Deep Dark Secret of Inflation: Andrew Zatlin
Summary
➡ This article talks about how the stock market reacts to job numbers and the economy. When a lot of jobs are created, it suggests the economy is doing well, which can lead to interest rates not being cut. This can cause the stock market to drop because lower interest rates can boost the economy by making it cheaper for people to borrow money. However, the article also points out that the job numbers aren’t always accurate and can be influenced by things like government hiring and seasonal changes, so they shouldn’t be taken as absolute truth.
➡ The article talks about the Consumer Price Index (CPI), which measures the average change in prices over time that consumers pay for goods and services. Recently, the CPI increased to 3.5%, which is higher than the Federal Reserve’s target of 2%. This means prices are rising faster than the Fed would like. The article also explains that not all prices rise at the same rate – for example, furniture prices have dropped, but housing costs have gone up.
➡ The article talks about how high inflation is affecting many Americans, especially those who pay rent. However, the main reason inflation isn’t decreasing as expected is due to insurance companies increasing their rates significantly. This is particularly true for auto insurance, which has seen a 22% increase year over year. The article also discusses how the Federal Reserve is not cutting rates because it wants to slow down the housing market, which makes up a third of our economy.
➡ This article talks about how retail spending is influenced by factors like gas prices and auto sales. Even when gas prices go up, people don’t stop spending because they use credit cards and expect more money in the future. The article also mentions that spending can vary depending on events like the Super Bowl or March Madness. Finally, it discusses how companies manage their hiring to meet their financial goals, sometimes slowing down hiring to save money.
➡ The article discusses how hiring trends can indicate the health of different sectors of the economy. It suggests that manufacturing is growing, as companies only hire when they see a clear demand for their products. The article also mentions that the retail sector might face a short-term setback, but this could be a good opportunity for long-term investment. Finally, it highlights the importance of consumer behavior and the role of semiconductors as indicators of future economic trends.
➡ This text talks about the importance of understanding economic data and its impact on investment decisions. It emphasizes that we shouldn’t just accept numbers at face value, but look deeper to understand what’s really happening. The speaker believes that knowing how companies are making decisions can help predict future trends, which is crucial for investing. The goal is to invest based on what’s expected to happen in the future, not what has already happened.
Transcript
I am Frank Devechio, and I am the managing editor for Jim Rickords. And joining me today is one of the leading experts in the country today on payroll and jobs data, Mister Andrew Zatlin, or as he is affectionately known in our office, Mister labor. Welcome, Andrew. How’s everything today, Frank, it is great to be here. Hi, everyone. We’re all doing great and we’re happy that you could join us today.
And to get you up to speed on Andrew, when it comes to talking about employment and jobs data, payroll data and what it all means, there’s no one better to break it all down for us. He’s a top rated payroll and jobs forecaster by Bloomberg, and none other than the Wall Street Journal labeled Andrew the moneyball Economist. So he certainly knows his stuff. And that’s why we wanted to bring him in today and talk about some forecasting and what’s going on with the latest economic data, particularly when it comes to jobs and making sense of all the numbers that are thrown out there by the government and what he sees coming from markets.
We’re always looking for forward thinking trends to help our listeners understand what’s really going on. So, Andrew, last week we had a pretty decent jobs report that came out last Friday, 300,000 jobs gained, unemployment rate still under 4%. You know, when people hear these numbers, they think, well, that sounds like a big number. It sounds like a good one. Everything must be doing good. It, of course, always has a political lens during an election year of being, being a great thing and others saying, hold on a minute, that’s not so good.
And I think most people want to get an idea of what the jobs numbers really mean, the payroll numbers, what they actually mean for the economy and for markets. So today we wanted to get your take on how you see things shaping up for the coming weeks. As you digest and diving dive into those economic numbers out there, what do you see happening that is good? Not so good that you may have some concerns about going forward? Well, you know, jobs data, it’s like one of those things, you know, cocktail chatter.
Hey, did you see the jobs number? Good. Bad. But right now, okay, if you’re an investor right now in this market, this market has one bet on the table and it’s all about interest rates. Are interest rates coming down? If so, by how much and when. And we keep having disappointment after disappointment the last few months. And so when we talk about jobs data, let’s put that in the context of it’s not the only data point that’s been coming out that says the economy is hot.
I’d love to talk to you about the jobs data. I’d love to talk to you about how if you’re a betting man and your betting interest rates are going to be coming down soon, guess what? Payroll data last week was strike one. The inflation data was strike two. On Monday, we’ve got retail coming out, and that’s potentially strike three. All three of these data points at the headline level, they all say the economy is doing great.
In this case, good news is going to be bad news because if we’ve got a strong economy, interest rate cuts are off the table. So a lot of money. But believe it or not, we talk about the stock market because let’s face it, most of us, whether it’s 401 ks or whatever, that’s where we are. But the stock market is the moon, the sun is the bond market.
Interest rates that move move the bond market, and it’s the aftermath that then moves the stock market. So there’s a lot going on here when we talk about interest rates. There’s a lot of money, trillions of dollars. This is the big bet. Monday is going to be potentially strike three. And so would it make sense for me to walk through each one of these and why I say I think there’s going to be a strike three.
At the same time, I’d love to talk about, yeah, we’ve got these data points coming out. Yeah, the market believes in them. But I’d love to share with our listeners and our viewers why you got to look at these things with kind of one eye open and one eye shut. Let’s start with payrolls. Now, I’m more of a mechanic, meaning I get into the nuts and bolts of how things are put together in these conventional data points.
It’s sausage making. It’s ugly. You don’t want to know about it until you do want to know about it. So I kind of want to bring everyone a little bit into the weeds. I’m going to try to make economics sexy. Okay, let’s start with payrolls. All right? We care about payrolls primarily for two reasons, right? One of them is, as economists, it’s a finger on the pulse. If you’ve got more people working, you’ve got more money out there, you’ve got more wages, you’ve got basically people spending more money and you’ve got all this magnifier effect that people are spending.
