Ep. 115 – Andrew Opdyke – The Economy-Inflation-Unemployment-Evergrande
How is the economy going to change now that we’re in the fourth quarter of 2021? Is it still going to be like the last 3 quarters or not? How will it impact our economy in 2022 and the coming few years?
There has been a lot of uncertainty in how things are happening, which is leading to market volatility.
In this episode of the Secure Your Retirement podcast, we have Andrew Opdyke, a Certified Financial Advisor, Economist at First Trust Advisor. Listen in to learn how the current state after COVID is impacting our economy, inflation, and unemployment.
In this episode, find out:
· Reflecting on the first and second quarter of the year and how the third and fourth look like.
· How housing consumption and rent prices impact inflation.
· The likelihood of reacceleration in inflation numbers in the coming years.
· Andrew compares 2021 to 2013 and why uncertainty in different areas will cause market volatility.
· Why the employment healing is going to take the market a few years to recover.
· The minimal impact of the Chinese fund Evergrande on the US economy and S&P companies.
· Why US partisan politics are likely going to be the next volatility.
· Why Andrew is excited about the impact of the potential innovation in the US.
· “Uncertainty, in general, is the key driver of volatility in the market.”– Andrew Opdyke
· “As we move through the fourth quarter and the beginning of next year, we could see reacceleration on the inflation numbers.”– Andrew Opdyke
Get in Touch with Andrew:
· LinkedIn: https://www.linkedin.com/in/andrewopdyke/
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To access the course, simply visit POMWealth.net/podcast.
Here’s the Full Transcript:
|Radon Stancil:||Welcome everyone to our special edition of our Monday interview. Today, we’ve brought back our lead economist, Andrew Updyke. So let me just say this before we go much further, Andrew, thank you so much for coming back again and helping us. Because this is always so nice to be able to get a nice overview of how the economy’s working and what it looks like. So thank you.|
|Andrew Updyke:||Oh, absolutely. I love our conversations. Thanks for having me back.|
|Radon Stancil:||Great. So I tell you what, our goal has been trying to get you on about once a quarter or every quarter. Okay, here we set the time, we’re recording, this is September, 2021, give us an overview, how do you see things right now? We were having such a huge pump in the first part of the year. We’ve gone into this flat line, minor pullback. We’ve got some bigger news with some things going on. Can you just give us a synopsis of where you see things at right now?|
|Andrew Updyke:||Yeah, absolutely. So I would say the story the first half of the year was that we had the vaccinations going out, we had Delta, was not yet a thing. The COVID cases were declining across the country. We were back in this full reopening mode. So we saw an acceleration in economic activity in the first quarter and the second quarter. This past quarter, the Delta numbers started to rise. We didn’t really see restrictions put in place. There was some mask mandates, but we did start to see a little bit of a moderation on the economic data side. That said, I think you are hearing a lot if you turn on TV, if you turn on the radio, if you open the newspaper, it’s been getting a lot of coverage. And then you add in, there’s been what happened in Afghanistan. There’s been questions about what’s going on at the border.|
|As we reach the end of the year, there’s an escalation in the conversations related to the infrastructure bill. There’s been an escalation in questions about a Budget Reconciliation Act. So, we’re compounding uncertainties here in the third quarter and with the Delta that’s moderated activity, it’s led to some volatility in the markets for sure. But here’s what I’ll say, when we dig beneath the data and we look at, has this impacted consumers? Are consumers seeing a sharp pull back in what they’re doing? Have they stopped going to restaurants? Have they stopped going on trips? Have businesses stopped investing?|
|The answer to that is, no they’ve continued to move forward. The data is particularly, with the Delta in employment, which has been a hot topic here in the third quarter. The last data we got for the month of August showed a lower than expected number, came in at about 200,000. That was pre-ending of additional benefits. And I’ll say, that was also preschool starting back up. So over the last three months, we’ve added about 750,000 jobs per month on average. As we head here into the fourth quarter, the expectation is, the school coming back, the COVID cases right now on the down trend, it look like, are setting us up for a little bit of a re acceleration in activity as we move into to the end of the year.|
|Murs Tariq:||Gotcha, Andrew. So thank you for that little synopsis. And now we want to get into some of the things that have been major headlines, but what we appreciate on your approach and first trusted approach, is you guys are very numbers oriented, just like we are. And so we tell our clients all the time, let’s not get caught up in the emotions of what the media is saying, because ultimately the media’s job is to make things interesting. And it’s not always objective, and we like to be objective. So the first topic I’d like to hit is, around inflation. I read an article just this morning, Deloitte came out and said that inflation has actually been subsiding a little bit here in the US. Because over the past couple months it’s been, whoa, inflation is going to be terrible, numbers that we haven’t seen in decades. And so I just want you to touch on that. Where are we at with inflation right now, with everything that’s going on?|
