Afford Anything - Good News for the Economy; Bad News for the Markets

Episode Date: October 6, 2023

#465: The Fed is holding interest rates steady for now. The jobs report is better than expected. Stocks and bonds are both going down. What's going on right now in both the economy and in the markets and where should you put your money and your time and attention? That’s what we’re going to cover in this episode. Links mentioned: https://affordanything.com/inflation https://affordanything.com/365 Learn more about your ad choices. Visit podcastchoices.com/adchoices

The Fed is holding interest rate steady for now. The jobs report is better than expected. Stocks and bonds are both going down. What is going on right now in both the economy and in the markets? And where should you put your money and your time and attention? That's what we're going to cover in today's podcast episode. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything.

The every choice you make is a trade-off against something else. And that doesn't just apply to your money. That applies to your time. your focus, your energy, your attention to any limited resource that you need to manage. So how do you make decisions about what truly matters? That is what this podcast is here to explore. My name is Paula Pantt. I am the host of this podcast.

Typically, we are a weekly show. But once a month, on the first Friday of the month, we usually have a first Friday bonus episode. So welcome to the October, 23, first Friday bonus episode. Now, the theme for this episode is that good news for the economy is bad news for the markets, or at least it can be, and that's what we're seeing unfold right now. Let's take a snapshot of where we currently are. At the last Fed meeting, Federal Reserve meeting, the Fed voted to keep rates steady, meaning no cuts, no hikes.

However, the Fed is meeting two more times this year in November and in December. There's an increasing consensus that there's a lot of. are likely to raise rates again at one of those two meetings. As of the time of their last meeting in September, people thought, well, you know what, they're going to hold rate steady now, and they're also going to hold it steady in November, and it's too early to tell about December. Goldman Sachs put out a prediction that even at the November 1st meeting, they would still hold rate steady. People are less sure about that now, and here's why. The jobs report came out. In fact, a new report came out today.

It shows that the U.S. has added 336,000 new jobs in the past month. That was double the prediction of most economists, the consensus prediction. And it was substantially higher than even the highest range of that prediction. In fact, the jobs report is the strongest that it's been since January. Back in January, 472,000 new jobs were added. So this new report of 336,000 jobs is, the strongest that it's been in the past 10 months. And our unemployment rate currently stands at 3.8%. Now, that's great news for the economy. People have jobs. But it's concerning news for a Fed that holds the dual mandate of keeping inflation in check while also not letting us slide into recession or high unemployment. The Fed right now, based on the jobs report, is not worried about high unemployment. And many of the previous concerns that people had had about recession, while those have not gone away, they have certainly abated.

And that is going to give the Fed a lot more leeway to be able to continue to raise rates in order to get our inflation down to its target of 2%. Now, one thing that's interesting about the latest jobs report is that leisure and hospitality are particularly leading the pack, which means consumer discretionary sectors are leading the pack. which points to consumers having and spending discretionary income. In fact, the number of jobs in restaurants has exceeded where we were in February of 2020 right before the pandemic. Now, what's good news for the economy can be bad news for the markets. The U.S. index futures dropped by 1%. And in fact, earlier this week, on Tuesday, it declined 1.4% in one day. I got a little bit of flack on Twitter when I referred to that as the market tanking.

People are like it's 1.4%. That's not a tank. In one day it is. You know, if it took a week for it to drop by 1.4% sure. But that is a severe one day drop. It points to a lot of volatility, a lot of skittishness in the markets right now based largely on the growing consensus that the Fed is likely to raise interest rates and that could jeopardize a lot of industries. And we're going to talk more about that in a couple of minutes. Because there are a few sectors that are ticking time bombs for as long as interest rates are high. Now, one of the questions that I've been getting, I've been asking you, I've been asking this community through social media, hey, what is it about the current economy that you want to understand? And one of the questions that keeps coming up is, hey, we keep hearing about all of these strikes happening. How is that going to impact the economy? Right now, as of Friday, October 6th, right now there are tens of thousands of workers on strikes. So there's 75,000, thousand Kaiser Permanente workers who are currently on strike, as well as around 25,000

