E1: The Point Debut - Let's Draw From The Hat

Welcome to our inaugural episode of The Point, sponsored by Basepoint Wealth! In our first episode, we introduce a relevant and timely topic in a 60 second segment we like to call, What's the Most Important Thing. Then we dive right in by drawing our first topic quite literally from a hat.

We hope you’ve gained some valuable insights or maybe even a fresh perspective on our topic today. We would love to hear from you with your questions or specific topics you would like us to cover. Simply email us your questions or suggestions to info@basepointwealth.com and who knows, your topic might be featured next.

Be sure to subscribe to be notified of upcoming episodes. Visit www.basepointwealth.com for more information and important disclosures.

We hope you’ve gained some valuable insights or maybe even a fresh perspective on our topic today. We would love to hear from you with your questions or specific topics you would like us to cover. Simply email us your questions or suggestions to info@basepointwealth.com and who knows, your topic might be featured next.

Be sure to subscribe to be notified of upcoming episodes. Visit www.basepointwealth.com for more information and important disclosures.

Transcript

The Point Podcast Debut: Rising Rates, Falling Jobs 

SUMMARY KEYWORDS

rising rates, falling jobs, long end curve, mortgage rates, asset prices, recession pressure, housing prices, unemployment indicator, labor force, job market, inflation control, financial planning, economic data, market valuations, bond yields

00:05

Welcome to The Point Podcast. We have informed, intelligent conversations about today's financial topics submitted by viewers like you. Let's go ahead and get started. Here are your hosts, Landis Wiley and Allen Wallace. 

00:25

Welcome into The Point sponsored by Basepoint Wealth. I'm Landis Wiley, your host, sitting here with Chief Investment Officer, Allen Wallace, thank you for taking some time and joining us today. For those new to our podcast here, really, our goal is just to have a conversation about stuff going on in the world of finance. Hopefully, demystify things a bit for you out there. And so we hope you enjoy it. The interesting thing about the way we do this is, Allen, I have no idea what we're going to talk about. We come here, we sit down these chairs, we draw something quite literally out of a hat, and then we just banter about it. So, we hope you enjoy it before we get into that, though, we like to kick off each of our episodes with a 60 second bit called “The Most Important Thing”. And the most important thing is exactly what the title says. It's something going on in the world of finance today that's really very important that may be influencing aspects of day-to-day life for you out there, and certainly for us and for our clients here. So, Allen, without further ado, I'm going to kick it to you. What's the most important thing?

01:24

So right now, the most important thing is the long end of the curve, and what that means is interest rates that are not short-term. The Fed sets short-term interest rates, specifically, the longer-term rates are based on supply and demand. So right now, the Fed has a pretty big balance sheet, and that's starting to run off a little bit. And we use the metric of inversion, which means that short-term rates are higher than long-term rates, as a typical predictor of recession. And we've been in one of the deepest inversions historically, and we typically see that yield curve uninverted. In other words, long-term rates go up above short-term rates, and we've had one of the largest uninversions of all time over the last couple of weeks. So, the long end of the curve is starting to move up. That would typically tell us that a recession is getting closer. It also puts a lot of pressure on asset prices, especially large tech stocks, which are kind of dominating the market right now. So, keep your eye on the long end of the curve. It's starting to move up. The yield curve starting to uninvert. That would typically tell us we're getting closer to a recessionary environment. 

02:25

These thoughts were originally recorded on October 20, 2023, since then, long-term rates have dropped significantly. The 10-year treasury is now under 4% and asset prices have spiked in response. This illustrates how quickly things move in investment markets and reinforces the importance of keeping an eye on rates and the futility of making predictions.

02:46

And obviously, I guess, tied into that a little bit, is that maybe what's driving some of the increase in mortgage rates that people have been experiencing and hearing about,

02:54

yeah, mortgage rates are typically priced off the 10-year treasury. 10-year treasury is getting close to 5% it actually touched 5% for the first time recently, since, like 2007 so that is starting to creep up. I saw mortgage rates have hit 8% on a 30-year. So, in essence, that doubles the price of your house. We, most people, don't buy their house based on the price. They buy based on the payment, and so when the payment goes up a lot that gives you less monthly income to pay for it, you should see housing prices start to come down. That hasn't happened yet because there's a little bit of a supply shortage, but as we work through that, you may see the price of homes start to drop a little bit to make up for the fact that mortgage rates are higher, perfect.

