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The Penta Podcast Channel is home to all of Penta's podcasts, including the Macrocast and What's At Stake: A Penta Podcast. The Macrocast, produced by Penta and Markets Policy Partners, features weekly insight and analysis on the latest macroeconomic trends. What's at Stake: a Penta Podcast features in-house experts and often special guests for analysis on the biggest issues shaping business and public policy.
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Macrocast: The power of the Congressional spouses
What happens when the government hits pause and the financial markets hold their breath? On the latest episode of the Macrocast, Ed Mills, Washington Policy Analyst at Raymond James, joins Ylan Mui and Brendan Walsh to discuss the potential effects of a government shutdown on markets. The group explores the possible twist of a temporary funding extension and the seismic shift this could cause in consumer sentiment.
Later, our experts turn to the 2024 elections and the heavyweights that could influence voters' decisions—including economic and social issues, healthcare woes, and legal battles. The episode also examines the U.S.-China relationship, particularly in light of Secretary Raimondo's recent trip to China. You won't want to miss it!
Hello and thanks for joining today's episode of the Macrocast. I'm your host, elon Mui, a managing director at Penta. Brendan Walsh of Markets Policy Partners is my co-host. John Fagan is out today. Well, brendan, I feel like Labor Day is a distant memory at this point. Summer's officially over, even though it's still like 100 degrees outside. We're all back in DC in person. Congress is coming back into session as well, so I'm super excited today that we have our very special guest, ed Mills, a managing director and Washington Policy Analyst at Raymond James. He's here to talk to us about the shutdown 2024 and, of course, the Fed. He's also a longtime friend of the pod, so, ed, welcome.
Speaker 2:Long time listener, first time colleague.
Speaker 3:Actually it's true.
Speaker 1:We're going to remedy that, though we're remedy that. So, ed, all right, just give it to us straight. Do you think there is going to be a shutdown after September 30th, and will markets even care if it happens?
Speaker 2:I think the easier answer is will the markets care? And it's a no. We were looking back since 1995, we're all market shutdowns. Market generally goes up during a shutdown, really, yeah. And because you know, debt in the deficit matter. But if you kind of look at the two, the debt ceiling debates, if we were to default on our government debt, that was a 10. This is a 2. And could we shut down? Sure, are there real issues here? Absolutely.
Speaker 2:But I also see some path forward, because House Republicans say they want a series of changes or kind of real cuts to the government spending, but they've only actually passed one of the appropriation bills. So they're not in a good negotiating position in terms of what does the final deal look like. So I think the most likely outcome is a short-term extension a month, six weeks, do something related to the disaster spending, because we've had wildfire, right, you know we've had, you know kind of a couple disasters. We've had a couple of hurricanes, wildfires in Hawaii. The big question is what happens with Ukraine funding. I don't think the House includes it, the Senate probably adds it back on, and that's where we might get the shutdown is, if we have a true standoff. But I think that this is a really live-to-fight-another day and if we have a shutdown, it's probably closer to Thanksgiving than the end of this month.
Speaker 1:Do you think this even drags out to the end of the year? Could it be a, you know, holiday shutdown, perhaps?
Speaker 2:Absolutely. But what Republicans want is they want to make sure that whatever extension here is short enough so that they don't get jammed up. When I worked down the hill I always said the most powerful group were the congressional spouses. That when it was right before.
Speaker 1:No it's true.
Speaker 2:It's true. It's like I sat there, as you know, getting a phone call from the husband or wife of the member I worked for, and it was like when are they going to be done? We have plans. We're supposed to go on this vacation, you know, you know, kind of Chuck Schumer has turned to his caucus before. He's like do you want to spend Christmas with me?
Speaker 1:Or do you want to spend Christmas with your?
Speaker 2:you know kids and your grandkids opening up presents, so the forcing mechanism of holidays is real. And so how's? Republicans say let's do a six-week extension so we're not up against the December holidays. Let's have that and do it six weeks because that's still a couple weeks before Thanksgiving. So if you need to push it down, you know, or have a shutdown that is five to 10 days, you're still not up against Thanksgiving and ruining folks holidays because if it gets to Thanksgiving it gets solved.
Speaker 1:So you think the markets are just kind of immune to this at this point because they've seen this play out so many times before and ultimately it does get resolved and ultimately the workers who are furloughed end up getting backpaid?