Bump, bump, bump. The economy goes up, boom, your stocks are doing great. Okay? And the opposite, there aren’t as many jobs. There’s layoffs, whatever it is, then the economy shrinks. And guess what? Your stocks aren’t doing well. And that’s the first reason. We just kind of want to know because we are consumer economy and because jobs are so central, we want to know what’s going on. There’s a second reason, and the second reason is a little bit, it’s a reality.
Okay, Frank. The reality is the market doesn’t care. Most of the big bets that go on once a month when everyone gears up for payrolls coming out, well, they’re gearing up because there’s a big bet. Is it going to go up or down their expectations? Is it going to be like Goldilocks and three bears? Too hot, too cold or just right. And the market decides what that means? Just right.
Bets are put down. And if there’s a surprise, one way or the other, there can be issues. Okay, so on the one hand, you got the whales. They’re betting on a number. It’s like going to the baseball game. They’re betting whether the next pitch is going to be a strike or a ball. They don’t really care about the outcome of the game. They don’t. It’s a bet. That’s all it is.
Someone a long time ago determined this was the big bet for the year or the month. Now there are other investors. I’m one of them. I’m not smart enough to know how to make the bet, knowing what I know where it’s going to be. I can forecast it. I’m one of the great forecasters out there, but it doesn’t mean I necessarily know. Oh, it’s going to be. For example, I say that last month the number came out 303.
What consensus was expecting? They were expecting about 200. That’s a 50% 200 to 300. I was close to it. I was almost 250. I was, I think, the second closest on Bloomberg for my prediction. I think I was the closest for the private part. I’m going to come back to that. There’s a difference between private and total. The difference is what’s going on with government hiring. We want to talk about that because we do want to peel back the curtain and say what’s really going on.
The bet, the bet’s made. Consensus is wrong. Hey, if consensus is wrong, does that mean the market’s going up or down? I’m not smart enough, so I’m more of a long term investor. And that’s why I don’t really focus in too much on what pitch is coming in. I’m looking at the total game. The total game lasts a few innings. It’s going to go a few months. So going back to the premise, why do we care about these economic data points? Why do we care about payroll? Because it is telling us, is the economy expanding? Hey, Frank, economy’s expanding.
It’s not rocket science. Stocks are going to go up. Economy not expanding. Stocks are likely to go down. Having said that, the interest rates playing an outsized role during COVID interest rates went down to zero. Then theyre up, theyre moving. Now theyre going to inflect again. This has everybody jazz. Its like being at the craps table. Everybodys gathering around. Is the table hot or cold? Whats going on? A lot of action.
And thats these three data points. Its a lot of actions. Its throwing out a lot of trading, payrolls, inflation and Monday retail. So let’s take each one, see what they’re saying at the high level. And then I’m going to tell you what they’re really communicating. Okay. And so you’re going to come, unfortunately, I’m going to tell you right now to cut to the chase. I’m going to give you two different realities.
I mean, it’s like Superman and Bizarro Superman. You’re going to see two different things and they’re going to coexist and it’s going to blow your mind. Maybe. But this is the reality of the stock market. So let’s start with payrolls. Okay. Payrolls number comes out 303. It’s huge. To put this in context, in general, in a normal economy, a number of around 200,000 jobs being created is, let’s say it’s warm, it’s very good, it’s very solid.
Gdp of 2% would be throwing out about this many jobs. It’s just boom, boom, boom. So when you see something like 300, you go, wow, that’s more related to an economy that’s growing more than 2%. That’s like growing 3%. Hence the economy is hot. The porridge is hot in the Goldilocks scenario. So the number comes out and it’s hot. What happens? The immediate reaction was one point, whatever percent of the market came down in one day, the market kind of melted down.
Why? Because it all goes back to interest rate cuts. They’re not going to cut interest rates. If the economy is strong, it’s the opposite. They want a slower economy. Otherwise, when you cut interest rates, what you’re doing is you’re juicing the economy. You’re throwing liquidity out there. Suddenly it’s cheaper to take out loans, more people take out loans, it turns the economy up. They don’t want that right now.
They want to cool it down. That’s CPI inflation. That’s the second one. We’re going to talk about hot jobs, hot economy. That’s strike one. Interest rates don’t happen if you take liquidity off the table. And by the way, this isn’t the only liquidity problem that’s going on. It’s tax season. People are going to be paying taxes. So even less money is going into the economy right now. So it’s got a little bit of, no one’s out there bidding for stocks.
There’s not as much money out there. That’s why the market kind of seized a little bit. It’s still expectation. Right. Nobody expected interest rate cuts to come. Now, three months ago they were hoping, but they’re looking out on the horizon later in the year. And this is one of those maybe they’re not going to cut as much or as soon. And so some betting is taking place. In fact, if you notice, mortgage rates popped up a little bit again because rates aren’t going to be coming down in time for the housing season.
This has big effect. There’s big ramifications. Well, what if I told you that this number is meaningless? What if I told you how they get to this number is them picking up a phone and calling people? And who has landlines these days? That’s one way to get to the number. The other is they send out surveys and they hope to get these surveys back. There’s guesswork here. Now it’s educated guesswork.
But anyone who wants to die on the hill, that we had exactly 303,000 people hired, and in fact, I can tell you how many window pane hangers kind of a thing, it’s not possible. It’s a best guess under the conditions that the government’s under. And, you know, at least it’s a directional thing. So you take it for what it’s worth. At the same time, you got to be very careful here for two reasons.
