The day after the Federal Open Market Committee meeting, Tony Welch, CIO at SignatureFD, will analyze the meeting statement, the Summary of Economic Projections and Fed Chair Jerome Powell's press conference.
Transcriptions:
Gary Siegel (00:09):
Hi, welcome to another Bond Buyer Leaders event. I'm your host Bond Buyer Managing Editor Gary Siegel. Today we're going to discuss yesterday's Federal Open Market Committee meeting with my guest, Tony Welch, Chief Investment Officer at SignatureFD. Tony, welcome and thank you for joining us.
Tony Welch (00:32):
Great. Thanks for having me, Gary.
Gary Siegel (00:35):
My pleasure. So tell us a little bit about SignatureFD before we get started.
Tony Welch (00:41):
Good. So SignatureFD is a registered investment advisor headquartered in Atlanta, Georgia. We have a little over $6 billion in assets under management. We also have a satellite office in Charlotte, North Carolina. We are not affiliated with Signature Bank. That has been something we've had to clarify in the last couple weeks. In fact, we're not affiliated with any bank. We are just a pure registered investment advisor.
Gary Siegel (01:16):
Excellent. So was there anything in the post-meeting statement or Chairman Powell's press conference that surprised you or grabbed your attention?
Tony Welch (01:28):
Yeah, thinking back to it, our expectation heading into the meeting was that this would be a meeting that somewhat followed the playbook that we saw from the ECB that they just kind of laid out. They did 50 basis points and then they dropped forward guidance. So the market, when we were looking at market pricing, they were giving the Fed a 25 basis point hike based on the expectations. So the Fed took that and they basically dropped the forward guidance as well. So some things that I do think that were noteworthy from the presser and the statement were that change of language that indicated ongoing rate hikes that change to some additional policy firming may be appropriate. So that was notable. That looks like maybe another hike is what they're kind of penciling in, but there is some variability around that.
(02:28):
Ten of the participants see another hike, seven of them see a terminal rate that's higher than that. But in general, they do seem to be approaching that expectation for the end of their hiking cycle. Some of the other things that I thought were interesting out of there, especially in the questions portion is Powell tried to draw distinctions between the liquidity that they're providing via the lending facility and quantitative tightening. And I'd say that's probably the piece that surprised me the most, that they kept their balance sheet contraction intact despite the banking stress that we've been seeing. And I would've expected a pause there to just step back assess the liquidity environment. But they were linking monetary policy and banking stress and they really tried to focus on the impact of credit on the economy and how that sort of mirrors potential rate hikes. So that was interesting as well.
(03:32):
Powell took kind of we don't know what we don't know tone regarding tightening credit conditions. I thought that humility was pretty interesting. He referenced that it could be modest, it could result, it could basically have the impact of being more tightening that could be significant. So that was interesting. And then they see the job market obviously is continued to be tight inflation higher than they'd anticipated. So I think one place that was interesting, Gary, was that unenviable task that Powell had of trying to provide some safety or this feeling of safety around deposits at the bank. He essentially had to try to thread this needle of trying to implicitly guarantee banking deposits without explicitly doing so, which is something that I certainly don't envy. But I think out of everything that I heard, the thing that was a surprise to me was that ongoing quantitative tightening despite the stress, I thought they probably would've paused there.
Gary Siegel (04:40):
Well, a couple points on that, Tony, he's been threading the needle for about two years now or trying to anyway. And you say that the statement kind of signaled that they're near the end of the rate increases, but again, with that uncertainty it changed from one meeting where they said ongoing increases to now maybe the possibility of a rate increase that could change again in the next month if the banking situation spread month and a half actually, if the banking situation calms down and inflation and jobs keep going the way they've been going.
Tony Welch (05:24):
Absolutely. I mean I think that that's the playbook is you don't commit to any sort of forward guidance. You give yourself the flexibility to weigh the data as it comes in and go from there. And we may talk about it here soon, but our suspicion is the data's going to break in such a way that we're near the end of the tightening cycle.
Gary Siegel (05:52):
So it sounds like you pretty much agree with the SeP projections, especially on rate hikes.
