Uncertainty Around Future Policy
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I was anthon's and i'm happy, Jones. And this is on investing in a ritual podcast from charge, while each week, we analyze what's happening in the markets and discuss how that might affect your investments.

So is you and I are both on the road this week, and i'm sure you're getting a lot of questions about some of the policy changes in washington. S, M, I, potential tariff s, the effect of the economy, inflation and markets, immigration reform, tax policy. And we had the pleasures and privilege of being with our colleague, my towns, and who covers a lot of the issues in washington for us. So that's been fantastic. But what kind of questions are you getting these days?

Well, you're right. And you and I rode impact when we did our panel last night.

There was a lot of discussion about tabs, say, if I had to put IT in sort of a thematic button in terms of what types of questions some of them are, are abroad with regard to policies and questions around at all line of do you take him literally or take him seriously and how that applies to terrify and immigration this time? Do we assume that the campaign promises go to that degree? And of course, our answer is, and even our calling my tells and answers, we don't know that something we're going to hold have to wait and see about.

But certainly one of the things we talked about on on stage, as you know, yesterday, is that IT is really, really hard to argue. The other side of tarsal slow growth and race inflation and at the extreme of what has been proposed, they're highly inflationary. So i've been getting a lot of questions about the inflation impact of terrace, and I answer often by also weaving in the immigration side of things into the extent that there are massive portages that, of course, lowest labour supply and all equal raises labour costs, which have you add that into the mix? That puts supports pressure on inflation.

And that could be part of the reason why your world has been affected with with higher bond fields, which to some degree also reflect that economic growth has been fairly resilient. But now as we look into the the future, the inflationary impacts of both terabits and immigration come into play. I'm really curious as to your thoughts on the december fed meeting. There is still a decent amount of data between now and then, including A P, C, E version of inflation, which is if its preferred measure and we get another jobs report before that s fit mining. But what would your betting odds be in terms of the fed moving by another twenty five or pressing the pause button for that meeting?

I would take the case for a pause is getting stronger. And the reason is the economic data have been resilient. As you mentioned, ever since we started to get the upward revisions and september to the data, what we've see is an economy that's really growing at a pretty healthy rate to and half to three percent with pretty full employment.

The unemployment rate is edged up, but it's stuck around four percent, which we used to think was actually below for employment. And wage growth has been pretty healthy. So we don't have a lot of areas of the economy that are suffering.

There's a few housing obviously being one of them, but financial conditions are pretty easy. You know credit spreads are very, very tight. There is no difficulty financing for corporations and stock market. Well, IT was at all time high is certainly not showing signs of cratering and tightening financial conditions.

So when you look at all that, you say why would the fed need to move now, particularly with all of the uncertainty about what policy is gonna going forward and how that affect inflation? So you know, we know that the labor markets in good shape right now. If that were to change in the next report, I think the fed would respond to IT.

But I don't know that, that's a likely event. A inflation is still declining, but th Epace s lowed. We're still not at the two percent target for a core P, C, E and certain areas like services, especially housing and insurance. Our stock then, as you mentioned, immigration reform, which could reduce the labor force size by know as much as eight percent, maybe a little bit more, that could have a big influence. So polis said, I think reasonably, that they don't want to deal with fiscal policy until they know what that fiscal policy is, and that's a long way down the road.

On the other hand, we know from previous experiences of the fed in two thousand sixteen, when there were all these policy changes proposed, they did discuss them and model potential outcomes at the meetings before they were actually implemented just to have, you know, baseline kind of evaluation of what I might mean. So it'll be interesting to see this week we get the fed minutes from the last meeting, then job is claims. And as you mention the inflation number of so I think I would be watching those minutes pretty closely to see how much discussion there was around fiscal policy at that stage of the game.

And then, of course, we have payroll coming up in another CPI report before the next fed meeting. So I would make the case for a pause. I don't know if the votes are there for paul versus to go ahead another twenty five. I know that they've had another twenty five on the kind of the agenda for quite some time, but I would say right now, I would lean towards the pause and wait and see and then take another look at the next meeting yeah.

that's the camp I find myself and at this point, but of course, to your point, the data can change that a perspective. But in there are you mention housing? I'm glad you did because although it's not a huge driver of the economy, IT had started to show some signs of life in the period from when the fed started telegraphing a shift to your monetary policy and in the very early stages of right cuts.

But given the back up on the long end, we saw a really, really quick reversal of those. Some of that Better data. And the most recent news has not been great at all.

We had weaker housing starts. Sales were okay, but nothing ganging. Bus inventory is now rising. Mean refile activity is basically exploded here. So one of our themes for a while now in this whole notion of the role through of rolling strength and weakness in the economy that's been going on for the past few years in this pandemic era that even when you started to see services, maybe take IT a bit on the the chin because that's been the big strength in the economy.

It's been the strength in the inflation numbers that maybe you have some offsetting stabilization improvement in areas that have had their heart landings like causing like manufacturing. And unfortunately, that doesn't seem to be happening. And IT shows you just how sensitive area like housing can be given what's happened to longer term interest rates.

So I think that's something that's worth watching, especially if the economy weakens and IT starts to hit services, but inflation stay sticky, keeping the fed in pause mode, you don't likely get that lift from housing and or manufacturing. And I think on the manufacturing side of things to as we we touch on, there's so much uncertainty with regard to policy. So things like not just capital spending, the capital spending intentions continue to be weak, rightly so, because I think of you a business leader and you're trying to plan out, you've got ta be in wait and see mode in terms of those policies like immigration and tariff. So I I think we may be at at sort of a stall point in that cyclical activity while businesses wait to see what policy proposals become actual policy.

