Bob and Ben discuss the election year, the pressures that both political parties might exert on the Fed to implement changes in interest rates, and the narrative that the economic data is portraying for investors.
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Introduction to the Podcast
Bob Fraser: All right, podcast listeners, the election year is upon us. Oh, joy. What does that mean for interest rates? Will the Fed hold steady or will they succumb and try to get this president elected? All right. Let’s tune in and get the scoop.
The Invest Like a Billionaire Podcast
Ben Fraser: This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor and help you build legacy wealth. Join us. As we dive into the world of alternative investments, uncover strategies of the ultra wealthy, discuss economics and interview successful investors.
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Economic Predictions for the Election Year
Ben Fraser: Man. It’s going to be a crazy year. So everyone, thanks so much for tuning in. This is our Top of Mind episode. These are shorter episodes that are focused on one topic. Something we’re reading in the news. Different articles and also educational content. Love putting these together as you may have some suggestions for things you want to hear us talk about, please share those on TheBillionairePodcast.com. So yes, let’s dive into it, right?
Bob Fraser: Should we say I told you first for the, like n time .
Ben Fraser: Yeah. Yeah. It’s so interesting ’cause it’s yeah we’re looking at all these numbers coming out and all these headlines that are acting surprised with the, GD prepay print or the the jobs added last month.
Bob Fraser: And yeah, jobs, 353,000 jobs added last month.
Ben Fraser: Yep.
Bob Fraser: And the economy way above what people expected. And then the 2023 GDP print came in at 3. 1 percent growth, which is very pretty high growth for the United States. And the last quarter was at a 3. 3 pace way, way higher. And, anybody who’s been listening to us, we’ve been actually predicting a soft landing and a strong economy for 2 years now.
And here we are. Here we are. It’s a, and then data just keeps saying the same thing. So we told you.
Ben Fraser: Yeah, it’s, the same reasons we’ve been saying for a while.
Understanding the Current Labor Market
Ben Fraser: One, it’s a strong labor market, right? And so we’ve shared these charts in the past. You could check out the episodes if you haven’t listened to them, but.
It’s a huge jobs gap, the number of job openings that are available right now, relative to the number of people seeking employment is a very large gap. And it’s not something that we’ve seen a whole lot for historically, and it’s continued to be an issue. And we think it’s going to continue to remain an issue from a structural challenge in the labor markets.
And then on top of that strong consumer spending. We’ve been saying that consumers are healthy and have real wage growth. They are very comfortable in their current debt commitments. And even though sentiment is low, and this is one of these weird paradoxes, consumers just have pretty low sentiment, not a whole lot of excitement about the economy.
They’re not spending like it. And they continue to spend pretty aggressively. And so for, really those two reasons, plus other things. It’s continued to drive GDP very,
Bob Fraser: Let me make an observation because every time we say the economy, the consumer is super strong.
The Impact of Inflation on the Economy
Bob Fraser: We get pushback, people say wait a minute, inflation, people are suffering and yeah, absolutely right.
So the bottom kind of quartile of earners. Are really suffering, but they’re the smallest component of the economy. So if you talk about the economy it’s on fire. It’s doing very well. Everything about it is showing strength right now. And in the United States numbers, it doesn’t mean people aren’t suffering.
So there are a lot of people suffering and the, that just a lot of people under stress right now at the lower end. But again, that’s not the economy. That’s 1, 1 segment of the economy that has less impact. Again, I’m just being dispassionate here and being pure data driven. Right?
Ben Fraser: It’s a great point to make, right? Because. We do see these kinds of mixed signals sometimes. And which is it? It’s both, right? And you have to look at things at the scale that they are. And I think that’s where sometimes people miss it, right? Where they get confused. And that’s also probably what’s leading to a lot of the lower sentiment is you’re going to the grocery store and you’re paying 30% more than you were, six months ago. And you feel the pain of that. So it’s definitely a real thing, but real wage growth has continued to rise very high and in general, across the board averages averaging out, most of the consumers are in a really good position.
The Role of the Federal Reserve in the Election Year
Ben Fraser: So with that kind of backdrop, we just saw to hold rates steady. And it’s funny. I feel like most election years, people are like that. Okay, it’s gonna be an election year. We’ll make it through. But I feel like this time more than ever. It’s just I want to put my head and say out and just get over it.
But, it’s just adding the politics into all this just gets so interesting, right? Because the Federal Reserve is an independent agency and body that is not politically impacted, but they still are the ones that are driving a lot of the expectation of the economy and the political powers that want to continue to perform well for their party to perform poorly if they’re running against that party.
So it’s. It creates a lot of just layers of interesting dynamics as we go into this. So you want to unpack some of that for us?
Bob Fraser: Yeah. What’s happening, of course, we had this massive inflation and stimulus, which is from the stimulus, which has caused the Fed to, of course, raise rates, just slow everything down and they’ve paused now and we’re hoping for, inflation to come down to their 2 percent mark and for the economy to start to slow job losses to increase and it really hasn’t happened.
So it looks like a soft landing inflation is approaching their target, but still what? 50 percent higher or more. From their target and that’s, and they’re dead set on their target. So here’s the risk. If they don’t want to miss again they don’t want to cut rates too early and then have everything start popping again and we, and re energizing inflation, they don’t want to do that and so they don’t want to cut early and they, but they also.