UAW workers currently on strike. There are also around 160,000 writers and actors who are involved in the SAG after strike, and the film and television business has lost around 45,000 jobs since those labor strikes have begun. Now, that last ad is since May. Since May, employment in the film and TV sector has declined by 45,000 jobs. By contrast, the telecom sector was stable, it was relatively flat, and the publishing sector added 6,000 jobs. So cumulatively, between UAW and Kaiser Permanente and Sagafra, we're talking about a number of workers

that certainly is large enough to make headlines, but in terms of the overall employment numbers across the broader economy, and you think about how large this economy is, how many industries, how many sectors, how many workers we have. According to the Bureau of Labor Statistics, as of the second quarter of 2023, there are 121.5 million full-time wage earners and salary earners in the United States. And so the impact of the strikes is notable in the employment figures,

but it doesn't change the overall employment numbers. at least it doesn't change it so drastically that there would be an impact in that relationship between employment and inflation. Because that's ultimately, when we talk about employment figures, the reason that we care about this so much is because there is a tight, tight bond between employment and inflation. And that's because of something called the wage price spiral, right? Wages rise, so prices rise in order for companies to pay their workers. But then because prices rise, other workers want higher wages. And so that wage price spiral where a rise in either wages or prices triggers a rise in the other, that is often seen in inflationary environments. And if you want to really deep dive into an inflation explainer, go to afford anything.com slash inflation.

That's afford anything.com slash inflation. We also have a podcast episode. It was episode 365. You can access that at afford anything.com slash episode 365, where we peel back the layers in order to deepen our understanding of not only the wage price spiral, but also demand pull inflation and cost push inflation. We talk about hyperinflation, biflation, stagflation, core inflation, the CPI, the PPI. It's a super deep dive. So again, afford anything.com slash episode at 365 if you really want to understand the subject.

At any rate, all of that is to say that to answer the question that I have been hearing from you on social media, the strikes certainly put over 100,000 people out of the workforce, at least temporarily, as the strikes are going on. And yes, that is a loss of labor, a loss of productivity. but in the context of the 121.8 million people who work in the United States, it isn't going to rankle the inflation numbers. Now, what are the ticking time bombs? As we head into a future where it looks more and more likely that the Fed will raise interest rates the next time it meets, either in November or in December, they're meeting two more times this year,

given the likelihood that interest rates in the future are likely to be higher than they are today, who might this hurt the most? Well, one answer are companies, particularly smaller businesses or newer companies, that up until this point have been relying on cash reserves, which they've accumulated at a time when capital was cheap. So when interest rates first rose, they didn't have to respond to those higher rates because they had cash reserves, right? those types of companies, and we're talking startups that are pre-revenue, you know, companies that are not default alive, companies that do not yet have sufficient revenue to be able to pay their bills. Again, startups, small businesses, many of those companies have been living off of their cash reserves and as those start to run out, they face an environment where it is harder, not only to borrow, or I should say more expensive, it's equally as difficult to.

borrow in terms of qualification. It's simply more expensive to borrow. So it's not harder to borrow. It's costlier to borrow. There's a distinction between the two. So I want to be clear about that. They face an environment where it's costlier to borrow, as well as an environment where it's more difficult to raise funds from angel investors, from VCs. In that world, the scrutiny has gotten more intense, the bar has gotten higher. And so there will be a culling. a shakeout, or at least the conditions for one are set. Those small businesses, those are one of the ticking time bombs that will be interesting to observe in the months to come.

Another is commercial real estate because we are currently in an environment of incredibly high bond yields. In fact, bond yields rose above 5% for the first time since 2007. And high bond yields mean lower valuations on commercial properties. So you've got these problems. properties that have lower valuations and on top of that, you know, not all commercial properties are necessarily office spaces. Commercial is a broad brush that includes everything from retail to multi-unit residential to warehouses and self-storage. So not all commercial real

estate is necessarily office space, but certainly we're seeing this double whammy of lower valuations on commercial properties coupled with less demand for office space. which has a strong impact on one segment of the overall commercial real estate sector. And so when you have that double whammy, you're then left with commercial investors who are faced with either selling their properties in a falling market or trying to survive until interest rates drop, which means hanging on for another couple of years, most likely. And so again, the conditions are in place. for the commercial real estate sector, particularly office spaces, but commercial broadly,

to be in a bad state. And I should just note for the record that this is a big piece of why I have always been hyper-focused on residential and residential only. Why in years and years of real estate investing, I have only stuck to residential and never ventured into the commercial space. The risk profile between these two categories is incredibly different. And, it's tempting to want to bundle them into one package because, hey, real estate is real estate, right? But no, it's not. Residential and commercial played by completely different sets of rules. And I got a lot of flat – years ago, I got a lot of flack for it from people who are like, why are you in residential? You can make so much more money in commercial.