Yeah, I think there is any of permutation of the policies. So yeah, you could take them at face value and say all these things are going to happen. But you also know that sometimes when we impose tariffs, we provide subsidies to the companies that might be affected.

We did that previously when we put them terrible on in china. And then we subsidized farmers who had lost market share to china. They've never really fully recovered that market share.

China now buys a lot from argentina, brazil and instead of the U. S, because that trust is broken. So we get terrific. But do we get subsidies too?

I mean, I think if you're writing like you say, you're a business leader, what are you're going to bed on, right? What is going to affect you most and is IT going to be offset by something else. And then there are their counter terrorist, the uncertainty, ty, which is, I think, terribly overused word in our business.

But in this moment in time, I would say it's at a very high level because you have everything in play and you can go many, many different directions. And so again, I think that makes a case for the fed and may be pause, take a beat, say, you know what, we need to just sit back and much how this plays out now, I think there will be summit of that. Who will say, you know what, rates are still high relative to inflation.

We are in good shape. We don't want to ruin what we've got going in the economy here. Let's do another twenty five, and then we can sort of sit back and wait and see next year. So it's kind of fifty, fifty in my mind. I would be in the pause camp, but I know that there are some of the fact probably are still inclined to do another twenty five.

Well, you and I are both in the post camp, but yeah, I I I haven't tt any calls from singing members at the fed asking our opinion so we can partially ate well.

I will be going to a conference, one of the fed conferences, in a couple of months. So i'm kind of anxious to see how they stack the panel and see they have up there. That's always kind of a good indication of where things are going.

But you know that we have the ukraine, russia thing and and the nuclear threat that hit the market to you know bundle to pin all over the place. We've just came turning back and forth. But staying at a relatively high level.

And I think that, that is uncertainty translated into higher yields. And in the bond market, the way that translates is an increase in the time premium and term premium is just a fancy word for the extra yield. Investors demand to invest in longer term treasuries verses short term.

So you can either buy a bunch of three months tea bills and roll them over for ten years, or you can buy a ten year bond. Usually you want more yield from the ten year bond to protect you from what might change in the market. And usually, what changes is inflation.

So I think that what we're seeing is a big move up in the term. Prey mim, recently, I have been actually negative. Now it's positive and there's plenty of room for you to move higher if this uncertainty continues or if the threat of inflation.

Picks up or you know some other development that could affect yield? Ds, so I think you know, fortunately, in the bond market, we actually quantified just about everything, and that's how we're gona watch IT. But I don't know in the stock market, how do you how do you measure that?

We just want the stark market, just want to IT.

Of course. I mean.

there is a time to what to your world. And I think the bond market is to some degree, the driver's seat for the equity market, but they're also mario moves on a data day every day, week to week that um really have very little explanation. I think there is less rationality more often in the equity market than there is the bond market.

We have a lot of other factors to watch to and these that are harder to quantify perhaps.

So we are off next week for thanksgiving, will give our listener's a little bit of a break. And every week, of course, we would like to say thank you for listening. We are so appreciative if everyone has been really supportive of the podcast, especially those of you who have given us feedback on apple podcast or on x and linked in. And Kathy, since IT is thanksgiving next week, I wanted to ask you in addition to friends and family as or something you are thankful for this year.

Oh, good. I feel like it's been a very busy year, but a very good year. And I I guess I would narrow IT down to i'm really grateful for my colleagues have a wonderful team, Cooper, Howard, Colin Martin, that I work with, the molson tiago, who is behind the scenes and does so much for us, and dian Jacobs who keeps me on track and make sure I show up where to show up occasionally so um and and for you and your team and everybody in our our little give for world, you know it's been a great collaboration. And I think this podcast has a great way for us to spend time together where previously, we just didn't have them much time to convergent chat and and to share ideas about you.

Couldn't agree more. I obviously very thankful for this past year in this podcast. This has been a lot of fun, and you're absolutely right. We we're probably, on a weekly basis, issue and irr together on zone calls or web access. But the usually a larger group IT used to be a rare opportunity for you and I to just ripping and converse, but getting to do in this format and having people that wanna listen.

And of course, our team that you and I are looking at right here on screen and that picture and that portion in court hill, their phenomenal of reera, your for your team, my slightly smaller team, Kevin gordon, who we all know and love, is just so off the charts. And and to your point about dian, Adrian bata keeps us on track going in the right places. I often say that Adrian manages me, and Kevin maybe more than me managing a Adrian.

So that is nice. And and you know, since skipper, our shop center for financial research got wrapped into the broader chabas at management organization, were just surrounded by really talented people whose voices we heard more indirectly in the past when we were in somewhat of our own cirilo. So I am very grateful we have that collaboration with A A larger group of really, really smart people.

So very thankful for all those. But even though we set aside from friends and family, you have to throw in, you know, friends and family and my kids and my husband. So it's gonna a lot of celebrity are celebrating .

my mom's ninety nine birthday this week. So SHE is talk about off the charts .

that unbelievable well done.

incredible ah well, I hope I got those genes. You know i'm hoping I got those genes .

but we'll see yeah my dads ninety five and a few months so getting there as well.

it's really remarkable. Zero point zero three percent of the population IT is pretty rare. So that's good stuff.

So that IT for us this week. I hope everybody has a wonderful thanksgiving. As always, you can keep up with us in real time on social media atlason thunders on x and linked in i'm not on facebook and scram a what's up so you think you see me? There is an imposter .

and i'm at Kathy Jones as Kathy will OK an accent linked in and if you've enjoyed the show, we'd be really great though if you'd leave us a review on apple podcast or rating on spotify or feedback wherever you listen. You can also follow us for free in your favorite podcasting at will be back with a new episode in two weeks.

For important disclosures, see the show notes or a visit shop dot com slash on investing, where you can also find the transcript.