One, this 303 number was baked with a huge slice of government hiring. The total number. I touched on this a couple minutes ago, and I want to dive into it again. This is a layer cake. It’s got layers. It’s got, like, how many construction workers, how many manufacturing, how many software. It’s this big layer that gets built up. That’s the private sector. Then the top layer is government postal service jobs, public school jobs, and so forth.
This 303 number had over 70, almost 80,000 public workers in there. It’s never that big. It’s a one time, what the hell happened here moment. If you ignore that, and I do, I look at the private sector, because, let’s face it, that’s the real economy. The number was good, not great. It was closer to 232,000. Well, that’s 300 versus 230. Now, consensus was totally wrong. I had a number out there, 212 versus 232, which was number one.
It was pretty good. Point being, it’s not as frothy as appears. So, yeah, economy good. Not 303,000. Great. There’s an anomaly there. Now, there’s another two things that come in that make this even more. I don’t know what to believe. One of them is seasonal adjustments. Oh, my God. These guys are crazy. They’ll take the number, and then you have to do seasonal adjustments. Right. Every year it’s the start of spring.
And so you’re going to have things that only happen in springtime. Right. You don’t see a lot of Baskin Robbins employees in December. Okay. You’re going to start to see them in spring. Well, you’re going to offset that. Right. And so they’ve got these mathematics that say, okay, every year we got 5000 Baskin Robbins employees in April. So I’m going to net out that 5000. And whatever the difference is, is the actual gyration.
They’re constantly playing with these seasonal rate adjustments. They’re constantly playing games. Not to mention, remember, the first pass is they sent out some surveys in form. Sometimes they don’t make it back on time. So what happens is you get this preliminary number. Give you an example. In January, the number came out 353,000. It was massive. It was huge. Frank, forget 303. Two months ago was 353. And then the next month, they came back and they’re like, you know, that was our preliminary, our revised number.
It’s like 230. We’ll get 353 to 230. That’s a big difference. What I’m trying to say is this number is not truth. Anyone who thinks this is the gospel and that this is absolutely true. Hey, man, they’re smoking too much. Okay, this is a best guess. We know that it’s not zero. We know it’s not negative. We know it’s not 100. It’s somewhere in the good to great zone for an economy that’s supposedly plugging away at like 2.
5% GDP growth. And if it’s higher, we get the sense it’s better. But we got to keep in mind this is a moving target. It’s making sausage. Don’t take this for truth. I believe the number is going to get worse over time. And we do have layoffs in the wings. Remember, layoffs are announced. Those are intent in today’s litigious environment. You can’t just fire somebody. When I was at Cisco, oh, my God, the gyrations these guys would go through.
You’ve got a vet according to age, gender, nationality, all these things you’ve got to take into account before you can say, yeah, you’re the one who goes. Takes a lot of hr effort when they make an announcement on layoffs, it’s what they’re going to do. So we haven’t seen the layoffs hit yet. And then also, hey, white collar people, which is the bulk of who’s getting fired. Look at these severance packages.
Hey, Frank, you’ve been great. I’m going to give you three months. Well, guess what, Frank? If you take that three month package, the company says you’re still on their payroll. So all this layoff action that we’re seeing in January and February, we’re not going to see that for two or three more months. And that’s assuming they don’t have a job within that timeframe, that they haven’t found a new job.
So there are a lot when you’re a mechanic at this level, you start to see there are movements that are real, there are movements that are part of the model. But it’s like if you always know there’s going to be some amount of noise, you accept the noise and you try to look past it. So I don’t really get hung up on what’s the right number. I’m playing the model now.
I’m playing the model in order to be a good forecaster for my clients and for everybody else. Off on the side, I am trying to predict truth and justice. Off on the side, I am measuring each and every company out there, and I’m looking at their hiring individually, and I am looking at whether it’s going up, down, or sideways, because I am trying to get truth, because I’m very basic.
The economy is growing. I want to be long in this market. That’s why last year in August and September timeframe, I was jumping up, I was beating the drum that 2024 was going to be the year of the bull and you had to get in. Now, turns out I was right. But I wasn’t right because I got a crystal ball. I was right because I’m following the numbers.
The hiring numbers were inflecting up again. Companies had started to get back away from that defensive posture and get more into a sense of the economy was not rolling over payrolls. Strike one came in hot. It could get revised next month. Down. Doesn’t matter. The market’s going to forget. The market has short term memory. I don’t. Is 300 meaningful to me? It’s good. It means that we are seeing growth.
I’m more focused on my own reality based numbers. Is IBM hiring more? Is Macy’s hiring more? That kind of thing. The second strike, though, it’s got the same thing where you’ve got this number here, it’s headline number. And all the computers out there, all the algorithm driven bots that are trading this market, they look at the headline number. I’m looking for a little bit more truth. And so let’s dive into why the CPI number again? It came in hot, 3.
5%. A couple of months ago. It was 3. 1%. What does that mean? Well, it means two things. The Fed has a target of 2%. They want inflation to be super cool. Well, 3. 1% is closer to 2% than 3. 5% is, so it’s moving in the wrong direction. This month it went up, it didn’t go down. That’s problem number one. The thing is, when you look at CPI, it was strong.
Again, you’re not going to cut interest rates because that heats the economy if you’re way above where the target is, not where you should be per se, but where the target is. That was strike two. Because again, hey, inflation and interest rates move in inverse directions as far as the Fed’s concerned. So that was strike two. But again, if you pull back the CPI numbers, this is where it gets.
Again, you shake your head and you’re like, really? That’s not what I’ve been told. That’s not what I’m hearing. So, Frank, oftentimes you read the popular press and they’ll say inflation came out at 3. 5% and core inflation, blah, blah, and you sit there and you’re like, okay, next time I’m golfing, I’ll say, hey Frank, how about that CPI number came in at 3. 5% and you’re going to be like, yeah, that’s hot.
