Moody's Talks - Inside Economics - Poor Policy, Plunging Home Prices, and a Plummeting Pound

Episode Date: September 30, 2022

Mark, Ryan, and Cris breakdown this week's key economic data and developments in financial markets. They also go through the economic impact of Hurricane Ian and the policy errors that are unfolding in the U.K. and ironically where Mark records the podcast from.Full episode transcript.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by my two colleagues and co-hosts, Chris Duretis. Chris is the Deputy Chief Economist and Ryan Sweet. Ryan's the Director of Real Time Economics. Hi, guys. How's everybody? Good. How are you, Mark? I'm tired, actually. I'm on a global world tour. Number one is in Europe. And that's now starting to wind down. And I've got the Middle East coming up. and then Asia after that. So, um, go long as you know. This is like the fourth consecutive podcast.

He says he's tired. Really? Is that true? It's at least two or three. Maybe four. I don't know. There's no Wawa coffee in, uh,

Europe. So, that is definitely a problem. I mean, I'm having these flat whites. Have you ever read a flat white? Oh yeah. Oh, yeah.

Yeah, they're good, but they're not, wow, they're not well. Yeah, and there's no hazelnut. Yeah.

There's no hazel nut and they're too small. You know, they give you something like this, you know, few ounces. I don't know. Maybe that's what it is. Maybe I'm just not getting my coffee. I think so. I think that's... It's as far as you don't pack it. That's got to be it. Yeah, it's got to be it. Anyway, a lot going on over here in London, if you've not noticed. We definitely should talk about that and we'll come back to it. Of course, a lot's going on in the U.S. as well. We had this devastating hurricane Ian, which, by the way, came pretty close to my home in Vero.

All is okay. A lot of leaves and branches on the ground, but nothing damaging. But it looks like it did a lot of damage. And I know, Ryan, you've done a lot of work trying to assess the economic consequences of that. So let's talk about that. But before we go to those two things, why don't we chat about, we've got a lot of statistics this week, a lot of data. So maybe just an open-ended question to you, Ryan. What of all that data do you want to talk about?

What do you think is most interesting in terms of shedding light on what's going on in the economy and where we're headed? I think we should start with GDP. So this is our third estimate of second quarter GDP, but it also included the annual benchmark revision. So anything between 2017 and 2022 was subject to revision. So what I took away from the revisions is the level of general. GDP is now 1% higher than it was previously thought. GDI, which we thought GDP is going to get revised towards GDI was actually the opposite. GDI got revised. GDI's gross domestic income. And it's just two ways of measuring the economy. You know, GDP is the value of all goods

and services we produce. And GDI just sums up the income part. So rents, profits, wages and salaries, things like that. And there was a sizable downward revision to GDI. So that difference between GDP and GDI shrank quite significantly. And the other thing that I noticed was inflation got revised up this year. Can you ask on that, Ryan? So GDP, since the pandemic got revised up a bit, you said about a percentage point. And GDI got revised down. And so it now looks like the gap between the two, the difference between two is

back to historical norms. They had gotten as wide as it had ever been in history, the so-called statistical discrepancy. That's the difference between GDP and GDI, but now that discrepancy is back to normal. Exactly. And this is what happened after the financial crisis. So that statistical discrepancy got really wide.

I think if I remember correctly, it was at the time the widest on record, and then after these subsequent revisions, it's wiped away. So that's not too surprising. But I was hoping GDP would get revised up more. We still have those two consecutive declines in GDP in the first half of this year. But GDI got revised lower.

And looking at the components, it was profits, which the government always has a hard time measuring profits in real time, but also wages and salaries. And that, you know, the BEA, the Bureau of Economic Analysis there, a estimate of compensation, wages and compensation, was getting out of line with the data that we get from the Bureau, labor statistics, the so-called labor income proxy. So there's this gap that was dividing, and now that gap is closed. So, you know, I was disappointed that we didn't get a bigger upper revision of GDP. I was open. We'd wipe away at least one of those declines in the first half of the year. Well, I mean, the, I think the thinking is that the best measure of what's going on is the average of GDP and GDI. And I, do you guys know if you take the, As my stat, I'm going to have to change my stat.

Oh, sorry about that. Oh, it's all right. So the average is now, got revised lower, and the average of GDP and GDI fell 0.4% annualized in the first quarter and 0.3% annualized in the second quarter. So before both the average had risen, now they're showing a decline. Okay. But it's still pretty flattish, right? 0.4.3. Yeah.

annualized. So. Correct. Okay. And, of course, declaring recession based on that, right? No, well, would you? I mean, no, but some would, right?