Real interest rates are, I have gone very high and they’ve meaning really after adjusting for inflation, real interest rates are really hitting a very high mark, and so you don’t want to cause a lot of damage either in the economy. So they’re trying to walk this tightrope now they claim and they’re insisting that they are politically independent and they’re going to make it.
Make their decision based on data alone. Okay. And good for them, so they’re going to do that, but I’m telling you, the pressure on them is on real, so the, who’s the chairman of the Senate banking. Committee, Democrat who’s up for reelection, of course, and putting pressure on the Fed and telling the Fed you got to cut rates for affordable housing, right?
You have to make housing affordable and so rates have to be cut and it is. And believe it or not, it’s a precedent, right? You saw the Fed cut rates in 2020 the Fed cut rates in election years in 2004 to help George Bush get elected. They helped Barack Obama get elected and 2012 in 2020 it started with this, we started the bond buying program when the pandemic erupted. So the truth is, they’re the, there’s, this is the boss, the president’s your boss.
Ben Fraser: As a little wrinkle into this, the one who appoints the Fed share is the president, right? So Jerome Powell’s term will come up during the next president.
Bob Fraser: So does anyone believe Biden has not reached out to the Fed chairman. Okay. He’s been busy touting nomics and, no, one’s really buying that. And he’s behind in the polls. He’s behind in the polls, pretty much all the polls. Joe Biden losing another, and, but he’s still the most powerful human being on the earth.
And so is he going to just, Oh I guess we lost, it’s not going to happen. So the question is what will the Fed do? And
Predictions for Interest Rates
Bob Fraser: And, but I’ll tell you, all indications are the Fed is holding steady and it is being data driven, but you got to believe the pressure is building.
And I’ll tell you my take, I’ll tell you my take, and this is just purely a guess and speculation. I think they will lower rates slightly. So it’s enough. It’s to give a nod to give a nod to, Oh, things are better. We’re getting lower to our inflation targets and it’s.
It’s going to appease all the political pressure, but without materially changing. So I don’t think they’ll lower much. I think the lower, just teeny tiny bit, and continue to wait until 2025. So that’s just my speculation, and we’ll see what, what happens.
Ben Fraser: Yeah the yield curve is already pricing in some expected rate cuts this year, right?
And I think it’s.
Bob Fraser: Which I think it’s optimistic.
Ben Fraser: Maybe. Yeah. I think that’s what I wanted to ask you is, do you think I heard another big time economist? I’m not going to say his name because I don’t remember exactly how many cuts he predicted, but very well known. He was predicting, I believe it was four or five rate cuts this year. I’m just like. Okay. I don’t see that. No, I don’t see that.
Bob Fraser: I wonder if he’s still predicting that after the GDP Brent and after the jobs.
Ben Fraser: Yeah, but I think it does beg the question of. Okay, the expectation is that rates are already going to be cut this year. So that’s the baseline that Powell has to work against already.
So to see further succumb to more pressure of less work, that’s what the market’s already pricing in. Jerome, says Mr. Biden, so you need to go even more aggressive than that. Or do you think, he can hold the line of that’s, where we think we’re going and, one or two, 25 basis point cuts. It’s the job done. Or do you think there’s, it potentially puts more pressure to make, do more rate cuts even this year?
Bob Fraser: If you look at what they’re saying, he is never waffled on this. I want 2% PCE, core PCE inflation, 2% core PCE. He is never waffled. We’re not close to 2. 2%, so it’s come down very rapidly.
Okay. And as we pointed out it came down with oil and it came down for a number of reasons.
The Influence of Jobs and Energy on Inflation
Bob Fraser: But you’ve got this underlying pressure of jobs. And energy that is going to be very difficult to lower core PCE, because those are underlying drivers of inflation that are systemic.
Now I do think energy, I think we’re going to see. Continued weakness and energy through 2024. So that’s going to help. And we’ve talked about the housing component coming down, the rent components coming down. That’s going to help. So I do think we’ll see core PCs continue to drop. Will it drop to two?
I think that’s going to be a really tough challenge. I think it’s going to be really tough. It’s possible that it’ll get close. It’ll touch it. But again, jobs and the wages are just not going down anytime soon and think about how wages underlie everything, right? Everything.
And so even though it’s not a component of core PCE, it’s a sub component of every part of core PCE. And then as our energy crisis unfolds in the next few years, as we’ve been predicting, then it’s all off the table. I, if you go by what they’re saying, they’re not going to lower or lower much.
And especially if you keep having these kinds of burning hot jobs prints and GDP prints, they’re going to make you super nervous. You do want to cut and then have inflation take off again. That’s going to be embarrassing. They don’t want to do that. Yes. Oh yeah,
Ben Fraser: All eyes are on the bed and I would not want to be drawn a bell this year.
That’s for sure. A lot of scrutiny, a lot of pressure and. We’ll continue to keep this as a recurring theme that we’ll address as things happen throughout the year, because I do think it’s going to be interesting to see how it plays out. But as of now, maybe he can hold steady and withstand the pressure and be very curious to see.
Conclusion and Invitation for the Next Episode
Ben Fraser: So thanks so much for joining this episode. Hope you got some value out of it. Obviously, if you’re enjoying it, please subscribe, rate the show, help us just continue to get in front of more people and be sure to tune in for the next episode. See you then.