Joining us right now to talk about the market, the economic impact of all of this, all of this Middle East tension, where it’s all headed. Joe Lavonia is here this morning with us, SMBC, Nico Securities America, Chief Economist, former Chief Economist at the White House National Economic Council. Good morning. Good morning. You surprised about how resilient the markets have been a little bit of all this. It seems that there’s a little bit of tit for tat, right, Israel and Iran and kind of it was sort of a little bit of theater, hope that’s the case. Oil hasn’t been able to make a move above 90, which is good. We need oil to up like probably around 1/21/25 where it was when Russia invaded Ukraine. That really caused I think a consumer hit, right? But the problem, Andrew is that with oil even in the 80s summer driving seasons coming, refining capacity issues, gasoline prices are going higher. That will be a problem for the consumer. What do you just make of the volatility though? I mean it’s just, it’s, I mean the volatility in markets actually generally have been pretty quiet. If you look at the VIX, I mean the oil markets have moved around, but markets have been unusually quiet. I’m worried at some point there will be something to kind of galvanized and cause volatility to pick up in a more meaningful way. I still think it’ll be economic. Actually don’t think it’ll be geopolitical, but we’re not there yet. Economic as in terms of what? Yeah, like imagine like at some point. So question is why is the economy so strong And I mean the Fed’s very tight. Mortgage rates are up near 7%, housing affordability, first time, home buyers all time low. the Fed is pushing back against the government, even state and local governments. We’re spending in the GDP accounts at the same pace we were during the pandemic, during where we were in O nine and then where we were coming out of the O1 crisis. So the government is really spending money, the fish trying to offset that. At some point that fiscal spigot either has to slow or the market is going to force the government to stop spending as much And that sort of at that moment you know you get, you get some weakness. Also I don’t believe the employment numbers are as strong as they are and you know at some point before the years that we could get an employment surprise to the downside. Well, so Jason Furman’s in the camp by the way that if in fact, if in fact there are going to be cuts from the Fed, it’s it’s not going to be a function of inflation. It’s going to be a function of employment. Yes, I agree with Jason. I, I’ve argued that all along. I, I thought inflation, inflation has come down, but it stopped the last few months, which is very unsettling and we’re going to need a handful of months now before the Fed will feel confident that inflation is finally on that lower trajectory. That gets us, Andrew, to the thick of the of the convention season. I I hear what people say politically, but I don’t think the Fed wants to do anything in July and it’s going to be harder in September. I agree with Jason. If the payroll data weaken, the unemployment rate goes meaningfully above 4%, the Fed will cut. The question is does that happen? That’s sort of the debate. Kashkari yesterday said he sees cuts in 2025 because of the political cycle in part of and. And Williams said, you know, it’s not the base case scenario, but if the data bears it out, we’re ready to hike rates. Yeah. He mentioned the hype were yeah, that’s right. So Melissa, we came in thinking there could be a lot of cuts, the economy would be weak. We’re running these massive deficits. Their pockets are weakness, but clearly the economy has has held up reasonably well. We’ve pushed all our cuts out. So now I see the first cut in December. So I agree with Neil on that, that we’ve got to kind of push things out. But you know, again, you know the yield curve I’ve come back to many times with clients. Yield curve now has been averted 22 months. We get to July 1, it’ll be two years. It’s never happened before. At some point something will break. It broke in March of 23, a recession that never happened because I mean that’s what we’re saying. But here’s when I say break, I mean something within the markets like for example with Silicon Valley Bank, Regions Bank, something something will break in these banks. And someone made a good point to me. Why did Powell pivot back in December? Because the data didn’t justify. I thought maybe it was political. Someone made the point it might have been. Look, markets sold off a lot last fall, 10 years went up to 5%. You still have billions and billions of dollars of unrealized losses on commercial bank balance sheets overlay with commercial real estate. What if the consumer slows? What if gas prices rise, real wages shrink again and they get more consumer defaults because we’re seeing it on autos, we’re seeing the credit cards, we’re seeing it in some FAFHFA loans. I don’t know. These things kind of become they they these cascading effects that happen. I’m just saying that’s just how cycles play out. The problem, of course, is you never know when it’s gonna happen. I just think that the environment’s still ripe.
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