03:36

So certainly something to pay attention to, and obviously may impact the pocketbooks for everybody out there. Absolutely. Okay, perfect. Thanks again for joining us again. If this is your first time here, we're really excited to have a conversation with you or in front of you about things going on in the world of finance. So again, first time at The Point, what we do is we've got a hat hidden back here behind my trusty coffee cup the in a minute, I'm going to reach in, pick out a topic, and it's going to be the thing that Allen and I just converse about. So wait, can't wait. Sometimes it's things that we are really familiar with, and occasionally it's topics that are a little bit new to us as well. Part of that's because the topics that are in the hat often times come from you out there that are watching us. So, we appreciate any feedback that you want to send in, any topics that you may want to hear about on a future episode. But without further ado, let's figure out what we're what we're talking about. So here's our trusty, trusty little hat. I don't know what the theme of the hat is, but seems kind of cool. So let's see what we got. I've got one.

04:39

lot of words on that one, there

04:42

are a lot of words on this, so we don't mind it. Send short ones next time. All right, the Fed had continued to raise rates throughout the first half of 2023 to slow down the economy. One of the markers they appeared to be using as a gauge to their success is unemployment. Is unemployment a good measure to indicate the success of the rate hikes is unemployment a good economic indicator in general? If not, why does the news talk about it so much? And what are good indicators of a healthy economy? Okay, so there's a lot in there, a lot of questions. I think one that maybe we can hit on is just because the news talks about it doesn't necessarily mean that it's relevant. So let's, let's get that out of the way right away. Sure. So let's talk about unemployment. Let's talk about maybe the Fed in general. You know, not everybody out there may, may track the financial news quite as much as I think we do. So, you know, the Fed, over the last two years, has really been on an extended battle to fight back inflation, right? And I think we've, we've all experienced that, right? You go to the grocery store, milk costs lot more, bread costs lot more, cars cost more, gas costs more. Everything seems to cost unfortunately, those are included in inflation, right? So there you go. You got, you already got one thing kind of here as far as metrics. So the Fed's actions are, last two years have really been focused on trying to constrain inflation. The Fed has a dual mandate, one is to keep inflation at a reasonable level, and two is to help support employment. Right? Full Employment is kind of one of their defined goals. So, you know, they've got to balance those two. Typically, as they raise rates, it tends to slow the economy. People get worried about recession. People associate recession with job loss, all those kinds of things. So that's kind of been the theme the last two years. I mean, unless I've missed something, I haven't seen much change in unemployment numbers, though, as they've done that. So you know what? I guess what's happening. Rates have gone up a lot. We're all feeling it. So you know what's going on the other side of the coin with labor?

06:42

Well, the first thing is, it's important to understand what they're talking about when they say unemployment. Unemployment is measured in six different ways, right? There's you U1 through U6. And typically, when you see unemployment on the news, they're talking about U3. And I won't get into the details of each of those, but basically U1 is just all the people that have been unemployed for the last 15 weeks, and it goes all the way down to everyone who's unemployed, everyone who's looking for work, everyone who would look for work, or who has recently lost a job. So it depends on which one of those numbers you're looking at. Now they all have ticked up a little bit this year. The U3 rate is in the 3.7 to 3.8 range, but if you look at U6 it's actually almost 7% and those have all raised about 1% over this year, so unemployment is starting to go up a little bit. But also, we have a lot of jobs that are available. I think there's something like 7 million jobs that haven't been filled yet. So what that typically tells you is you have some sort of imbalance in your labor supply, right? There's lack of training, or people just aren't, aren't trying to find jobs, and that's determined by what's called the labor force participation rate. So you're not technically unemployed if you're not looking for work, right? So that's the devil is in the details there. So even if you don't have a job, if you're not looking for work, then you're not technically unemployed. You may be what's called a discouraged worker, but that's not included in U3. So when you look at the headline number, you're not you're not being included. So going back to what you said about the Fed's dual mandate, the taming inflation and maintaining full employment are sort of competing goals. So, they're trying to walk a tight rope here. Historically, it hasn't been very successful. They typically over raise the rates. They leave them too high, too long, and then when they cut it, it's typically too late. But we will see there are still some people out there saying, soft landing. I've heard less calls for the soft landing recently. I've heard more about maybe just a landing. Typically, after that, then you start to hear about the hard landing, and all this happens three months after the recession is over, right? Because that's when we finally find out about it. So there's a little bit of magic that goes into those