|Andrew Updyke:||Yeah. So the latest data point that we got on inflation did show a little bit lower number than we’d seen in prior months. But I caution in that, that one of the factors that pushed that number down was a decline in things like airline ticket prices. That is something when the Fed says transitory, they’ve historically over the last year, been talking about prices that went too high and they expect them to come down. That’s one of those prices that went down and I expect it’s going to come back up. But even if we ignore that, the number that came in was CPI, consumer price installation rose 0.3% on the month. If you annualize that, if we had that each month throughout the year, that’s about three and a half percent inflation for the year, which is substantially above. We were at about one and a half percent during almost the entirety of the recovery from the financial crisis.|
|So we’re moderating back down in the last month or two, but we’re still well above where we were pre COVID, last recovery. And here’s the other thing I would know. What’s really hasn’t been showing up in the data from an inflationary standpoint, is housing. And that shocks people a lot of times when we talk about this, but housing, the way housing gets calculated for inflation numbers, they’re not looking at home prices. They say, you buy a home, that’s an investment you’re going to sell the home later. You may sell the home for more than you bought it for. What they care about is the consumption of the home. So essentially they’re looking at rent prices. Because you don’t own it before, you don’t own it afterwards. It’s a pure consumption number. We had a moratorium on evictions over, basically the last 12 to 18 months that recently got lifted.|
|Now we’re starting to see some rapid repricing on the rental side, as they’re starting to bring in new tenants, tenant are moving on. So I have a feeling that as we move through the fourth quarter and into the beginning of next year, we could see a re acceleration on the inflation numbers. And I’ll say, that the fed, who the Federal Reserve recently had a meeting, it was their September meeting, and they acknowledge this. They’ve essentially acknowledged that inflation has been more persistent than they thought, it’s running higher than they thought, they lifted their guidance on where they think inflation’s going to be this year, next year, and the year after. I don’t think we’re going to be at 6%, 7% inflation over the next two, three years. But I do believe, and it looks like the Fed is starting to lean towards the belief that we’re probably going to be in the 2%, 3%, 4% range for the next few years.|
|Radon Stancil:||Good. Thank you. So now talking about the Fed that they’re talking about this tapering idea and pulling back, which I think for most people, it makes sense. You can’t keep doing this, right? But every time that conversation comes up, it freaks the market out. Or at least they’ll say it does for a day or so. Could you help us maybe understand while logically, I think most people in the United States would say needs to be done, but yet why the market reacts so negatively to it and how you see that playing out?|
|Andrew Updyke:||Yeah. To be honest, the goal for the Fed is, they’ve got a twofold mandate. One is on employment and one is on inflation, and what they’re doing right now, they’re purchasing $90 billion a month in us treasury securities. What they’re doing on the mortgage backed security side, they’re purchasing $30 billion. So it’s $120 billion a month. It’s not really doing anything to lift employment. There’s no companies that are out there that says, “Oh, the tenure treasury 1.3% just isn’t quite low enough for us. We were going to hire that person, but we’re not going to do it now.” That’s not at all the case. What we have is more job openings than we’ve ever had in the history of the United States. It’s been difficulties getting people back to work, and the people are not sitting there looking and saying, “Hey, if the tenure treasury was a little bit lower and I’m going to go back to work.”|
|So I think the markets, I think economists are looking at what the Fed is doing and saying, what you are acting on, the purchases you’re making are not impacting the areas that you’re really focused on. It’s not really providing benefit. And on the mortgage backed security side, I haven’t heard anybody argue that the housing market is struggling right now and needs more support. If anything, they need more workers, but again, this isn’t going to fix that. So it’s appropriate. I think it’s appropriate. The Fed could have started this before and what the Fed wants to do, the key thing that the Fed does that impacts markets, impacts the economy, is when they start to lift interest rates, when they lift the federal funds rate, which is the base rate that impacts our mortgage rates, our car loans, our student loans, business borrowing and investment, and the Fed wants to have tapering done.|
|They want to have eliminated the purchases before they make movements on the rate hikes side. Now the rate hikes are not coming this year. I would be surprised if we see them in the next 12 months, but as we get towards the end of 2022, and we start looking into 2023, it’s probably going to be appropriate for them to start raising rates. So they want to have tapering out of the way. Now, why does the market freak out at times? Well, for that, we have to go back to 2013, 20 13 we had what was called, the taper tantrum. That’s the last time that the Fed was doing these types of purchases and then pulled back on it. Now 2013 and 2021 to me, are incredibly different environments. Back then, the financial system, the banking system was far less capitalized. One thing to take from history.|
