--:-- Georgia Howe: Welcome to an extra edition of Morning Wire. I'm Georgia Howe with Daily Wire Editor-in-Chief John Bickley. It's Saturday, October 21st.
--:-- John Bickley: Thanks for joining us.
--:-- Georgia Howe: Today, we're discussing the puzzling economic landscape with an expert. Joining me is managing partner of Case Capital Advisors, Kenny Polcari. Kenny, thanks so much for coming on.
--:-- Kenny Polcari: It's a pleasure to be here.
--:-- Georgia Howe: So let's start with the big picture. Are we in a recession? Did we escape it? Or is one still coming?
--:-- Kenny Polcari: No, so we're not in it. Actually, you know, you could say that we were in a rolling one, but officially we have not been in it. The government hasn't declared one. So officially you have to say we're not in it. Is it coming? Yes, I do believe it's coming. Although the government has done a very good job of pushing it off. And they've done that by, you know, plenty of money supply, keeping everything settled.
--:-- Georgia Howe: Although you have to ask the question, is it really settled? Look what's happening to interest rates. Certainly over the last couple of weeks, interest rates have spiked higher. And that's just setting us up for what I think is going to end up being a more difficult economic time ahead.
--:-- Kenny Polcari: And so I suspect now that the recession is probably going to start, or at least it's going to feel like it's coming towards the end of this year, very early next year.
--:-- Georgia Howe: And how would that affect everyday Americans?
--:-- Kenny Polcari: Well, look, it's going to be tough, right? You'll see unemployment spike, spike higher, and you'll see people losing their jobs. You'll see inflation will continue to be a problem on people's paychecks. And so therefore, it's just going to get more difficult. Interest rates will go up. Mortgage rates will go up. Housing will come under some pressure. So there'll be economic malaise across the specter.
--:-- Georgia Howe: Now, where does inflation stand right now? And can you go over some of the recent numbers?
--:-- Kenny Polcari: Yeah. So inflation has come down. Let's be fair. Inflation has come down. Right. It spiked to a high of nine point four percent about a year ago. It has been steadily coming down. But the fact is that inflation still exists. So prices continue to go up just at a slower pace. Right. There's a difference between deflation and disinflation. Deflation is when they actually start to go negative. We haven't gotten there. Disinflation is when the pace of price increases just starts to slow, which is where we are now.
--:-- Georgia Howe: I think the latest CPI number was 3 which was a tad bit higher than what they had expected which again is not good because that just suggests that inflation is starting to rear its ugly head again and could potentially start to push its way higher.
--:-- Kenny Polcari: And for a lot of people who may be listening to this, you know, the last time this really happened was 40 years ago, back in the late 70s, early 80s, when the Fed prematurely paused because they thought they had killed inflation, only to find in the months that followed that inflation started to rear its ugly head and start to go upward again.
--:-- Georgia Howe: And that's when Paul Volcker, who was then Fed chair, had to really jam rates much higher to slow the economy down and sent the economy into a two-year, very deep recession.
--:-- Kenny Polcari: Am I calling for that this time? No, I don't think it's going to that bad. But I do think that the Fed's not done raising rates yet. I think they're going to be forced with the realization that inflation is remaining very sticky. And it's on the stuff we need, right? So they can say all they want that the price of used cars have come down and the price of computers have come down, that's great. You can't eat a used car. You can't eat a computer. But you need food. You need energy. You need utilities. You need health care. Those are all the things that continue to increase in price. And those are the things that are going to impact the everyday consumer.
--:-- Georgia Howe: Now, you mentioned deflation. Do you think it's possible that we could see some of these prices coming down? Or are we just going to have to wait for wages to catch up?
--:-- Kenny Polcari: Well, that's a very interesting question. Because what will happen now is that people are used to these higher prices, right? So if wages catch up, this will then become the norm, right? This will be just what prices are, but everyone will be making a little bit more money, and so therefore it will become the norm. Do I see prices deflating, actually turning much lower? I don't see that happening unless we run into a recession that's going to be deep like it was back in the late 70s, early 80s, where you saw suddenly demand plummet and deflation take hold.
