0:03

A roller coaster week in the stock

0:05

market that saw the steepest sell-off in

0:07

decades followed by an aggressive rebound has

0:09

renewed concerns about the health of the

0:11

U.S. economy. In this

0:13

episode, we talk with an expert about

0:15

the economic factors playing into the turbulent

0:17

week and how much the presidential race

0:19

will influence the economy going forward. I'm

0:22

Daily Wire Editor-in-Chief John Vickley with

0:24

Georgia Howe. It's Saturday, August

0:26

10th, and this is an Extra Edition of Morning

0:29

Wire. Joining

0:33

us now is Peter Earle, Senior Economist

0:35

at the American Institute for Economic Research.

0:37

Peter, thank you so much for coming

0:39

on. Look, this week we saw a

0:41

big sell-off in the stock market followed

0:43

by a rebound. Can you put

0:46

all of the events leading up to this sell-off into

0:48

perspective for us? Certainly. So

0:50

what we've really seen in the last few days

0:52

is that we've gotten some economic data which

0:55

has in totality shown or suggested

0:58

that the U.S. economy is

1:00

in worse shape than we thought. In particular,

1:02

we've seen a lot of bad news regarding

1:04

U.S. labor markets and employment. The

1:06

weekly and initial continuing claims have

1:09

been rising, and they're above the level that

1:11

usually suggests softness in the labor market. We've

1:14

seen an increase in warn reports. That

1:16

is the worker adjustment of retraining notification

1:18

act, where any company that has more

1:20

than 100 employees has to warn employees

1:22

that they're going to do layoffs. We've

1:25

seen a rise in those. And

1:27

last Friday, we got the July unemployment

1:29

report from BLS, that's Bureau of Labor

1:32

Statistics, and the U3

1:34

number, which is the amount of the

1:36

total labor market that's out of work,

1:38

rose much more than expected. It rose

1:40

from 4.1 to 4.3%, which is much

1:42

higher than expected. But

1:44

more importantly, it triggered something called

1:46

the sum rule. Now, the sum rule says

1:48

that if the U3 number rises by a

1:51

certain amount with very few false positives, we

1:53

are in or about to enter a recession.

