food, and if they do that when there's not enough stuff then we all start competing for the same goods and services and we start bidding the price up and that's the recipe for inflation and if we didn't learn that in a pandemic, God help us. Right. So that's what they're thinking. They're thinking this is potentially a supply shock. It could be a big one if we revert to the April 2nd tariffs or a small one if we stay close to where we are now. I tell you what, though, listen to Chris Waller. He's one of the Fed governors. He's the only one at the Fed who got inflation right last year when he said, look, I think the inflation pressure we saw fourth quarter, it's seasonal . You'll see. We'll get into the beginning of next year. The numbers will come in lower. We'll feel a lot better about the thing. And the crazy thing is we had tariffs that went into effect in February, right? The Canada, Mexico, China tariffs. We had more tariffs that went into effect in April. We've seen March and April CPI. Chris Waller was right. The numbers were fantastic. And by the way, there were a lot of tariffs in there. You could see it in furniture, electronics prices, and so on. But if the government's not handing everyone a wad of bills, we have to make choices about what we spend on. And so people flew less and the airlines cut prices and, you know, people traveled less and hotel prices stopped rising quite so fast. The food prices came down. So overall, you know, year on year, the inflation rate went down in March and April. It was amazing. 

[Vinnie, 11:58]

What do you think the impact is on those inflation numbers? One of the things I was asked hypothetically is, well, if the tariff thing didn't exist, what would CPI be right now? And looking at one of your recent forecasts, it looks to me like you have inflation, number of different metrics receding back down to kind of below 2% target by the end of ‘26. I think that's accurate. So, in my mind, that's okay that, Chris, at some point your firm believes this will be in the rearview mirror and inflation reverts back to the Fed's target of 2%. Is that a fair statement? Are we just seeing the numbers we're seeing now as a residual lag from all the spending from the government and COVID? Or is it just a nudge higher because of tariffs?

[Chris Lowe, 12:44]

Yeah, it's that. So, we had highly stimulative Fed policy coming out of the pandemic. We had highly stimulative fiscal policy, like the most stimulus since World War II. We haven't seen anything like it in 75 years. We now have restrictive Fed policy. Remember, they're not done normalizing rates. And if you look at the yield curve, you know, the overnight rate is higher than most of the bill curve. So that's evidence when the two-year note yield is below the Fed funds rate, as again, Scott Besant said, it's an indication the Fed is tight. So, we have tight monetary policy. Fiscal policy is tricky to tease it out, right? Because when the CBO does the math, they can't take into account anything the administration is doing. But from a sort of economic standpoint or a market standpoint, the way you measure whether policy is tight or loose is, are they going to have to fund more debt? And if the budget passes the way it stands today... and we get the tariffs at the level where they are today, the deficit is actually going to shrink. And it'll shrink quite a bit because they eliminated something like $1.3 trillion of green energy spending over 10 years. They tightened up pretty significantly on some of the non-defense discretionary budget. And then most of the tax cuts that we've been reading about, the $4.1 trillion or $4.3 trillion in tax cuts, well, that's just actually keeping things where they were already. That's part of why we had that $2 trillion deficit last year. So, you know, I think it actually is somewhat restrictive, which means that the economy should slow, which it is doing already. And it means that people are going to be a little more cautious about spending. And we've seen the last couple of income and spending reports, the savings rate is way up this year. So, people are, in fact, becoming more cautious. And that, I think, will keep inflation in check. So, I wouldn't be surprised If there's a short-term pop in prices, we see a 3% year-on-year number. But right now, inflation's 2.1. It's the lowest in two and a half years. So, we've made some, sorry, three and a half years. We've made real progress toward that 2% target. We pop for a few months and then come back down. And to go back to Chris Waller, that Governor who predicted it last year, he thinks by the end of this year, we’ll have enough confidence for the Fed to be comfortable cutting rates again. 

[Zach, 15:36]

And Chris, I guess within that reading through it, is that why the Fed's trying to, like my interpretation of the last meeting is that they're trying to sit back and wait. So that if there is that pop, they're not on the hook to raise rates. They're saying we're going to wait and see a little more. And they're a lot more worried about the downside. Is that fair? Or is it? 

[Chris Lowe, 15:55]

That's absolutely fair. And I think, too, remember, there's 19 members of the FOMC. It's a very collaborative group. And we've heard from almost all of them. They're not shy. Right. And there are some who are more concerned about the supply shock than others. And, you know, they are absolutely right. If we have a real supply shock where, you know, you go into stores and the shelves are empty for a while, throwing money at people is going to make it worse. That will lead to inflation. And until they're certain that hasn't happened, there's enough of them at the Fed who are just absolutely not going to be willing to cut rates. 