Tony Welch (06:01):
We do and we don't. So I do think that they're near the end of their tightening cycle. I mean, let's talk about the SeP just a little bit if we can. And what they did from their revisions from December, so they, they shave real GDP for next the rest of this year and next by a little bit. They've got real GDP coming in at 0.4%, down from half a percent. So not a ton, but they did reduce real GDP. They've got unemployment climbing from 3.6 to 4.5 by the end of the year. That's actually a slight decrease from December, but more or less close to the same. And they've got PCE inflation going from 3.1, they revised that up to three and Core PCE, they revised up a little bit and they kind of kept their Fed funds rate at that 5.1 level and moved it up about a quarter point next year to 4.3.
(07:02):
But what I'd like to do is there's the projections, but what does that imply? So we see the projections, what's that apply? And for that we need to look at what what's going on in Q1. We're almost a quarter of the way through this year, and so we've got their projections for the rest for 2023 at large. While I look at the Atlanta Fed real GDP tracker for Q1, that's resting at 3.2% annualized growth there on real GDP. So call that a 0.8% quarter for growth. So the economy could stagnate the rest of the year and you would end up with growth that's better than the projection that they have in their SEP. That's if the Atlanta Feds right, they're probably not, growth is probably softer than 3.2%. But the point is is there's some economic momentum in the first quarter and it's not going to stall overnight because it's much like inflation. It's concentrated in the stickier areas right now, it's concentrated in the service sector. So the Fed is implicitly implying that they see not just a meaningful slowdown, but you actually need to get it some sort of contraction in activity if the first quarter's going to be that strong probably in the back half of this year. And that's notable. The unemployment rate isn't going from three six to four five in the absence of a recession. So I'm implying here that the Fed says we're going to go into recession in the back half of this year.
(08:43):
That's where I think that I've got a bit of a disagreement with the Fed. So they basically, they look at the balance of risks. That's another thing that they kind of look at is do you think the balance of use, the upside or downside on the economy, almost a hundred percent of the members think that the risk due to the downside in their economic projection. So think about that for a second as they're implying that they think we're probably going into recession and the risks are that it's worse than what we think it's going to be. So that's where I think there's a little bit of disagreement and we'll kind of get into what we see for the economic backdrop I think a little bit later. But where, so it's a yes and no. I do think they are closely end of their tightening cycle, but I do think that they may be a little bit too negative on the economic backdrop right now.
Gary Siegel (09:36):
Well, certainly a projection of 0.4 growth for the year suggests that especially with downside risk suggests that they think that there's going to be a recession, although they would never say that out loud.
Tony Welch (09:51):
Exactly right.
Gary Siegel (09:54):
So where do you see the terminal rate? Do you see 5.1 as the stopping point?
Tony Welch (10:02):
We're in the vicinity of the terminal rate now. They could go again in May. I think I would give that less than a coin flip chance. In order to get that, I think you'd need to see inflation accelerate again. And that's going to be very difficult to do given that there's still a lot of hot inflation from the first half of last year that's going to roll off of the calculation. So if you consider in February we printed a 0.4% month over month move on inflation, you could do that for the next several months and you would still see CPI drift down into the threes or so over the course of the next three to six months. So I think they're going to have inflation, at least the year over year rate of inflation is going to be a tailwind for them. I have seen a lot of hiking or a lot of references to hiking cycles haven't ended till the Fed funds rate is above inflation. Well, PCE inflation 4.7 or so, the Fed funds rate is right there. If you've got some downside in that in the next couple months, then I think you're in the vicinity of where the Fed can stop hiking.
Gary Siegel (11:20):
Well, the SeP suggests that the Fed won't low rates this year but could next year. And they don't have inflation hitting 2.1% until the following year. So they're saying that even though they said they want inflation down to 2% and they're going to do everything to bring it down to 2%, they're going to cut rates before it hits 2% according to the SeP.
