Credit Market Meltdown, Hirings Collapse; Is 2008 Repeating? | Eric Basmajian
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people are missing about $5,000 of real income. Hadn't we stayed on that trend. So for a family of four, that's $20,000. When you have a supply side shock, you have higher prices and lower growth like we mentioned. And the Fed really has uh an ambiguous response to that. From from a very high level, tariffs are attacks. So, the higher the tariff level, uh, the the more tax basically you're pushing in the economy. >> A wave of private credit redemptions have been hitting Wall Street over the last couple weeks, spooking investors and markets alike. What is going on? Are we on the precipice of another financial crisis? Is this the beginning of a bigger credit crisis? And what's next for the labor market? Will we get more layoffs in 2026 than in 2025? What's next for wages? What's next for the housing markets? We'll talk about all this and much more with Eric Basmajian, founder of EPB Research. This video was sponsored by Koshi. It's a fully regulated platform that lets you trade on realworld events from economic data to political outcomes. Sign up and use my code lin link in the description down below or scan the QR code here. New users will get $10 deposited to your account when you trade $10. Traders can put money down on the favorite teams, events, elections, and more in all 50 states, including California and Texas. and over 140 countries. Eric, good to see you again. >> Good to see you, David. It's been a few months since we talked. Glad to be back. >> Yeah, you've been away uh for personal reasons and I'm happy that you're back. I'm happy you're good health. Uh we've missed you and we're glad that you're back online and uh helping us out with more information. Everybody should check out EP Research. He's put out some great content and also his YouTube channel. Great content there. Links down below. Eric, uh you've been talking about the housing market on your YouTube channel. We can touch on that. But first, let me just bring up some pieces of news that I mentioned in the introduction. So, a lot of big shops on Wall Street, Morgan Stanley, uh, Cliff Water as well, and JP Morgan are restricting redemptions at private credit funds. So Morgan Stanley uh seeing funds um a flurry of bad news following several credit issues in recent months has drawn fresh scrutiny to the roughly $2 trillion private credit market according to US News as investors questions the question the health of loan portfolios and the resilience of borrowers in a high interest rate environment. Morgan Stanley Private Credit said in a letter to investors that the North Haven Private Income Fund returned roughly $169 million or about 45.8% 8% of investors tender requests for the quarter. Cliffwaters $33 billion private credit fund redemptions reached 14%. Meanwhile, in the same week this week today, JP Morgan's uh marked down to restrict lending to private credit uh continues. So JP Morgan is marking down the value of certain loans to private credit players. Uh the move from the largest US lender extends a flurry of jitters across a roughly $2 trillion private credit market. earlier this week. Tell us about what you know of the situation so far and why there's been so many redemption requests. >> So, we have had quite a quite a string of these headlines on private credit the past couple of weeks, right? >> Yeah. Um if if you recall, we also had a pretty um a pretty long string of these uh similar headlines back in 2022 2023 more related to real estate funds when there was the uh huge increase in interest rates from the Federal Reserve uh in 2022 that caused uh a big slowdown in the real estate market specifically on the multif family and commercial side. and we saw a lot of uh gates and redemptions from a lot of real estate related uh uh funds as well. We're seeing something similar now. It appears that this is more related to the software space uh and and things of that nature. Where where all of this sort of comes together is is through the labor market. So whenever the labor market is relatively strong or uh or somewhat stable, you can get a flurry of these headlines and they don't generally spiral into systemic events. Uh but when the labor market starts to really deteriorate and people uh start to redeem uh money for uh because they need liquidity uh and reasons like that, that's when it becomes much more of a problem. So if we go back to 2022 2023, the economy was still adding uh a pretty significant amount of jobs. There was definitely weakness in certain pockets of the economy, but the economy was adding jobs and the unemployment rate while it was uh rising, it was rising really slowly and from a very low low level. We were in the 3% range on the unemployment rate. uh today we see uh a continued slowdown in the labor market and you know the way that we judge the labor market is primarily through the cyclical sectors construction and manufacturing first that that's what always leads the downturns and as of now we have about 120 130,000 job losses in those sectors. uh but that started back in 2023 2024. So it's been a very very slow uh decline in the labor market in those sectors and the