And I’ll be like, yeah, it was hot. Frank, here’s the thing, it’s not a monolithic number. It’s not like you walk out your front door and everything went up three and a half percent, okay? It’s an aggregation. And again, it’s just like payrolls. They’re going out and they’re asking 100,000 companies. What’d you do last month? Tell us now. Now, same thing. They got to go out and they’ve got to measure a lot of things.
They do their best, it’s sausage making. But here’s the thing, again, they’ve got seasonality, again, they’re tweaking it in different ways, but let’s look past it, put that aside because this isn’t like conspiracy. Like someone’s going, hey, is Biden going to get elected? We got to bring inflation down to get them elected. Ok? It’s not that level. It’s just, it’s a bunch of economists and statisticians who’ve got nothing better to do than sit there with their tinker toys and play around.
They have different, they have core inflation, they have supercore inflation taking out energy, things that are, they’re trying to get a signal right? There’s all this data coming at them. They’re trying to get a signal that says okay, and again, like payrolls, is it up, down or sideways? And what do we think? We know there’s noise in there. We know the methodology is as flawed as can be, but it’s the best we got.
But since it’s consistently flawed and since it’s consistently noisy, we’ll get a signal out of it. Okay, what I want to do, what I want to share though is when they do CPI, it’s not monolithic. Some things are going up, some things are going down and those are the trends that I look for. For example, furniture, video equipment. Americans haven’t been buying this stuff for the longest period of time because of COVID We spent a lot of money refurbishing our houses, buying new couches and stuff.
And guess what, that just pulled in spending. So by 22 and into 23 sales of furniture, sales of all the stuff that we put in our houses that have this wonderful home environment while we were sheltered in place, down 30% year over year. I mean, Ikea is freaking out. They cannot recover what’s going on, though is while furniture and anything coming out of China is negative and it’s in the CPI numbers, anything coming out of China is cheaper than it was last year.
Other things, food, energy, theyre kind of in that 2% zone. What im trying to say is think of this as a layer cake and four major layers that I want to talk about. They can change over time. Which ones are doing what? Maybe weve got oil suddenly collapsing or something, oil suddenly shooting up. Its the Ukraine war. They can take pole position differently over time, but primarily, again, here’s how the markets and the Fed look at this.
You’ve got food and energy, food and gas, right? Those are pretty volatile. You could have a storm come in, wipe out some chickens, boom, price of eggs go up. Does that speak to the broader economy? Nah. So what they do is they’ll say, look, here’s total. Now off on the side, here’s food and here’s energy, here’s the core. This is what we really want you to pay attention to.
Well, problem number one with this whole approach is, let’s say I’ve got massive inflation in cars. I don’t care if I already have a car, right. That inflation doesn’t affect me or rents are going up substantially and I own a house. Again, I don’t care. Those things don’t affect me. Inflation over there doesn’t affect me. I care about food and energy because no matter who you are, you got to eat and you’ve got to use energy.
And so there’s kind of stripping out the things that really hit kind of like operating expenses. That’s the bulk of your operating expenses when you own a home. It’s water, electricity, utilities, homeowners association, whatever it might be, you got to commit to that every month. And you’re worried about that going up. Occasionally you might need a new roof or something. And, man, inflation and roofing tiles might be soaring through the roof, but you probably aren’t going to be exposed to that.
When you look at this inflation number, this monolithic number, it’s not really meaningful. You got to pick it apart. So I’m going to show you how to pick it apart. First of all, the first layer is this. Energy in food. Guess what? The inflation today in energy and food, 2. 1%. Fed wants 2% inflation. So that’s perfect. It’s right where the fed wants it to be. Thank you.
Now we got the next layer, which are commodities. And by the way, if we’re talking about not a cake but a pie, 100% of the pie, that slice, that food and energy slice, that’s 20% of the total. 20% of the total. Boom. It’s where the fed wants it to be. The next big slice is commodities. It’s about 10%. And excuse me, it’s about 20%, I should say. But again, commodities, this is all the stuff coming in from China.
Commodity prices are negative. So we got the first segment, the first slice. I’m shifting my image from a cake to a pie. I don’t think your audience minds here. My audience. Okay, so the first slice, 20% of total, where it needs to be. The next slice, equally big. Well, guess what? It’s negative. So now you got deflation. Even better for this total, right? It’s. We’re below that 2% threshold.
The Fed’s getting what they want. Now we come to the two places where the Fed’s not getting what they want, and one of them is services. Are you want to go to a concert? Well, guess what? Inflation and concert prices. Services encounter a lot of things, and they’re actually on the more inflationary side. They’re closer to 4%, a little bit hot. But the two biggest contributors right now to inflation, one is what they call, well, I won’t use the language, basically, rent, shelter, what does it cost? This is almost 40% of that pie.
Food and energy, 20. This is forties. This is the dominant play. This is high. This is in the 5% zone. It’s way higher than the target. Anything that we’ve gained in terms of soft inflation with food, with energy, with commodities, we’ve given up with this. They’re balancing each other out and they’re pulling it closer to 3%, which is above the target. So that’s a problem. Now, when the fed raised interest rates, that was supposed to chill the housing market, right? Mortgages at 7%, you’ve killed affordability compared to when mortgages were 3% just a couple of years ago, right? Yes, 7% normal level, nothing weird about that.
But it’s very bad when you just came out of a period of 3%. So you’ve got an affordability problem. And they thought this would slow down the housing market. In the past. That’s what it did, right? You wouldn’t see 5% jump in rent, you wouldn’t see 5% jump in home prices. That’s what you’re seeing now. I got my own suspicions about why this is. And it’s tied to a bunch of things, inventory, not as much supply.
Also, Airbnb is out there sucking up a lot of the excess availability, different things going on, all coming together, but at the end it doesn’t matter. The end of the day we have 5% inflation in housing and rent equivalents. And it’s just, it’s holding things up. Is it going to slow down? Yeah, inevitably it’s going to slow down over the next few months. But now we come to the last piece of the equation.