Well, this is why. When times are good, commercial can be far more lucrative, but when times are bad, commercial can bottom out a lot harder. Residential, by contrast, tends to be much more stable comparatively. So startups, commercial real estate, both of those are sectors to watch closely in the future. Also, pensions, I hate to say this, but retirements and pensions are, some of them may not end up doing well. The thing is, when we talk about retirement and pensions, first, let's have some definitions. A defined contribution plan is a plan like a 401k, where you as the individual worker, you make a contribution. to a 401k or a 403B, right?

By contrast, there are these other types of plans. They're called defined benefit plans. And those defined benefit plans, those are things like pensions, right? Because a pension pays you a benefit in a routine, periodic, and predictable way. Now, a lot of pensions typically will have something like 60-40 equities bonds as their holdings. And that is right now not a very good-looking portfolio mix, not to, pinpoint that particular asset allocation, but simply to state that both equities and bonds are taking a hit right now. Recently, the biggest pension fund in Sweden had a bit of a shake-up.

It bet heavily on a particular commercial landlord. This landlord was its single biggest holding. And it also made bets on regional banks in the United States, like Silicon Valley Bank. And so it has had to recognize some huge losses. Now, that's not to say that a Stockholm-based pension fund is necessarily the canary and the coal mine, but it is another area to keep our eyes on as we're watching this incredibly unique time in history, in economic history. Think of how quickly interest rates have risen between 2021 and today. The steepness of that curve over such a compressed timeline. That has ramifications on every part of our world.

So with all of that established, what should you do with your money? How should you be thinking about your investments and your retirement? One of my missions is to make sure that good, clear, and thoughtful information about personal finance and personal economics and personal entrepreneurship, I want to make sure that that information is available at no cost to you. That's what this podcast is for. And so big thanks to the sponsors who are able to make that possible. So we're going to take a quick break to hear from them. And when we come back, let's talk about how you can take this knowledge and apply it to your life. The holidays are right around the corner. And if you're

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S&P 500 versus the 10-year treasury yield. Right now, again, as of early October, 23, right now the equity risk premium is near zero, which means, in theory, at least at this moment, stocks carry higher risk for no additional reward. Now, to be clear, that's not long-term always the case. That's simply how the equity risk premium is measuring out right now. And a big piece of that is that the 10-year treasury is getting closer and closer to the 5% mark. Now, that's on a 10-year treasury. On a one-year treasury, you can pick up a one-year treasury bill at 5.4%. So if you are looking for a place to park your cash, give some serious thought to treasuries.

Now, I posted this on Twitter the other day and somebody asked a very important question, which is how do I actually buy one? TreasuryDirect.gov. It is a dot-gov website. It's an official government website where you can buy treasury bills directly. Now, let me make the caveat. This is not investment advice. Nothing on this podcast is ever investment advice.

This is purely for educational and informational purposes. I am not a licensed financial advisor. I am trained as a business and economic journalist. And so you should regard this simply as a piece of financial media. and remember, the media is never a substitute for actual professional advice. But with that disclaimer in place, I, as a member of the media, am absolutely loving treasuries right now. Now, does this mean go rethink your whole asset? Obviously not.

The fundamental tenants of long-term investing still hold true. Buy and hold passively managed index funds. And maintain an asset allocation that is appropriate for your age. your risk tolerance and your risk capacity. Remember, risk tolerance is psychological, risk capacity is logistical, right? Have an asset allocation that is appropriate for your age, your timeline, your goals, your risk tolerance, your risk capacity, some split between equities and bonds that reflects that in low-cost, passively managed index funds. All of that remains the same, right? That does not change. What I'm talking about specifically is

when you get that bonus at work and you're like, oh, here's some extra unexpected money that's outside of my normal dollar cost averaging. It's outside of the systems that I've already set for how I routinely invest. This is an additional contribution above and beyond what I would normally make. Where should I direct it? And of course the answer to that is multifaceted, but my encouragement to you, if you have historically not really looked at treasuries that much because historically, at least for the last decade, they've been kind of boring. Right now, they're really exciting. So that's the first major point that I would make. The second is Dave Ramsey said something really interesting lately.

And I have to say, I respect Dave. he has done an amazing job of helping countless people get out of debt, and I respect anybody who does that. He and I disagree about many things. Our philosophies on debt are very different. That said, Dave Ramsey said something recently that I wholeheartedly agree with, and it's a statement that is contrary to what the broader population thinks. He says, and I agree with this, that this is the best time. to buy a house. And the reason for that is that this is a point in time when competition is incredibly low. Home buying right now is at its lowest point since 1996.