Tony Welch (11:47):
Yeah, and this is where I think that they've kind of got a little bit of a mismatch in what they expect for economic expectations and just how sticky inflation is. We're where we're seeing the inflation right now. We know a couple things. We know that goods inflation has come off the boil quite a bit. We know that shelter inflation has been the big driver of higher core inflationary pressures and we know that's going to roll over. So now they're looking at this core services component and this is the things like the airline prices that jumped in the last month. If we go into a recession, I don't suspect that the so-called sticky inflation components are actually going to be that sticky when you think about where they're concentrated. So I do believe that any sort of contraction in economic activity would be a death now to inflation for at least this part of the cycle. And I do believe that if they're cutting interest rates, they're doing so at an inflation level that's lower than what they're expecting.
Gary Siegel (12:59):
Do you think rates are restrictive at this point?
Tony Welch (13:03):
Yeah, I mean if you look through what you don't get a banking turmoil like we had last week, if rates aren't sufficiently restrictive in the traditional sense, I would say that rates are restrictive. But this is a unique cycle in that it's not being driven by the cost and availability of credit. That's not the driver in the bus right now. That's not driving the economic expansion along. So in a sense, the Fed has done what they can do. The Fed can't make people stop spending on their travel and leisure right now. They can't make companies give up their labor that they're likely to hoard for some time. Now all they can do is create a headwind on credit on the cost and availability of credit. They've done what they can do. You've seen it in the banks, you've seen it in some real estate areas, but it, it's going to take a while before some of this stuff funnels through the economy and it goes back to credit driving the bus.
Gary Siegel (14:19):
So there's a lot that you've said there that we'll get to later, but right now let's talk about yield curves. They're negative. What is that telling us?
Tony Welch (14:30):
Yeah, I mean they're negative across the whole curve. The one that I think we need to, the one that has a well, lot of them have a good track record, but the two year is massively inverted to the Fed funds right now. And so what is that telling us? That's telling us that over the next two years, the cutting interest rates, and I think the Fed themselves are telling us that over the next two years we're cutting interest rates. And I'd also think that eventually we are going to get a recession. I try to keep things light with clients sometimes and say there's no sense worrying about the next recession because it's going to get here whether you want it to or not. And the truth is, we go through business cycles of expansion and recession. So you're either in a recession or you're marching towards the next recession.
(15:25):
So an inverted yield curve is telling us that there's going to be a recession, the fed's going to be cutting interest rates, it's probably going to get here within the next two years. And I think that's going to be correct that the yield curve will prove correct. But we do have to remember that the lead times on this are extremely variable. The yield curve does not do a good job of telling you exactly the quarter we're going to label contraction in. And it doesn't do a good job of telling you how deep it's going to be. So I do think we should pay attention and calibrate for recession starting sometime within the next two years, but we need to look to other areas to try to get a little more precise.
Gary Siegel (16:13):
Well, Tony, the yield curve doesn't tell us how deep the recession's going to be, but I'm going to ask you how deep do you think it's going to be?
Tony Welch (16:22):
So I already kind of alluded to, and I think one of the things that I get asked a lot is like, is the recession here? Are we in a recession right now? And my answer is kind of always, well, have you been to a major airport lately and tried to fly somewhere? If you don't believe we're in a recession currently, the consumer is just too strong at this moment. I think that does get into some of the uniqueness of this cycle. There's several things that are kind of creating an economic moat right now. They're going to wear off eventually, but you consider a couple of these things, right, is we had 2.4 trillion of pandemic savings that wouldn't have been accumulated outside of the pandemic. About 1 trillion of that has been worked down. That means we've got 1.4 trillion remain. That's a big number in excess savings.
(17:17):
The job openings to unemployment ratio right now is still running at about 1.7. And you and I, I'm sure could have an interesting conversation about how accurate that those job openings numbers are. But I think directionally it's good data, they're, it's a tight labor market and corporations are in pretty good shape for now with their cash positions and interest coverage ratios. One of the things that I thought was interesting in 2022, Gary, an interesting kind of thing I saw from friends at empirical research was they broke the income distribution up into Quintiles and they found that in 2022, despite all the inflation, the middle 60% of earners actually were able to get ahead in 2022. It's really the tail ends of the income distribution. So you've got a ton of pent-up demand right now. It's unwinding. We're not in recession today, and I think these things are going to push recession out now.
