Buying a home is harder than ever before. Young people are waiting longer and longer. What does that mean for our economy? Wage growth is being outpaced by housing costs, so where are we really? Oh by the way, cars and healthcare and other costs are expensive too! The data is skewed by Covid, so what is really going on? Are the next generation potential homebuyers really all that worse off or are they culturally different, with different values? And what is going on with DOGE—does government spending cuts hurt the economy? What are the states doing? What are the numbers, not the prognosticators, saying? Prognosticators talk about inflation so often, it may lead you to ask, “Is anything disinflationary (and is that good)?” Where are we at with the unemployment number and is that a reliable number? And learn why jobless claims, produced weekly, are a reliable indicator, as volatile as they are. And the ultimate question, maybe, is America OK?
Welcome to the Expert Podcast.
Welcome today's podcast. I'm Karl Frank here with two special guests, and I hope, my hope is that Nate Merrill, who got stuck in traffic will be here in any minute, and Jeff, our third host, is still on vacation, enjoy your time off, Jeff. Hope you're having a great time wherever you are. Our guest today is Jack Janosiewicz from Natixis.
He's a portfolio manager and he has his own set of podcasts. He's a national speaker and and a money manager who is a very tactical manager. And so he's got a lot of timely advice about investments. And then my friend from Natixis, Mike Thelen, who is the gentleman who introduced the two of us.
So Mike, Jack, welcome to the Expert Network Team Podcast. I'll pick him up. Thanks for thanks for having us on. Yeah, thanks, Bob. It is so great to have you both. And and I know when Nate comes, he'll have the tough questions, so I'll just start with a really easy one, because, politics are always easy, right?
There's never any emotions, never any drama. It's always the same old story. Oh, no, wait, then we elected Trump and the whole world changed and it changed right away. Suddenly, maybe faster than any other time in our lifetime. So Jack, what do you make of that? And what does this mean for our clients and investors and people who have money in equity markets in particular?
What's going on? First of all, maybe it's worth caveating that I'm a strategist. So my role is to make money. So whether it's Republicans, Democrats, both split, however you want to call it. My job is to make money. So with that in mind, when we think about some of the stuff that's going on here, the there's certainly some big changes going through right now.
And, we always hear the adage that the market doesn't like uncertainty. That's true, but I think, at the end of the day, once you finally get the rules to the game, corporate America does a pretty good job of learning how to make money with those rules. So the issue I think right now is simply we want to know what the rules of the game are.
And the amount of headlines that are coming out on a daily basis, I think is really what's making this complicated short term because it's like drinking water through the proverbial fire hose, right? Just the constant barrage of stuff coming up across the tapes. One day it's tariffs, one day it's being pulled back.
Another day, it's 10%. And then it's 25. Then it's, we're giving one offs here and there. So the bottom line here is that we just don't really know what the rules of the game are. And that is making it a little bit more complex. And I think the market is now starting to try to digest the idea that.
There's a lot going on here, but in the background, the other issue, we're starting to see the economy slowing. So you get this uncertainty on the geopolitical side, along with a modestly slowing economy that sort of creates this really tough cross current. And I think that's, it's really putting a little bit of pressure on the equity markets right now.
It's the combination of uncertainty in a modest slowdown, not necessarily the best cocktail for the market, but I will say one last thing here. We are slowing, but we're slowing from actually very high levels of growth. And that gives you a pretty big cushion to slow into. So even though we talk about slowing.
That growth rate where we're starting from matters, and I think that's the thing that we take comfort in. We're certainly very far away from a recession because of that. Yeah, that's really an important point I think and maybe a lot of people don't realize it and certainly I've heard from some of our clients that hey this, you know the economic news might be one thing but the business I'm running is doing something completely different And some of them are saying they've been struggling more than what the news headlines make it out to be But jack what is the?
The overall situation of the U. S. economy. We always fall back on really the one big premise in which is the the consumer, right? The consumer is basically the U. S. economy. It accounts for 70 percent of growth here. It's consumption led. So the health of the consumer is what matters the most.
And, one of our favorite charts that we love to show with our clients is this concept called aggregate income. And we also use a slang terminology, household paycheck proxy. What is it? You're just simply taking the number of people that have a job, multiplying it by how many hours they're working each week, and then multiplying that by how much they're making per hour each week.