|And we see with every single recession, when a recession happens, we focus intensely on what led to that recession. And we put all these safeguards in place to try to prevent it from ever happening again. So the last recession and this, this recession almost never looks like the last one. Our banks came into this recession incredibly well capitalized. They had more assets, they had more equity. They had fewer loans as a percent of that. They had stronger loans. And so the banks have been stalwart through this, right now, the banks are overloaded with liquidity. They have more than enough cash on hand. So the concern that happened in 2013 was, as the Fed stops buying, there’s in the system, are the banks going to get stressed? And what it led to was about a 1% rise in interest rates.|
|Now, ironically, the interest rates rose on the news that the Fed was going to slow down purchases. And then those interest rates moved right back lower during the purchases. We realized in 2013, that it did not have the impact that we thought it would. The tapering discussions have led to some volatility in the markets. It’s led to some volatility in interest rates, but not nearly as substantial as it was back in 2013. And Powell said at this last press conference, unless we get a terrible job report next month, which I think is an unlikely scenario, the Fed is going to start this tapering process at their next meeting, which is in November.|
|And they’re going to start that process. They’re going to start to ease their way back. And that’s going to take them six to eight months to do that, to clear themselves from the market. I expect the banks will come in, they’ll pick up purchasing treasuries where the Federal Reserve is not. I think it’s going to look largely be a non-event, but nobody knows for sure. And uncertainty related to government policy, Federal Reserve policy, COVID uncertainty in general, is the key driver of volatility in markets. So it’s something we’re going to be living with here, I think, as we move through the end of the year.|
|Murs Tariq:||Yeah, it’s almost comical in a way, how specific and how careful the Fed has to be with their rhetoric or when they’re coming out with these updates and everything. Their speech writing, I think is probably it more important right now, than what the presidents is, because of the impact that it has. The meeting that happened just the other day, and then the markets took off because it’s not happening immediately. Now it’s going to happen in a few months. We all know that, but the markets loved it just the other day.|
|So with that said, you mentioned unemployment and we know that the additional unemployment benefits have subsided. And we’ve talked about this in a previous podcast, where you made some very logical guesses as to what’s going to happen when these additional benefits go away. Is there any data that’s coming in yet? Or is it too soon to talk about what’s going on there? But what are your thoughts as far as, hey, now these additional benefits are gone and we still are seeing, especially in the service industries, restaurant industries, a lack of employment, a lack of being able to fill the tables. Not because people don’t want to go out to eat, but we don’t have enough people to serve. So where are you at right now with all that?|
|Andrew Updyke:||So, we don’t have enough data yet. I was looking at the data this morning. We got the most recent initial claims report, continuing claims report, but they lag, they lag with a week or two or three weeks. So we really don’t have much information on how this is changing the dynamics in the employment market. And for everyone listening, the two major changes that we’ve seen over the last month were one, the removal of the additional unemployment benefits. And ironically, I don’t know who was the PR person in charge of this, but we pulled the additional benefits on Labor Day of all days, but we removed it for the 24 states that had not already moved. Now, those 24 states include California, New York, Illinois, and Michigan, which were among the highest in the entire country in terms of unemployed people, they alone represented about four, four and a half million people on these extended unemployment benefits that have now gone away.|
|We haven’t gotten a great check yet on how many of them, or if they’re coming back into the labor market. The other group is the group that was dealing with childcare issues. And I completely get this one. My wife is a fourth grade teacher, and last year she was teaching school from home while my daughter was taking kindergarten from home, and I had a two and a half year old at home, I was in the office because during COVID, we had never been busier. I get the burden that it put on people last year, trying to work or think about going to look for when they were dealing with the kids at home. But now, my wife’s back in school, my daughter is in school. My little guy, he actually just turned four last week, he’s in preschool. School’s back in session. I think that’s also going to be easing some of the burden on the childcare.|
