The big question here came up on Friday are those jobs numbers.
It really was so far away and above what was expected.
What do you make of those numbers? Where are we in this economy and how can
it keep doing what it's doing? Well, we've got something of an
Energizer Bunny economy. The economy keeps moving right along.
It's not only that we've got a very strong employment number this month.
We had upwards revisions for the last two month.
If anything, it looks like job growth is accelerating.
For the moment, this is great news. We got an economy that looks very strong
and the wage inflation numbers looked very much under control for the medium
term, very complex picture that the Fed has to read.
Tight and substantially tightening labor markets combined with significant labor
unrest, combined with significant uncertainty about commodity prices.
And even though it doesn't show up in the inflation statistics explicitly,
people feel when interest rates are going up, when mortgage rates are
approaching 8%, like their cost of living is rising.
So very challenging environment going forward.
These are good numbers and you got to recognize that these are good numbers,
but I can't say that they give anything like assurance of soft landing.
And I think the risks of a hard landing are very much as real as they were.
And perhaps the fact that the plane is flying even faster than we thought makes
the hard landing at some point risk look a little greater.
So, Larry, why is the plane at this point flying this fast?
I mean, an awful lot of people thought once you raise the rates as much as the
Fed did as quickly as it did, it would slow things down.
Sure doesn't look like that message is getting through, for example, to
corporate leadership. That's hiring as fast as they can,
David, that economists will be studying that for a long time.
One of the things I've talked about on your show is that interest rates may be
less restrictive than they used to be. When people don't sell houses because
they're locked in with low mortgages, house prices go up and that makes people
feel wealthier. When the government's got as much debt
as it does and interest rates go up. That's more money in people's pockets
and they spend some of it. When capital that people are purchasing
is a new age system rather than building a new factory.
It's all shorter duration and less interest sensitive.
So we may be living in a world where the interest rate is less of a tool for
guiding the economy than it used to be. And that means when things need to be
cooled off, interest rates are going to have to be more volatile than they have
been in the past. That's one important part of it.
And the other important part of it is what's happening with the budget deficit
and what's happening with the government's fiscal position.
Even though we've got a booming economy. The deficit as a share of GDP.
Once you take out special factors will just about double.
This year will rise by more than 3% of GDP.
That's been a big push forward to the economy.
And frankly, our financial authorities haven't done what has been done by
corporate treasurers and by smart households over the last several years
when the private sector was turning out its debt.
We did more terming in with QE and what the Treasury has done than we've done
terming out of the debt. And that means that we've got a wall of
higher and higher debt. That's finance that is ahead of us.
So I think it's a combination of the changing impact of interest rates and
the fiscal expansion that explains where we are.
And that's why I don't think interest rates are likely to come down quite as
much and haven't for a long time thought interest rates were going to come down
as much as the market did. Markets revised its view substantially.
I wouldn't be surprised if the market revises its view a little more.
Well, let's go to where the market is right now, because we did see.
Real turmoil in the bond markets. We saw yields really go up.
You two or three weeks ago on this program talked about a 4.75% on the ten
year. And at the time, it seemed like an
awfully high number. Now, if anything, maybe you were you
were not fast enough in making the call, given where we are this week.
Is that because of supply and demand, because of the the deficit that you're
talking about and how much the supply is exceeding the demand right now?
I think this half underlying reality of the strong economy and what's going to
be necessary to keep the economy in balance, what Fed watchers call our star
and everybody, just as I've been warning for quite some time now, are revising
upwards their view of our star. I think that's half the story.
And I think the other half of the story is people thinking that there's just a
big issuance of debt ahead and there's less willingness to hold us long term
debt given rising rates in Japan. That source of demand may fall off.
Who knows what's going to happen with China as a source of demand for U.S.
debt? The changes that all the banks are
making to make sure that they're not the next ESV be caught with a lot of long
term bonds. That's reducing holdings of long term
bonds. So if you've got more supply and less
demand, that should be less, more supply and less demand.
That's got to got to have a big effect on price.