unemployment rate uh is either creeping up extremely slowly or remaining relatively stable depending on the month that you look at. So we have some downward momentum in the labor market and we certainly have still some pockets of weakness in the interest rate credit sensitive sectors of the economy. But in my view we don't have um a deep enough or broad enough uh deterioration in the labor market where some of these headlines are likely to spiral uh into a more systemic type of an event. >> Well, can you just comment on the headline numbers? So last Friday, uh the jobs numbers came in. Non-farm payrolls fell by 92,000 for the month compared with the estimate for 50,000. Here's a chart compiled with CNBC showing the uh monthly job creation since 2022. And payroll numbers are very noisy as you know. They they change up and down from one reading to another. But can you just comment on the overall trend that you're seeing here in 2022 and what this means? >> Yeah, absolutely. So as I mentioned the trend in the labor market is certainly one of uh loss of momentum or or slowdown in the labor market and we can see that in the payroll numbers and again I specifically like to focus on the cyclical areas uh of the labor market construction manufacturing and certain subsectors within that like residential construction and we're seeing outright job losses in those sectors albeit the magnitude of those job losses is pretty small uh as I mentioned about 100 150,000 over uh a 2-year period. So, the monthly loss is is is at a trickle really. Uh on the flip side of those payroll numbers though is the unemployment rate and the unemployment rate uh takes into consideration obviously both the job gains and losses as well as the labor force. It's a ratio and that ratio that unemployment rate is not actually revised heavily. it's hardly revised at all where those non-farm payroll numbers are revised very significantly. So, while we're seeing a slowdown in the payroll numbers and the slowdown is concentrated in those cyclical sectors, that's definitely a warning sign and it's a sign that interest rates in the economy and monetary policy is restrictive uh to the interest rate sensitive sectors. We're not seeing a commensurate increase in the unemployment rate uh just yet uh which is not as alarming. Now the unemployment rate is uh at the second highest level of this cycle. I believe it printed about 4.44% in the last reading, but it's been in a really uh tight band for the past several months. And you would have probably expected the unemployment rate to rise more given the drop in payroll numbers that we've had. So some of this is because of a slowdown in labor force growth. So labor market is definitely weakening. The weakness is concentrated in those cyclical areas. That's definitely a warning sign. But the unemployment rate itself hasn't uh started to accelerate in that nonlinear way that's more characteristic of uh traditional recessionary uh conditions. Well, I think the average consumer just wants to know whether or not his real wage, his or her real wage, is going to improve or deteriorate throughout the year. In other words, changes in living standards. What are some leading indicators you look at to gauge whether or not our salaries and our wages are going to beat inflation this year? >> Yeah. So, on a year-to-year basis, it can be kind of difficult to judge that because, of course, the swings in oil prices will drive the headline inflation numbers, and that is what factors into some of these real wage or or real um uh income calculations. But on a broader sense and we did a video on our YouTube channel uh on this uh about you know where income has gone or where growth has gone in the United States and the longer term trend is not very optimistic for the average person's real income or real wage because ultimately real income is tied to productivity. Uh and in order to achieve sustained increases in productivity growth uh you need to have uh investment in the economy, private investment in structures, equipment, infrastructure, machinery and over the last several decades we've invested less and less into our uh private infrastructure and that's suppressed the level of productivity growth. So over the past um several decades from you know roughly the 1960s until 2007 we had real income that grew at about a 1.8% 8% pace for that entire period and people became accustomed to that pace roughly two% call it uh and when you project your future income forward you know you say okay I'm going to be roughly here in 10 or 12 years and that factors into people's decisions when making purchases like a home or family formation uh after the 2008 crisis and the compounding effect of this lower and lower investment that has dropped that real income growth has dropped dropped from a 1.8% trend to a 1.3% trend. And that doesn't sound like a lot, and that's not something that you can really feel on a year-to-year basis, but when you compound that over 10, 12, 15 years, the average person ends up 10 12 15% worse off than they would have been. And in that video, we calculate the delta. And on a per capita basis, people are missing about $5,000 of real income had we stayed on that trend. So for a family of four, that's $20,000. So