This one is crazy. When I said you got to look at CPI, you got to understand. What you got to understand is it doesn’t cut across everything. Not everyone is going to be affected by this high inflation in housing. Most Americans, yes, because they pay rent. A lot of Americans, tens of millions of Americans have a mortgage. We don’t care. It’s locked in. There is no inflation on rent for us.
It frees up money. Okay, so for everyone, if you didn’t have to buy a house, your inflation is minimal, 2% mild. Pretty good, right? Why isn’t the Fed cutting rates? Because the Fed’s looking at this headline now and it wants to chill the housing market. Because by the way, the housing market is a third of our economy. Not just buying and selling homes, building homes, refurbishing your homes, buying appliances for your homes.
This is a third of our economy. So if you want to slow down economic activity, this is where you do it. And it’s not really working to the degree the Fed wants it to. So we’ve got stickiness. It’s going down, but it’s sticky. But here’s the real culprit, and this is the one that quite frankly pisses me off the most. Auto insurance. Would you believe me if I told you that the number one reason why our inflation isn’t coming down to where we want it to be, it’s because of greedy insurance companies.
Now we know the greedy, right? You don’t have a, you don’t have watchdogs in every state over the insurance industry because they want to be pals, right? We all know we put in place government bodies to watch over these folks because it’s an oligarchy. It’s an oligopoly. They control everything. It’s a mafia is really what it is. They extort money because, hey, man, you got to insure your house, you got to have auto insurance.
No matter what, you’re forced to buy this. And they can jack up their rates as much as they want and get away with. In fact, Frank, the deep, dark secret of our inflation comes down to insurance companies have jacked up their rates almost 40% to 50%. Three years. The revenues for progressive, for Allstate, for Chubb, you name it. All these companies, their revenues are up 50% in three years, their profits have tripled.
They have siphoned off. Cumulatively, they’re siphoning off. Not siphoned. They are siphoning off every year now, almost $200 to $250 billion more than 2020 COVID year 2019. Why? Because they raised their prices. Do they need to do that? Because costs are going up? Well, it depends on whether you want to believe them or believe reality. If you want to believe them. Hey, home prices have shot up, so it’s more expensive to cover.
Right. That makes logical sense. Hey, Frank, that $500,000 home, it’s now a million dollars. If I wanted to burn down, I’m on the hook for a lot more. So, hey, mister committee chairman for the insurance committee for the state of Texas, you got to let me raise my rates because otherwise I’m losing my shirt here. Yeah, losing your shirt. Meanwhile, your profits have tripled. That’s what they’re saying.
The reality is this is just green inflation. They’re just jacking up their prices because they can and they’re getting away with it, siphoning off all this money. And it’s juicing up inflation. The number one, the highest, fastest, most inflationary component in this whole aggregated consumer inflation index is auto insurance. Let me explain to you the math, really basic auto insurance has been running 22% year over year for months now.
They jacked up their prices 22% this year. They jacked them up the year before. They jacked them up the year before. This is a tiny wafer. It’s almost meaningless. It would be noise in any other period of time. Who cares about auto insurance? We care because even though it’s really tiny, it’s growing. So much of that 3. 5% number, 0. 6, is coming just from auto insurance, jacking up their prices.
If they weren’t doing it, we’d have inflation below 3%. So here’s why I say look at the number. Understand a little bit more about the number. People aren’t being body slammed by inflation. People are being body slammed by auto insurance. Inflation doesn’t matter, though. It’s still money coming out of your pocket. It still hurts. Now, some of it’s not as. It’s a degree of pain, maybe inflation, really, for folks who own a home, inflation is not 3.
5. It’s closer to three, two and a half. It’s still up there. Okay. It’s still higher. Than what we want to see, supposedly from the Fed. So what do you do? Well, the government could step in and start talking to the insurance company saying, no, you got to bring your rates down or no more rate hikes. I’m not holding my breath. That means we’re going to continue to see this disappointment in the fact that inflation is going to stay as high as it is.
It’s going to trickle down, but slowly. It’s not going to suddenly tumble below 3%. It’s a problem. It’s a problem because it’s an election year. Powell wants to keep his job. He’ll keep it if Biden gets elected. And Biden’s not going to have a lot of positivity. It’s not a tailwind. If inflation is still high and interest rates are still higher than people want. A lot of pressure, a lot of moving parts here.
Inflation, when you see that 3. 5%, understand it’s a fudge factor. It’s especially fudged right now because of that insurance thing. Be that as it may, I can sit here and I can unravel it all day long. The Fed’s just going to look at it and say, still higher than we want. Not touching interest rates. That’s strike two. And I don’t see that changing anytime soon. Strike three is retail.
Retail is coming down the pipeline. So retail again. It’s that layer cake, it’s that pie. It’s got different things coming into it. It’s sausage making. The worst part about retail for me, and I forecast retail, and I do a pretty good job of it. One of the things that irritates me is people mistake. Retail comes out. It’s another one of those hot data points. Retail is the consumer spending problem is the retail number no longer tracks consumer spending.
It tracks things that are paid for at a terminal. It doesn’t track air. So everybody flying around this country doesn’t track. It doesn’t track hotel spending. It doesn’t track anything that’s really tied to what you and I would say is our discretionary spending, our play money gambling. Oh, my God. America’s big gambling. Draftkings, you’ll never see spending on draftkings become part of the retail number. This number has got to be 50, 70 years old.
The way they made it. They’ve completely ignored all the other ways consumers are spending. And it’s not like they’re, you know, you go out, let’s say you’re redoing your wardrobe, Frank, not that you have to, but let’s say you were. It’s not me saying, hey man, you went out and spent all this money, but I want to complain because you didn’t buy a belt. I’m telling you that your whole wardrobe is what’s being ignored and they’re tracking spending on belts.