[Vinnie, 16:37]

Right. So, we're basically still on a holding pattern. We might get through a whole calendar year without the Fed doing anything, even though the markets are sort of maybe got one or two priced in. Is that probably a fair statement? And then Jerome Powell, his term expires next year, correct? 

[Chris Lowe, 16:54]

Yeah. He's done at the end of January, and he could potentially stay on the board. So the governors at the Fed serve 14-year terms. The chair and the vice chairs serve four-year terms. So when the term as chair ends, if you still have time left as governor, you can stay on the board, which he might do. Although I think it's been close to 100 years since someone has done that. But there is still another seat that opens up because Arianna Kugler's seat is due up. That ends in January. Normally, a governor would just be reappointed. But I'm sure President Trump is going to want to put someone else on the board because then he can put that person in the chair. But I also think it's important to recognize that the Fed chair has limited power. It is, again, it's a collaborative institution. They operate, they set rates by vote. There is precedent. In the 1990s, there was a meeting when Greenspan wanted to cut rates and the board went against him. And we didn't find out until the transcript came five years later. But he changed his vote. And the reason he changed his vote is because he didn't want it to look like, first of all, that the institution didn't have his backing. But he also didn't want it to look like he didn't have the backing of the institution. But, you know, it does happen that sometimes they don't agree. Dissents have become rare, particularly, I think, under Powell, because he allows them all free reign to speak their mind. But if someone came in and tried to strong arm him, no way. It wouldn't work. 

[Vinnie, 18:49]

But said differently, we may have seen the last rate decrease under Chairman Powell. 

[Chris Lowe, 18:54]

It's entirely possible. And one of the things that I think is along that line is noteworthy is that as welcome to the market as the tariff pause was, and then the China tariff pause a month later. Now, we don't actually know what the tariffs look like until July for most of the world, August for China. And then in addition to that, we had the International Trade Court rule the whole thing unconstitutional, and then that was put on hold by the appeals court. So even... When the pauses end, and we get agreements in place and we find out what the rates are, the whole thing is still up in the air. And the reason I bring that up is a big part of the market volatility we've seen has come from uncertainty. And every time there's a setback and then a reset, the uncertainty gets pushed out. And where it looked like we might have this whole tariff thing settled in three months, now it's starting to feel like we're well into the fourth quarter before the Fed can do anything, if that. 

[Vinnie, 2008]

 Right, right. 

[Zach, 20:10]

Chris, can you maybe expand for the listeners? What's your forecast right now on the Fed funds over the next year or two? And then the follow-up question is, how would that be wrong? In terms of if you have a couple of cuts, what's the condition that might lead them to do 10 cuts or vice versa? 

[Chris Lowe, 20:28]

Yeah. If you look at the Fed's own forecast at the beginning of this year, they were going to cut twice this year and then ultimately cut... another four or five times over the next two years. And I think two cuts is reasonable. Three is possible, but that's it total, with interest rates at their current level. So, I think the essential thing you have to wonder is why were interest rates so low with the 10-year note below 2% and overnight rate close to zero for years and years between the financial crisis and the pandemic? And why, after the pandemic, are interest rates suddenly so high? And I think the biggest difference is confidence in the budget process and Congress's commitment to bring that deficit down. That's why so much hangs on the budget, because ultimately, the Fed has to set the overnight rate at a level that's consistent with the rest of the yield curve. The point, and I think Greenspan articulated this really well when he was talking about price fixing is a bad idea, he's argued that for everything, except for some reason, overnight interest rates. And of course, the Fed makes its living fixing prices in the money market. So why is that good? And he said, well, because we don't go too far from neutral. But if you go too far from neutral, it distorts the market and you start creates more trouble than it's worth. And that's really the key. You know, the Fed certainly could ease 75 basis points. We have a normal shape curve. That'd be fine. But if they go 150, short-term rates are just way too low, given the lack of confidence in the long-term budget picture. 

[Vinnie, 22:29]

That's really informative. Chris, I'm curious, maybe a pivot here, talking a little bit about credit and your expectations for credit in our economy. Obviously, I'm sure you're aware of that Klarna earnings report that came out, the buy now, pay later company that had some huge losses in Q1 and then had on the heels of losses in Q4. And I think the stat was something like, we've got 100 million customers and 41 million of them have had late payments. And so, you look at that and you say, oh, geez, well, who would have thunk that that could be the case, right? When you are lending people money to buy burritos off of door dash. But I'm just curious, just generically, what you're kind of seeing, thinking, hearing for credit. Zach, we travel around and it's still fairly benign. You see some cracks, but I'm just curious because you certainly have people always trying to forecast what the next crisis is. And I'm wondering if you're seeing something that might be noteworthy. 