Now think about that. Remember in the year 2020 and in the year 2021, when you wanted to buy a home, it was impossible because there was so much competition. The moment that a home was publicly listed on the MLS, it would immediately get five or six offers. And it would sell on the day that it was listed at above asking price. And oftentimes, homes sold before they were ever formally publicly listed because a good real estate agent knows what homes are going to be listed before they're listed. It's referred to in the industry it's referred to as a pocket listing, right? So through those informal informational networks, real estate agents know, hey, this particular house is not publicly listed yet.

This is not public information yet. But I know that this house is going to come on the market. Let me put in an offer before it's ever formally on the market, right? Those are called pocket listings. And so in 2020, 2020, 2021, when competition was fierce, a lot of homes wouldn't even make it to the public listing stage. They would go as pocket listings. and the ones that did publicly get listed on the markets tended to go under contract almost immediately.

The average days on market back then was incredibly tight. Average days on market is a metric that measures how long a home sits on the market prior to going under contract. It was incredibly low back then. It's incredibly high right now. So given that lack of competition, buyers right now have incredible power. You can negotiate for a lower. cost, you can ask the seller to cover closing costs, you can ask the seller to make repairs,

you as the buyer are competing against a much, much smaller pool and you have a lot more power, and that's why this is a very, very good time to buy a home. And that's an opportunity that likely, we don't know the future, but likely will not continue to exist in a few years when mortgage interest rates come down and the pool of buyers gets bigger. So that's That's another thing that I would say. And finally, the last thing. And this last point is good news for millennials, bad news for Gen X and baby boomers, and to be determined news for Gen Z. And this last thing is the following. A recent report by Vanguard, the Vanguard Retirement Readiness Report, found that millennials, and in particular, older millennials, across most income brackets, low-income millennials, high-income millennials, across most income brackets, millennials are better on track for retirement than any other generation, including Gen X and older baby boomers. Now, in fairness, I'm going to put an asteris here with Gen. Z, it's just too early to tell. With Gen Z, we'll know in 10 years. It's just too early to make any conclusive statements about Gen Z. But millennials are more on track for retirement than Gen X and older baby boomers. And the reason that I want to highlight this is because this is something that I have advocated for a long time. This is a hill that I have long been ready to die on. And this is

that the unexamined echo chamber that we keep hearing of being a millennial so hard, right, the stark contrast of facts versus myth when it comes to millennial money, right? We hear this intellectually lazy echo chamber of millennials have it so hard because we have higher education costs and higher housing costs and higher health care costs as compared to baby boomers, right? And you hear this played out in the media over and over and over. But the reality is if you actually start digging into the facts, millennials are in a financially healthier space than previous generations at an age-adjusted rate. So millennials at the age of 30 or 35 or 40 as an aggregate are in a better financial position than our predecessors were at that same age. Now, why is that? Well, millennials have had the benefit of having the first decade and a half of our adult lives take place in a raging bull market.

2009 through officially 2020, because there was a one month recession in 2020. So 2009 to 2020, we had an 11-year bull market, the longest bull market in American history. And when that bull market ended, in 2020, it dipped for a month before it became a raging bull market again and a massive one. The run-up in stock growth from 2009 through today means that millennials in particular have had the benefit of a sequence of returns that performed very, very well when we were in our 20s and 30s. Now there's this widespread pervasive myth that, oh, millennials aren't investing. And it's particularly right around the Great Recession. You used to hear that a lot. In 2012, 2013, the aftermath of the Great Recession. There was every, oh, millennials are too scared to invest.

I actually once turned down a sponsor on this podcast. This was maybe five years ago. Because this sponsor handed me ad copy, and they wanted me to repeat these myths. These myths that like millennials aren't investing enough, which when you actually start digging into the data is not true. But they wanted me to repeat these myths. And I literally said, hey, keep your money. I don't want it. You literally cannot pay me to say that.

I will not say that on the air because it is not true. It is simply this intellectually lazy headline, the woe is me headline that is not backed by any actual data. and this Vanguard Report, the Vanguard Retirement Readiness Report, really brings that to light. Here's one fact that comes out of the Vanguard report in the 70th percentile of wage earners, right? The 70th percentile of wage earners have a median income of $61,000. Now, workers with that $61,000 median income need an estimated 68 percent of their annual salary, which is 68 percent of $61,000, in order to be able to sustain their expenses in retirement, right? Only, only millennials in that income bracket are close to achieving that rate. Baby boomers are not. Gen X is not. Gen Z, it's too early to tell.