Speaker 2:Yeah, Every single time they've gotten back pay. There's a couple of areas. If it goes on for a really long time, then we're dealing with some approval processes through different healthcare agencies. The SEC is not able to register new IPOs, so there's a slow down there. Where we have seen some impact before is on consumer sentiment, and so we are in a macro environment that's a little bit tepid and we're very concerned about the consumer. So, if this is different, is this one of those things that pushes us a little bit closer to recession because the consumer sees DC dysfunctional again, pulls back because they're not quite sure? I think on the margin it's important, but probably not something that is going to be a game changer in any way, shape or form for this market.
Speaker 3:Yeah, and we talked about that last week because the economy is actually quite good, but the consumer is still so pessimistic. So this is just another reason for the consumer to be pessimistic. Yeah, because things are expensive.
Speaker 1:Yeah.
Speaker 3:Yeah, no, the consumer is still spending. They complain about it, but they still go out and spend. Shocking.
Speaker 1:I can't believe I'm pulling out my credit card again, but I'm just going to swipe or I'm just going to tap.
Speaker 3:Shutdowns in DC are kind of fun because everybody knows you're going to get paid eventually. So Wednesday everyone's out partying at noon.
Speaker 2:Yeah, shutdown specials at the bar. It's like some of the best happy hour deals in the city.
Speaker 1:Putting your political hat on. I know we spent so much time here talking about the macroeconomics and the data, but one thing that we've been kicking around to is this idea that a shutdown could be a political necessity, in the sense that it provides sort of a venting mechanism for House conservatives. They can say that they did something right and they can sort of get it out of their system so that we can move forward. Do you think that that actually could help the process?
Speaker 2:It's potential. I think that there are some House Freedom Caucus members who look at this and say we cannot have debt limit 2.0. And that if McCarthy cuts a deal that requires Democrats to come on board, that there could be a motion to vacate the chair. And actually back in January, when there was round after round and round of votes, that was getting a lot of the fight out and it kind of has actually helped McCarthy throughout this year.
Speaker 2:I think that the balance here is you absolutely have that fight and the desire for that fight, but does that win you a single seat in the House of Representatives? That's a really narrow majority. Mccarthy's job has been to show the country that if you elect Republicans to lead the House of Representatives, the government can function, because on the margin, the seats you have to win are seats that are currently held by Democrats to expand your margin. So if you shut down the government and I think that's part of the reason why he did not want to default and wanted to have a lot less drama this year is because his goal is trying to win the majority again in 2024. And it's really really close. Democrats only have to pick up six seats and we've had some redistricting cases that probably maybe get them even halfway there already.
Speaker 1:How do you think the economy is playing into the 2024 election so far? I mean, it seems like you know, brenda you just mentioned this disconnect between sort of sentiment and you know the macroeconomic data. We see it in Biden's poll numbers as well.
Speaker 3:Yeah, it came out yesterday before. Biden's numbers are pretty terrible. But that's a little more unique to him, being old, you know, than necessarily totally the state of the economy.
Speaker 2:So we look back at Raymond James and we saw that in the last 80 years or— during Biden's entire lifetime every president has been reelected unless there was a recession. And so that is George HW Bush, that's Trump, carter, gerald Ford. If there is a recession next year, that is one of the biggest risks to his reelection. If the economy holds in and we get the soft landing and we avoid recession, the bet is he wins reelection. So it is the economy.
Speaker 1:But it also seems a little bit lopsided, right, and that if the economy is booming he may not get a big bounce and pull numbers. But to your point, if the economy bottoms out for a recession, then it seems like it's over for him, right?
Speaker 2:Yeah, you only get the downside.
Speaker 1:You only get the downside.
Speaker 3:But the Republicans are safe because who they're going to run is you know, doesn't have any controversies around them.
Speaker 2:You know a year out. One thing that we always look at for kind of polling data is approval rating, because if you are underwater on your approval rating it's hard to win reelection. But if Donald Trump is the nominee for the Republican Party, his disapproval, or upside down approval versus disapproval, is about the same as Joe Biden, so it's just a question.
Speaker 3:Yeah, oh that's interesting.
Speaker 2:They're about equal. They're about equal. Sometimes Biden is a little bit more net positive, or a little bit.
Speaker 1:you know, or you know, they trade off and we have never had a you know, in the modern era, a former president running for reelection.