Yeah, and going back to the little textbook, rule of thumb. Well, I'd also point out the revisions are only beginning, right? Because this is, every year you get five years of revision. Right, and then we get the big benchmark one that occurs in a few years. So that's going to be telling. So I don't think the story's actually quite been written here yet. We'll see. Even if it holds, right?

Yeah. Labor market, other indicators don't confirm a recession in the first quarter at least. And that's the most important thing. But just for optics and the Pyrrhic victory, I still, I'm not conceding defeat here. I suspect that data will be revised. And at least one of those quarters will go positive. And even by that benchmark, this would not be two quarters of consecutive declines would not be, we would not do that. But of course, I got to wait a long time for that

to happen at least another year or so. But okay. And then you mentioned inflation. There was also some revisions, the Bureau of Economic Analysis, when they released the GDP revisions also released revisions to their price measures. And so there were some revisions there as well. There was. So the core PC deflator, which is the Fed's preferred measure of inflation, in the second quarter got revised up from 4.3% annualized to, or 4.4% annualized to 4.7% annualized. Seems like a small upper revision, but that, you know, that's going in the wrong direction and just, you know, supports the Fed's very hawkish tone. It may require a little bit more hiking than what we previously thought. Right. Okay.

So if you run through our macro model, it takes roughly another 50 basis points in rate hikes to reduce inflation by, you know, that 30 basis. point revision that we got. Really? That's what our model says? It takes a half point more on the Hens rate target to reduce inflation by three-tenths of a percent? Correct. I guess core underlying inflation. Core underlying inflation. Interesting. Okay. And do we know what's the base, why fundamentally was behind the revisions? Anything in any particular aspect of inflation that caused the revisions? That's a great question. the BE8 changed their source data for one of the inputs into the PC defulator from they were using the PPI for used in new vehicles and they switched it over to the CPI. And we all know that the CPI for new vehicles group gangbusters.

So I think that my gut is that's a big source of it. I see. Interesting. Okay. That's, you know, because vehicle prices have gone skyward here. So that alone would make a big difference, I would think. Yeah. And that's why all these annual revisions, you got to read through all the, I mean, we can get in the weeds.

So you get to read through these technical notes and they tell you like what changes they made and methodology changes. And that's why, you know, this over the weekend and next week, I got to change our high frequency GDP model to kind of reflect these changes in the source data. So to make sure that we get it right. Right. Okay. And right now in Q3, based on your tracking estimate, where are we? Positive. Of course, this takes all the different monthly data, weekly data that comes in, and we have a model that takes that and translates that into what it means for GDP growth in the current quarter Q3.

Where is that right now? A positive 1% annualized. So this time last week we're at 0.8% annualized. Now we're up to 1%. And the reason that we got nudged up was durable goods orders. So they came stronger than we anticipated in the model. And that kind of douched up business investment in the third quarter. Okay.

Okay. So it feels like, correct me if I'm wrong, but it feels like business investment, not in, not in, not in structures, not in buildings, but in equipment and software, intellectual property, that seems to be holding up pretty well. Yeah, it has. Is that fair to say? I think it's a fair assessment. I mean, there's some signs of weakening ahead, like the ISM new orders that kind of leads core capital goods shipments. and that's showing signs of softening over the next few months. But nothing that would raise alarm bells.

Yeah. Okay. Hey, Chris, these revisions to the B.A did to GDP and to GDI and to the inflation statistics, how does that influence your thinking about where the economy is and where it's headed or pretty consistent with your thinking? I would say fairly consistent. But again, as Ryan alluded to, Our hope was that GDP was going to go towards GDI upward versus the opposite.

So it does suggest that the economy certainly is weaker than we might have otherwise had hoped for. But I don't know that it significantly changes the picture. I think we already accepted that it was weakening whether or not it was recession. So I don't know that this really changes things in terms of the outlook or even in terms the Fed's policy, right? So there's still more script to be written in terms of the inflation measures as well. So I think they'll take those with a grain of salt.

Yeah. Okay. Okay. Any other, I mean, I want to play the game, the statistics game. So I don't want to steal too many statistics here. But any other, because it seems like there's a raft of data that came out this week, any other of those data you want to call out. I did notice UI claims, unemployment insurance claims, initially.

unemployment insurance claims kind of a window into layoffs they fell to below 200,000 in the week last week and of course anything anything between south of 250 would be a pretty strong job market south of 200 feels like rip roaring is there something weird going on with that data there might be some technical more maybe the hurricane affected that a hurricane hit Puerto Rico and Puerto Rico they're not captured in monthly employment or GDP but they are captured in UI claims, so unemployment insurance benefits. And when you get a hurricane, normally that depresses initial claims for a week or two because when you lose power, people can't file and also they can't be processed for UI benefits. So usually hurricane depress it for one,

two weeks, and then you get this big spike as this backlog of people filing gets work through. So we're likely going to see claims remain low next week. They'll be higher than 193. But then the hurricane Ian's effect on Florida, that's going to show up. up in a couple weeks. Okay. All right. Well, maybe that's where we should go now. Let's just go to the hurricane.