The only place in this retail number where you will see experiential spending of people saying, hey, you know what, let’s go out, I feel good, let’s spend some money. I got money in my pocket. There’s only one place and that’s the food and drinking spending. Basically going out to a bar and saying, man, I’m going to buy a twelve dollar bud light at the bar. Could be $2 back in my chateau.
But I feel so good I’m going to blow my money out just because it’s good times. I track the consumer spending, the good times spending because that tells me if a consumer has money in their pocket now and thinks they’re going to have money in their pocket tomorrow, but the retail number doesn’t track that. And so that’s part of the problem. Go back to what I mentioned a minute ago about inflation and how everyone bought everything they need for their home a couple of years ago.
Most people aren’t rushing out to buy a new computer or a new tv. Mine’s a couple of years old. It’s perfectly fine. Right. But that’s what this number will track. Well, that’s not telling me the real state of affairs with household finances and consumers. It’s really tracking how much people aren’t spending on things and it shifted to spending on experiences. So you could have retail going down and it doesn’t mean anything in the sense of telling me our consumers feeling the strain or not.
Okay. And that’s what I want to know. We have more hiring, more spending. That’s good, but there’s a quality to that. Are we hiring minimum wage folks, part time workers or are we hiring people who are earning $100,000? White collar salaries, big difference. Right? More money in the economy. Well, I’m looking at this retail number and it’s going to be baked high and here’s why. One of the, I should say two of the major components of retail, gas and autos, okay? And those move a lot.
Gas prices moved up quite a lot and so that is going to move up. We sold a lot more cars. Remember, the weather improved for us towards the end of March. Auto sales held steady versus the, you know, look at the prior month. You didn’t have as much. So you can have this number bounce around simply because of what’s going on. Gas prices. Now, between you and me, if gas goes up, do I suddenly freak out and I say, that’s it.
I’m not going to spend, I’m not doing Starbucks? No, it’s a one month thing. I know gas prices move up and down. The way it’s looked at is you’ll often see, well, there’s the headline number. There’s the retail number. There’s retail minus autos. There’s retail core. It’s basically kicking out things like autos and gas. Again, it’s like looking at inflation. Well, don’t pay attention to food and energy.
Well, I have to pay attention to food and energy because that’s what’s kicking my butt, because I got to spend it every day. Same thing with retail. I’ve got to buy gas. Why should I ignore what’s going on there? Right. Well, a lot of the justification here is I’m credit card spending. I’m an american man. I am constantly putting stuff on my credit card. I’ll get to it next month and worry about it next month.
The gas price could go up. It’s not a guns or butter situation where I spend on gas. I can’t buy tickets to Aerosmith. I can do it all. I can do it all because I’ve got credit cards. And quite frankly, my household debt is still below where it was pre COVID. Yeah, interest rates are higher than I want them to be, but I still have wiggle room. Wages are up.
I’m carrying a little bit more debt than I want to, but that’s okay. Stock market’s up. Maybe I’ll tap into my portfolio a little. When we look at retail, what’s going to come out is we’re going to have a strong auto, a strong gas number. And then were going to have strength elsewhere. Now, February was an awesome month for retail spending, for consumer spending and the Super bowl.
The amount of gambling that happened, the amount of partying that happened was off the rails. Were talking $20 billion more than last year. Huge number. March didnt have that. We had March Madness. Right. But it wasn’t Super bowl quality. So you’ll probably see a little bit of pullback in some of these smaller segments. But when you peel back the big jump, I guess, let me restate this a little bit more clearly because I don’t know if I was clear.
Every month someone’s going out and spending and yeah, they’ve got a budget. Guess what? That credit card helps them go beyond their budget if they want to or need to, they’re going to go beyond that because they’re going to think, I’ve got one more money coming down the pipeline, I’m okay. They could be lower income people who just got a fat minimum wage hike. Money came to them.
Money’s in the system. Whoever you are, you’re probably, you’ve got some wiggle room. And so if gas goes up, it’s not going to force you to not spend in that particular month. So there’s no give and take. You can have it all. American consumers want it all and they tend to spend everything they get. And then some gas prices can go up this month, but you’re still going to have the same steady run rate of spending.
So I just want to be clear about that. It’s kind of like pouring the beer. You could have froth at the top, but the beer levels the same. Now for this month in particular, like I said, you got some things going on. We just had a big Super bowl. You might have some spending for spring break, depending on the timing of spring break, but for the most part, that’s an April thing, not a march thing.
And so you don’t have a lot of big spending events per se. That’s a problem for March. But again, every year it’s the same, more or less. What we have, though, in March is, again, kind of have a peak situation where spending has kind of peaked. And so now we’re going to have a little bit of, we had some bad weather. People didn’t do a lot of their home projects.
Okay. Well, now that’ll happen in March. So you’ll have some things move up, you’ll have some things move down and so on and so forth. Basically, you’re going to have spending at about, we’ll say four, 5% annualized level. That’s a lot. You know, it’s a little bit above inflation. It’s a little bit above the GDP. But when you think about it, it’s pretty much wage growth. That’s really what we’re seeing a little bit more.
So I think on Monday we’re going to have that solid run rate. You’re going to have the froth of, well, cars. We sold a lot more cars because weather improved and so forth, and gas went up. So we talked in terms of baseball. Strike one, payrolls were hot. Strike two, inflation was hot. Strike three, retail is going to be hot. That means the market could pull back again.
Right now the market went down. Now it’s up. That could be a dead cat bounce. Another drop. Now, I happen to think when I look at this, it’s like betting on baseball pitches or a particular inning. When I want to look at the game, I want to say, hey, the New York mets all the way, or whatever your team is, right? In this case, interest rates are taking pole position for investors out there.