Speaker 2:So it's normally the incumbent gets the you know all of that baggage and the challenger gets any of the upside. But there is, you know, kind of both are very well known and very well kind of established in terms of if you like them or dislike them.
Speaker 1:Yeah, Well, and then I think it does it also speak to this idea that I mean the disapproval. How do I say this? The dramatic disapproval for Trump is driven by the level of animosity among Democrats, and the dramatic disapproval for Biden is driven by the dramatic animosity among Republicans, so it's really they almost like cancel each other out. It's just the strength of the base.
Speaker 2:Yeah, and it's so it's. It comes down to the middle and the middle will vote on the economy.
Speaker 1:And and do you think the economy is going to be the issue? I mean, we talked about the recession and how that could factor in, but it seems like right now, there's also so many other issues that could be top of mind for voters, whether it's social issues, healthcare issues, whether it's legal issues. Right, I mean, where do you think the economy is going to rank? Yeah, abortion.
Speaker 2:Yeah, it's, it's going to be one of them, but all of those issues are going to have huge importance. One of the things I view about politics is that things are impossible right until they're inevitable.
Speaker 2:And it changes on a dime, and so one of the things that I always warn people when we're talking about an election that is more than a year away, like it could you know? You know it could very easily be a replay of 2020. It can be completely different as well. So you know, abortion issues, social issues, economic issues, legal issues all of that will factor into it. We just don't know exactly what the waiting will be until we get much closer to this election.
Speaker 1:Yeah, I feel like I did so many stories around the midterms, you know, headed into, headed into November, about poll after poll showing inflation. The economy was top of mind for voters. Then we have, you know, not a blue wave, but certainly at least the blue ripple right, and then the storyline was all about well, this was about democracy, this was about governance and we thought we understood the polls, we thought we understood the voters, and you know they had something else in mind.
Speaker 2:Yeah, they frequently do. Yeah, they do I think the one thing is that I've viewed a lot of times in elections is that the group who actually is the majority is the leave me alone crowd. So if you get the candidate that you think is going to be the least impactful on your daily life, oftentimes they win. And so, in some ways, when Donald Trump would call Joe Biden Sleepy Joe, there was a certain voter that's like yes, please give me something.
Speaker 1:Sleepy.
Speaker 2:The question here is is that for that voter, did the agenda of the Biden administration so far, which has been actually far more kind of aggressive in their ability to accomplish things than I think people would have given them an?
Speaker 3:opportunity, for it really is one of the most unprecedented first two years of administration in terms of actually passing yeah, it's usually at 1, maybe at 2. But they've had like four really big bills yeah.
Speaker 2:And so it's like does that voter say, as long as Congress does not continue to do that, I'm fine with keeping the incumbent, or do I want to stop that? And then it comes to the alternative and the alternative if it is former President Donald Trump, his four years in office were not kind of a leave me alone type of period. It was DC was front and center. So that's where I think it's very difficult to know exactly what voters are going to want to have.
Speaker 3:The one that cracks me up is the Inflation Reduction Act, which really is just the infrastructure bill. It marked the top, no, but it's actually very popular in red states because they're the only ones that have approved any of the project. All the blue states it's still caught up in state level bureaucracy.
Speaker 2:So on the ground is actually a very popular project because actually things are getting built, yeah, and I think that what's amazing about that is that we look at the estimates in the Inflation Reduction Act, so it's about $400 billion of tax credits on green energy. There's no limit to exactly how much gets spent.
Speaker 3:No, the CBO has already had to revise it up.
Speaker 2:It's taken up much quicker than they ever expected Exactly, and the Biden administration when they have an opportunity, they expand the definition through the regulation we had permitting reform, or phase one of permitting reform in the debt limit debate. And if we get more permitting reform at the end of this year, that $400 billion, we could look back in a couple years and see it easily go to a trillion. Does it go more than that? And then that really helps, as the conversation we started with, which was the fiscal spend of this country, is the House Freedom Caucus going to get a budget cut? Those budget cuts, compared to the spending of the Inflation Reduction Act and the Bipartisan Infrastructure Bill and the Chips in Science Act, are dwarfed and so when we talk to our economists, he is increasingly adding in upside to the economy in terms of fiscal support for the economy because of those bills, and they are going to have runways of five to 10 years.
Speaker 3:Yeah, they don't need new legislation to be passed. People just like them and the way that they were structured, it can expand yeah.
