Afford Anything - Fed Forecasts, Buffett's Birthday, and Selena Gomez's Billion-Dollar Brand

Episode Date: September 6, 2024

#538: The latest jobs report just dropped, and it's a game-changer. Job creation numbers are lower than expected, at 142,000 new jobs in August. This comes on the heels of the biggest downward revision in job numbers since 2009. We're diving deep into what this means for the Federal Reserve's long-anticipated first rate cut. Are we looking at a modest quarter-point cut in interest rates, or a more substantial half-point drop? The Fed's decision could mean the difference between that dream house being within reach or slipping away. We'll break down the latest data and translate what it means for you. In our second segment, we're celebrating Warren Buffett's 94th birthday by exploring how he continues to lead Berkshire Hathaway with razor-sharp acumen — and what this teaches us about aging. Finally, we'll turn our attention to Selena Gomez, who just became a billionaire. Around 81% of her wealth comes from her makeup line; only 3% of her net worth comes from acting and singing. Her story highlights the power of entrepreneurship in building massive wealth. Join us for a blend of timely economic analysis and inspiring success stories. For more information, visit the show notes at https://affordanything.com/episode538 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey, Afford Anything Podcast listeners. This is Steve, that guy who does stuff for Paula. Somehow this morning, I messed up on the first Friday bonus episode. So if you have already listened to the first Friday episode, we apologize. No, I apologize. It was my mistake. And this is a corrected version. So you may have already heard some or all of this content, but I have now fixed the problem. And I'm hoping that if you haven't listened all the way through, you give this a chance again. Please enjoy Paula's first Friday bonus episode for September for 2024. Breaking news.

The jobs report just dropped and it's a game changer. But can we trust it given the recent revision and how strongly will it influence future interest rates? We're going to discuss that and much more in today's episode. Welcome

to the Afford Anything podcast. The show that understands you can afford anything, but not everything. Every choice carries a tradeoff. And that applies to your money, time, and energy. This is a show that focuses on five pillars. Financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double eye fire.

I'm your host, Paula Pant. I trained in economic reporting at Columbia, and I help you prioritize. On the first Friday of every month, we post an in-depth look at the economy. So welcome to the September 24, 1st Friday, Economic Update. Now, why do we do this on the first Friday of the month? Well, we are not the only people who release a special report on the first Friday of every month. The Bureau of Labor Statistics releases the employment situation summary, which is better known as the jobs report, on the first Friday of every month. They always do so at 8.30 a.m. Eastern time. So when you tune in to this show on the first Friday of the month, you know that you are getting the latest job report numbers, the freshest job report. numbers, the ones that have just been released that morning at 8.30 a.m. And if you're thinking, well, why should I care? I have a job. The jobs report has implications for everything ranging from how well is the GDP doing to what are interest rates

going to be, which means how expensive is your mortgage going to cost? Before we get into today's numbers, let's pause for a moment to put these numbers into context because this is not an ordinary month. And that's for two reasons. Number one, the Federal Reserve, which sets interest rates, is meeting September 17 and 18. For the entire year, they have kept interest rates steady. And for months now, analysts and markets, both trading markets and betting markets, have widely been expecting them to lower interest rates at the September meeting. The question is, by how much? And the jobs report that was released this morning carries the data that highly influences that decision.

So depending on the numbers in this morning's jobs report, we will have a pretty good guess as to whether we can expect them to lower interest rates by a quarter of a percent, by half a percent. You know, how much are they going to go down, both at the September meeting as well as throughout the rest of the year? Because remember, they're meeting three more times this year, September, November, and December. So that's one of two reasons that this morning's jobs report is particularly fascinating. But there's a second reason as well, and that is that a few weeks ago, in mid-August, the Department of Labor announced a revest. vision to the previous jobs numbers. The Labor Department had previously stated that in the 12 months leading up to March 24, there had been 2.9 million new jobs created. That was what the

Labor Department originally said. But a couple of weeks ago, they revised that number and they downgraded it to 2.1 million new jobs, a downgrade of about 30%. So they revised job growth numbers by 818,000. That revision suggests that the economy is weaker, more fragile than previously thought. Now, I should say that the Department of Labor does this frequently. Revision is standard practice. Every jobs report comes out with a disclaimer. And annually, the Labor Department, the Bureau of Labor Statistics, the BLS, releases annual benchmark revisions to their jobs numbers. So the fact that a revision was made is de rigour, it's commonplace. But the scale of the revision, the severity of it, is unusual.