(18:17):
I think it would be, there'd probably be too much hubris here. If I were to tell you, I could tell you the severity of a recession that starts in 2024 or beyond, I think that's going to be difficult to determine. But if I had to give my best guess Jay Powell & company think that their tools can work pretty well in a recessionary scenario this time around, and I'd have to agree with that. If you see where there's been the weakness in the economy, it's been in things that are housing, things that are interest rate sensitive. And I do suspect that there's going to be massive pent up demand in those places. So the economy should respond pretty well to a lowering of interest rates when we get to that point. So that's, I would say I don't think any recession feels mild and certainly not to the people that are most affected by it, but I don't believe it'll look as devastating as some of the more recent recessions we've been through.
Gary Siegel (19:19):
Well, I'm going to pick on a few words you said this time around now everyone is talking about how different the times are now than previous times and some people have compared parts of the recent past to the 1970s to the 1980s to 2008. Can you talk about that for a while?
Tony Welch (19:42):
I think that is an excellent point in question. So I'm in the fortunate seat of being able to sit with 1,600 client households. And so I get a really good feel for the general sentiment among at least our clients. And I can remember the first half of 2022, the major fear was, this is the 1970s all over again. They saw the geopolitics coming into play, they saw the oil price spike, saw the wage strength, and frankly just thought it was a replay of the 1970s. And then we started to get a little deeper into last year and clients started to shift their focus. Inflation started to come off the boil in the back half of last year a little bit. And I stopped kind of hearing the references to the 1970s and then we just had this banking issue. And that brings up that feeling of is this two, is this actually 2008?
(20:49):
And I think it's interesting because we have a lot of cognitive biases as human beings, but availability bias is one of the greatest ones where we're looking for what if we actually experience in our lives, what does this most closely resemble? We want to make sense of a chaotic world. What's the pattern that we see here today? And so we think back to things we've seen before, but this cycle is none of those things. It's 2020 to 2023, it's the pandemic, it's the pandemic reopening, it's pent-up demand, it's stimulus, it is supply chain issues. But a lot of that stuff is starting to normalize. And this is where I say we will be in a recession eventually because a lot of the stuff that we saw that was unique to this cycle, we'll start to wear down eventually. So that pandemic savings will get spent down eventually, these big increases in wages that we've seen. We've already started to see some softening there. That's going to start to become more regular. And eventually what you're going to be left with is, you're going to be left with something that's much more normal to us is high interest rates, tight credit, tight credit availability, leading us to the next more traditional recession. But I think it's such a good, sorry to be so long-winded on that, but it really is an interesting point where everybody kind of wants to try to make the comparisons when it is its own unique animal.
Gary Siegel (22:35):
No, don't feel bad about going long. People want to hear you, not me. So give us what's ever on your mind. Let's talk a bit about consumer spending. That's a huge portion of GDP. What are your thoughts on consumer spending, consumer confidence and how this is going to affect inflation going forward?
Tony Welch (22:59):
Yeah, so I look at what inflation has done to consumer mood and it's soured consumer mood to the point of it does look a little bit like what we saw with consumer sentiment in the prior inflationary periods. Nobody likes inflation and that tends to beat consumer expectations down. However, inflation has been moving in the right direction and we saw consumer confidence begin to bounce in the fall last year, we saw a little bit of retraction in consumer sentiment with the last reading from University of Michigan, but it's still significantly higher than where it was in the middle of last year. So consumers are feeling on net a little bit better. And that's feeding through, like you mentioned, the consumers roughly two thirds of GDP or so. And that's kind of that engine that's driving the economy forward right now. So I do think that you've got that a little bit of that downbeat mood still lingering.
(24:07):
And I do think there's a little bit of, with the consumer confidence numbers, you have to look a little bit at what people are doing rather than what they're saying. And there has been a bifurcation in the way people say they feel versus what they're doing. It's certainly not stopping them from traveling and what have you, right now. So it's a good question. It's something that we track quite a bit, kind of see where the consumer's at, and I would just kind of sum that up with consumer sentiment is better than it was still some room for improvement there.