You know, obviously that's doing, that's done a lot of damage to the state of Florida. Here we are September 30th, 2020. So it hit Florida yesterday and done a lot of damage. Now it's in South Carolina, I believe, we're headed in that direction. I think it's headed in that direction, yeah. Yeah. You're headed in that direction. What kind of, what kind of assessment do you have of that?

because every we do this work to assess the economic loss related to natural disasters like hurricanes when they're meaningful. This is clearly meaningful, both in terms of the business disruption, how much lost economic activity due to businesses closing and other activities shutting down. And then also the physical damage. Do you have any assessment of the economic consequences at this point? Yes. What we did, we look at daily output in the counties that were most,

significantly affected by the hurricane. And IRR calculations is going to be roughly $7 to $10 billion in lost economic output. Now, a lot of money is going to flow into the region. So the number sounds small, but federal aid, insurance money is going to flow in. And then you're going to get a lot of rebuilding. So that kind of offsets some of the net loss in economic output. But $10 billion is still a lot. Damage, I think we're estimating $50 to $60 billion.

So this is going to be one of the costliest hurricanes on record. So as much as $10 billion in lost economic output because lost electricity, business shut down, can't operate. You're going to have businesses that close. You're going to have the big hit is because of lost power. And I think last time I saw it's like over a million people still don't have power. And that's going to disrupt businesses. And the hurricane occurred during the work week. And that's when daily economic output is higher.

Usually during the weekends, it's lower. And that's going to that kind of boosted the hit to those regional economies. I see. And then of course, insurance money comes in. And then some government aid will likely come in for sure. And so that would lift economic activity. So we'll get some of that lost economic activity. And then, of course, some of the activity that didn't get done will get done.

Exactly. never get done. Airplanes won't fly two times as twice as many flights, but we'll get, but we're going to go out and eat two or three times because they couldn't do a hurricane. Or Disney World, right? Yeah, that got affected, yeah. And of course, this is a script still being written.

Yeah, correct. Because it has, we'll have to see how it does, how much the image it does to the Carolinas and the rest of the Eastern Seaboard, I guess at some point. Yeah, and the other thing that always comes up with hurricanes is the window, the broken window fallacy, you know, does hurricanes really actually net boost the economy? And there's a big difference between economic activity and economic welfare. So, you know, these people that are affected by the hurricane aren't better off, but you're going to see a lot of economic activity is rebuilding and the money you mentioned flows into them. You know, one thing I've noticed, because we're doing a lot of work in this area around climate risk. and obviously these kind of natural disasters are part of the climate risk that we're facing,

is that in recent decades, I'd say the last three, four decades, if you towed up the lost economic output and the physical damage, and then you look at the insurance money, private insurance money, and the government aid that comes in, it's almost one for one. It's almost like the government fills the whole in the economy left by private insurance. So, you know, you go to Katrina, that less insurance, more government money. You go to Superstorm Sandy, it was kind of flipped. There's more private insurance, less government aid.

And it's kind of a regularity in the response, you know, to which I find fascinating. And it does feel like, you know, obviously you take this big hit and then you get this money flowing in and economic activity. And at the end of all of that, you're saying we still don't quite get back. The economy doesn't quite get back. The capital stock, the physical stock doesn't quite get back to where it was before the pandemic. Before the natural disaster occurred. Correct.

Yeah, interesting. What about any damage to oil, natural gas, refining operations, anything like that? This was Florida. So, probably. Yeah, it dodged all the. the main energy infrastructure and the Gulf, you know, by Louisiana and all that. None of that was affected. So, yeah.

That's the one nightmare I have that, you know, hurricane is going to blow through the golf, shut down all those platforms, hit the coast, wipe out a refinery for a few weeks, and then got gas prices going back up to $5 a gallon. And given where we are, that would be pretty debilitating economically. That's why Hurricane Katrina was such a larger impact on the macro economy, the U.S. economy. So this one's going to be small. It's going to save a few tens of percentage for it off GDP, but Hurricane Katrina did a lot more damage because gasoline prices spiked. Oh, that's interesting. So you think the Q4 GDP will be, we'll see a bit of a hit there.