Speaker 2:I looked last week on the Infrastructure Bill and I think everyone in the market has moved on and that's done. We've only announced about half of the funding about $260 billion of the funding.
Speaker 2:A lot of that hasn't even gotten to the states. It hasn't gotten spent. So we still have another half of it to announce and probably 70 to 80% of it to actually be spent, which again is more fiscal support for this economy. And so if you have a slowdown, that's going to put a lot of construction workers, a lot of people within infrastructure, keep them employed through an otherwise normally weak period.
Speaker 1:And that was part of the point right that this was a long-term investment and they tried to emphasize that, even at a period in which the economy was maybe not in the greatest spot, but that this was a once-in-a-generation investment. This could change the trajectory of the economy. This wasn't handing out checks directly to households.
Speaker 3:And even beyond that we actually really needed.
Speaker 2:Like our infrastructure is falling apart and I think we've been talking at Raymond James about how we are in the early innings of industrial renaissance in the United States because of this. And what is different about this is that, historically, when we talk about the industrial base of the United States, it's usually through the lens of jobs, which are incredibly important, but the new lens that DC has seemed to be putting on this is through national security.
Speaker 2:That COVID and US-China trade war supply chain has taught us that if it is important to us, we need to make sure we have control over that supply chain, that it is built here, that our technology is a national security asset, and if it's not built here, then we want to make sure it is built by a friend.
Speaker 3:And so, yeah, john and I, in a separate endeavor, are very involved in that, and it's really been very enlightening how much the government, especially the Defense Department, understands that and is putting money behind that.
Speaker 2:Yeah, I mean, I talked to someone who is a former official at the Defense Department and what he said to me is like look, it's no secret that we have spent countless years protecting the oil reserves of the Middle East, because that's how we fuel our economy as we move to a more electric economy and our vehicle fleet gets electrified. We cannot change that geopolitical risk from the Middle East over to China. And when you look at the Inflation Reduction Act, some of the largest subsidies are for EV battery recycling and manufacturing here in North America, not just in the United States, north America and then you source that material. Anyone who is a friendly nation of ours. It's a game-changer.
Speaker 1:This is also the impetus for the Chips and Science Act. That was exactly how it was couched and that's why it was able to get that bipartisan support, both from folks like Chuck Schumer and from folks like Todd Young.
Speaker 3:It's not a hard to explain. We know that China eventually wants to invade Taiwan, and that's how the chips are, so we got to get them out, and I think we have really awoken to this idea that how did we ever let such an important piece to the economy the semiconductors?
Speaker 2:you don't, and it's even more.
Speaker 3:It's gone parabolic in terms of the value of a chip to the world economy.
Speaker 2:Why did we ever let it go in such a geographically and politically vulnerable area? And so it's going to take time, and on the Chips and Science Act, we've almost Zero of that money has gone out.
Speaker 3:I know, yeah, and so it's like that, still riding the regs, no, like the one we were supposed to build one in Arizona, but that's kind of good.
Speaker 2:Yeah, and so I think.
Speaker 2:I guess the criticism is and what happens all the time is when I'm talking to investors is people see the bill, they get excited, the bill passes, these companies are coming out and kind of coming up with all these projections of all this support that they're going to have and all this ability to expand production, and upside Stocks react to that and then six months later the money hasn't gone out and then everyone is like what happened? Stocks come back in, everyone declares it dead and then a year later they actually get the money and it starts to work. So we're kind of like past that peak excitement point and we're probably over the next couple of months going to see a lot of those stories of what a company has told us is not coming to fruition, because with DC, companies are always able to almost project out to like blue sky and when it doesn't happen they have a bureaucrat to blame.
Speaker 3:Yeah, and it's not just money, it's also expertise. The reason Taiwan became it was they, as a government, saw that they needed to do something that was really important and they decided, okay, semiconductor chips, this nascent industry. So they spent a lot of money to train Taiwanese people to know how to do it, and that's how that happened. We don't have the expertise, so we not only have to put money behind building the factories, but we also have to start educating people to know what to do.
Speaker 2:The good thing, though, is that we have the patents and we have the technology and they can we have immigration right?
Speaker 3:We have immigration. We have so many kind of things that are working. We still do yeah.
Speaker 2:There's so many good things about what we have in terms of natural resources that when we make this commitment to support some of these industries, we have, over time, the ability to actually do it.