a family of four, let's say, that was sitting there in 2005 and 2006 projecting out where they would be in the future has a deficiency of about $20,000 in real terms, which uh is is pretty significant. and that hole has been plugged with with debt for the most part. So, uh the long-term trajectory on real income is not uh super optimistic so long as we continue to maintain an environment of low private investment. And the reason we have low private investment is mostly because it's being crowded out by a larger and larger uh government sector. Jack Dorsey's block just announced 4,000 employees to be laid off in uh in February. That's roughly half his workforce, Eric. Um, and let's talk about the broader trend of tech layoffs that have been happening ever since last year. Uh, I'm going to pull up a prediction market for you to comment on. This is from Kowi. It's a prediction market based in the US. And it says here, more tech layoffs in 2026 than in 2025. Traders are predicting 74% chance, 73% chance. Now, that there's going to be more layoffs this year than last year. Is this an AIdriven narrative as more tech companies trim down their workforce in favor of AI or is this a symptom of the broader labor market slowdown even outside tech as well? >> Yeah, I think I think it's twofold. So there's certainly you know some AI component to this but we also have to remember that coming out of the pandemic the COVID uh boom that we had there was a huge increase in hiring particularly through this tech sector. So there was certainly some overhiring that happened in the tech sector. So some of these declines that we're seeing are a correction of the overhiring. Now companies may blame that on the AI or efficiencies but you know I think uh I think Jack Dorsey's company uh my numbers may be slightly wrong but I think they tripled or even quadrupled their headcount from you know the before the uh or right around when the pandemic started to the peak and then they've cut some uh employees now but I still believe that they have a higher headcount today than they did at the start of the pandemic. you know, my numbers may be slightly off, but there's definitely a correction in overhiring that's happening. But I also think that the uh the AI movement uh has been concentrated and the adoption has certainly occurred probably more um uh quicker in some of these tech sectors. uh but when we piece this together for the broader economy and I always try and come back to the sequence of uh the way that the business cycle plays out uh the tech sector uh while they're high-paying jobs they're generally not the sector that leads economic downturns or contributes significantly to economic downturns. generally high-skilled employees and they have a higher propensity to be taken up in a new job if they've been laid off. Secondly, since it's not an interest rate sensitive sector for the most part, the job losses there tend to be more idiosyncratic. Whereas when you see the job losses coming through construction and manufacturing, those are directly tied to change in monetary policy. And those are the job losses that have more of a tendency to ignite a self-reinforcing cycle. So I'm not as concerned in a business cycle standpoint from uh increased layoffs or job losses in the tech sector as I would be if I saw uh a more significant or an accelerating pace of job losses in the more cyclical areas of of the labor market. So maybe we're not gaining a bunch of jobs, but according to the most recent reports, uh we're not losing a lot of jobs either. So this is from uh Reuters. The number of Americans filing new applications for unemployment benefits fell last week, suggesting labor market conditions remained stable even after the economy shed jobs in February. For now, the low level of layoffs evident in the report from the BLS on Thursday should give the Federal Reserve from room to keep interest rates unchanged for some time according to the author. So uh this is the uh we're talking about the initial claims. Initial claims for state unemployment benefits slipped 1,000 to 213,000. So, how do you rectif reconcile uh I guess low number of initial claims to low payroll growth? I it just seems like, you know, yes, we're not gaining jobs, but not a lot of people getting laid off either. Is that is that accurate to say? And there's just equilibrium in the labor market. >> The the framing of that is absolutely correct. So, the term that many people are using is this no hire, no fire economy. Um, so what we're seeing is a very very low level of hiring. And the reason we're seeing a low level of hiring is because the Federal Reserve has raised interest rates and the current level of monetary policy is fairly restrictive for those interest rate and credit sensitive parts of the economy. And we know this because if you look at something like mortgage rates, mortgage rates are compressing or restricting the volume of transactions in the housing sector. We have a very low level of existing home sales. We have a fairly low level of new home sales. So the current level of monetary policy is restrictive for those interest rate and credit sensitive sectors. So those sectors aren't doing a lot of hiring and those are the sectors that really