Because it's coming at the very end of Q3. Yeah, I don't think we'll show up there. Will it show up in Q3? Should I guess, right? It should. Yeah. Interesting. And then we get, I don't know. Yeah. We'll see how I'm You get the You do get the insurance money Perhaps flowing I don't know It's some hit

But you'll get some benefit I don't know Correct Do you know Ryan or Chris If you line up The economic loss And the physical damage

And compare Ian To other storms Where it lines up You know Is it a big one Or is it Kind of in the middle Do we

Yeah We put it on the website Yesterday I can pull up I Yeah Laura rats Did a nice article

on this and based on that table the table that she produced it looked like it was number seven right so Katrina Harvey Maria they're much worse and then so kind of in the middle fuel today's dollars Chris in yeah in inflation adjusted dollars right okay so that's pretty meaningful then it's pretty yeah yeah yeah definitely and this is an initial estimate to your point it's not over yet right you know yeah right it's the carolina's we're gonna have we're to add that into it. That's a, that could be significant. So yeah, and of course it comes up to the East Coast and flooding and all kinds of stuff, you know, even here, you know, when we're in Philadelphia, we got, we got, we got nailed by Big Storm last year. I can't remember the name of it.

Do you remember? A lot of flooding. I don't. That did a lot of damage. I can remember, Scuyl Expressway was underwater, you know, in the city, you know, the Vine Street, you know, where, you know, goes on down Vine Street, it was just completely, like, a lake did, did a lot of damage. And that was like the remnants of storm. I can't imagine. I know. Yeah.

Yeah. Landfall. Direct hit. Yeah. Yeah. Okay. All right. Okay.

Let's play the game. And as you all know, but I'll just repeat it for those that don't. And by the way, I'm a bit of a podcast proselytizer. I don't know if you guys are as well. So every event I speak at, you know, every, you know, podcast I do for someone else, a webinar, I say, you've got to listen to this podcast. And there's always someone in the audience that huge fan. Like here in London, we had an event, a conference, and we had a number of real big fans in the audience.

Actually, people coming up and saying, I love your podcast. So, but I proselytize. So there are people who join every week. that don't know the statistics game. So we've got to clue them in. And it's very simple. We each put forward a statistic or two. The rest of the group tries to figure out what that is through clues and questions,

deductive reasoning. The best statistic is one that is not so easy that we all get it very quickly, one that's not so hard that we never get it. One night, it would be bonus as if it's relevant to the topic at hand. And, of course, Ryan is. really good at this. I have to say I'm maybe better. Okay. Someone's got to keep score. We don't keep score. We haven't kept score for all year. Someone's got to go back and look at the annals here and the historical annals. You got to do that. We have to bring back the dollar confidence.

We have to bring back the dollar bets too. That's not. All I know is I'm going to win the dollar bet on long-term interest rates. You guys, really what we have to go back. It took bad policy to into your interest rate force. Okay. Who wants to go first? Chris, you go first. Sure. Negative 0.6%.

Isn't that GDP in the second quarter? Declined minus 0.2 No. That's not the one I'm thinking of. But that's that is the right minus 0.6? That's the correct number. There could be a lot of minus 0.6.

That was my, that's my tricky dodge. Oh. Okay. So that is in the GDP report. There were a lot of point threes in this week as well. I know. I know. Next it up.

But this is not related to GDP. Okay. Is it a statistic that came out this week? Oh, I know what it is. It's house prices. They fell 0.6% month over month. Oh, where's my bell? Oh, very good.

That's right, Mark, you're jet lag. Although, let's add, to be, we got to make sure he knows what he's talking about. Which index? Because there's a couple, two index. I'm not mistaken. The other one was not. T. Schiller, right? Oh.

HFA purchase only monthly. So that is definitely a blumish, right? That's a blemish, it's fine. How do I take back the Cal Bell? No, you can't take it back. So that was the FHFA House Price Series, the monthly House Price Series, fell minus 0.6 in the month of July, I believe, right?

Yes, that's right. And that is significant. That's a large decline. You have to go back to 2007, start of the housing crisis to get that type of a monthly decline. I mean, that's pretty significant. And they do, did you look at it regionally? Did you have a- I did.

Okay. So, all right, so bonus question, which is, there was only one region that actually showed any growth. East North Central. Oh, wow. You really stand out. Ryan. That's impressive.

That's impressive. That's impressive. Okay, now here's the bonus. This is a number. Which states are in the east, north central region? Do you guys know? Oh, my gosh. Oh, come on.

East North Central. To be honest, I don't even know that was a region. Oh. Oh. Well, I think I got this right. Someone's going to correct me if I've got it wrong, but that includes Michigan, Ohio, Indiana, Illinois,

in Wisconsin. Am I right? I'm looking up. Illinois, Indiana, Michigan. You mentioned Wisconsin. Got it. Yeah. Wisconsin.