Speaker 1:Well, Secretary Ramondo was one of the biggest proponents of the chips act and she recently went to China. Was that a productive trip? What do you make of her visit over there?
Speaker 2:I think it was a productive trip.
Speaker 2:Our call all year is that the Biden administration wanted to engage at high level conversations because they know that the relationship can't materially get better.
Speaker 2:They just don't want it to materially get worse, and they describe this as conversation without compromise.
Speaker 2:So the big part of that trip was establishing a new dialogue two times a year with the Secretary of Commerce's counterpart in China. If there are flare ups and we are seeing a flare up this week as it relates to Apple, are there an opportunity to talk about this we are going to get in the next couple of weeks some more tech restrictions on the semi cap equipment and semiconductors that can be exported from the United States as well as the Netherlands, japan, south Korea. That is a hurdle that we have to come over. I don't think it is going to really deteriorate the relationship more, but China will respond. They know that it's coming. They don't like that it's coming but quite frankly, there's not much that they can do because their economy is quite weak right now and they are struggling how to respond in a way that harms us more than it harms them and, with the nature of all their joint ventures, most of the time any of their response would have at least an equal negative to their own economy.
Speaker 1:How do you see China's struggling economy? I feel like the Western world looked at our experience coming out of COVID and we're like, oh my gosh, everything went gangbusters. China comes out of COVID and they stumble out the gate. How do you think that resets their role in the global economic order, does it?
Speaker 2:I think that you're seeing a lot of estimates that China's economy overtaking the United States economy. That's not the trajectory anymore. We do see a Chinese leadership that is much more insular than they.
Speaker 3:This is a choice. They're not screwing it up. They're actively deciding not to expand and to become Xi's. It's all driven by Xi.
Speaker 2:And Xi is not going to the G20.
Speaker 3:Which is unprecedented.
Speaker 2:Especially when you have one of the other competitors in the region India. If you're China, you do not see the stage to Modi in India. But there's another person that's not going to the G20 because he'd be arrested is Vladimir Putin.
Speaker 1:Maybe we do want him to show up after all that.
Speaker 2:And so, if Xi went, most of the votes, as it relates to the communiques coming out about Ukraine right now, are going to be 18 to 0. I don't think Xi wanted it to be 18 to 1 and have to vote time and time again as the only defender of Putin, but it does show some of the things that we don't know about China. This is an honest surprise that he's not going to the G20, and it leads to a lot of questions as to why Is the domestic hold on power not as strong as we think it is? Is the economy worse than it is? How does China respond to that? They could do some things to add to stimulus.
Speaker 2:The thing that could be an impact to the market is if they start blaming the United States that a lot of Chinese leaders have held on to power through propaganda. Usually it's directed towards Japan and how terrible Japan is towards them. But because we've had these tech restrictions, the thing to watch as an investor is how much do they start blaming the United States and how much is that taking out on US companies? Certainly something that we're starting to see a little bit. We don't expect it to ramp up too much, but that is a tail risk out there.
Speaker 3:And just going back to the Chinese economy, we're going to keep going back and forth. But you as a Chinese foreign direct investment was always a huge part of the growth story in China. You as a multinational company just can't risk opening up a new factory or anything in China. You could just get taken over. You have to start expanding out of.
Speaker 2:Yeah, now there is a big push and this is part of why it is going to take years to do the IRA, the Chips and Science Act. It's part of sending the message to the multinational business community that if you have something that is sensitive, you might want to reconsider, kind of where that is headquartered.
Speaker 3:Apple's the perfect example, but they're stuck for a while. They can't not produce phones there, but certainly if they hadn't already started. It started yesterday that they're going to come up with a plan to start building factories somewhere other than China.
Speaker 2:Yeah, and I think that for a long time and for the last five years, as I've been on this US, China beat. Apple always came up and I was like no, Foxconn is too much of an employer throughout China for the Chinese government to go after it. There was something that did happen this week that hadn't previously been in there, which is the founder of Foxconn resigned and has decided to run for the presidency of Taiwan.
Speaker 3:That's a great bug.
Speaker 2:Yeah, and so the KMT, which is the preferred party of Beijing, had a candidate, the mayor of Taipei technocrat. Look like he had a shot With the Foxconn founder entering this. It looks like the incumbent party of the DPP, which is the pro-independent party, the anti-Beijing party, now, as of today, looks much more likely to win reelection. And so I put in this US China relationship the semiconductor restrictions, the new Huawei phone that seems to be competing with 5G. There's a lot of factors, but I haven't heard a lot of conversation as to whether or not this Foxconn portion of Apple has been changed because of the desire to run for the presidency, which is in January.