08:54

numbers, sure, well, and that seems to, I guess, maybe be the theme of the Fed in recession. A little bit, they seem to hike rates until something breaks, or they tend to cut rates until something breaks, right? We get a bubble that's too big. Or, you know, whatever the case may be. So as we're as we're maybe looking at what, what's happening with the economy right now, and people are maybe looking at some of those indicators, unemployment being one, I think you hit, you hit on one thing. Is, number one, understanding what the heck the indicator is. You know, one of the challenges with unemployment is, if you're not looking for a job, you're not technically unemployed, right? At least as far as that calculation is, and I can remember back to, you know, 2008, 2009 there were obviously substantial numbers of people losing their jobs. You can turn the TV every night and you saw people getting marched out with cardboard boxes in, you know, New York and everywhere else, unemployment seemed like it didn't quite track with maybe what you're seeing on TV, and in large part, if you know, as I learned more what unemployment really was, you figured out that, well, some people just gave up. You. Right? And so unemployment, over time dropped off, but meanwhile, you still had a lot of people that were that were that were not back to work at that point, right? So is that, you know, that can lead people maybe to get different feelings about what's going on the economy, that's than what's maybe true?

10:14

Well, you know, there's a concept called granularity, and that is looking at things at different levels. And part of the problem with following financial media is that they're giving you the highest-level information. They're giving you a single statistic, they're not defining it, and they're not giving you any sort of circumstances that go into that calculation, right? So, when you look at U3 unemployment, you don't even know that that's what you're looking at. So, when we're trying to make assessments of what's going on out there. We don't just look at the top. We dig down much deeper. We look at a much higher granularity view to see, not only which unemployment rate are we talking about, but how is that unemployment rate calculated? Where does the data come from? How old is the data? Those kind of things, so that we can make an actual decision about what's going on, not just looking at a statistic. A statistic is just a shadow of reality. And what we want to look at is reality. We want to make sure that we know the sources of the data. If you look at data coming out of China, a lot of it is actually even fictitious. If you look at our data, our data is, I think, trustworthy, but it gets, it gets conveyed in a way that maybe is misleading, right? And I think that there's, there is a little bit of that going on here, but, but if you break down our unemployment situation, what you find is that there are a lot of jobs open, but we have an under trained labor force. We've had this shift from a manufacturing economy to a service economy over the last 30 or 40 years, we've pushed a lot of people to go get educated at college. We haven't given a lot of direction in what areas they should be seeking, and you've got a lot of liberal arts degrees out there that end up being baristas at coffee shops, right? And the unfortunate thing is, you end that with a couple $100,000 of student debt, so the education itself isn't even worth the cost of attaining it. And a lot of these jobs that are open are being filled by immigrants, right? So not the type, not the not the immigrants that are seeking asylum at borders, but the type of immigrants that come from educated backgrounds in countries like India and other parts of Asia come over here and fill those higher-level jobs. I remember when we were recovering from COVID, a lot of people talked about, hey, employments picking up, but if you looked at the actual numbers, it was mostly service employees going back to work, right? So we have to be really careful and dig down into what kind of jobs are being filled. If everyone was a bartender, we might be at full employment, but the GDP would go down right. So we have to are they high paying jobs? Who's filling them? Are they being filled by our existing labor force, or are we supplementing the labor force by people moving into the country. And there's a lot of political ramifications of how many visas we issue, and how easy that process is for a company to import someone into the United States to fill a job.