That's impressive. Okay. All right. Now, how about you want to know the capitals of each of those states? No. I want to know all the metropolitan areas. Well, Mark probably knows the metches. Yeah.

Well, those are those, I know that stuff because back in the day, you know, we really focused on a lot of regional issues, East North Central. Bread and butter. Okay. Go ahead. Go ahead. Well, let's keep going. Which of the divisions actually experienced the fastest growth over the last year? Over the last year.

Yeah. Oh, that's interesting. Is it the mountain region? No. I would have thought so too. South Atlantic. Very good. Very good. South Atlantic. And the weakest? Northeast. Over the past year. Yep. Oh, over the past year, I would have to say. Think of a big state. The mid-Atlantic? No.

North New England? No. Oh, is it California? Pacific. Really already on a year? Because I know it's experiencing pretty big declines now, the biggest, I think. It is now and then over the last year as well.

Oh, is that right? It's come down that much. It only grew 10% over last year. Can I ask you a question about that? Yeah. Because I, in my stylized fact, tell me if I got the fact rights, and then what's going on,

the most significant price decline so far, have been in California, really Bay Area, L.A., San Diego, gotten creamed. In the strongest market, big market, not small market, big market, has really been Florida. Florida's held up much better. Like I think in that date of Miami, it's still seeing price gains. This is an example. How do you explain that? What do you think is going on there, that regional difference? You know, I don't expect that to continue forever. I think Florida prices are going to go down. But why that difference do you think?

So a couple of the tech industry, right, certainly facing some layoffs. Ah, okay, yeah. Some weakness there. And if we think about the bay, California is also always expensive, right? So it's, you're starting from a very expensive proposition. So any weakness can kind of multiply. So that would be my working hypothesis. Or many, I guess, that's a good reason.

I would have thought it, my intuition would, same thing, but it would be affordability. The price is high. That's right. And the mortgage rate rises and the mortgage payment becomes prohibitive in place. Exactly. That's what I meant. Yeah. Oh, that's what you meant.

That they feel because it's already so unaffordable, right, any little additional, any additional cost. is going to drive out demand significantly. Right. And then Florida, what do you think is going on there? Why is that held up better? So Florida is interesting because you had a lot of migration into Florida. Naples actually, by our house price index, Naples, Florida was the fastest growing metro over the past two years.

So lots of increase there, but it's not at the top of our list in terms of overvaluation risk because you also had a lot of wealth, a lot of higher income individuals moving there. So I think that provides some ballast to those markets, right? So people aren't perhaps forced to sell or don't need to sell. Yeah, makes sense. Yeah, now, have you noticed mortgage rates? I mean, they come down a little bit. Down to what, like six and a half?

No, not that much. They're below seven. Christmas is probably exactly what they are. Yeah, I mean, they're high. high. I mean, that's definitely higher than we expected. It partly goes to the higher treasury yields, you know, interest rates across the border tourism. But the spread, yeah. That's been persistently high. That's the mortgage rate, the difference between the mortgage rate in the 10-year yield, which captures lots of stuff,

like prepayment risk, credit risk, the cost of origination, the cost of servicing, you know, all those things are in there. But typically the difference between a 30-year fixed and a 10-year treasury yields like 150 basis points, right? $0.25 percentage points. And now it's double that. It's just double that. And that's a real problem.

I mean, if it was, you know, if it was a normal spread, the 30-year fix would be going for five and a half, not seven, right? And that would be much more manageable. And that's more consistent with what our forecast was. We didn't expect this gaping out of the mortgage. spread and thus the mortgage rate. So what do you suppose is going on there? Why is that spread so wide?

I guess it comes down, in essence, to back always to supply and demand on the MBS side. So some lack of liquidity or you have investors worried about prepayment risk, putting in some additional premium. The yield curve does strange things to expectations of how borrowers are going to perform in the future. One bond trader I talked to, and I think he's right, was pointing out that you have extraordinary interest rate volatility. Rates are jumping all over the place. And when that happens, the option, the prepayment option is high. The value of that is a lot higher because right. So the compensation investors need to taking that risk is higher. And, you know, that gets built

into the spread. And that goes to what's going on over here in London and the UK, which will come back to, but also Fed policy, as long as the Fed's on the warpath and people don't really know when that's going to come to an end and at what rate they're going to stop and what it all means you can get this significant up and back and all around on rates, and that's creating this higher prepayment risk and this adding to the mortgage rate. Is that not right to you? Yeah.