Gary Siegel (24:49):
So let's talk about how the market views what the Fed is saying. They haven't been on the same page very much. The Fed now says they're going to hold rates after maybe one more rate hike and the markets see rate cuts,
Tony Welch (25:09):
So who's right? So I think that market is overshooting on their expectations for rate cuts. If my outlook on the economy is correct, of course there's risks to the economic outlook that our outlook could be wrong and we need to appreciate those risks. But I do think that the market is overpricing the probability of cuts. I mean, I think they've got the first cut happening in the June-July period or so in market expectations right now. And that would take a significant deterioration in the economic backdrop to get cuts from here. And I think the Fed has been pretty stubborn in their intentions that it's going to take some serious economic pain before we start to cut interest rates in their own projections. They say we're likely going into a recession and unemployment's going to go up about a hundred basis points by the end of this year, and our interest rate's going to be the same. I think we need to somewhat take them at face value for a while on that enough economic pain, they will be cutting interest rates, but I think that it's a little aggressive to be pricing interest rate cuts in the June-July period.
Gary Siegel (26:43):
Well, the Fed again has said that the Jerome Powell has said that he wants to get inflation down to 2%, but if you look at the SeP, they're planning to cut rates even before inflation goes down to 2%.
Tony Welch (26:58):
Yeah, a couple things on that note is one, I think there's going to slowly be a trickle in of a softening on that 2% inflation target. I just think that you're going to get to a place where say we're running 3% and nominal growth is still pretty good and you're keeping wages are okay. The economic backdrop is okay, is 3% inflation really that much less palatable than 2% inflation? And I would argue probably not. I think that what they're worried about is that inflation expectations become unanchored. And to that note, Powell needs to continue to be tough with his inflation rhetoric. And we have actually seen it's W, so by the way, Gary, it's working right, inflation expectations. When we've seen in the latest reports, inflation expectations have come down, they've rolled over the N for the next year, the next three years, university of Michigan polls shows that inflation expectations have come down. So I think he's got to sound more hawkish on where that inflation number needs to get down to just to make sure that he keeps those expectations anchored. But I do suspect you'll see softening in that message of being dogmatic about getting down to 2% as we get closer to a 3% handle.
Gary Siegel (28:30):
Well, even yesterday the statement seemed a little do more dovish than Powell did because he again said during his press conference that he wants inflation down to 2% and the fight isn't close to over.
Tony Welch (28:45):
Absolutely. And that is all about making sure that you've got that hawkish tone that keeps those expectations anchored.
Gary Siegel (28:55):
So where do you see wage growth going? I know you said it's been slowing down, but is it going to stay near the level it's at or is it going to continue to slow?
Tony Welch (29:06):
So on wages, this is a really interesting dynamic that I think differs humongously from the 1970s is the worker group has not had power for a long time. And so much so that I don't believe they truly think they do have pricing power right now. And you've seen it in a couple things. In the last jobs report, one the month over month wage growth was 0.2. That does not sound like a wage price spiral to me. Average hourly work week declined. We added something like 311,000 jobs. If you account for what we lost from the average hourly work week, that's the equivalent of losing like 380,000 jobs. So there is some softness there in the labor market to which maybe the worker is right, maybe they don't have the pricing power that we suspect they could have. So on that note, where we see wage growth going this year is mildly positive. But coming off the boil from what we saw in 2021 and 20 particularly 2021, that was pretty incredible. Spike in wage growth started to moderate a little bit last year, and I think you'll see a continued moderation of that throughout the rest of this year.
Gary Siegel (30:38):
So we've seen a lot of strength in the labor market. What is causing that? Is it that employers in some ways are afraid to fire people because they had such a difficult time finding people in the past two years?