--:-- Georgia Howe: Because I don't see that coming, I think what we're going to get is this inflation that just settles in at these elevated prices, which will become the norm. And then if wages catch up, then we'll be on that same flat foot again.
--:-- Kenny Polcari: One exception to that might be the housing market. Are housing prices going to come down as a result of these interest rates?
--:-- Georgia Howe: Housing prices have to come down. It's just a math problem, right? As interest rates go up, they become unaffordable for the everyday person. And so in order for that to balance out, the price has to come down.
--:-- Kenny Polcari: Now, I think we're starting to see that mortgage rates now, 30-year conventional money is running at about 7.5%, 7.6%. If you want a jumbo loan, you're already paying over 8%. Look, I thought it was going to be 7% where we're going to start to see it. In fact, they've done a good job of kind of that not happening. But if rates approach 8%, and by the way, based on what's happened in the bond market over the last, even the last week, that does suggest that we could see 8% mortgage rates relatively soon.
--:-- Georgia Howe: And I recently read somewhere that the cost of housing is out of reach for Americans in 99 percent of counties in America. How do we even get to that situation and how do we get out of it?
--:-- Kenny Polcari: Well the way you going to get out of it is that prices are going to suddenly come in right. They are going to start to deflate. The other thing is, you know, you own your house, you're attached to your house, emotionally attached. So you think your house is worth potentially more than it is in this current environment. But don't forget, two years ago, when rates were 3%, there were 10 people trying to buy your house. And so the price went up and up and up. So you think that that's still the case. That, in fact, is not the case. You can put your house on the market now at a ridiculous price. You don't get any lookers. And you're going to have the reality of what's going to be affordable is what's going to hit these sellers, right?
--:-- Georgia Howe: The buyers are already starting to feel, look, I can't do this. I can't pay that price. I can only afford to pay here. If you want to sell it to me, I'm happy to buy it. And ultimately, that's the reality check that has to happen. And it's got to come from the sellers, right? And as more and more people get a little bit anxious that they need to sell the house and they want to sell the house, it'll be like anything. It'll be supply and demand. And suddenly there'll be more houses for sale. Buyers will have their pick of the litter and you'll see prices adjust.
--:-- Kenny Polcari: Now, retail sales soared in September. There's also a hiring surge in August. Those are some of the indicators I know Wall Street types like to look at. What do those indicators tell you?
--:-- Georgia Howe: So it's very interesting. Let's talk about the hiring surge. You know, we were expecting 150,000 new jobs on the first Friday when they report that number. In fact, it came out at 350. Do you realize that 150 jobs were part-time jobs? They weren't full-time jobs. They were part-time jobs. Now, does that mean that people are now going out getting two jobs because they have a full-time job? Now they're getting a part-time job just to keep up?
--:-- Kenny Polcari: I would suggest that is the answer, right? That the part-time jobs are an increase because people are trying to struggle ahead.
--:-- Georgia Howe: Your other part of the question was? So we had the hiring surges and then retail sales. Okay, so retail sales came out yesterday. So we were looking for up two-tenths. It came in up seven tenths. And they were going, oh, look at how great the consumer is. The consumer is so strong.
--:-- Kenny Polcari: Let me tell you something. The consumer is spending more money, but they're actually buying less because of what inflation has done.
--:-- Georgia Howe: So you're going to go out. You're spending $10 or $20 more at the grocery store every time you go, or you're spending $10 more to fill up your car. You didn't buy more gas. You bought the same 16 gallons of gas. But because you paid more, it appears as if you're spending more. Well, in fact, you are spending more, but you're not buying more. And that's the issue.
--:-- Kenny Polcari: And so I think yesterday's number, while they kept talking, look how strong the consumer is. I actually think that that's a falsehood. I don't know about you. I'm not necessarily buying any more, but I feel like I'm spending more money just trying to buy the stuff we need, right, to support a family.