caused the big swings or amplitudes in the labor market. On the flip side, the economy has and this is a artifact of the pandemic and a lot of the stimulus that we pushed through the corporate sector as a whole uh that may be skewed by some of the bigger companies but if you take corporate profit margins they're at the highest level uh basically in history. Now, some sectors like the residential sector are seeing compressing margins, but as a whole, corporate profit margins are at the highest level we've ever seen going back many decades. >> So, if corporations have very high profit margins, and they're experiencing a slowdown in business conditions, they're not as inclined or they're not as under as much pressure to lay off employees in order to preserve that profit margin. So they have more of a buffer. They can sort of absorb more of a decline in profit margins before they're forced to do layoffs. Um so in previous economic cycles, let's say if profit margins in the corporate sector were 8% and they started to fall, you don't have a lot of room before those profit margins get really close to zero and you have to do a lot of layoffs to sort of preserve some level of profit margin. Today in the corporate sector across the whole economy we're up at 16%. So if corporations saw a 200, 300, 400 basis point drop in margin or a compression in margin. Uh that's not that's concerning to them. They may stop hiring like we've seen, but they don't have that gun to their head to fire large amounts of people to protect uh profit margins that are cascading towards zero. And that's the dynamic that we're in where these companies where they have these really insulated profit margins. The profit margins are starting to come down because of this slowdown we're experiencing. And what they're doing is they're just saying we're not going to hire people uh but we're still not under a significant amount of pressure to fire people. So that's why we're seeing uh this dynamic play out. And the way it shapes shapes out in the data is we see a low level of initial jobless claims because that would be more capturing recent firings. Uh and we just see a very slow pace or a flat pace of payroll gains because there's just not a lot of hiring going on. So it actually does make perfect sense when you square all the data together. the the the question going forward will be uh do profit margins continue to compress and do they compress enough to where companies have to begin laying people off and perhaps some of these geopolitical tensions with the increase in oil prices may add additional pre pressure to those profit margins that could accelerate some of the things that are going on. But in an environment with very high profit margins, these companies have been able to maintain this low higher low fire environment for really the last 2 years or so. One sector that really isn't doing well is the auto sector. I'll just read you a few stats from some earnings reports that came out recently. BMW full year 2025 pre-tax earnings fell uh by 5% to 9.9%. Oh, that's sorry. Guidance has lowered further from 5 to 10%. pre-tax earnings fell 10 billion euros. Toyota net income fell 25% in the first 9 months of the fiscal year. Uh Ford um missed earnings. The uh fullear adjusted EBID was 6.8 billion with an eBay margin of just 3.6%. Um they've adjusted guidance downwards. Uh General Motors, they've lost billions of dollars in their EV strategy. Now they're changing course. Atlanta, same story. Um, Porsche just released uh earnings down, I think something like 90%. Uh, same thing with Mercedes. And a lot of these companies that are European have manufacturing plants in the US, but they're still talking about how tariffs are hurting their margins and their sales. Now, I'm just citing one industry to illustrate your point. I wonder if this is also a function of consumer strength not being there to absorb higher costs because these automakers are plainly saying they're going to start passing on costs to consumers this year and their sales might be a reflection of that. What do you think's going on here? Yes. So, I'm glad you brought that up. So uh we we look at profit margins um for the whole economy and then we also break down profit margins in what we believe are the two most important sectors which I continue to reiterate are the cyclical areas of the economy construction and manufacturing. uh in uh in several videos that we've done on YouTube as well as I believe the pinned article on my Substack uh we try and create these flowcharts of the economy to show um the cyclical areas and and where the most uh leading and vulnerable sectors are. Um so when you look at the economy, construction and manufacturing are the two most cyclical. But within those two sectors and let's focus on manufacturing for this example, you have durable goods manufacturing and non-durable goods manufacturing. Non-durable goods would be things like food, uh beverages. Uh that's not as cyclical. There you go. That's great. that that's not as cyclical as your durable goods manufacturing. Your durable goods manufacturing are your machinery uh and of course your autos. So autos really do fall into one of the most cyclical areas of the economy. And uh when you look at profit