The other point that you just made is the Fed, of course, right? They are no longer a buyer of MBS security. So you have a pretty significant buyer. And although it's unlikely that they will sell that portfolio, like, you know, it's not out of the realm of possibility as well. So there could be some additional supply that comes online. That could take all the prices too. Well, hopefully that spread normalizes at some point because if it doesn't,

we're going to change our forecast on housing too. If it stays around 6 and a half, 7%, that means for the goal of yours. Demand is going to be where sales are going to be lower and house price declines, which we're expecting are going to be more severe. That's right. Yeah, and this decline, to your point,

0.6% was in July, right? So we're still looking here. It's not even fully capturing. What was the mortgage rate in July? It was like 5, 5.5%? Yeah, I think 6 maybe. Did it get that high? Okay.

At the highest, I think. Pending home sales are tanking. And pending home sales lead existing homes by one to two months. And pending home sales are down 24% year over year. Do we get another date of point on that this week? We did. Yeah. That's dated for August.

So now we're looking at sales in September and October for existing and it doesn't look good. Oh, boy. I don't think it was much worse than July if that gives you any solid. Yeah. It's just consistently dropping. It's plummeting, but it's very. It's very low. All the metrics are down.

What about you, Ryan? What's your statistic of the week? How about you go? Because mine's going to lead into the last thing we've got to talk about. Oh, okay, fine. And we're talking about, oh, London, the UK, the British. And what's going on here? Big hit.

Chaos. 3.5%. 3.5%. Is this a long-term interest rate? It is not. Oh. It's a statistic that was released this week. It's an important statistic.

It refers to the U.S. Yes, indeed. It refers to the American household. Oh, the savings rate? The savings rate. There you go. There you go. Personal saving rate, 3.5%.

Yeah, way to go, Ryan. That was the saving rate in the month of August, 3.5. And that is pretty low by the standards of recent history. You go back pre-pandemic, the saving rate was north of 7%. In fact, that got revised higher. The saving rate got revised substantially higher coming into the pandemic. But it was well over 7%. And so now it was half of what it was.

And we calculate what we call excess saving, extra saving. That's the savings that household did above which they would have typically done during the pandemic, if not for the pandemic. So that goes to household sheltering in place, not spending, generally high-income households, and also government support that went to a lot of middle and lower-income households. And that excess saving built dramatically during the pandemic. In fact, it peaked by our calculation in December. December of 2021. So at the end of last year, at $2.7 trillion, so that's over 10% of GDP. It's been coming down

ever since because the saving rate's been below that 7% threshold that was established before the pandemic. It's down $400 billion, and we're now sitting at $2.2. Still a lot of extra savings, but it's coming in pretty quickly. And one other thing we've been learning, looking at other data from the Federal Reserve is that households in the bottom part of the income distribution, the bottom quintile, the bottom 20% of the income distribution, actually blown through their access savings or appears that they've blown through, and they have fewer, they have less cash in their checking accounts and deposit accounts than they did prior to the start of the pandemic. So, you know, this hit to the economy from higher inflation, higher oil, gasoline, prices, food,

prices, rent, consumers have cushioned the blow by allowing their savings to come down and, you know, draw down the excess saving they have in their bank accounts. Also, they've started to borrow a bit more, particularly, again, those lower income households that are most stressed and have blown through their savings more quickly. They seem to be using their credit cards and taking on personal loans, you know, more aggressively to help supplement their income. So this has been a, a pretty significant cushion to the economy during this period. But still, you know, a reason to be, it depends on how your prism here, but, you know, it is a reason for optimism, right? Because it means that consumers have a lot of firepower there, that they can use a cushion that they can

call upon if they need to to supplement their incomes to keep on spending. And hopefully that keeps the economy out of recession. But the other way of looking at it is, well, it doesn't, if it keeps consumers from not becoming more cautious in their spending, and the economy doesn't slow sufficiently, then the Fed's going to have to, because of the high inflation, step on the brakes even harder. So now those two interpretations, which do you think is,

or maybe there's another one interpretation, which one do you think is most relevant? Chris, do you have a perspective? I go, as you can tell, I go for the optimistic perspective. that this is a cushion, but here's how you view it. It is a cushion. I agree with it. But again, to your point, the demographics are quite different, right, in terms of the impact.

Yeah, but most of the spending is done by folks in the top part of the distribution, right? So not to, there's a lot of, yeah. In terms of macro consequences, in terms of the macro consequences, yes, it's a benefit. Yeah. But have to stress that the. there are certainly households that are already suffering in this environment, right? And that that cushion is no over there or even if the cushion exists, it's certainly diminishing. Yeah.

Okay. What about the other interpretation that it's too much of a cushion? It's not allowing consumers to pull back enough to allow the economy to moderate sufficiently, bring in the wage and price pressures. I don't see a lot of evidence that consumers are going crazy. Yeah. Even at the high end, right, where there is a lot of access savings. So I don't know that it's really influencing the behavior to that degree.