13:12

One I guess, to the point of what types of jobs are being filled. Some of the debate recently with labor numbers, unemployment numbers, jobs numbers, has been exactly that. You know, the headline may look like, oh, there's lots of jobs being filled. People must be going back to work. Unemployment must be low. If somebody is getting laid off, they're finding a job. If you peel back even a layer, and you start looking at, well, what, what's really in those numbers, what we've seen lately is oftentimes those are part time jobs, right, that are being filled. I was reading something recently that there's a record number of Americans right now working two jobs, right? And so that's part of what maybe is driving data that says that job creation is robust. At the same time you have this low unemployment rate that doesn't seem to be moving around a whole lot. Well, it may be because people that aren't employed are getting jobs. It may just be the people that are already working or getting a second a second job.

14:09

There's a couple of factors there. The first is that, you know, we have this gig economy going on where you can, you know, you can drive the Uber you can deliver groceries from the grocery

14:18

store or or be the guy that was working for three different tech companies at the same time. You know, all of them paid him 150,000

14:25

Well, there's some of that going on, and I never realized how contentious an issue work from home was, but apparently it has reached, you know, highly contentious status here, if you if you mentioned to someone that's working from home, and it may be more inefficient than working from an office. You might be accused of, you know, being negative or, you know, having some sort of vendetta against those who work from home, right? I didn't realize it was that serious, but it's something I noticed personally. You know, I didn't feel like I was as efficient when I was working from home and mowing the grass at one o'clock in the afternoon. And doing my work at 9pm

15:01

right? The dog chasing the kid? Exactly? Yeah.

15:05

And there's a lot of that going on, right? And some of that is that people have multiple jobs because they're working from home. And you might, you know, be working for two different call centers at the same time. And you know, if the call doesn't come through to you, it goes to someone else. And we've experienced some of that here at Basepoint with our service providers. But there's this big there's this big protective instinct from those who work at home to say, hey, we're just as efficient as everyone else. And here are five studies that prove it. You read the study and it doesn't prove anything like what they're saying, and that's, you know, that's a whole separate conversation about the reliability of studies the over

15:40

what's reliability of studies, reliability of data, right? And fundamentally, I think that's kind of what. What this topic is about is, you know, unemployment. We can see the numbers out there. As you said earlier, you got to really understand what that number is reflecting. You've got places around the world where the data is just purely made up, right? That goes into it. Our data is at least real, but oftentimes we don't do a good job of explaining what it is or why it matters, or how it fits in the context, or, well, you got to take that data point and put it with this data point and put it with that one. And now you can, now you can draw a conclusion to it.

16:13

So, you know there's an old saying that if you torture the data long enough, it'll tell you anything you want to hear, right? And I think that's true. And we find that, especially, you know, even in our area of work, in, you know, creating financial plans. I mean, we can adjust assumptions to cause wide variances in a financial plan. Well, imagine how much ambiguity there is an entire economy when you have hundreds of 1000s of data points that can be mixed and matched, and math can be applied to them to show this certain thing. And I just, I think we need to just be cautious and try to look at reality, not look at, you know, what the, what the derivatives of reality are, which is what we find with statistics, right? 

16:56

Well, and it feels like this is a period of time, you know, thinking about markets performance, you know, the sentiment that people have, and they look in their portfolio, they see that it's up or down. You know, 2022 is a tough year for a lot of people out there. There's a tendency when you're in that negative period, and maybe fear starts to set in, or concern, or, oh my gosh, I'm losing money. When's the market going to bounce back? Individually, but collectively as a market, maybe sometimes we start to try to read into numbers, searching for that thing that's positive. Yeah, right? Confirmation bias. Confirmation bias, right? Looking for, oh, well, the jobs market's robust. So you know, the fact that, fact the market's up recently, it's supported by the data. 