But that’s in the short term, month to month type of view. It’s contributed to the stock market going up. This expectation that if you cut rates, that’s going to juice profits. Okay, I like to look at my hiring data, though, and I like to dive into, is this company hiring more? Is this sector hiring more? And if they are, I don’t care about interest rates. The market will catch up to the fact that, hey, meta is hiring more.
That means their profits are going to go up and, wow, at some point in time the market’s going to be like, well, you’re growing. See, companies are coming out of the corporate world the way I do. It’s not, its not complicated the way companies think. Its remarkably simple the way they operate at the very top. They dont really care about much more than delivering earnings to Wall street.
They want to be predictable. No surprises. Your costs are pretty much predictable. Its like, Frank, youve got Netflix. You know every month what? The Netflix bill is going to be very predictable for companies, especially now, because even manufacturing companies, they’ve got subscriptions. They know based on annual terms how much money is coming in. It’s a lot less variable than it has ever been in the past, a lot of predictability.
So they know what the revenues are going to look like, more or less. And so they know what their hiring needs to be in order to deliver a certain margin and a certain EPs. And that’s what they’re looking at month in, month out. Every manager at every publicly traded company is expected to know what’s their hiring look like, how many bodies do they have, how many butts and seats? What’s the cost on average to have somebody at that company? Boom, okay, that’s how many people I can afford to hire and keep my EPs.
What you’ll often see is third month of the quarter, you might have a company tap the brakes a little bit, slow down their hiring. That’s window dressing. Because believe it or not, if you’re meta, for example, let’s just use meta. Let’s say that the average software engineer at Facebook gets 100 grand. It’s probably 200 grand, because the company’s kicking in benefits the company has to pay for things like rent, and electricity and all this other stuff for the company.
Every employee costs $200,000. If they fire ten people, that’s $2 million. They fire 100, that’s $20 million. You start annual, you start breaking that into a quarter. You put millions of dollars. If you remove that cost, that could be a penny or two of earnings. I don’t know. They’re particular whether $20 million annualized translates to how much divided by their stock. But you get the idea if they want to get a penny or two, every company will basically say, don’t hire this one.
Don’t hire in March. Thats our quarter end higher in April. Because if you give me a body right now at 200 grand, youve cost me tens of thousands of dollars for one month. And no, I need to save a million dollars this month, guys, to get that penny per share. To surprise Wall street by tracking hiring not just on a monthly basis, but on that trended basis, you look at the game, not the inning, but you look at the game, you start to see who’s really going to be the winner and who isn’t.
And hiring is my way, my prism into it. At the same time, I can’t ignore the fact that looking at individual company hiring, I can consolidate that and say, in general, here’s where the hiring is happening. Is that good or bad? My hiring right now is saying the manufacturing base is continuing to inflect up. We’re going to see more manufacturing activity. And that’s kind of coin operating. Companies in the manufacturing space only build if they have a clear line of sight to orders, to demand, to inventories that need to be replenished.
So I feel that we’ve got tailwinds and headwinds. If I were an investor out there right now, we got a short term opportunity. Monday, retail strike three. The market’s not going to like a strong retail number. It’s going to pull back. Could be a great buy opportunity for the longer term stuff that says, hey, manufacturing, manufacturing needs electricity. We need a lot more electricity in this country than people realize.
There are lots of plays there. So I’m looking at the more not long term trends, meaning I’m getting in now and it might pay off five years from now. It’s more, hey, you know what? I’m going to get in because growth is already happening because they’re expanding their worker base and they’re not going to do that unless they have to. No company wants to hire if they don’t have to because it’s a burden.
My God, you know, how hard it is to fire people in this country. You don’t just hire because, and so you’re hiring because it’s human capital. It’s. You need it to grow to support your growth. GM knows if they put another worker on the line, how many cars they can produce with that worker. Okay, reverse it. GM knows demand is out there for another Hundred cars. They need x number of workers to produce 100 cars.
So they StArt hiring. So because of Andrew, because of the market is so centered on these big reports that come out, inflation report, the retail report, and the market moves up and down. It used to be that they looked at fundamentals a lot more than they do today. It seems like you said it’s almost like a horse race today is the inflation number up, down, sideways, and then the market reacts to that.
So you’re saying that you see a hotter retail report coming out Monday, which will not bode well for the market, and that that’s a buying opportunity for many when the market retreats. I believe our economy is not going towards a recession. That may not be a popular opinion, But I believe that the data that I’m looking at, the hiring data, says we’re not about to fall off a cliff.
And so you got to bet a little differently if you thought we were going to fall off a cliff and instead things are stabilizing. What, you got to change your bets. You got to move some money around differently. Right. That’s what the pros are doing. They’re moving their money a little different, and then you got other things like technicals. But right now, the problem with the market is everything’s priced in.
It’s priced to perfection. That’s why it stumbled. Hey, what do you mean payrolls were good boom. What do you mean inflation’s good? Boom. Okay, is that a really bad body blow? Well, anytime the market goes down 1%, that’s a body blow, goes down even further. Well, it recovered. Hey, you know what? I’m not knocked out. The market’s trying to come to grips with the idea that we might not see a recession, that in fact there are problems at the margin, but they’re not deteriorating too much inward yet.
And to be honest, they might. But everything’s price to perfection. That’s why I see the market tumbling a little bit. Not 5200 going down to 4800, but pull back closer to 5100, 5000 even, maybe, I don’t know. But a little more consolidation, a little less. Everything priced to perfection. Interest rates going to get cut. Happy days again. I don’t see that I also think off on the side, the market is trying to come to grips with the election.