Right. Which is pretty amazing when you think about it because it's actually cash, you know, sitting in their checking account. Like when they go pull money, go use their debit card, they can see how much cash is sitting there. I mean, it's like literally right there they can spend it. But the consumers have not been doing that. They've been drawing it down, but pretty judiciously.

And basically just supplementing their real income, not doing any more than that. They're not spending with any kind of abandon. It doesn't appear to be. I think they're seeing it as wealth. And some of that cash is just waiting to be redeployed. The market's stabilized. So I don't think the consumers view it as, as a, Available.

It is cash. They don't view it as cash. I just don't want to invest in stock market right now. Yeah, I don't know what to do. I don't see any good investments out there. I'm worried about everything. So I'm just going to park in cash and wait. Okay.

Ryan, what's your statistic? All right. It's going to be a little. You already got a big clue. It's something related to the UK. Oh, okay. 130. Hundreds.

Pardon me? Basis points. 130 basis points. Oh, 130 basis points. Is that the increase in the 10-year guilt? Over what period of time? Last week. Since they announced the budget, or the new fiscal plan.

Over the last month. That's good, Mark. That's impressive. That's good. I bet it really over the last few days. I'm sure it's over the last few years. I'm guessing. The actual increase over the last month is 130 basis.

Oh, it is. Most of that has occurred over the last, you know, a couple of weeks. The last few days. Yeah. No Cal Bell? What's that all about? All right. All right.

Well, that's a good one. Yeah. And what is the, do you know what the tenure guilt is today? 4.08%. 4.08. Okay. And I do know. For perspective, over the last month, the tenure treasure yield is up 54 basis points.

Is that right? The tenure is up 54 basis points. points. Now 53. It's getting a 3.67 or something like. 3.773. 3.73. Okay.

And it had gotten as high as four and the 10-year guilt, that's the equivalent of the 10-year bond issued by the British government to finance their budget, their government. I think it got to 4.8 when I was here. Before the Bank of England made their U-turn. Right. When the Bank of England decided that they're going to start, they stopped, no QT. I'm not selling bonds, which they had announced, and now they're going to be buying bonds, QE. They panic.

Well, it felt like they need to do something, right, because it was starting to disrupt the, I think the pension system here, because you had a lot of pension of funds that had bought into this scheme that would help them manage their interest rate risk, and it kind of got flipped upside down and then they started getting margin calls and had to put more money in and so they were worried about the pension fund system here. So they felt like they had to do something. Let me ask you this. Let me describe what, you know, is going on here. So people have context. And I'm really curious what you guys think about all of this. So what's, there's turmoil here in the UK. As of today, it's winding down. It's a

Friday afternoon, you know, markets are calmer because of the Bank of England's decision to come to QE to buy bonds. But it's been a tumultuous week. And it was ignited when the new British government, they have a new prime minister, Liz, trust, is it Liz, trust? Trust, announced a very large fiscal package, deficit financed, as they would say, are unfunded. So that means they're going to go out and borrow money, take that money, and provide really large tax cuts, not targeted, large corporations, wealthy households, and then also increased spending. This is now to help with the energy bills. So energy prices are up everywhere. They're up a lot here, more here in Europe, because more closely tied to Russia.

And the idea is to cap how much prices will rise, energy prices will rise. And so that's a, you know, spending, government spending. And again, that wasn't targeted. You know, everyone gets that, whether you're low income, high income, it doesn't matter. And it's a lot of money. And it's a lot of juice. And this economy, you know, is our economy to the second, to the second power. I mean, you think we have a tight labor market.

excruciulating type labor market. Their unemployment rates close to ours, but their full employment unemployment rates a lot higher than ours. Wage growth is very strong. You know, unions are stronger here. So wage, the wage price dynamics are a bit more vexed here. Wages are feeding into prices, prices into wages, so inflationary pressures are developing.

And so investors, global investors, seeing all that bulked and said, what the heck are you doing? This makes no sense whatsoever. and by the way, count me in that camp. This is so off the rails, this policy at this point in time, I keep thinking I must be missing something. What am I missing here? But it turns out everyone agrees with me.

This is really bad. And so they've sold, they started selling the bonds, the British bonds, because they said, you're going to, you know, are you going to be able to pay me back in a timely way because you're going to be borrowing so much money? And on top of that, because you're going to juice up the economy in the near term, you're going to fan inflationary pressures. You may create this stagflation environment. And the only way out of that is by really jacking up interest rates. The Bank of England will have to jack up interest to ring that out.