Tony Welch (30:55):
I don't know if I could say it better than that, Gary, that is about spot on. And I'm in the fortunate position where a lot of our clients are executives or own small, medium sized businesses. These businesses essentially were out-competed for labor in 2021, 2022, they're still playing catch up to fill open positions right now. And the struggle that had to hire good talent, when you go out and survey, you go out and survey folks and say, what's been your biggest problem? And filling seats with good talent has been one of their biggest problems. So seeing is that this has been two, three years of a major challenge to fill their open positions. The likelihood that they're going to turn around and fire these people is a lot lower. They're going to hold on to their workers. That is a valuable resource to them at this moment, to the next point where they're light, you're likely to see some margin, some profit margin contraction, probably more so than you would've seen in normal cycles before they start letting labor go. There's actually been a really good relationship between what profits are doing and the unemployment rate. So traditionally you don't see hiring start to drop off in actual layoffs until profits turn negative. Well, we look and see what's going on with corporate profits right now. They're slightly negative, yet the job market is remaining very, very tight. So I think that's very indicative of that point that you made and what we're kind of seeing on the ground among our client base.
Gary Siegel (32:46):
Another reason that it's going to be tough for the Fed going forward, because apparently job market is not going to soften
Tony Welch (32:58):
No, but there is some softening. So I do want to make sure that we distinguish between a very tight labor market that's getting tighter or a tight labor market that's starting to soften. And I think it's kind of the ladder there. One of the things that I would look at is the quit rate. So that kind of tells you how confident are you in your ability to find a new job if you're leaving your current employer. And that's started to fall. So along with wages coming off the boil a little bit, the quit rate's starting to fall some more announced layoffs. None of this is a big problem right now, and I don't suspect it's going to be a big problem for a little bit, but it does point to a labor market that is not tight and tightening, but a labor market that is tight and loosening somewhat.
Gary Siegel (33:56):
So what are the biggest risks to the economy, Tony?
Tony Welch (34:01):
Well, what is it? The statement you've got your known knowns, your known unknowns, and your unknown unknowns. And the biggest risks of the economy are always the unknown unknowns, which unfortunately, Gary, I don't have a crystal ball that I can tell you about those, but I can talk to you a little bit about the known unknowns that we have out there. And I think one of those is not necessarily the banks. I do think that the Fed did a really good job. The Fed and the Treasury did a good job shoring up the issues that the banks face right now. But it's not just the issues of the banks. What does the issues that the banks do to the consumer, what's it do to people's confidence levels? And I would kind of point out, I think it was Citi just released their credit cards spend for last week and it fell, the credit card spend last week fell amongst the banking turmoil.
(35:09):
So if this continues to be on the front burner, if people continue to see story stories about banks on the front of the Wall Street Journal on major media networks, it is possible that they start to kind of clam up and reduce their spending. And that's something that I think is a risk that we know that that's sitting out there. Particularly I talk about our availability heuristic and we all remember the GFC. So when we start to see articles that make us concerned about the banks, it is possible that the consumer does start to pull back with some of these negative, negative headlines. So that's something we need to watch. The other thing that I think would be a major risk is another spike in energy prices. I mean, if you look over the last year, energy prices have been extremely well behaved. One of the interesting kind of stats I'll bring up with people when I do presentations is what do you think the price oil is up over the last year?
(36:18):
And you'll get all kinds of responses, like 50%, 30%, that kind of thing. Well, it's down down year over year, and most commodities are, so I'm not sure that the economy is in a place that it could take another oil price spike and kind of make it out the other side without a recession. We handled it in last year, but I'm not sure we could do it, do it again. And for that, you've got to look at, there's potential geopolitical turmoil brewing in Iran. That's something that we need to keep an eye on. It may not be base case, but it's certainly higher than a tail event. So those are a couple known things that I think are big risks to the economic backdrop.
Gary Siegel (37:11):
Well, you mentioned the banking crisis, and we really haven't discussed that. How much of the banking crisis was caused by the rapid rate hikes and did the Fed have a choice but to raise rapidly?