They’re trying to figure out, is Trump going to be the winner? Because Trump mandates very different from Biden mandates, very different. And there’s a lot, again, there’s a lot of money at stake. Trump is all about juicing the economy. The Fed doesn’t want to juice the economy. There you go. When you look at hiring in different sectors of the market, what sectors do you see as the more leading indicators of where the economy is headed? If you see a sector, whether it’s in manufacturing or what have you, and you see much more hiring than in other sectors, do you put a light bulb in your head saying, oh, this is good for the economy? Going forward, it might not be showing now, but down the road, this is good.
I work backwards. What I do is I say, okay, 70% or so of our economy is consumer driven. So if I think there’s going to be a great bellwether for the economy, I’m going to look at what the consumer behavior. And so I’m looking at consumer related stocks and sectors. And I like retailers. I like retailers because they’ve had the snot kicked out of them. They’ve had to get super lean.
And so again, I like retailers because they’re customer facing. You might think in terms of, oh, there’s Etsy, there’s eBay, there are other retailers. The thing is, they don’t have brick and mortar setups. And so there’s a certain amount of traffic that’s going to go through them. I like to look at the plain retailers who are super exposed to consumer foot traffic. The retailers out there now look at them because, again, they’re going to hire only insofar as they see people coming in and spending money.
I mean, I can’t tell you that. You know, there were times where I’m going into a retailer, there’s nobody around. I mean, nobody to help me. And that’s interesting to me. Walmart does stuff like that. So do a lot of the bellwether stocks. I look for the consumer are going to be, by and large, just simple retailers. I then look at other Internet type of companies because when people are worrying about making rent, they start cutting back on Disney, they start cutting back on Netflix and other things that do they really need or not need this month a little trickier these days, because quite frankly, it’s weird how cell phones, they’re necessities being on Facebook, that’s a necessity.
Some of these things that I would consider to be, yeah, who cares? My kids would be like, no, dad, that’s like breathing air. But I look at those sectors and then they’re going to pull along other things. I look at semiconductors as my second bellwether. And semiconductors are tied to consumer and companies because in a very real sense, if it doesn’t have a semiconductor in it, it has a semiconductor in the thing that made it.
Semiconductors are also unique because they’re not. They’re more build to order. It’s not like stuff sitting on the shelf. It’s not like you pull into autozone and say, hey, I need some of them pentiums. You know, it’s not like you buy tires or something. If you’re going to buy something with a semiconductor, there’s a lead time. Semiconductors have a very defined lead time. So whatever’s happening in the semiconductor world, it’s because orders have been placed and they’re responding to those orders.
So it’s a very real thing, but it tells you what’s going to happen, say, five, six months from now. Let me explain your apple, it’s March, it’s April around, okay? You’ve got to gear up for September, back to school. You’ve got to get all your new iPads, whatever stuff it is, it needs to be on the shelves no later than August. All right? So that means it’s got to be going through customs in July.
It’s got to be on the ships in June. It’s got to be made April and May. That means in January, February timeframe. Apple had to make their orders to meet that September timeframe. Pretty straightforward, right? If I know what’s happening in February with semiconductors, I know what Apple is expecting to do in September, and they’re expecting to do that based on their robust market analysis and from their end user demand.
So you look at semiconductors, because everything that’s happening right now with semiconductors is speaking to the back to school and holiday shopping season. So if you take your ladle, take your spoon, take a taste out of certain things going on the semiconductor space, what you’ll find is they’re starting to take off again. And I think that’s because consumer spending is starting to open up a little bit more.
Even though we’ve peaked, I think the expectation out there right now by households is things are good and they’re going to stay good. And so I’m okay with spending more money. Semiconductors, it’s all tied back to consumer spending. So is companies spending at the end of the day, GM is spending because consumers are spending so on and so forth. Right. Gotta love these leading indicators. Gotta love them.
This is how investors and our listeners can take advantage with this type of forward thinking. Well, it’s a lot to take in. The bottom line is we shouldn’t take all these numbers at face value. There’s data below the headline numbers to know about. And we hope listeners realize now after listening to you today and watch out for how the market reacts to a strong retail number next week.
Did you see that? Right there. The sun came and went as I was preaching the gospel. Did you like that? Like that the heavens opened up. Yes. Zatlin knows what he’s talking about. Yeah. To what you’re saying is, look, what you’re hearing about MSNBC, whatever, whatever your favorite Fox News, whatever it is, they’re not going to have the time or opportunity to contextualize. And context matters. Do we care? Who cares about economic data? Let’s face it, I got to tell you, college economics put me to sleep.
But as an economist, my whole goal has been to make it sexy again, because it does matter. The end of the day, it’s like being a doctor. You got to take the pulse. You got to know how the patient’s doing, and then you can make decisions accordingly. I’m here to help share what I think are more accurate ways of diagnosing how the patient is and then maybe possibly teasing out together, what should we expect? Not just what just happened.
Okay. Payroll has just happened. Zatlyn, you did a great job last week. Take your victory lap. Whatever. I want to know about what’s coming down the pipeline. What’s your framework for understanding what we’re about to see? Because as an investor, I can’t really invest on yesterday. I’ve got to invest on tomorrow. So that’s why I try to understand in my framework, what’s really happening. I come from Main street, not Wall street.
And I’m more interested in knowing companies are making decisions, and they’re making decisions based on fact, based on things they’re experiencing in their markets. And if I can get a window into that, if I can see what they’re doing, doing, never mind what they’re saying, what they’re doing. And if I know from the corporate experience that I’ve had, what they’re doing today is a reflection of what they expect three, six months from now, I’d like to invest accordingly.
I’d like to put my money down on that visibility. I also want to understand, does it hold water well, we want our investors to invest on tomorrow. And that’s why we love having you around, Andrew, is to break it all down for us. I am so excited to be here. And I’m excited to work with you, Frank. We’ll see what happens next week when we get the retail report.
And see how markets react when strike three comes through. Strike three, baby. It’s been a real pleasure. And we’ll do it again soon. Take care, everyone. We’re in it to win it. .
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