Speaker 3:Do you know what? Why did he decide to do that? Was it like a slap in the face to Xi?
Speaker 2:I think there's been a couple of other independent candidates in there and the incumbent party, the DPP. Their candidate has been viewed as relatively weak compared to the incumbent president. It's the incumbent vice president who is running, so when there is an opportunity it was more of an opportunity Knox versus I don't think it was to undercut the KMT but it was more of a. As in the United States, when someone sees a potential opening to be the leader, you take it.
Speaker 3:Yeah, there was a report out of Japan, the Nikkei newspaper, that apparently she was called in front of the elders this week to say this is not acceptable. What's going on in the government?
Speaker 2:Yeah, no, it's the, if you remember, in the lead up to the party congress that gave him an unprecedented third term. There was a lot of those stories. There was a lot of question and he did what he needed to do to consolidate power. But I think a lot of people look at China, look at Xi's leadership, as a monolith, and when I talk to our contacts they're like it is until it's not, and he is always going to need to preserve. And when you have the economic weakness, people get very concerned about the civil unrest that comes with that.
Speaker 3:I mean, this is official statistics, so it's probably even worse, but the youth or the young person unemployment rate is above 20%. You don't want a lot of unemployed males that don't have wives because of the restrictions.
Speaker 2:That's a powder keg for them. And then you look at also the demographics of China over the next.
Speaker 3:People don't realize how bad the Chinese demographics are.
Speaker 2:Yeah, it's going to be a population that starts shrinking sooner rather than later. And they'll be upside down in terms of a far greater older population than younger population.
Speaker 3:In terms of the developed nations, you guys actually has probably the best demographics. People don't quite realize that.
Speaker 2:Yeah, and the thing that I always talk about with demographics we talk about housing and it's the demographics. Housing is not a discretionary choice. It's like you need to occupy a unit of housing at a cost and so we were dealing with some pretty high mortgage rates. The last time we had really really high mortgage rates was 1980. What did home price appreciation do then? It went up, because I always go back to the average first time home buyers 34 years of age. What happened 34 years before 1980 minus 34? 1946.
Speaker 3:The baby boomers. So now there's a weird dynamic.
Speaker 1:The Fed has other issues.
Speaker 3:But if they were focused on simply they wanted house prices to go down, ironically the cutting rates would actually probably stimulate it, Because something like 80% of people are locked into a pretty good low rate mortgage. So you have to have a big life event to move out of that mortgage, so you don't have any supply in the market right now.
Speaker 1:Yeah, we rates could actually increase inventory.
Speaker 3:Yeah, because people would move.
Speaker 2:Yeah, we asked that Raymond James on. We do a monthly macro call with a bunch of institutional investors management teams and on average people said the rates had to drop at least below 5%, maybe below 4% before they would consider moving, and that's a good cross-section of America.
Speaker 2:Yeah, and it's just a and this to me, one of the big problems for the Fed is that, as you taught me, Brandon, like with the components of CPI, 40% of. Cpi is essentially housing costs, just housing and so and it's really just rent because we don't measure what your house is worth.
Speaker 3:We measure what you could rent your house for. So it's all just rental. Yeah, and very scientific. If they don't like what you say when they serve at you, they just put in their own answer.
Speaker 2:Ok, that's interesting Because I did that like a sample size of two. I asked my wife what we thought we could rent the house from, and it was a very different answer for me. So I was just kind of, we're talking about how.
Speaker 3:CPI is going to be raising, yeah, so someone's totally off. They just throw it out.
Speaker 1:So, ed, is it your view that the Fed the Fed has made pretty clear that rate cuts are not now on the table, but eventually, at some point in time, they will start cutting rates. And is it your view that when the Fed does begin that process, home prices are going to plummet?
Speaker 2:Well, I think if the Fed cuts rates, mortgage rates go down and that on the margin could unlock. But I do think the first move are folks who were on the sidelines, who couldn't afford.
Speaker 1:Yeah, exactly yeah, so you actually could, so you actually bid more.