|Now the employment report, this is the headline report. This is the one that gets the most attention, that gets done the week of the 12th in any given month. So these benefits ended on the sixth. The survey is that week, that ends with the 12th. There just was not enough overlap to really see, I think, a pickup in activity. We’re going to probably have to wait until November, when we get the October report. In the meantime, we’re going to continue to look at places like Indeed. Indeed, who does the job posting, job search activity. That was one of the areas that had shown earlier on, that when the benefits ended in the other 26 states, that ended earlier, they saw a pickup in job search activity, in job applications. If that plays out with these remaining 24 states, and I think logically, people are going to look and say, I still need to pay for food.|
|I still need to pay for a place to live. I think we’re going to see a portion, not everyone, but I think we’ll see a portion of those people return back into the labor market as we move toward the end of the year. You add in that again, those Delta cases are on the downs swing now, nationally. And I think as we move in the fourth quarter, I think we’re going to see a re acceleration, maybe see some months where we add 800, 900,000, maybe a million plus. And so far this year, just to put all these numbers in perspective, we’ve added 4.7 million jobs so far, through August. I think we’ll probably hit about 7 million for the year. Now 7 million would be the single best calendar year of job gains, in us history, but we lost over 22 million jobs last year. We had brought back about 12 million through the remainder of 2020.|
|Even with this strong number. Even if we hit a record year, we’re still going to be down about 3 million jobs from where we were when all of this started. And if you include jobs that likely would’ve come. If we’ve continued adding jobs, had COVID never happened, right now, we’re on track at the end of this year to be three to five million jobs below the trend we were on before this. So the employment healing is going to take us into 2022. It could take us through 2022, to really get everything back on track for the economy, the supply chains, to really feel normal. We’ll be improving over that timeframe, but we still have a little ways to go.|
|Radon Stancil:||All right. I got a thing that we’ve had a few conversations with our clients about, they’ve reached out to us. About the middle of September, we got this situation with Evergrande, this Chinese fund, that owns about, I think they said they were going to default on about $300 billion of real estate payments that they had borrowed. And my context was, if you put that in the context of the entire stock market, that’s a small number.|
|I know it sounds big, but it’s a small number, but it did, or at least let’s say this, the stock market pulled back and it was given excuses around this idea. Could you just talk to us a little bit, let’s just pretend a company like that did default or a fund like that did default on that much. Really, you see that being a thing? What do you see? Why did it create such a, I don’t know, hoopla, and potential pullback in the market? And this idea, I saw one article that said, “We don’t think it’s going to be a title wave, but it’s going to be bigger than a ripple.” So could you talk about that a little bit?|
|Andrew Updyke:||Yeah. So let’s talk about Evergrande, because this is something that got a lot of attention over the weekend, into the beginning of this week. It is a very large Chinese property development management company. Now they have about $300 billion, globally, in debt of which about, $18 billion is US dollar denominated, $18 billion. So again, let’s put this in context. One, the Fed right now is buying $120 billion a month of bonds, of security. So this is roughly one six the size of what the Federal Reserve is doing in a month in, month out basis. But here’s the thing, the Chinese property markets, this is an area where people have been seeing trouble coming for some time. The yields on these bonds have been rising and rising, significantly above the levels that we see here in the United States, because it was clear that a risk was building.|
|And so, US Financial System, the banks, who are typically the ones that are holding international debt, funds that were holding international debt, there was very little exposure here in the United States. What we watched take place on Monday, was that was the thing that got the headlines. I think it really was an excuse. They were thinking about potential tax hikes. They were thinking about what’s going on at the border. They were thinking about what happened in Afghanistan. They were thinking about uncertainties related to all these other things, Delta, employment, whatever it may be, and this was just the tip of the iceberg. And so before we really knew much about it, before anyone had, had that ability to really dig in and say, how much exposure do we truly have, the market reacted to it. Now, here we stand, just a couple days later and the market is realizing this, and we see some corrections.|
|This company may default, they’ve said they’re going to try to service their US debts, their international debts, first. And that the losses would come within the Chinese economy. Let’s assume China, because China gets a lot of attention whenever the name comes up, they have many people, they’re the world’s first or second largest economy, depending on how you calculate it. But for the S&P 500, for example, S&P 500 companies as a whole, have about 2% exposure to China on their revenue side. So if China were to completely disappear, sure, it would have an impact on the S&P, but it’s not catastrophic. These things get blown out of proportion. The other thing that, when we were thinking about this earlier this week, defaults, they’ve got a really bad name, but from an economic perspective, a broad market perspective, I think the response is overdone.|