And you put that together, it's like the entire consumption power of the U. S. economy, right? And what we're seeing right now is it's still growing above the previous 10 years trend. And it does a pretty good job. If you go back and look at those 708, What happened? You started to see it really roll over and rolled over and actually went negative.
We're sitting at levels that are north of 4 percent in here, which does a pretty good job of mirroring growth. That's a pretty good backdrop. So you still need to slow from 4 percent to zero and then turn negative. For really the onset of a recession, and this takes a long time to evolve. So the bottom line here, the consumer is still in pretty good shape.
The housing or the job market still in pretty good shape. It's slowing, but again, you start to need, you need to see the layoffs. And there's really, I think a hard point to make there is that. Corporate America is still in good shape. We don't need to lay off anybody right now. And that's the key takeaway I think here the underlying economy still decent and it's because of the labor market so In 07 08 of course is the great financial crisis And so you're saying back then this was an indicator that helped lead and predict something bad happening.
Is that what you're saying there? Yep, and today it's nothing like that exactly and it's very you know Like I said, we look at the three month change the six month change Just so you get a little bit of faster turning signals there And we just compare it to basically the pre pandemic level.
So from 2010 to 2019, we're still above that rate. So again, when I talk about starting points matter, we're above the historical trend and pre COVID for the previous 10 years, there's some cushion there and slow, that's still fine. It looks like things are pretty good for consumers then but what about these layoffs?
What about the federal layoffs? Isn't the federal government like a huge portion of our economy? Yeah I think we've done a little bit of work on this and keep in mind When you look at the number of federal employees, it's about three million when you look at the total labor force you're talking about let's just round it up 170 million you know based on the numbers that we have seen I read some numbers, I think I've seen about 70, 000 people have accepted this sort of layout package, if you will.
And there's another cohort that's that falls into this 200, 000 bucket where I think you're there, but you're not there with tenure, so to speak. So it's someone who's pretty young. So it's somewhat something you probably the first person you let go, so to speak. So you're looking at, let's say, between 250 to 270, 000 people and I ran when I ran the numbers I use 200, 000 and it just to do simple math here.
If you think about the average worker in in D. C., they make about 100, 000. 200, 000 employees making 100, 000. Do the math, put that up against an economy that's consumed, we consume roughly about 20 trillion. It's a rounding error when you start to think that those people are, A, not even going to collect benefits.
They're going to earn zero, which means they're going to spend zero, which is not what's going to happen. These people, if they do let go, some of them will find a job. Some of them will take their package and wait it out. And think about it too. If you look at the unemployment number for the unemployment number to move up you need, I think roughly almost a million people let go.
So if you're talking about two to 300, 000 people being let go again, 170, 000 people that are employed. You're talking about the unemployment rate moving up from something like 4. 2 to maybe 4. 3 again. Yeah, it's not great. We don't like to see people losing their jobs, but is it going to be incrementally negative on the economy?
It's just not big enough at this point. It might certainly hurt DC But the broader economy I think is still going to be resilient with that. It's just not big enough to matter that is really good to hear the numbers behind the scenes because You know your heart goes out to these people who lost their jobs, right?
I mean they chose early in their career to take a lower paying job with job security and a lifetime pension And gave up everything in the corporate world and now they haven't got the upside of the corporate world or The pension or the job security, right? Your heart goes out to them. And again, there's a number though.
We're hiring And the numbers that I'm quoting, I'm assuming worst case scenario. These people don't get another job. So they're not spending a penny That's not really what's going to happen here. So you can again the numbers we just ran through That's like the worst case scenario, which is really not a high probability event Wow, so that's a that's the numbers I think tell a different story than the news, right?
And that's really important for us to hear Another thing that you had in your one of your recent commentaries that I found was really interesting Was some of you're talking about inflation and certainly some of the administration's policies seem pro inflationary and I'll just begin since we're making this transition from federal layoffs are federal layoffs going to be Inflationary or deflationary or not even a matter because of the numbers that you just went through I mean at the heart of it, it's probably too small to matter if we were going to just play it from a pure economic perspective, I would argue that you're losing a source of demand So as a result, you know that probably puts a little bit of downward pressure on prices because you just don't have as many people purchasing goods and services but it's too small to matter too small matters really the big thing.
Yeah. Yeah. Yeah. And then what about some of the other policies like namely the week that we're recording this tariffs are all over the news. And I imagine by the time this podcast goes live, they'll still be in the news. No, I don't know whether they're going to be on or off, but they're on right now. So what does that mean for inflation?