Tony Welch (37:27):
Well, the banking, I mean, I don't want to just bail the banks out and say it wasn't their fault at all. The Fed's been telegraphing hikes for a while now, and we've known that interest rates were going higher for a while now, but it is largely due of the Fed zone making. I mean, when you consider that the amount of stimulus, the amount of stimulus that hit the system, went into banks in the form of deposits at the exact time where interest rates were zero. You know, think about banks can do three things with those deposits. They can hold it into reserve, they can loan it out, or they can buy securities. And the reality is there hasn't been a lot of lending activity when you have all that money floating around. So they bought securities and they bought safe securities just with longer duration on them.
(38:26):
So there was an asset liability mismatch. But I do think it is a bit of a crisis of the Fed's making though I wouldn't absolve banks entirely from that as well in terms of did the Fed have a choice? I don't think they had a choice in hiking. I do think that the mega size, 75 basis point hikes, that's something that history may look back on as being a little excessive, especially when you consider we still had yet to see a lot of the supply chain disinflation start funneling through the system. And we started to get that in the back half of last year. And it would've been interesting to see what that could have done to inflation by its own accord. And also, one of the things I worry about longer term about what the Fed has done here is they've essentially locked up the housing market investment.
(39:29):
Residential investment has pretty well locked up here. And you think about where inflation could be structural for the long term, I suspect having a higher supply of homes would be better for longer term inflation than having home builders stop building. So I do think that that's something that could have long-term implications, especially since we have a housing shortage right now. So a couple things there. Again, the Fed kind of created this mess with the banks, but the banks had opportunity to position better for it. And then in terms of did they have to hike? They had to hike. But the speed at which the hikes have occurred is really unprecedented.
Gary Siegel (40:22):
I'm going to take a question from the audience because we're getting close to our end time. One of our attendees wants to know, employers have said they have a hard time finding good talent. However, I've been searching for a new job for about nine months now, and each job could have 300 to 700 applicants. That does not really compute your thoughts.
Tony Welch (40:50):
So I do think that we need to consider, I'd be interested to know, what industry you're competing in. I do think that we need to think about, I think about things largely from a macro perspective and the data in the macro backdrop is what it is. There's a lot of job openings per unemployed person. I think one of the issues structurally that we're facing from an economic perspective is a job skills mismatch where a lot of folks that have been displaced it, they've been displaced in an industry that is on net contracting. So there is potentially a little bit of that going on, but I'd have to know what industry that that's in.
Gary Siegel (41:56):
All right. So we're running short. We're almost out of time. The last question is going to be what questions are you getting from clients? What are they worried about?
Tony Welch (42:08):
Yeah, that's an excellent question because I do think, again, I've got kind of this unique place where we serve so many families and we get a look at what people are seeing. And if you would've asked me this question about nine or 10 days ago, I would tell you that their biggest concern and what they're asking is, are my deposits safe? And how do my custodial relationships work? How are we backstop in the money that we have? We did a lot of work around that for clients, and those questions have certainly calmed down. I think the reoccurring question that I've gotten, especially with interest rates coming up as much as they have, is why take any risk here at all with this uncertainty? Why not just embark on some TBI buying spree and wait things out? Why would we be in stocks? Why would we be in riskier credit?
(43:08):
Why would we be in other regions? All of that kind of thing. When you can get T-bills nearing 5%, and I haven't gotten it a lot lately, but I would say one of the questions that we get is around the debt ceiling. And I do suspect that that's going to pop up more and more as the debt ceiling kind of approaches and the debate around the debt ceiling approaches in general. To that end, one thing that's been kind of interesting there, Gary, now that I'm thinking about it, is we have clients that are interested in buying quality corporate bonds because they suspect that it's better quality than US Treasuries at this point. So that's kind of an interesting tell on where the sentiment is around there. But in general, I just say our clients are just as much a part of that economic ecosystem that we've been talking about today. Directionally, they were very downbeat in the first half of last year. Sentiment improved. They've been traveling, they've been going back to their doctors, they've been spending on services, and I've seen no slowdown in that whatsoever. So that's kind of what we're seeing from the client base right now.
Gary Siegel (44:21):
I know I said that was the last question, but we got a few more from our audience if you have a couple more minutes.
Tony Welch (44:26):
Excellent. Excellent. Yes.