So the jobs report is essentially Ponsetani Phil, you know, the Groundhog on Groundhog's Day. The jobs report itself does not determine how much the Fed will reduce interest rates, but it does send a signal because if it's a good report, then the Fed is more likely to make a smaller rate cut. But if it's a bad report, then the Fed is more likely to make a bigger rate cut. So looking at the jobs report is kind of like the groundhog seeing its shadow. You get a sense of how much longer winter is going to last. This is the largest revision to total payrolls since 2009. Now, the sector that got revised the most, which is to say the sector that's doing way worse than had previously been reported,

are professional and business services, with 358,000 fewer jobs than reported. Other areas include leisure and hospitality with 150,000 fewer jobs, manufacturing with 115,000 fewer jobs, and trade transportation utilities, 104,000 fewer jobs. There were, however, a few sectors that saw upward revisions as well. So to be fair, these reports do not simply get revised in one direction. they go both ways. When I say that it is standard practice for reports to be revised, it goes both ways. And so we did see that private education, health services, those had more jobs than previously expected. So those industries are doing better than previously expected. Health services added 87,000 additional jobs more than was thought. Transportation and warehousing added 56,000 more jobs and other services added. an additional 21,000 jobs. All of that is to say that while a few specific sectors are doing better than we previously thought, overall, the broader trend is that fewer jobs were created

in the 12 months leading to March 2024, which means there is more shakiness in the economy. And that increases not only the likelihood of a Fed interest rate cut, which at this point is in your certainty, but also potentially the size of the size of the economy. that cut. Prior to the revision, many analysts were expecting that the Fed would cut rates by a quarter of a percentage point. After the revision, more people started betting on the size of that cut getting bigger, on the Fed cutting rates by perhaps half a percentage point at their September meeting rather than simply a quarter. There's also a lot of speculation that over the span of the next three Fed meetings, September, November, December, the Fed will in total cut rates by

around three quarters of a percent between now and the end of the calendar year. So that, to give you a snapshot of where we stood as of yesterday, that was the dominant thinking, as of yesterday prior to the newest information, which is the first Friday report. That's the groundwork, that's the context, all leading up to this morning's report. And I realize that in my enthusiasm around giving the context that leads us up to this morning's report, I am arguably burying the lead. So let's not delay any further. Here's what we learned in this morning's report.

The U.S. added 142,000 jobs in August, which is way lower than we expected. And on top of that, the numbers for June and July were all. also revised downward. So not only did we add fewer jobs in August than we expected, but we also added 86,000 fewer jobs in June and July, as previously reported. That means the three-month average, the trailing three-month average, is 116,000 jobs. What that tells us is that businesses are reluctant to hire. The high interest rates, the effect of high interest rates, is catching up with us. money is more expensive to access and therefore businesses are borrowing less, investing less, hiring less. Meanwhile, people want to work more than ever. Labor force participation is at 83.9%, which is, historically speaking, quite high.

The highest that it's been on record in recent history was in July at 84%, a flat 84%. That was the highest since 2001. So more people than ever want to work, but fewer jobs are being created. And there's another measure. This is a measure not of unemployment, but rather of underemployment. And it's a measure of people working part-time who would like to be working full-time. That is currently at 7.9 percent, which is the highest level since October 2021. Again, those are people who are working part-time, so they are employed. But they are not voluntarily choosing to work part-time.