margins across these sectors, autos have the lowest profit margin of all the sectors that we can look at. So you're seeing job losses in auto manufacturing. You're seeing a slowdown in business equipment investment, which is one of the spokes on the bottom of that chart there. Business equipment investment, one of the subcategories of that would be transportation equipment or the auto sector. So it does make perfect sense that that would be one of your canaries in the coal mine or one of your leading sectors that would experience the slowdown first because it's interest rate sensitive on both ends. both from the producer side as well as the consumer side. And you make the point uh uh very well that as consumers begin to get squeezed on this real income, uh they're not going to be able to absorb the price increases that these companies are going to try and pass through. So, if they try and pass through these price increases, you're either going to see a drop in sales, which we're starting to see, or if the companies try and eat it, a further compression in margins. And the problem for the auto sector more so than any other sector in the economy is they don't have any buffer room to absorb that profit margin. They're really close to zero already on their profit margins. So that's why job losses are beginning uh in motor vehicle manufacturing which is the category uh and that is probably going to continue. So that is a sector that is of concern in the economy. If let's say tariffs were dropped this year and the Supreme Court ruled against Trump's tariffs earlier this year as you know uh Trump is still maintaining that he's going to have some tariffs but we we know that the Supreme Court ruled against them. What happens if we have lowered tariffs throughout the year? Uh are we going to get an improvement in margins or do you expect no change? >> So um a drop in margins would be a positive thing for the economy. Now, uh I think we Yeah, we we talked on the show several months. >> Uh yeah, a drop in a drop in tariffs would be a positive for the economy. I think we talked when these tariffs were originally being floated. There are reasons for why you may want to implement tariffs and I don't want to go into all of those reasons, national security and etc. But from from a very high level, tariffs are a tax. So the higher the tariff level uh the the more tax basically you're pushing in the economy whether that ends up being absorbed by companies or consumers it doesn't really matter that the level of tax in the economy is going up. So if if tariffs are maintained or increase that would be a negative for the economy. If we drop tariffs uh that would be a positive thing for for the economy. Um now, uh it may increase the deficit because we've had some some increase in revenue from from some of these tariffs, but that's some of a separate discussion. But the bottom line is these tariffs are not helpful to the economy from a standpoint of economic growth. Uh so if we were to remove tariffs, that would be a net benefit to to the economy. Uh increasing tariffs would be would be a net negative. >> Now, let's talk about housing a little bit. You've also covered this on your own channel. Uh, can we just give an update here? I want to pull up a text or a tweet rather that you made recently. There's still negative forward pipeline for single family and multifamily residential construction, but far less so than in 2024, 2025. What are we looking at right now, Eric? You made this tweet uh just today, earlier today. >> Sure. So when when we're looking at uh housing and and a big focus of mine when we talk about housing is really housing construction as compared to housing prices. Of course we cover h uh home prices and and and uh the implications of that. But the real uh focus is housing construction because that's really the engine of the economy. That's really one of the biggest swing factors. So this chart here is is really a take on housing construction. So what we're looking at is uh the level of housing starts minus the level of housing completions. So if you're starting less than you're completing, then the pipeline is is is shrinking. If you're starting more than you're completing, you're building a backlog that's going to have to be uh constructed. So uh if you look at the uh the the chart on the right is multif family. It's a little bit more of a clear picture because the swings are a little bit larger. You can see that in 2021 and 2022 starts were vastly exceeding um completions which meant that we were building a huge backlog in multif family construction which set off this really big boom in housing construction, housing employment and that's what caused a lot of the vibrance in the economy in 21 and early 22 as well as a lot of the inflation pressure. Uh then that dynamic started to flip where interest rates went up. So starts dropped, but we were com completing all of the housing that was under construction, those apartments that were under construction. And that delta, that imbalance dropped to -300 orgative -400,000 units. And that set off a huge decline in the pipeline of housing construction. And that's what's caused this big downturn in the housing part of the economy. It's largely why the