Now, why is that? Well, millennials are more likely than any other previous generation to have had automatic enrollment in retirement plans, meaning when we sign up to work at a company, the 401k or the 403B is opt out versus opt-in. We are automatically enrolled in those retirement plans at greater numbers than any previous generation, and those retirement plans often actually escalate our contributions each year at much greater rates than any previous generation. Millennials are also more likely to have had access to low-cost index funds, ETFs, and target date funds, low-cost, passively managed,

Broad market funds, we are the generation that is more likely to have had access to that than any previous generation. We are also the generation that had the opportunity to benefit from online side hustles while we were in our 20s at the age at which that additional money could be used for additional savings. Gen X did not have that. But the fact that the actual data shows that millennials have greater retirement readiness than Gen X does, and Gen X is closer, is a testament to the distinction between what we feel and what happens largely thanks to automation behind the scenes, right? Automation means that we as a generation are enrolled, automatically enrolled in retirement

plans. But what we feel, right, our subjective emotional experience is, wow, I feel like everything's expensive now. And that's not to say things aren't expensive. Absolutely healthcare costs have risen at a much higher rate than inflation has. But when you pencil out the numbers, that does not offset the benefit of being able to invest in a low-cost index fund starting at the age of 21 or 22. That is a huge advantage. And it's not an advantage that Gen Xers or Baby Boomers had.

at least not in the numbers that millennials and Gen Z years have. It's going to be really interesting to see how retirement-ready Gen Z ends up being. I predict they're going to blow everybody out of the water. But time will tell. So the major takeaway from this, first of all, don't listen to the loud voices on social media that want to complain, complain, complain. Because often their complaints are reflections of their emotional experience, but not necessarily reflections of actual mathematical, numerical financial realities. That's one.

The other is that automation is the key to financial success. The more that you can automate saving and investing, the better. And the reason why, despite high home prices, despite student loans, the reason why millennials are doing so well today when it comes to retirement readiness is largely thanks to two, automation. We've done a lot of podcast episodes about how to form better habits, but remember the hierarchy, the waterfall. Automate first, habit, second. First thing you want to do is make habits unnecessary by virtue of setting up automations. So automatically saving money, automatically investing money, making it an automatic pull from every paycheck. That is the

number one thing that you can do to have a good financial future. Automate, automate, automate, automate everything. And only the things that you cannot automate, you then want to build and ingrain deep habits. But automation always comes first because that is the key. And so that's my child. If there's a takeaway here, an actionable step, look at your financial life. What is it that you are doing that you can automate? Maybe it's increasing the amount of contributions that you're making to your retirement plan. Maybe it's increasing the amount of each paycheck that you are siphoning off to a separate savings account that you're putting towards a down payment or that you're putting towards a student loan payoff or that you're saving into making a car payment to yourself, right,

a savings account dedicated to that. What are the areas of your financial life that you can automate or where you can improve the automation that is already happening? Start with that because that will be the key to all downstream success. There are apps as well that will automatically, you know, acorns, for example, it automatically rounds up every purchase and then invests that roundup. Use the apps, use the tools, use anything that enhances automation. So that is the actionable takeaway that I will leave you with today. And if you are a member of GenX or a baby boomer, please, don't worry. You're doing great. You are the type of person who listens to a personal finance podcast, which means that you are the type of person who is proactive about managing

your money, about planning for retirement, about making sure that you are on strong financial footing. So kudos to you for that. And if you are a millennial who is not feeling ready for retirement, you're good. Don't worry. You've got time on your side. You're young still. Compounding is your ally. So get started now. All right. That is the first Friday episode for Friday, October 6th, 23. Thank you so much for tuning in. Please let me know what you thought of this episode. If you're on Spotify, there is a section there where you can say what you thought of the episode of leave a comment. I would absolutely love to hear what you thought of it. You can subscribe to the show notes at afford anything.com slash show notes. Again, that's afford anything.com slash show notes. And again,

if you want that deep dive into inflation, that is at afford anything.com slash episode 365. and we also have an email series about inflation that you can get for free at afford anything.com slash inflation. Thank you so much for tuning in. My name is Paula Pantt. I am recording this from a hotel room in Scotland where I am spending the next week. I'll be sharing pictures on Instagram. You can follow me there at Paula Pant, P-A-U-L-A-P-A-N-T.

Thank you so much for being part of this community, and I will catch you in the next episode.