They are doing so because they can't find a full-time job. as opposed to a separate class of people who are voluntarily choosing to work part-time for various personal reasons, maybe family obligations, maybe they're semi-retired, etc. We can also see that there are certain sectors that are incredibly resilient, health care, enormously resilient. Construction, which does not surprise me at all, has also been enormously resilient. The reason that doesn't surprise me is because we have a massive housing shortage. So a lot of the job growth is in health care, construction, and food and beverage establishments, brick and mortar restaurants. So if you do want a job, as of right now, those are the best sectors in which to get it. By contrast, manufacturing is shrinking.

It lost 24,000 jobs in August. So I would give it, and pretty much every analyst is going to give it, a hundred percent probability that the Fed is going to lower interest rates when they meet. on September 1718. The only question is, buy how much? Will it be a quarter of a percentage point? Will it be half a percentage point? If you are a betting person, this would be where you stake your $10 beer money. The investor market, the trading markets, are seeing, as of this morning, investors currently

are putting it at a 50-50 chance of either a quarter point or a half. point. Text your friends, place your bets. Will it be a quarter point? Will it be a half point? That's the answer that we're going to learn on September 17, 18. But it will absolutely be one of those two. So changing gears, notice what we haven't talked about yet. Notice that we are this deep into the show, and we have not yet discussed inflation. And if you want an inflation report, that right there tells you a lot. because these economic reports back when inflation was bad used to always lead with inflation. And so that's the combination that we're living in right now. We have inflation that's approaching 2%, which is the Fed's target rate. Consumer prices rose 2.9% from July 2023 through July

24, which is the most recent month for which data is available. Now, the August data is going to be available on September 11th. But as of today, September 6th, The most recent data comes from July, and that puts us at a trailing 12-month annual inflation rate of 2.9%. That was the first time since March of 2021, that the 12-month increase was below 3%. So with inflation down in the two's approaching 2%, and with unemployment over 4%, it makes a strong case for a hefty rate cut. My guess would be, and you can mark my words, I'm predicting that by the end, of 2024, we're going to see a minimum rate cut of three quarters of a percent. So there it is my official prediction.

Time will tell. I do not purport to be right. I only am making an educated guess, and we will see how close I am. But here's the takeaway for those of you who are thinking about taking out a major loan. And typically for most of the people in this audience, if you're thinking about taking out a big loan, it's probably because you're thinking about buying a home. As interest rates fall, more and more buyers are likely to enter the market, which means competition for homes is likely to rise. And when competition rises and there's more buyer demand, that means prices go up. So if you

are thinking about buying, I'd get on it. Now, all standard disclaimers apply. Don't stretch yourself too thin, don't do it if it would make you house poor, make sure that you have a solid financial foundation, have an emergency fund, et cetera, et cetera. If you've listened to this show for any period of time and you know the principal finance rules that I consistently hammer home, all of the standard personal finance rules apply. But within that context, if you're thinking about buying something and you have the down payment and you're ready, I would not hesitate because you You can lock in a home before prices increase and then refy that mortgage down the road when rates decrease. As they say, marry the property, date the rate.

Let's turn our attention to the markets. The markets throughout the last month have been choppy, volatile. And people are scrambling to find an explanation. Some have pointed the finger at Nvidia and tech and AI stocks. and have speculated that investors are afraid that there is an AI bubble or that there's been over speculation, that these stocks have run up far too much on hopes and expectations, and now they are renormalizing again. That's one possible explanation.

It's an easy explanation. It feels like it could be true. But there's another more interesting hypothesis that I want to float. And this involves the carry trade. A carry trade, C-A-R-R-R-Y, a carry trade, takes place when investors borrow money in a currency in which interest rates are low and invest where returns are expected to be higher. And so many traders may have made speculative bets based on the assumption that the gap between interest rates in Japan and interest rates in the U.S. would remain wide. This is all based on reporting from the economist,

which I am citing heavily. Now, on July 31st, the Bank of Japan decided to raise interest rates by a quarter of a percentage point. And meanwhile, analysts, as we just discussed, expect that the Fed in the United States is going to lower interest rates by at least a quarter of a percentage point, if not half a percentage point. And so the gap between U.S. interest rates and Japanese interest rates is now tightening.