Federal Reserve has had to cut interest rates. Uh it is a big reason why we've seen some of the pulse of inflation come out certainly in this part of the economy. Uh but now as the Fed has cut interest rates and things have uh again changed, we're seeing both on the single family and multif family, those are kind of going back to the zero level. When you take the two of them and put put them together, which I've done in uh some of my client reports and in some different charts, we're still at a slight net negative. So, we still have a little bit of a negative pipeline going forward, meaning that housing construction or housing uh construction activity is still going to come down over the next several months, but it's going to come down a lot slower than it did in 24 when there was a, you know, a really aggressive decline in housing construction activity. So, it's coming back closer to an equilibrium, but we still have some some net negative in the pipeline going forward. So, you know, housing, employment, housing, uh, uh, residential home builders, their margins, those are still going to be under pressure. Um, that's a sector that is still probably in need of a little bit more monetary policy support. >> When you have negative forward pipeline, what does that imply for future prices? >> Presumably, that means changing in inventory. Yeah, go ahead. >> Yeah, so it's it it it can depend, right? Because this is it plays out in a sequence. So you can look at both angles of course where if you have you know less pipeline then there's eventually going to be less supply and that could cause prices to go up in the future. Um but really the the impact on prices uh through the lens that we look at it is through employment right so if if you have a big decline in let's say the housing construction pipeline and that causes a big decline in housing construction employment and then a decline in employment in all of the associated industries and that causes the ripple effects where the labor market broadly slows down the unemployment rate goes up then you're going to have a situation where home prices come down. So, we look at home prices really um both at uh from an employment standpoint as well as um a supply or a month supply level. Month supply in the in the single family home market is still um imbalanced in in the sense that uh there's a high month supply. So, month supply is about seven seven and a half balanced is about six. So when month supply is higher, that generally means prices are going to be softer. But you have to have this huge caveat when you're talking about home prices that that 7.5 month supply is a national average. That could be nine in some areas and two in other areas that you know average together to be to be seven, seven and a half or whatever the case may be. So we do have a really bifurcated market in terms of home prices. Uh most of the softness in home prices which we do see some softness in home prices are coming mostly through the sunb belt parts of Florida, Texas. Um but in the northeast and midwest that month supply is actually much lower than that national average and you still have some pretty high prices there. And this is entirely because there's really no building that goes on in the Northeast and the Midwest. all of the construction, that pipeline that we talked about, it's really all across the sunb belt of the of the country. >> Okay. Well, just today, uh, major news coming out of, uh, Congress here. We have a new bill that's been passed. Senate passed this major housing affordability bill by Warren and Tim Scott. Uh, the Senate passed a bill Thursday aimed at boosting the supply of housing and bringing down prices, making a rare bipartisan breakthrough on a major issue. Uh such a big bipartisan vote is increasingly unusual in Congress. The bill aims to tackle a major affordability issue for voters ahead of the midterm elections. Uh it's uncertain if it can pass the House as is and President Donald Trump still has to sign for it. Uh signal he's not interested in the package as he is passing separate voting legislation. Uh basically it aims to um this housing bill seeks to cut inspection days for the department of housing uh by uh and uh key to the uh bill is um preventing Wall Street from buying up single family homes. Have you had a chance to look into this and uh analyze or just think about how this may impact supply of housing? I haven't looked into this bill specifically, but of course, we've heard over the past several weeks and and and month or two, the uh banning institutional buyers of single family homes, it's not going to be a significant driver of what's going on in the housing market. That's not the main problem. Uh I'm actually uh generally opposed to anything that gets in the way of of free markets. Uh so that something like that would likely have unintended uh consequence. uh I don't know the specifics of the bill itself um but you know generally the problem that we have is uh a lot of our housing policy in the country has been has been designed uh around uh reducing supply but also stimulating demand. So when you have lower supply and stimulating demand of course you get prices that that that go up. Um, you know, I don't know any the details of this