And we've heard horror stories from all around the country, from, in our community it's some of the people who use aluminum, they're worried about, these, some of the manufacturers, and then the farmers worried about the farmers and potash, which comes from Canada, which I guess is pretty expensive.
Tell me about what you think this means. So I'm going to quote some research that the Fed 2017 or 2018, because again, this is really, I think what it comes back to is how's the Fed going to react because if they see this as inflationary and then the Fed probably hikes rates. If they don't, then maybe it's not a big deal, but they have what's called the the Teal Book.
And the Teal Book is basically the prep work they do before an FOMC meeting. And it's basically staffers putting together research for voting members on the on the committee. And they had asked the the members to actually look at the impacts of inflation back in 2017. So basically the first go round of the Trump administration, when they started to put some tariffs on and the modeling they did basically showed that you basically get one off price increases in the risk from what they were doing was basically that if the fed were to actually hike rates.
The probability of an induced recession increases, whereas if you did nothing, the odds were marginally higher, and basically inflation fades away over time. Now, let me put some details around this, okay? Inflation is a rate of change, right? So the example I like to give is you and I go to the bar one day, and we've been getting a beer, and it costs us 2.
Today we go, and it's 3, right? So all of a sudden, you've gone from 2 to 3, so that's a 50 percent increase. Okay, that's so on an inflation adjusted basis. We're going to see 50 inflation 366 days from now if that price of beer is still three dollars That inflation rate drops to zero because you're looking at a year on year change So what you're talking about here is if it's inflationary, you need to see a persistent rise in price level Out in perpetuity, whereas technically when you look at tariffs, it's really a one time price increase.
So the teal books basically says treat tariffs as a one time increase. However, the risk is that if inflation expectations, so they go and do all these surveys, they talk to you and me, business owners, and they ask them, where do you see inflation in a year from now, five years from now, if those start to move.
Then the Fed gets worried about the idea that inflation potentially could be coming contaminated, becoming contaminated because the concerns of tariffs are starting to perpetuate to the broader economy. So the way I would argue this is the Fed's language, look through it, but we're paying attention to inflation expectations.
If inflation expectations start to rise, then we get worried and then the Fed will react. So that's how we're using our framework for that. Which tells me we need to be a little bit more reactionary as opposed to proactive So we're not doing a ton because of that You got to wait and see how things play out before we're actually going to do anything right now Yeah, that's really interesting.
So from an investment standpoint and money management standpoint you're recommending pause and that's what you're certainly doing at your company right now, as you're saying, Hey, we're not going to try and get ahead of this, we're going to wait to see if it, how, whether it gets what you're using the word contaminated, it's going to propagate. And again, think about it. The other big takeaway is simply the underlying health of the economy is still pretty good. Corporate ends are still going up and that's really what matters in here. You get a couple of blips on the tariff front, the underlying strength is still pretty good.
So we're trying to look past it. And again, like we talked about at the onset on, off, we could have sold in the markets up because they're off and you're just going to get whipsawed around, that's the bottom line. Yeah, don't try and time it, especially these times. Do you think, this market has been both up and down during the administration year.
It's been a pretty interesting ride. Do you have generally any more positive outlook for the forward looking, administration years, or do you think it's just more chaos during the next four years as a general rule, we should people be expecting good things, or should they be expecting more of the same that we've seen?
Yeah. So I think what's going to be somewhat of a limiting factor is the fact that you're going to have midterm elections coming up. And so a lot of these politicians are going to have to go back to their constituents and face them and have to worry about being reelected. So I think the window for a lot of the things that Trump wants to do somewhat small because you got to get it done and then let things settle down and work themselves out.
And so that the constituent or that so that the policymakers can go back to their constituents and basically say, here's the results of what we did. It's going to be hard to get through four years of this again. I think people felt. The concept of a red sweep made it a slam dunk for things to go through when you start talking about the majority in the House being three seats, yeah, if everybody stays party lines, that's one thing, but you're already seeing some cracks in the foundation for that party line vote because, some of these policies are maybe not quite as advantageous for some of these guys going back to their constituent states.
And so they're saying, Hey, I got to worry about my reelection. Maybe I really can't vote party lines here. So the idea of being able to slam home all these reforms. With the red sweep, I think you got to take that with a grain of salt. Here's a few things that will get done. Think about what's going on with the, with the budget right now, we can't even get the budget done.
