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--:-- John Bickley: Welcome to Morning Wire, I'm John Bickley, Daily Wire editor-in-chief, and this is your Sunday edition.
--:-- Georgia Howe: And I'm Georgia Howe.
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--:-- Georgia Howe: 2022 was a year marked by persistent inflation, skyrocketing costs, and overall economic instability. Now, as recession looms over 2023, many Americans are asking what comes next and how they can protect their own personal finances.
--:-- John Bickley: For this episode, senior editor Cabot Phillips sits down with Kenny Polcari, market strategist and managing partner of Case Capital Advisors, for a conversation about where the economy is heading in 2023 and how Americans can prepare.
--:-- Cabot Phillips: Hi, everyone. I'm Cabot Phillips with Morning Wire. We're joined today in studio by a familiar voice for many of our listeners. That's Kenny Polcari. Kenny, great to have you with us. Thanks for having me.
--:-- Kenny Polcari: Thanks for having me. It's always a pleasure when I come to Music City.
--:-- Cabot Phillips: So looking ahead to the economic outlook for 2023, what's some reason for optimism? We'll start with the positive first.
--:-- Kenny Polcari: Well, so the reason for optimism is we will get through this, right? And at the recession, while I already think we're in it, and I think it's kind of a rolling recession, so I think it's going to start to improve in the second half of the year.
--:-- Cabot Phillips: Now, that's going to depend upon what we hear from the macro data and whether or not inflation is responding the way that they want it to respond.
--:-- Kenny Polcari: Look, we were as high as 9.1% in the summer of 2022. Now, as of last week, we're down at 5.7%. That's great. That 3.5% or 4% move was really the fluff, but we're still at 5.7%. They want to get to 2%. That next 3.5% or 4% move to get us there, that's going to be the meat and potatoes.
--:-- Cabot Phillips: That's where it's going to be difficult for the Fed to get us to, and that's why I think they're going to continue to push on raising rates. Maybe not at 75 basis point increments but 25 basis point increments if you continue to do it will continue to add pressure.
--:-- Kenny Polcari: And that what I think people need to worry about.
--:-- Cabot Phillips: You mentioned the upcoming Fed meeting. Just to make sure our audience understands why the Fed is continuing to raise rates, can you walk them through what their goal is?
--:-- Kenny Polcari: Right. So the goal is to have price stability, really, right? Full employment and price stability. Well, right now we've got full employment. We've got upward pressure on wages, which is now creating a wage price spiral type of inflation, which is exactly what it was back in 79, 1881, which then forced Paul Volcker, who was Fed chair at the time, to force rates much, much higher than inflation, to stall the economy, put it into a two-year recession, which was ugly.
--:-- Cabot Phillips: There are analysts or economists going, oh, no, the Fed's going to pivot. The Fed is not going to pivot in 2023. Look, 2023 is an off year. It's not an election year. So if the Fed needs to really do something drastic, this is the year to do it because there's no election. 2024 starts the presidential election cycle. They don't want to have the economy into a complete tailspin during the presidential election. It'll be a mess.
--:-- Kenny Polcari: So I think what they're going to do is force it. They're going to force the pain in 2023. And then in 2024, as per Jay Powell, that's when he expects to start to see the Fed begin to ease back, right, to try to re-stimulate the economy and bring it back from what they suspect is going to be a difficult time.
--:-- Cabot Phillips: So in the meantime, is there a chance that consumers just simply hit a wall where they say, if retailers keep raising prices, we're just not going to be able to keep buying these products? And then that sort of brings prices down.
--:-- Kenny Polcari: I think we're approaching that in certain parts of the economy. I think people are starting to pull back and not do and maybe not go out to dinner as much. I mean, have you been out to a restaurant recently? I mean, you go out to dinner, just the two of you, and by the time you get the bill, it's sky high. Because they end up having to pay dishwashers $30 an hour, and they can't even hire them at $30 an hour.
--:-- Cabot Phillips: Shifting gears to a part of the economy we've talked quite a bit about on the show, what are you hearing from the housing market?
--:-- Kenny Polcari: Listen, housing is very sensitive to mortgage rates, right? Interest rates. Most people in this country buy a house with a mortgage. And so therefore mortgage rates, as they've ticked up, have put pressure on housing. And so, you know, if you bought a $600,000 house at a 3% mortgage a year and a half ago, you were paying $2,000, $2,084 a month. Today, if you buy a house that's $590,000 or $600,000 and you're paying 7%, your mortgage is now closer to $3,100 a month. And that's just the house. That's not the taxes. That's not the maintenance. That's not everything that goes along with it.
--:-- Cabot Phillips: So I suspect that as the Fed is raising rates this year, that we're going to see mortgage rates continue to tick up. I think right now they're about six and a half percent. They were a little bit higher than seven percent kind of in the in the late fall. They've ticked back a little bit on the idea that the Fed is going to pivot and cut rates. Feds are pivoting cutting rates at least not this year so I think mortgage rates are going to continue to tick up and that going to continue to put pressure on housing.
--:-- Cabot Phillips: And look, let's not kid ourselves. There was a lot of fluff in housing prices. We saw how they went up astronomical. And so some of that fluff has already been taken out, but there's more to go.
--:-- Kenny Polcari: I want to get back to something you talked about earlier, that's earnings season. For those who aren't aware, what is earnings season, and what are you expecting to see this quarter?