Gary Siegel (44:28):
Okay. So do you see continued growth for businesses relocating to tax friendly states like Florida and Tennessee.
Tony Welch (44:38):
Absolutely. I think that there's a structural trend right now that is moving away from the higher tax states into the lower tax states. And it's not just the taxes, it's the regulatory burden that they see in those same states. I that I don't know that we have time. This is the Bond Buyer. I'm sure, Gary, you have a lot to say about this, but from a municipals perspective, there's some interesting things that could play out over the next several years. I look at the revenues that states like California, New York are intaking versus their obligations and revenues are falling in those places. And so that's going to be a challenge for certain states going forward. But I I'll say as a resident of a Southeastern state that I don't believe that that trend is going to stop anytime soon.
Gary Siegel (45:35):
So what industries and at what position level are you seeing hiring?
Tony Welch (45:41):
Well, you're seeing it in services type things. You're seeing travel and leisure is picking up mightily. So employees for hotels, airlines, that type of thing. We're also seeing it in specialty services. Our own industry, the financial service industry has seen hiring pick up quite a bit. And I would say one of the biggest ones that is just seems to structurally be hiring, and I don't see this going away anytime soon, is in healthcare, in the healthcare fields. I have a wife that's a nurse and the amount of recruiting stuff she gets on a regular basis is pretty insane. So I would say those are some major places where we're seeing quite a bit of hiring
Gary Siegel (46:37):
And to promote The Bond Buyer. We had a story this week about nursing situation and how week to week workers were getting $10,000 a year last year, and that's gone down a little bit. It's still an incredible amount of money they're getting.
Tony Welch (46:53):
Absolutely.
Gary Siegel (46:55):
The next question is, how do you also feel that the bank should have increased the mortgage stress test benchmarks to decrease low interest lending?
Tony Welch (47:14):
I am not sure. A couple things. I think the banks are a little bit a victim of their own success through the influx of the deposits here at just the precise wrong time. I think the lending books that they have are very solid. And so that's where things are a lot different today. Delinquencies remain very low, troubled loans remain very low. Now all of this can change in a recessionary situation, but as we stand today, it looks like, and banks, ever since the GFC, the lending standards have really not loosened all that much. And you look across the mortgage market, the FCO scores on what people were taking in for their, or what they were were doing on the lending activity were really solid. So I would emphasize that the issues here for the banks is a duration mismatch, not really anything wrong they've done from a loan perspective.
Gary Siegel (48:23):
And this is absolutely the last question. How do you see the outlook for tech companies and do you see the impact of AI and machine learning and what is the impact of AI and machine learning on the economy?
Tony Welch (48:39):
Okay, so the outlook for tech companies is somewhat bifurcated in the immediate term, but you've got to have kind of a bullish perspective long term because how the bifurcation in the intermediate term is, look, the economy is going to downshift and slow. And what tends to work when the economic trajectory is slowing is your high quality growth companies, your companies that can continue to grow in the face of a slowing economic environment. That tends to be the top of the market right now. So you might have noticed what kind of, what's doing well to start this year is the heavyweights in the NASDAQ and what have you, and that's almost a flight to quality there among the uncertainty. But you've got to be bullish on tech writ large, long term because if we do have demographic headwinds, we do have inflationary headwinds. They will require tech solutions to solve those.
(49:43):
And that's where we've seen the capital expenditure spending that we're actually getting in s and p 500 companies right now. It's been more on the tech side of things to kind of enhance their business, their productivity trends. Where I think AI is go, one, it's incredibly fascinating and I'm very bullish on these things. I think what you're going to find is you're going to find, generally these are going to end up being productivity enhancements and good things for economic growth at large. I think companies that can adapt and utilize and leverage AI to their benefit versus fighting the trends are going to be huge beneficiaries of this stuff. But to the extent that we've got structural issues from an aging population, reassuring, reassuring kind of inflationary prospects, it's going to be technological solutions that help solve those.
Gary Siegel (50:50):
Well, that concludes this Leaders event. I want to thank the audience and I want to thank Tony Welch, chief Investment Officer at SignatureFD. Have a good afternoon everyone.