--:-- Georgia Howe: Although the one exception to that might be the miscellaneous store retailers. That's things like office supplies, florists, gift shops. Those were up 3%. So any. Yeah, you know, that was a curious number. And I didn't I didn't I haven't been able to really figure that out.
--:-- Kenny Polcari: The most the miscellaneous stuff, you know, is it I was trying to think, OK, is it the holiday? It's not really the holiday yet, although we're coming into the season. Was it Valentine's Day? It was a Valentine's Day. So why the uptick and things like that? I, for one, cannot explain that.
--:-- Georgia Howe: OK, so how long do you think this level of spending can go on? It sounds like you kind of answered that, that we're stuck with it because of the prices.
--:-- Kenny Polcari: We also seen reports from The Wall Street Journal that credit card debt has hit one trillion dollars. What going to happen when all those bills come due?
--:-- Georgia Howe: So that's another problem. First of all the credit card debt is hitting such high levels because people are using credit cards to pay their bills to stay, you know, on top of it, right? Some people use their credit cards to buy food every day or every week. But what's going to happen is, because you know, credit card rates are revolving credit, right? Every time interest rates go up, the rate on revolving credit cards go up, right? Some of these cards are charging you 25% and even 30%. And if you're a day late or if you don't pay the minimum, the rate goes up again on you.
--:-- Kenny Polcari: And so what's going to happen? And you're starting to see that in, we heard from the banks this week, what they've done with their loan loss reserve account. That means they are putting aside money in a loan loss reserve account to make up for what they suspect is going to be tougher times ahead. So defaults. People are not going to pay their credit card loans. They're not going to pay their mortgages. They're not going to pay their auto loans. You're already starting to see that in auto loans, right?
--:-- Georgia Howe: And so ultimately what's going to happen, and American Express is coming out on Friday. Their earnings are coming out on Friday. It's going to be very interesting to hear what they say about credit card defaults, right? The same will be true of Visa. The same will be true of MasterCard. When they report over the next couple of weeks, people should be listening to what they're saying about credit defaults, because that's going to suggest what they're seeing, you know, two, three, four months out about the consumer, the health of the consumer, and the ability of the consumer to be able to pay those cards.
--:-- Kenny Polcari: All right. Last question. Wall Street investors, traders in general, they don't like chaos, but we're seeing a lot of chaos globally. We have the war breaking out in the Middle East. How do you expect that this is going to affect things like oil prices, stocks, even just the economy overall?
--:-- Georgia Howe: So that's exactly true. The market doesn't like uncertainty. Chaos is certainly uncertain, right? Now we've got this new war in the Middle East. And so it provides short term chaos because the markets get anxious and nervous. And that's what's happening. We've seen it happen last week when it first broke out. You saw it happen again when the level of battle heated up again. We saw the markets back off. We saw interest rates jack up because it's a safety trade. People are afraid of stocks. So there's pressure on stocks.
--:-- Kenny Polcari: But typically what investors should know is that the chaos from geopolitical stuff rarely prices stocks in the long term. They create short-term chaos and they make you very nervous. But that's actually, if you're a long-term investor, that actually becomes an opportunity because good names get whacked. Names like Apple and Amazon and Microsoft, people go, oh my God, I want my money. And so they sell these good names and they take the money and they put it somewhere else.
--:-- Georgia Howe: The fact is it's Apple and it's Microsoft and it's Amazon. And I hate to say, I don't want to sound as if I'm insensitive to the geopolitical events, but the truth is in the longterm, those geopolitical events do not price stocks. And so what I would say to people is that as long as you've got a well-diversified portfolio and you've got names in your portfolio that you like, you bought them for a reason. The fundamentals have not changed. But if the stock backs off because of the anxiety and the chaos, that actually provides a longer-term opportunity.
--:-- Georgia Howe: Well, Kenny, it was great to have you in studio today.
--:-- Kenny Polcari: It's a pleasure to be here.
--:-- Georgia Howe: That was managing partner of Case Capital Advisors, Kenny Polcari. And this has been an extra edition of Morning Wire.