17:38

Yeah? I mean, I think there's a lot of armchair quarterbacking going on like that, where you check the headline number and you see that it's it's fine. And so, you know, you push the pedal to the metal in your investment portfolio, but then you realize that the only reason unemployment is positive is because we added a million bartenders and we imported 500,000 people from Asia in order to take on programming jobs, right? So, but on Main Street where the rest of us live, people are losing work because housing starts are down 7% and that's where real people work, right? So it's said that a recession is when your neighbor loses his job, and a depression is when you lose yours. So, we have to, you know, we just have to be careful about looking at high level data without using our eyes to see what's going on around us, you go to the grocery store and the price of food is up. You go to the gas pump and the price of gasoline is up. The cost of transportation are skyrocketing because there's not enough demand. And so you, you know, you need to make some realistic assessments of where we're at. You look at the yield curve uninverting. These are, these are all signs that start to point to recession. So there's a, there's no way for us to pin down exactly what's going to happen, but there's a really good way for us to tell when it's time to be cautious and when it's time to be cavalier. And we're in one of those periods of time where it's time to be cautious.

18:56

 So you know if, if maybe individual data points unemployment being one of any number of them out there are tough to be reliable indicators. What are maybe some indicators that we would look to, or combinations of indicators that we would look to, to signify, as you said, time to be really aggressive, time to be really cautious. What are some things that that you're looking at?

19:17

Well, we're looking at inflation. I mean, the headline inflation number has moderated quite a bit, but that's when, that's once you pull out food and energy, the things that people really spend their money on. So, I think prices are still going up. And you can tell that when you go out to eat right when, when you go out to eat, the price is double where what it was before we look at the market itself to see how it's priced, we never try to time the market, but we'll try to see if the valuations show us that we should be allocating more, more of our resources to stocks, and it just doesn't look that way right now, the S&P 500 is yielding somewhere around 4.25%, and we're getting close to 5% on a 10 year treasury. So why take the risk of equities when bonds are paying us more? And at the same time, the long end of the curve is going up, which tells us that it's a difficult time to be in bonds. And so, if we're earning less than what we need to survive, then we might want to be more cautious on how far out in maturity we go, because when we lock a when we lock a rate into a bond, that's permanent rate, because the price will adjust if rates rise. There's no way to move from a 5% bond to a 6% bond without taking a loss right through. Someone would have already figured out how to do that one by now, and it's just not what happens. So, we've been really patient. We've been sitting in cash for a couple of years. It didn't cost us that much. And now, instead of taking that big loss in bonds last year, we're sitting in cash, earning 5.25% at some point, we're going to want to lock in higher rates for longer, but we want to make sure that that rate at least gives our clients what they need for their to have their money last the rest of their lives. And we're just not quite there yet.

20:47

So, you know, kind of the message, I guess I would take out of that is, you know, being very cautious about looking at these individual data points that they get thrown around. And obviously there's, you know, you mentioned the politics side. There's obviously an incentive, from a political standpoint, to politicians on both sides to pick the data point that tells this story that they want to. Yeah, you can torture the data, and sometimes you don't have to torture it. You just hold up whatever data point well

21:11

So that you know that tendency to only look at headline numbers cuts both ways. If you use the the numbers that are good in order to bolster your case. When the numbers turn on you, someone else can use those to destroy your case, right? You just pick different numbers. Allen, yeah, well, or change the definition, right, right? But that's, again, that's a conversation for a different day. Yeah,

21:31

perfect. So I think that's good place to kind of tie this one up. I think we kind of covered a lot of ground on it. So again, we really appreciate everybody out there joining us. Hopefully this was enlightening. I think the general sense Allen and I would have on this is just be really cautious when you're looking at at data points, no matter what they are, making sure that you understand the context that you need to evaluate them in on so again, thanks for tuning in. We hope you enjoyed it. Hope you found it informative. Feel free to send in any topics, questions, thoughts that you have, you go to our website, basepointwealth.com Send us an email info@basepointwealth.com and who knows, maybe, maybe your topic or thought will end up here in our hat, and we'll sit here and banter about it on a future episode. So look forward to that. Thanks again for joining us on The Point.

22:16

Thank you for joining us for this episode of The Point Podcast, sponsored by Basepoint Wealth, as always, you can submit questions or topics you'd like to hear discussed to info at basepointwealth.com be sure to subscribe so you don't miss any future episodes. Basepoint Wealth LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies, investments involve risk and unless otherwise stated, are not guaranteed, be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.