--:-- Cabot Phillips: I like to call it the beauty pageant, right? It happens every quarter and companies come out and they reveal how much money they made or didn't make the past quarter. And then they give guidance on what they suspect it's going to be like for the next, at least the next quarter, if not for the next two quarters.
--:-- Kenny Polcari: And what's really important about earnings season is not so much the earnings because the earnings are history. They're done. They're there, right? They are what they are. What's really important about earnings season and what's more important as we move into 2023 is really the forward guidance that the companies give, that the C-suite gives about what the environment looks like. What does it look like for this company, for this industry going forward? And that's really a telltale sign about what they think is going to happen in the economy.
--:-- Cabot Phillips: So the banks have already started reporting. But what was very interesting is what they did about their loan loss reserve account. Loan loss reserves is the bank saying to you, we're putting all this money aside because we expect that there's going to be credit defaults going forward because of an economic slowdown, because of higher interest rates. People are going to default on their mortgages. Who's going to lose a job? Can't pay that price anymore. And so therefore the banks told you we are increasing the loan loss reserve account because we expect this to get more difficult.
--:-- Kenny Polcari: So that's the thing. Those are the kinds of comments that you want to hear or that you don't want to hear, but you're listening for from the CEOs, because that tells you what they're thinking and how they're preparing.
--:-- Cabot Phillips: So now we're going to hear from the tech industry. We're going to hear from healthcare. We're going to hear from, you know, the energy industry. They're all going to start telling you now they're not loan loss reserves accounts, but what they'll be specific to every industry where they think this is going and how, you know, that may affect their business. And that's kind of what's going to drive the sentiment over the next, you know, certainly over the next month during, during this earning season.
--:-- Kenny Polcari: We had a story recently talking about the record amounts of household debt in America right now. Just how is that going to impact the economy more broadly moving forward?
--:-- Cabot Phillips: Well, listen, household debt is very funny because if it's revolving debt like Bloomingdale's and Nordstrom's and, you know, Antail or whatever, that's those. Have you ever looked at your statement to really see what those what those companies are charging you? It's 18, 19, 20 percent is what is what the annual interest rate that I mean, it's usurious, right? How they get away with it is beyond me.
--:-- Kenny Polcari: But as people start to rack up debt and they're not paying off those credit cards every month, those interest charges continue to accumulate and they accumulate faster. And then you talk about an economic slowdown. You talk about, you know, the husband or the wife losing their job or getting pared back and earning less money. Suddenly you know you can feel the walls caving in around you.
--:-- Cabot Phillips: And then you start talking about something that I don't think people are talking enough about is adjustable rate mortgages have once again become very popular. And so when those adjustments happen, you know, you go in for a low teaser rate the same way you did in 2003, four, five before it all imploded in 2007, eight, nine, when all those adjustable rates came due, when the rate suddenly changes again, you're found with a much higher rate. Maybe you're not prepared for it. Maybe you lost your job. And so that's going to create a problem.
--:-- Kenny Polcari: Now, I'm not trying to paint this doomsday scenario. You ask me a question, what does it mean? Here's what it means. Now, if the economy doesn't fall into recession, if we don't go into a deep economic slump, then people will be able to pay those bills. They may not be able to do everything they want, so they'll pull back on vacations and they're not going to buy a new outfit or they're not going to go out to dinner so many times. But if it gets bad, if the recession is deeper than what they want you to believe, then you can expect to start to see headlines like that.
--:-- Cabot Phillips: All right. We've thrown a lot at you, Kenny. We'll give you one more from out of left field. The newly Republican-controlled House is trying to pass a measure that would abolish the IRS and implement a new flat consumption tax. It's not really that likely to get a vote on the Senate floor, but what do you make of that move?
--:-- Kenny Polcari: So listen, I think that's a great idea because I think the tax code is way too convoluted. I think there's way too many loopholes that that a lot of people can take advantage of and others don't have access to or can't take advantage of. Right. So I'm all for kind of a flat tax. Right. Just everyone. Here's it. Here's the number. No more deductions. Here's the number. Here's the flat tax.
--:-- Cabot Phillips: The problem with that is, though, once you do the flat tax, then Congress will find a way to spend more money. And then that flat tax rate keeps going up and then there's no deduction against it. Right. So that's the other side.
--:-- Kenny Polcari: Now, to your point, it'll never happen, right? But I do hope that they take away the funding for the 87,000 new IRS agents that they want to hire to go after guys like you and me, you know, that represent middle class or upper class America versus, you know, trying to draw more money out of us versus going to where, close the loopholes where they should be drawing money out of, you know, businesses or high net worth, I mean, ultra high net worth individuals.
--:-- Cabot Phillips: All right. A lot to get to on the economy this year. Many Americans will be watching very closely. Kenny, thanks for coming in.
--:-- Kenny Polcari: You're very welcome. Listen, I got to tell you, what a great beard you have, by the way. That's a perfect beard. It's coming in. I appreciate that. It'll come in white like mine. Just give yourself a couple of years.
--:-- Cabot Phillips: Kenny, I appreciate it. That's Kenny Polcari, market strategist and managing partner of Case Capital Advisors.
--:-- Georgia Howe: That was Daily Wire senior editor, Cabot Phillips.
--:-- John Bickley: And this has been a Sunday edition of Morning Wire. Well, that's all the time we've got this morning. Thanks for waking up with us. We'll be back tomorrow with the news you need to know.
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