[Chris Lowe, 23:30]

Yeah, I think one of the really critical things that isn't getting much attention, partly because we're exhausted hearing policymakers rant at us about it, but the income divide. It's still really ugly. And the pandemic made it worse. The pandemic response in the aftermath made it worse. If you think about - even there was a press conference at the Fed, it was 2023, late ‘23 or early ‘24, when someone asked Jay Powell about immigration. And isn't it a good thing having all these people coming in to the economy because it's keeping wages down? And his response, oh, yeah, absolutely. You know, if you look back at historical data, right, you've never had the unemployment rate rise almost a full percentage point without a recession until the last three years. And it happened. It happened in ‘23 and ‘24. Why? Well, because 10 to 20 million people joined the labor force and started competing for jobs, and wage growth that was running at six and a half percent slowed all the way down to, you know, three percent. Well, four, but you get the idea. Okay, now flip it around. I'm sure you know people. I've got relatives, you know, brothers and sisters, kids who didn't graduate from college. They're working minimum wage jobs. And, you know, unless it's mandated by the government, they haven't seen a raise in years. And the reason is nobody cares if they walk away from that job tomorrow because there's 10 people waiting to fill it. So, we had this problem. We had a labor shortage after the pandemic. We fixed it by opening the floodgates of immigration. But what that did was, where for 50 years before the pandemic, if you were a low-income worker, you had faster wage growth than anyone else in the economy. So, we were actually closing the gap between rich and poor. And since the pandemic... That initial labor shortage, they did pretty well. But ‘23, ‘24, and now ‘25, they've been left behind. So, when you look at credit and you look at the New York Fed does their consumer credit report that they update monthly, and you look at who's late on car payments, who's late on house payments, who's delinquent on credit cards, it's the very low FICO borrowers. It's those minimum wage workers. And, you know, yeah, lending someone money to buy a burrito on DoorDash, not the best business plan. But at the same time, they can't buy groceries without a credit card. That's how tight things are. 

[Zach, 26:37]

Chris, I think one more thing with the credit side and just the unemployment rate. So, you mentioned that the rate did go up the last two years. And I think, what's it, the SOM rules out there, it goes up five-tenths of a, or half a point.

[Chris Lowe, 26:50]

Right. 

[Zach, 26: 52]

Triggers a recession historically, but, in her defense Claudia Sam's defense, she came out saying it may not be a good indicator this time because of what you said - people coming into the labor force…

[Chris Lowe, 27:01]

Yep.  Rapid labor force growth .

[Zach, 27:04]

So, what do you think happens with the unemployment rate going forward here, I guess, in your forecast looking at inflation, GDP, are we going down? Are we going to see it go up because of a recession, like, how do you see that kind of playing out here in the next couple years?

[Chris Lowe, 27:21]

I think it's fascinating if you look at the stats year to date, what you see is that labor force growth of immigrant labor has flatlined, which makes perfect sense because, you know, you've got fewer than 5,000 people crossing the Mexican border on a monthly basis the last couple of months. And that's down from peak levels of 200,000 a month, you know, just huge numbers. Same thing at the Canadian border. It's not quite as tight, but down from 20,000 a month to fewer than five. So flatline in terms of immigrant participation and native born now starting to rise. So, what I think is amazing about that is companies must be paying up to get those people in the door. I think you are already starting to see some pressure and, I imagine, that will ultimately translate to one of two things, but probably a little bit of both is the unemployment rate actually coming down a little because you are going to pull people in who stopped looking because they couldn't find anything great. But there'll also be slower job growth. And what we will also see is the cost of things that we just take for granted as affordable is going to start to rise. And there won't be, for that reason, as much of it available. I do think that ultimately, border policy is going to drive at least a little bit of wage inflation, and probably some price inflation, at the bottom quintile. It'll be more expensive to go to McDonald's. It already is, by the way, a lot more expensive than it was. But it'll be a real treat for people to eat out. But at the same time, the living standards of the people who do have those jobs is going to get better. So, from a social standpoint, I think it's probably a worthwhile trade-off.