And that's enough to drive investors to unwind these carry trades, which then can set off a ripple effect of forced selling. Now, it's an interesting hypothesis. It is difficult to prove because there is a lack of official data on the dollar yen carry. trade. So the analysts at UBS estimate that the dollar yen carry trade represents around $500 billion worth of economic activity at its peak. So that's what the analysts at UBS say. The analysts at JPMorgan Chase estimate it to be worth around $4 trillion. So somewhere between $500 billion to $4 trillion is the amount that we're talking about. That's how how little official data there is. That's how little we know about how big of a chunk of the

global economy the dollar yen carry trade represents. Now, what we do know is that yen-denominated cross-border lending from banks to non-banks is worth $271 billion, and that that amount rose by 52% in the last two years. In other words, what we do know is that in the last two years, as interest rates in the United States went up while rates in Japan stayed solid. During that two-year period, the appetite for borrowing yen from the international community rose significantly. That's what that stat is saying. So going back to what led to this discussion, why have markets been volatile over the past month. It's possible, as some people are speculating, that markets are volatile because investors are worried that there has been too much investment in tech and AI, particularly in

NVIDIA. That is a possible and easy explanation. And Occam's Razor says the easiest explanation is the most likely one, so I'm not knocking it because it's easy. But it's also possible that anticipation of the Fed lowering interest rates is triggering a lot of trades that are not necessarily immediately intuitively obvious, including foreign currency arbitrage. And that could be a reason or at a minimum a contributing factor that helps explain why markets have been volatile. And I should note that while people are making a big deal about, oh, invidia has taken the biggest hit, well, yeah, also took the biggest gain. It stands to reason that the companies that saw the biggest gains would also see the biggest drops. The Magnificent Seven, a cohort of stocks that have really

led the growth in the economy, the Magnificent Seven have been overwhelmingly responsible for the bulk of the growth that we've seen. So the fact that many of those stocks are also taking the brunt of the blow, well, that's just proportionality. We're going to take a quick break to hear a word from the sponsors who make this show possible. And when we return, we say, happy birthday to Warren Buffett, America's favorite grandpa at 94 years old. The holidays are right around the corner. And if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens.

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Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big bank muscle, fintech hustle. That's your commercial payments of fifth third. better. Welcome back and happy birthday Warren Buffett, who on August 30th turned 94 years old

and has said that he has no desire to retire. And can I just say first, if you don't mind a moment of editorializing? The ultimate flex is to be a 94-year-old billionaire who has the wealth to no longer work, but the health to continue working and the passion, the love, the enthusiasm to want to continue in his career. Here's what's fascinating about Warren Buffett continuing to run Berkshire Hathaway as the CEO at the age of 94. We have had, in the United States, many cultural conversations recently around the question of of how old is too old to do a given job.

That conversation dominated the presidential election and was ultimately the reason that President Biden dropped out of the race. But in that conversation in which we fixated on the age of President Biden, 81, we used in our rhetoric age as a proxy for cognitive ability. Warren Buffett is 94 years old. At 94, he would love to have the youth and energy and vitality of an 81-year-old. When you're 94, an 81-year-old is a little kid. When the millennials are 94, Gen Z will be 81. But Warren Buffett has remained sharp. And the reason we know that is because he is so active in his public appearances. He will get up on stage.

I mentioned this in a previous episode as well, and this is an observation that was originally made by Chamoth Polly Hopatia. He will get up on stage in Omaha at the Berkshire Hathaway Shareholders Meeting with a can of Coca-Cola and a stick of peanut brittle in his hand, and he will speak about Berkshire Hathaway unscripted for between six to eight hours, which is a level of endurance that would tire out of, a 30-year-old. And if Berkshire Hathaway shareholders at the end of observing eight hours of unscripted remarks,

if they were to lose confidence in him as a CEO, they could sell their shares. But they don't. In fact, there's so much confidence around Warren Buffett as a CEO that people are worried about who's going to lead Berkshire Hathaway in the event that 10 years from now he might not be able to run the company at the age of 104. And I tell this story, this is now my second time repeating this on this podcast, but the reason that I emphasize this is because I think that what has been lost in cultural rhetoric is the conflation of age with cognitive ability. When we start using those two terms interchangeably, which is to say when we dismiss someone based on their age rather than based on their ability, we end up shortchanging ourselves because we then start to internalize. the belief that once you reach a certain age, you are quote-unquote too old. So you will hear people say, oh, I'm 60. I'm too old to start a business now. And then you back that down. Well,