1:55

So that's a lot of what's weighing on

1:57

the market right now. factors

2:00

playing into all of those negative indicators

2:02

that you've just listed. Well, we're

2:04

seeing that there's of course a rise in

2:06

unemployment, but that's partially a

2:08

result of a slowing economy. It's

2:11

also partially a result of growing

2:13

concerns about uncertainty coming, whether because

2:15

of what's happening overseas, Ukraine

2:18

and Russia, things happening in the middle

2:20

East tensions between the U S and

2:22

China. I mean, also interest

2:25

rates are high. Inflation is still not down

2:27

where the fed wants. We have an election

2:29

coming in the fall. So there's a whole

2:31

bunch of factors, economic, social, political, which

2:34

are weighing on markets right now. And it's kind

2:36

of given rise to a sort of a hair

2:38

trigger where people would rather sell now and ask

2:40

questions later. So they're getting out of an already

2:42

extended stock market. Do you

2:45

see any signs of a long-term problem

2:47

or just more short-term trends? Whether

2:49

or not this is a long or short term

2:51

situation is going to depend upon upcoming economic numbers

2:54

and what investors do. You know, in the last,

2:57

last six to eight months, what we've seen in equity

2:59

markets, in particular in the S and B 500, but

3:02

in all the U S stock markets is

3:04

that the advance in stock prices, the events

3:06

and indices was really being led by only

3:08

a handful of stocks that came to be

3:10

known as the magnificent seven. And

3:12

because of that, you know, we have a whole bunch

3:14

of other stocks. Most of the majority were either flat

3:16

or even slightly down on the year. The

3:19

hope is that the economic numbers, if

3:21

the economic data proves to stabilize and

3:23

maybe doesn't decline much more, then what

3:25

we'll have is with the stocks coming

3:27

down, there'll be sort of a turnover in

3:29

leadership. Other stocks will sort of come to

3:31

the fore and we'll have a more broad

3:34

based increase in stock prices. But that happens

3:36

then. Yeah, that, I mean, there's no reason

3:38

why the stock market can continue on to

3:40

forward and then maybe even newer heights. Another

3:43

factor right now is earnings. Corporate earnings have not

3:46

been that great. And in particular, in some of

3:48

the big stocks, you know, we saw Apple,

3:50

Microsoft, a lot of those companies revised

3:53

their future estimates lower. And

3:55

for that reason, yeah, it's time for some new stocks,

3:58

new sectors to sort of come. to

4:00

the fore and lead the charge onto higher

4:02

levels. I think the tech sector is kind

4:04

of exhausted at this point. And

4:07

what sectors of the economy do you think

4:09

maybe are primed for that kind of upward

4:11

action? If we continue

4:13

to see weak employment numbers, softening labor

4:15

markets, if consumers continue

4:18

to feel pressure on their budgets

4:20

because of interest rates remaining high

4:22

and because of ongoing inflation, the

4:24

sectors we most likely see are

4:27

the consumer sector, foods, things that people

4:29

sort of have to buy. We

4:32

would see things like certain industrial's

4:34

rise, certain commodity associated material stocks,

4:36

things that represent sectors or goods

4:38

and services that people have to

4:41

purchase, whether or not the economy

4:43

is slowing down. So foods, certain

4:45

pharmaceutical or healthcare related stocks, that sort

4:47

of thing, as opposed to more discretionary

4:50

items, high ticket or expensive items, that

4:52

kind of thing. Those in

4:54

tech are going to kind of have to take a

4:56

breather while the economy goes through whatever it needs to

4:58

go through to get back in shape. Now

5:01

you mentioned the Magnificent Seven earlier. Can

5:03

you talk through a little bit about

5:05

what we're seeing with them? That's Alphabet

5:07

or Google, Amazon, Apple,

5:09

Meta, Microsoft, Nvidia and

5:11

Tesla. What was troubling

5:13

about their earnings reports? I

5:16

mean, the one thing we can say about half

5:18

of members of the Magnificent Seven is that the

5:20

goods and services that they offer on the expensive

5:22

side, Tesla, Apple, that sort

5:24

of thing, whereas Amazon is a

5:27

consumer company that has very global

5:29

reach. So we're seeing different things

5:31

from all of them. But generally

5:33

speaking, their valuations have run up

5:35

so much that in order to justify those

5:37

valuations, their revenues would have to be very

5:39

high. And I think what their

5:41

companies are suggesting is that the revenues won't be

5:44

high enough to justify those valuations, but they are

5:46

also called into question by the withdrawal

5:48

of consumers for whom the savings rate

5:50

has dropped and their ability to consume

5:52

is pretty constrained right now, given many

5:55

of them are maxed out on credit. We've

5:57

seen a rise in the 30 and 90 day arrears. payments

6:00

and late payments on credit cards. So

6:02

consumers, they're kind of tapped out of

6:04

their pandemic savings and corporate revenues are

6:06

going to have to reflect that sooner

6:08

or later. Yeah. We've reported in the

6:10

past on credit card debt hitting record

6:12

levels. Where is the debt level at

6:15

right now? Well, right now the

6:17

highest amount ever of outstanding credit card

6:19

debt is still the case. It's over

6:21

a trillion dollars. What's been happening

6:23

a lot is that, you know, people have been sacrificing

6:26

spending in other areas to make their payments. I

6:28

think that two of the things we're going to

6:31

see the Fed take into account, whether or not

6:33

they say it or not, is not only the

6:35

state of the economy, but also taking

6:37

some pressure off of credit card borrowers by

6:40

lowering rates. Now, just because the Fed lowers

6:42

25 or 50 basis points doesn't

6:44

mean that the rate and interest rates on

6:46

credit card debt will necessarily lower that much,

6:48

but they will decrease somewhat and that could

6:50

take some pressure off of borrowers. Now, will

6:52

that pressure be enough to get them to

6:54

start spending again? Will consumers start consuming with

6:56

lower credit card rates? Probably

6:58

not to an appreciable extent, but it

7:00

all depends on what's happening elsewhere in

7:02

the economy. If we continue

7:05

to see unemployment rise, if we continue

7:07

to see decreasing open positions, that

7:09

should be still on the Joltz report, if

7:11

we continue to see credit card rates subject

7:13

to delinquencies and higher arrears rates, I don't

7:16

think that we'll see rates on credit card

7:18

debt come down much. And that's going to

7:20

affect the whole consumption picture. And of course

7:22

the revenues of these companies. So it's all

7:24

connected. It's all one big network of effects.

7:27

You referenced the upcoming election as adding some

7:29

volatility to the market. We heard the term

7:31

Kamala crash at the beginning of this week,

7:33

after she became a favorite in the betting

7:36

markets to win. At this point,

7:38

did the two candidates really affect the stock

7:40

market that much? At this

7:42

point, I don't think so at all. I think

7:44

the whole idea of Kamala Harris's emergence as the

7:46

leading candidate has very little to do with that.

7:49

What's happening in the stock market right now, as

7:51

we get closer to the election and in

7:54

particular polling is very close and

7:56

in particular, if either of the candidates had made

7:58

very sort of stark. announcements about

8:00

their policies, then we might start to

8:03

see effects in the stock market. But

8:05

right now, what we're seeing in the

8:07

stock market is much more directly attributable

8:10

to bad economic data and to more

8:12

general worries about uncertainty going forward. We

8:14

will see more directly related campaign effects

8:16

as we enter mid-October or so. Final

8:20

question. What aspects of the current

8:22

economic situation do you believe are

8:24

going underreported generally? I

8:26

believe that the fact that the savings rate

8:28

has fallen so much and

8:30

that there's almost nowhere left for consumers

8:32

to spend other than that of current

8:35

income. And, you know, of course, they're

8:37

facing at the same time they're facing

8:39

higher mortgage rates, higher rents, higher food

8:41

prices. I think the fact that the

8:43

consumer is pretty much out of gas

8:46

is something that has not been not

8:48

much of an incentive about it. It may

8:50

become more of a factor as we enter September, but

8:53

that's something that I'm going to have a

8:56

close eye on because, you know, we've seen

8:58

everything from buy now, pay later plans to

9:00

consumers shifting away from durable goods purchases. It

9:02

seems very much like consumers are they

9:05

don't have much left that's discretionary and they're

9:07

kind of playing a shell game in terms

9:09

of determining how much they're going to spend

9:11

on what and new areas. So that's something

9:13

that could very quickly hit the economy in

9:15

addition to rising unemployment and

9:17

sort of softening business conditions. Something

9:20

we'll certainly keep an eye on. Thank you so

9:22

much for talking with us. It's my pleasure.

9:24

Thank you so much. I hope you guys have a great day.

9:27

That was Peter Earle, senior economist at

9:29

the American Institute for Economic Research. And

9:31

this has been an extra edition of

9:34

Morning Wire.