[Vinnie, 29:25]

It's interesting, you talk about it being a treat to go out to eat. It seems like there's two consumers, right? You've got folks, most of these restaurants here in this city are packed. Yeah. Same thing in New York. And yet, you see consumer spending numbers and how much of it's being done by the highest earners. I mean, consumer spending numbers, you know better than I, pretty resilient, pretty good. But most of that spending is going on at the higher income level, which presumably it always has been, but that lower portion of our economy. It's like, there's two different economies out there and you're right. That gap is getting wider. It's definitely getting wider. How does, how does all this, you know, one of the things I wanted to ask you about was your outlook on the housing market. And there's just such disparate trends going on in different parts of the country. I have a friend who recently listed a home and it's in New England area and, and he had an open house on Saturday. We've all heard these stories. He had 31 offers on Sunday. Yeah. Whereas you go to places like Southwest Florida and the entire city is for sale. And the prices have been reduced. And housing inventories in some parts of those markets are at 12 plus months. I mean, they're back to levels that you saw in 2010. So, what do you see in terms of valuations in the markets? Obviously, it's geographically dependent. I'm just wondering if you had any general thoughts. 

[Chris Lowe, 30:48]

So, the whole Gulf Coast is the epicenter of this price correction in the housing market. It extends up mostly the west coast of Florida. The east coast is a little soft, but nothing like the west coast. And then around the panhandle into Louisiana, Mississippi, and down the Texas coast, the prices are starting to correct. And then you go west and prices in Southern California are pretty awful as well. They've come down a ton. And so, I think it's a combination of things. One of them that I think is maybe the most important is homeowners’ insurance. It's not only become expensive, but in some of these markets, it's actually impossible to get. I have a friend who has a house mid-coast on the west coast of Florida on the Gulf side that took a direct hurricane hit last summer, two summers ago, close miss. They're self-insured now. And that's part of the problem. There hasn't been an east coast Florida hurricane in a while. So those prices, the insurance prices haven't gone up as much. But then the other part of it is these are all seen as vacation destinations. And a huge part of the condo market went Airbnb. So, you've got people like my 32-year-old son, two of his buddies went in on a condo in Florida they don't use. They've got a local manager down there who cleans it, and they Airbnb it. And they were making good money for a couple of years. Well, now the insurance prices have gone up. The HOA cost has gone way up. And that's underwater. And they're looking to get out. By the way, they got a mortgage on that thing. And the bank's not happy that it's a business and not a residence, because it's supposed to be a residence. And the banks are cracking down. So, you have this weird Airbnb crash on the Florida coast at the same time. So, all these units that came out of the housing market are coming back in. So where am I going with this? I don't see a national housing collapse. But what I do see is there are markets that are so overbuilt that are correcting. Austin, Texas is another one. There's still people moving out of California to Austin, but not enough compared to the amount of housing that was built. So that market's come down. And I think we are getting these regional corrections that are coupled with builders who, when they did the math on these projects, were anticipating 200 basis points of rate cuts by now. And as we just discussed 10 minutes ago, that ain't happening. And so, all that math is off. They got to refinance, which is tricky as well. It's just the whole market, I think, is facing a lot of hurdles. And when you look at the Mortgage Applications Index, for example, from Mortgage Bankers Report on a weekly basis, it's yo-yoed this year. Every time the market gets going, wham, a week later, mortgage rates are back at seven and people are walking away. 

[Vinnie, 34:17]

Zach, I'm ready for my final question. Is there anything you want to add? Well, you said I couldn't ask him about the Triffin dilemma, so I think we'll skip that one. I was just going to ask one thing, Chris, and it was more around the lines of, and hopefully it's not stealing your question. If we do get a couple cuts... be kind of joking with our bank and clients. It's almost like that's what everybody wants is a couple of cuts and you get this a little steeper curve. What do you see Chris out there as the challenges? Like what are the key things that the bank bankers out there should be thinking about? Cause I do think from a margin perspective, a couple of cuts would be pretty darn good for a lot of community banks. But what are the other things as a credit? Is it, you name it, that you're looking at as potential issues to that forecast coming true? 

[Chris Lowe, 35:04]

I think, look, a couple of cuts. Obviously, for the creditors, rather, the lenders out there, a steep curve is a great thing, right? We love that. But if we're really going to see the economy benefit, if we're going to see people spending more, we need those longer rates to come down. And that's very much a market determined thing. I do think they will. But we've got to get through this budget process. We have to see some honest math. You know, God help us. But eventually we're going to get it. 

[Zach, 35:37]

Is it an oxymoron? 