I think that just tells you how pretentious, even with that three vote majority, it is how hard it's going to be to continue to do this going forward. So I think that gridlock is going to make it a little bit harder for things to get done going forward. Yeah, that makes a lot of sense to me too. And do you think in a situation like that, our average, listeners is not going to be a market timer, right?
They're going to be looking for companies to be making these decisions and being tactical. And then certainly my job, our job is to help them be strategic about their own personal financial plans and helping them find the right investments that help them achieve their own personal goals. Does this make it an environment where you think, The more active manager has an advantage, or do you think it's an environment where we ought to just all take a seat back and be a little bit more cautious and passive and humble, or what do you think?
Yeah, so I would maybe make the case that it's, I'm sure you know this well don't need to espouse it to you, but it's time in the market that matters, right? And so I think from that perspective, that's something that we always have to fall back on when we're talking with our clients, but from a perspective of the big picture backdrop, though again, I think it's never good to attempt to try to time it in and out of the market, leave that to someone who's that's your job that's tasked with, which is yourself to manage those portfolios.
And you've had the conversations with your clients where you're talking about where are those risk metrics that you're comfortable with, how much you willing to. Potentially lose. How much are you willing to how much volatility are you willing to take down? And you're building that portfolio constructed around those backdrops.
So let those portfolios do their thing. And, you're going to have ups and downs. Listen as I try to explain to people, the market goes up a little bit more than 70 percent of the time every year. So you go back in history, 70 percent of the time, the markets up, of those times when it's up, 50 percent of them are up over 20%.
Those are pretty good odds. If I told you the blackjack table, you'd win 70 percent of the time and know why, by the way, half of the times you do, when you're going to hit blackjack, you're probably not going to walk to the table. You're probably going to run to the table. So that's a pretty good backdrop that I think needs to be instilled in the minds of investors that time in the market tends to go up.
More than it goes down. You're going to have those sort of, obviously those one in every 10 year events. But, I think again, those are one in 10 year events. And hopefully the portfolio is positioned to absorb some of that with the risk off side of the equation. So you can protect on some of this stuff.
Very good. Yeah, I think you're on to something there. And certainly it's something that we believe heartily here that we can control the financial plan. We can't certainly control the government and the economy as a whole. The government can't control the economy as a whole either. So if anything, yeah, if anything is a little cold comfort there that.
If they can't torpedo it or launch it. So what other, concluding this podcast, which, we've got some good stats here. It sounds like we've got a little bit of perspective by pulling things back and some of the headlines that don't look at it in a economic point of view, looking at the big picture.
What kind of closing thoughts might you have for us to wrap up our first podcast? Yeah, again, I think what happens in Washington can impact the economy at the margin. At the end of the day, it's really corporate America that, like I said earlier, when you give them the rules of the game, they're going to figure it out.
And so when I look back at What's going on with regard to, margins, we're looking at earnings, expanding margins, expanding the unit labor costs are actually coming down. Productivity levels are going up. These are all very constructive things for the economy, but more importantly, for corporate earnings.
And that's the bigger point here. So again, things that happen in Washington at the margin can impact the economy, but for the most part, it really comes down to growth and inflation. And like I said, growth is slowing. But we're slowing from a very high level. So easily settling back into trend. I would even argue potentially a little bit above trend and inflation actually is going to continue to come down and based on what we're thinking, because.
As we talked about the labor markets cooling. So if we're cooling, if you want to talk about inflation being from a demand pull situation, if the labor markets cooling, it's very hard to see a demand pull, reaccelerating aggressively. And then the second one, the one big line item within that inflation basket is shelter.
So think of that as rent prices. Looking at real time rents, they're still falling. And that is a, that basically gets into the inflation basket with about a six to 12 month lag. So there's still plenty of disinflationary pressures coming from shelter. That's almost 20 percent of the basket in the course, PCE that the inflation bucket that the fed looks at.
So inflation's coming down, growth is slowing, but not cratering. We talked about the the consumer a little while ago, still in pretty good shape. I think you got to ignore some of the headlines out of D. C. Things are still going to be okay.
Jack, thank you so much. That was excellent. We really appreciate your time today. Let's wrap up the podcast there and and let's dive in a little bit more detailed next time. And and I know my partner, Nate, is going to have a lot of good questions. At that time. All right. Have a great beautiful day.
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