|It’s clearly going to have an impact on whoever lent to them. But if we go back to 2008, 2009, we had a rule called, Mark to Market Accounting. This rule meant that with a bank, if you were a bank, and if things started trading lower in the markets, regardless of whether or not it looked like it was going to perform, if somebody else needed to sell in an emergent. So if a situation like this came up and somebody wanted to clear it out, if you held it and wanted to hold it, you still had to mark it down. And it created this spiral where, somebody would sell something out of panic, somebody else would have to mark theirs down. Then they had to sell something in order to hit certain ratios. We created this panic spiral, and the government realized we shouldn’t have this Mark to Market accounting in place.|
|It’s just adding fuel to the fire, so we got rid of it. That rule does not exist anymore. It got removed in March, of 2009. So now defaults, they don’t have the same wave. I would say they don’t have the same ripple. I think this is something that in two, three weeks, the Evergrande, we’re going to remember this story maybe, but when we look back on it, we’re going to say, it has had very little impact on the fundamentals of the market. It had incredibly minimal impact on any of the companies in the S&P 500. It just made for good headlines.|
|Murs Tariq:||Well, that is a great summary there. And thanks for your position on that. We’ve got a couple minutes left here, Andrew. And once again, thanks for joining us. And you’ve been with us for quite a few episodes at this point, and we always like to end with putting you on the spot with a couple questions. And so my question to you is right now, where we sit here, getting close to the end of the year, what’s keeping you up at night? Now that we’ve talked about out all these different topics, and you’ve done a great job with our rapid fire that we’ve thrown at you today, what’s keeping you up at night right now?|
|Andrew Updyke:||Yeah. So what’s keeping me up right now, is my four year old who’s, for whatever reason, he’s going through this stretch where he gets up in the middle of the night. There’s not a lot that’s really keeping me up. There’s certainly things that I’m keeping an eye on. I’m going to keep an eye, I’m needing to watch to see if we have anything come up with, let’s say, another variant. If there’s anything that suggests that we’re going to see any sort of shutdown. I’m watching also the debt ceiling debates. This is a song and dance we’ve done a few times over the last five, 10 years.|
|My expectation is that here over the next month, this is going to start to become headlines again. And I’m sure we’re going to get a lot of questions on, is the US going to default on debt because we can’t get agreements in Washington? I think it’s very unlikely, but there’s a lot of partisan politics taking place. So that to me, is likely to be the next volatility event here as we start into the fourth quarter. We’re watching it, we’re looking at the numbers. We’re watching the debates, we’re listening to the whispers out of Washington, but that’s the biggest thing on my radar today.|
|Murs Tariq:||All right. So we’ll close with the positive. What are you excited about?|
|Andrew Updyke:||So I don’t know if we’ve talked about this before. I was reading a book called, Ten Trends Every Smart Person Should Know, and a bunch of other interesting ones. And one of the things I’ve been thinking about is, what’s taking place in the broader world. Let’s step back from COVID, let’s step back from just the broad economic… One stat that, that I found the other day, and I think this is an incredible stat is, up until the 1970s, less than half of the world’s population could read, less than half of the world’s adult population was literate. And we passed a point in around 1970, where we got to more than half the world population. And today we stand at 87%. And so we’re going through turmoil today.|
|We’re going through COVID, that’s having impacts. And I get the question a lot, with things that we did with the debt at all this, are you worried about your kids’ futures and what they’re going to grow up into, the debt burden in the US. And I say, “Look, there are certainly things to be concerned about, but this is one of the most powerful factors in the world. When you have the ability to read, the ability to learn. Plus, we got these guys, we got these phones that are everywhere in the world, kids today, whether they’re young, middle school, high school into college, they’ve got better access to information, better ability to learn. They have the capacity to learn in a way that we’ve never seen before.” And the deeper I dig into this and think about the ramifications.|
|Look, I don’t know if the cure for cancer’s going to come from the United States, or if it’s going to come from Bangladesh, or if it’s going to come from Vietnam, or Taiwan, or whether it’s going to come from Egypt or somewhere in South Africa. But we are unleashing potential for people to innovate, to build entrepreneurship. Now, I think as these ideas come out, they’re going to want to bring them to the US. They’re going to want to build their companies here. So right now, I’m really excited about seeing some of these trends that don’t get a lot of discussion. They don’t get covered on the news, but I think they’re going to be massively impactful here, as we look out 10, 20, 30, 40 years.|
|Murs Tariq:||Well, that’s great, Andrew. Once again, thank you so much for carving out some time for us today. We love these sessions with you. We learned quite a bit, and we know our listeners, you’ve become a bit of a fan favorite with our listeners. So we appreciate your time. And thanks again.|
|Andrew Updyke:||Thank you so much for having me.|