[Chris Lowe, 35:38]

No, I think from, you know, from the economics community, once we have a budget in hand and we can run the numbers, we will. And people will know. And again, you know, it's really simple, right? We're running a $2 trillion deficit. If next year is smaller and the year after that looks like it's going to be smaller still, we don't really care how we got there. We're just thrilled to know that we're going from six and a half percent of GDP down to five. If we can cross five. then you know what? It's sustainable. And that means we can now take it for granted we're going to get paid back. And I think we'll see those long-term rates come down. That's when you get the lower mortgage rates and the lower auto loan rates and so on. Until then, the Fed is fighting the market. And the market's in no mood to play right now. Really unforgiving.

[Vinnie, 36:33]

I guess my last question would just kind of maybe put you on the spot a little bit. Real hard hitting here. 12 months from now, hopefully you join us again. Where do you see this economy in 12 months, you know, as we sit here next summer? 

[Chris Lowe, 36:44]

Well, look, I'm thankful for that question. I think when you're looking at this guy, this president of ours, Donald Trump is... He's coming at the economy with four or five big structural changes that are having a profound impact. And it's all we can do to wrap our mind around the tariffs. I think the immigration reform is equally important. Hopefully by then, I know Congress is drafting something, and hopefully they can bring enough Democrats on board to pass it. We get a legalized immigration program where we can actually have millions of people come in because the economy needs millions of people. But we'll have that done. We'll have the budget done. The regulatory reform will be done. When you're thinking medium to longer term, when you're thinking about the next year, the next few years, it's important to recognize that Trump spent four years in the wilderness thinking about what he did in his first term and how he was going to do things differently. in his second. And one of the most important is he flipped the order of operations. We got the stimulative stuff first last time, tax cuts, regulatory reform. Economy starts to boom. The Fed raised rates. So, they cut it off at the knees, and then he puts the tariffs on China and we damn nearly had a recession. And so, he's thinking, OK, you know what? I'm not going to do it that way. This time I'm coming in with the tariffs first. And we're cutting the budget, which they did. I understand the arguing about it's only $300 billion. It's not the $1.5 trillion or $2 trillion he wanted in the beginning. But $300 billion in cuts, from an economic standpoint, that's big. If we had a $300 billion tax increase, it would be all over the front page. So, we have restrictive fiscal policy. We have this restrictive tax policy that is the tariff. And then we'll grow into that, get used to it, and the reg reform comes in. And it's all of a sudden easier to get a permit and start a building or a project. It's easier to do business. It's easier to bank and lend. And all of that stuff, economists estimate, is worth several hundred billion dollars a year. And then you've got the tax, at least the extension of the tax cuts. So, I think the economy should be stronger next year. I expect to see much better investment, a more comfortable consumer, the whole thing. And I think we're over the hump of the inflation threat. If we then have a Congress that's a little better behaved and continues to tighten the screws on the budget, I think it could add up to significantly lower interest rates. I'm hopeful that's the way it goes. I do think, though, the next six months is - it's volatile. It's up in the air and there's occasional setbacks that, you know, I think we will trace the top and the bottom of the yield range again before this thing is settled. 

[Vinnie, 40:08]

Well, no, I'm certainly looking forward to that. It sounds like you're very optimistic moving forward. And right now we've got so much uncertainty. It's like we keep using that word. It's probably the most used word. Either that or unprecedented. You keep hearing everything's unprecedented. But Chris, thank you so much for joining us. This has been a thrill. We very much look forward to your comments tomorrow. Any parting words, Zach? 

[Zach, 40:31]

No, Chris, thanks again. And thanks to all the listeners for listening. We really appreciate it. 

[Chris Lowe, 40:35]

Well, thank you. I appreciate it, too. You know, now I've got all my ducks in a row. I'm ready to go tomorrow. 

[Zach, 40:40]

This is a warm-up, right? This is an annual warm-up. 

[Chris Lowe, 40:42]

Absolutely. 

[Vinnie, 40:44]

Thanks again, Chris. Thank you. 

[Chris Lowe, 40:45]

Sure thing. 

On the Balance Sheet is a podcast produced by Darling Consulting Group, DCG. All views and opinions expressed by the hosts and guests are solely their own and may not represent those of DCG. All third parties are independent entities and are not affiliated with DCG. This podcast is intended for informational and educational purposes only and is not considered as advice. All views and opinions expressed are based on the information available at the time and may have changed based on current market and other conditions. For more information about DCG, please visit www.darlingconsulting.com or email us at info@darlingconsulting.com. 

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