I'm 50. I'm too old. I'm too old. I'm too old to switch careers. I'm too old to run a company. I'm too old to start lifting weights. I'm too old to learn how to code or to truly deeply understand AI. And once you have people who are in their 80s who believe that, then it quickly backs down to people in their 60s, their 50s, their 40s, their 30s who start to believe that as well. That is the danger of conflating age with ability. And that is why I love the example that Warren Buffett is setting by being 94 years old and still the capable of the ability. trusted, revered CEO of one of the biggest companies in the United States. Berkshire Hathaway reached a market value of $1 trillion, trillion with a T,

it reached that value two days prior to Warren Buffett's birthday. Imagine as a 94th birthday present, your company hits a trillion in market cap. It is only the eighth company in the United States to have ever reached the trillion dollar level. And it's the first company in the United States that is not a tech company to have reached the trillion dollar level. That is how competent, how unshakably competent, Warren Buffett is as a CEO. And I'm sorry that I use the word competent because it is such a understatement. but I'm choosing that word to emphasize this broader point, that age is not ability.

Ability is ability. And unfortunately, there are some people who lose their cognitive abilities when they are in their early 80s. And that's sad to see. But there are others who maintain health and vigor into their mid-90s and beyond. Look at Charlie Munger who passed away recently at the age of 99, Warren Buffett's business partner,

his late business partner. Charlie Munger was sharp and active and advising Warren Buffett and advising Berkshire Hathaway right up until he passed at 99. Look at Betty White, acting until the age of 99, and clearly loving every moment of it. Warren Buffett did not start Berkshire Hathaway. He took control of it in 1965 back when it was a struggling textile mill. Between 19, 1965, when Warren Buffett took control of it through today, its Class A shares are worth 55,000 times more money. In that same period of time, the S&P 500 rose 400 times X. So 400X, S&P 500, 55,000 X, Berkshire Hathaway between 1965 and today. Now, there are people who criticize him because stock performance,

in the last decade has roughly mirrored the S&P 500. Between 2009 and 2023, Berkshire's annual return average 13%, which actually underperformed the S&P 500, which has averaged 15% in that same time span. But large cap companies, and Berkshire is one of the largest ever in history, rarely generate returns that beat the index, particularly non-tech companies. Berkshire currently has nearly $280 billion in cash that it's sitting on. So at its trillion dollar market cap, it is not trying to generate the eye-popping returns of a small cap. It is steady, stable, and its shareholders have an indisputed and overwhelming level of confidence in its CEO. So this is partially an homage to.

to Warren Buffett and Berkshire Hathaway and partially a reminder, a message to all of us in this community, especially in the fire community, to never think of yourself as restricted by your age, regardless of how old you are.

Yes, you might have health-related concerns that correlate with age, as we saw with President Biden. He had health-related concerns that correlate with his age, but that is. is distinct from and should not be conflated with age itself. And Warren Buffett is the prime

example of that. So happy birthday, Warren Buffett. And I look forward to his continued leadership of Berkshire Hathaway. One last congratulations is in order. Selina Gomez is a billionaire. The Bloomberg billionaire's index put her net worth at $1.3 billion. Thanks largely to her entrepreneurial endeavors, including her beauty line called Rare Beauty, which is available at Sephora. Now, I'm sure half of you are thinking, oh, I love only murders in the building. And the other half of you are thinking, why should I care? Oh, great, another celebrity. How does this affect me?