Speaker 2:You get more bidding wars, you get more people thinking that this is their time and that could bring about the second wave of inflation. And if 40% of CPI is kind of essentially housing costs, if we start seeing bidding wars and housing because of the rate cuts, then that's a huge problem for the Fed. And so what I've been telling investors all along is that they were you know, the market was pricing in for a large part of this year. The first cuts in November. I'm like that is absolutely the worst possible time to cut, because the other thing we've learned about inflation is it's a 12-month rolling average and it takes some time for it to show up. And so if you're the Fed, you're like, well, it takes some time to show up.
Speaker 2:If I cut, say, in May, it's not really showing up before the election, but if I cut the previous November, I'm going to have a full year in there like just from a calendar perspective and how this math works, like I couldn't get to how the market could have assumed a November rate cut and I truly believe, the higher for longer, partly because when I look at some of the people who might be on the Fed pushing for some of the cuts, like Dr Lisa Cook got confirmed again this week to a 14-year term.
Speaker 2:We've had two other confirmations as well. You know her first speech out of the gate was the Fed's models are broken. I'm paraphrasing. But we need to get to the terminal rate and then we need to hold to make sure that the economic data that's coming in matches our updated models. So if she is internally saying, hey, I'm concerned about mortgage rates, I'm concerned about the unemployment rate, ticking up, the Fed staff can go. Well, you're the one that laid out the reason for why we need to hold for longer, which just kind of shows you, in my opinion, how the Fed does everything possible, especially among the governors, to make sure that there's consensus they don't like the Fed.
Speaker 2:They don't like that debate. They like to have you know that man behind the curtain moment of we have our models. This is what they say. This is what we should do.
Speaker 3:Yeah, no, that's a John I've been saying, but it's for the exact reason. We think that the Fed's done hiking, but that they're going to hold much longer than the market is expecting.
Speaker 3:And also, I think politics is not the driving factor. But they're aware of it. You know they're here in DC and, most importantly, around election the Fed does not want to be anything that either candidate is talking about. You know, so you're not going to do anything. You know kind of out of the ordinary to make waves, so I think on hold is probably the easiest way to solve that.
Speaker 2:Yeah, and I wouldn't be surprised if we got one more rate hike.
Speaker 3:We could, yeah, in September, but you know yeah.
Speaker 2:I think that the you know, but I think we're close to the, the, the, the, yeah. So I think that the two things that the Fed is afraid of is one a second wave before the election, because they're going to be they're like the Fed got it wrong again.
Speaker 2:Look at regulation. They got inflation wrong. On the upside, they also don't want to declare victory and say like, hey, we're done hiking rates and then have to do it again. So that's exactly this. Messaging we're getting right now is like why we paused and then hiked again. So they're like get us used to the idea that it's not kind of with the best precision possible, that like, as data comes in, if we need to adjust, because they don't want to get second-guest.
Speaker 3:No, totally. And oil is another issue because that's entirely Saudi Arabia and Russia holding, you know, barrels off the market. So that's a supply issue that the Fed really has no control over. But the consumer is not happy about it. So, you know, inflation is at least headline, is going to go back up in August and September just simply because gas prices are up. So it's another thing. You don't want to be seeing weak as inflation even though you know gas prices really date unless you want to drive the economy into a huge recession.
Speaker 2:The Saudis would have no problem with paying at the pump for the Biden administration. No, without a doubt, the interesting thing that I think the debate is does Putin actually want a relatively low oil price globally? Because he has to sell below the price cap and the closer the price cap is to the actual price domestically, it's kind of less explaining than it has to do If oil spikes up north of $100 and he's stuck at selling things below $60, that is a political problem for him. So some of the energy experts that we've talked to say don't be surprised if Russia actually tries to keep as much oil on the market as possible because politically it's less explaining. You have to do as to why you're kind of so outside of the differential between global prices and what you're getting.
Speaker 1:But this is also why, too, the Fed looks at core PCE inflation as their main indicator. And there, of course, now folks are arguing for super core metrics, right, and taking out some of that housing component. But you know, I think it's very fitting that on the macrocast the conversation is wide ranging, but somehow all roads do come back to the Fed. So thank you for joining us today. That does it for us. I'm Elan Moy with PENTA. My co-host is Brendan from Markets Policy Partners. Ed Mills of Raymond James. Thank you as well for joining the pod. Please remember to like and subscribe to the macrocast wherever you get your podcasts. Thank you so much for listening.