And that'll end very badly for everybody, including the British, because I mean a very severe recession. Not in the near term. Everything's all juiced up in the near term, you know, so no recession now. But you look out a year from now, year and a half from now, looks like it's going to be a complete mess. So the only thing that settled all this down, this is important all over the world because it was reverberating all around the world, affecting bond markets, including our bond market and our interest rates, was for the for the Bank of England to do a U-turn instead of, because that, because that's, They had announced quantitative tightening, along with the Fed and every other central bank, to try to slow the economy and quell inflation, and now they're queuing. They're buying bonds again, a lot of bonds.

That's the only thing that. And I wonder how long that calm lasts, you know, if the new government persists and continues down the road here and trying to implement this policy. So what do you guys think of, is my, your perspective on this similar to mind that this is like off the rails, is it kind of about as a gracious policy step that one could imagine? If you recall from our stagflation podcast, we said one of the causes is bad policy and this fiscal policy is bad policy. And the Bank of England has to respond. They have a single mandate and that's inflation.

So any inflation that fiscal policy adds to the economy, the Bank of England has to offset that. So that means very, very aggressive rate hikes are coming. So this is the fiscal dominance argument, right? That, you know, fiscal authorities can do what they want and the central bank just has to mop it up. Well, the issue, though, here might be that they don't do a good job mopping up or they don't mop up quickly. Yeah. Or they don't have the sufficient resources to mop up.

Right. I mean, in addition to her Liz Trust, the new prime minister's new policy, she also came out and said that she would want to review the Bank of England's framework for setting monetary policy. Yeah. This is going to be a bad road. Yeah, this is not going to end well. And then when the Bank of England steps in and buys those bonds, and, you know, I hear them saying, I need to do this to save the pension system and market functioning. and all that kind of stuff. And it's limited and it's short term.

I mean, that doesn't, that doesn't, I guess we'll see how aggressive the Bank of England will now be in their efforts to mop up to take away this growth that is going to be juiced up by the fiscal policy. But at this point, it feels like their credibility is under, it's questionable, right? I mean, and that's another reason to be a bit nervous if your investor and concerned about Stagflation, it's when the central bank doesn't aggressively respond to the inflation. That feels like that might be an issue here in the UK. So right now, markets-

Government's not backing down. Is there popular support? I mean, you're there. No. I think there's 30 points down relative to the Labor, they're Tory party, the insurer party. They're down 30. I think last poll saw it this morning, 30 percentage points, 3-3-0 relative to the labor party. So it's not popular.

Even though you're cutting taxes and you're cutting, you're capping the energy bill, people are very fearful of it because, oh, the other thing I didn't mention, the obvious is the pound. The value of the pound is crater, right? So the people, investors say, I'm not buying, you know, British bonds. And that's close to pounds to go down. And we got close to parity, you know. And that's, you know, I've been coming to London for 30 years. and I went to dinner the other night and got the bill and it just came out of my mouth.

I said, this is cheap. Can you imagine that? This is cheap. No one ever says that about London. But it's just like amazingly cheap, you know, compared to the U.S. dollar now close to Perry. It's the strongest of dollars ever been, I think ever relative to London. Yeah. So that's what's scary, spooking people, right? Because interestingly enough, in the United States, the thing that plays the most central role in people's thought process around their finances and the economy is the cost of a gallon of gasoline. You know what it is here in the UK? The pound. It's the pound. It's like a litmus test for how things are going. And right now it's going well whatsoever. So what's your call? So what's your call? Is she going to blink? Or what's the?

That's the forecast. They said the chancellor of the exchequer, kind of the person who kind of manages this policy, came out and said there's part two coming. So we'll see what part two looks like. If they double down and, you know, there's more fiscal stimulus, I think run from the hills, it's going to be a mess. if they kind of find a face-saving way to kind of do a Ui or a semi-UI or something like that, I think maybe this works out a little bit better, but we'll see. Either way, I think the U.K. is – the economy is going to suffer a pretty serious recession on it. You know, I think on here very high going in.

We've got brinksmanship in UK and in Russia now. So that's – Yeah, I know. I know dark scenario. Yeah. I'm not even going to ask for recession on, so we did that whole podcast. We'll come back to that next week. But yeah, a lot to be worried about here for sure.

Okay, anything else before we call this a podcast? I think that's it. A lot of ground. Okay. Okay, very good. Anything, Chris, you want to bring up? No, that's good for now. All right, we're going to call this a podcast.

Actually, I think, believe it or not, the next one I do, I'm going to be in Singapore. So, yeah, Singapore's going to be quite late at night when we do it. Another perspective. Because we get the employment report next week, right? We do. Yeah, so we'll be doing that. I always look forward to that. We get our other colleagues on as well.

So with that, we're going to call this a podcast. Thank you, everyone. Take care now.