Well, let's look at what we can learn from this. Selena Gomez is an actor and a musician. What percentage of her income do you think comes from acting and albums? In other words, what percentage of her network? do you think comes from trading her time for money as an actor and as a musician? The answer, 1.3% of her overall net worth is directly attributed to the money that she has made as an actor. And 1.8% of her overall net worth is the money that she's made from her albums. So the income that she has earned from her highly successful career amounts to around 3%

of her overall net worth. Now, touring is another 4.8% endorsements, sponsorships, that's another 6.9%. Okay. If we want to lump those things in with that trading time for money exchange, sure, we can do that. That's another 12% in total. But the overwhelming chunk of her net worth, 81.4%. Literally, we're talking the 8020 here. 81.4% is her ownership stake in her makeup line, Rare Beauty.

If anything, that is an underestimate because Bloomberg's wealth analysis team assumed the lowest estimated value of her stakes in businesses and based their analysis only on assets that could be confirmed or traced from publicly disclosed figures. so likely the amount of her overall net worth attributable to rare beauty is likely underestimated. What this highlights and the takeaway for all of us is that trading your time for money can only take you so far. Having an ownership stake in a product or service that is scalable, that is where orders of magnitude greater wealth can come from. That is the power of entrepreneurship. And that's true no matter how high income you are. Your W-2 paycheck, whether big or small, can never generate the level of wealth that can be achieved by owning assets, direct ownership of a company or companies. This is why entrepreneurship is one of the five pillars of this show.

And I understand not everybody wants to build major wealth. Some people want lean fire. Some people want to make just enough and then peace out of the game. And if that's what you know you want, more power to you, we're here to help you get it. But for those of you who want to build to greater heights, the fact that a 32-year-old actor and singer, who is currently in the public eye best known for, at this moment, for her starring role in a slapstick murder. mystery on Hulu, the fact that she has amassed a net worth of $1.3 billion, and Steve Martin and Martin Short have not, her co-stars, that right there is the power of entrepreneurship. So I'll leave you with that thought. That's today's first Friday episode. Thank you so much

for tuning in. If you enjoy today's show, please mark your calendars for September 17, because that's when we're going to find out how much interest rates have dropped, and we have been waiting all year for this answer. Text your friends, place your bets. Someone's going to owe someone a beer. Will it be a quarter point? Will it be a half point? We're going to find out together on September 17 slash 18. I'll be posting about it on social. You can find me on Instagram at Paula P-A-P-A-P-A-N-T. I'm also on Twitter at Afford Anything. A few people have messaged me to ask me about various economic policies floated by the two presidential candidates. I am preparing an episode around that. As you know, I do not rush to speak. I want to be very measured and

careful and well-researched and diligent and thoughtful about any statement that I make. So that episode is in the works. It will likely be the first Friday episode of October. But what I absolutely will never do is be one of those pundits that makes off-the-cuff knee-jerk responses. That is not what you will ever find here at the Afford Anything podcast. We hold ourselves, I hold myself, to a much higher standard. To catch that episode and to catch all of our future episodes, make sure that you're following this podcast in your favorite podcast playing app, including Apple Podcasts and Spotify. come find us on YouTube where we are slowly but surely getting our act together in terms of video editing.

We've just brought on a new member of our team who is a video editor, a full-time video editor. He is catching up on our backlog of videos as well as getting up to speed on our new ones with two episodes a week. We've given him a big workload right out of the gate. But we're adding consistently more and more videos to our YouTube channel. So you can find that YouTube.com slash afford anything. And as long as you're marking your calendars, don't forget that our course on how to ask for arrays will be available for beta starting September 23rd. We will have a URL available at a later date. We are still building that page.

But as of September 23rd, you will be able to join the beta cohort for our course on how to negotiate for a raise. So lots of great stuff coming up. Make sure that you're following this podcast. on Apple Podcasts, on Spotify, and on YouTube. Make sure that you're subscribed to our newsletter, afford anything.com slash newsletter. Thank you so much for being part of this community. My name is Paula Pant. This is the Afford Anything podcast.

And I'll meet you in the next episode.