bill. doesn't sound like there's anything in there that's really going to dramatically increase the amount of supply. But we have to think about all of the provisions in real estate that are very pro-demand, including, you know, all the depreciation benefits, the 1031 benefits, the step up in basis benefits, uh the Federal Reserve owning, you know, close to $2 trillion of mortgages on their balance sheet, um you know, uh exemptions on capital gains when you sell a primary residence. uh you know and I'm not saying anything specific about these policies uh you know uh on an individual level but when you take them all together they are very very very favorable demandside policies for housing in our country and when you meet that with any level of supply restriction which does occur more on a local level specifically northeast and midwest uh midwest like I mentioned of course you're going to have prices that rise and those price rises are going to be very very sticky. So, uh we we have a really uh demandside stimulative bend in our housing policy and in certain uh you know local jurisdictions, we're not uh really uh increasing supply very much and I don't think this bill in particularly addresses either of those issues in a way that's going to materially move the needle. >> Looking ahead now, the Federal Reserve is meeting next week. Uh what do you expect the FOMC to do in light of recent price action with oil following the Iran um war uh among other factors that we talked about in the labor market? >> Sure. So they're definitely not going to change policy at the at the meeting uh next week. Um, but what I think is important is about a month ago, so the middle of February, the market was pricing in a certainty of two rate cuts this year with some probability of a third rate cut this year. So, the market was in between two and three rate cuts for 2026 about a month ago. Fast forward to today and the market is uh less than one rate cut. So, we've gone from let's say almost three to less than one. big shift in in the past month. Most of that, if not all of that, is a result of the uh spike in oil prices around the Iran war because the last payroll report we got certainly wouldn't have been supportive of tighter monetary policy. When we think about supply shocks or oil shocks as we're experiencing now, whenever you have a supply side shock, uh what that does is it increases price but it reduces growth. And this is just a simple aggregate demand aggregate supply model. So when you have a a a reduction in supply, you're going to get higher prices and you're going to get lower growth. That's gonna that's the net result of what we've seen so far as as we have the facts today. Uh the problem for the Federal Reserve is that the increase in price or the increase in inflation will show up faster than the reduction in growth based on the way that the data is reported. So if you have a huge spike in oil prices, that's going to show up in next month's CPI. But the impact to growth or the impact to employment may not show up for three, four, five months. So for the next couple of uh months or the next uh Federal Reserve meeting or two, you are going to see a higher inflation rate, but maybe not as much of a change in growth. And that's going to um that's why uh the interest rate market has really pushed out the uh expected rate cuts into the future because the inflation is going to show up faster than the than the drop in growth. Although both will occur. Now the problem for the Federal Reserve or the worst case scenario is sometimes what we see what we saw during the pandemic is when you have a supply side shock you have higher prices and lower growth like we mentioned and the Fed really has uh an ambiguous response to that. They don't really have a good case to raise rates or lower rates because they have a dual mandate of inflation and growth and the net result of that will be higher prices and lower growth. However, sometimes policy makers recognize that and they see the lower growth component of it and respond to that with demand side stimulus. And that's what we saw during the pandemic. We had a huge contraction in supply. So the initial reaction was higher prices, lower growth, dramatically lower growth, recessionary growth and they responded to that with huge demand side stimulus. So then you have less supply, more demand, and that results in higher prices, higher growth, and then the Fed has to tighten aggressively into that. Uh we don't have any facts that suggest that that's going to be the policy. It's certainly possible that that's the policy, but but you can envision a world where oil prices go up and politicians respond by doing, you know, tax moratoriums or sending out checks to deal with higher oil prices or whatever, you know, scenario we can make up. But as we stand today, all we have is an oil price shock or a supply shock. That's going to be higher price, lower growth. the Fed shouldn't really have a material tightening bend to that policy other than the inflation is going to show up in the data a little bit faster than the um than the negative growth and that ultimately could be a problem for them if they maintain a tighter policy because of that. >> Well, we have to remember that the Fed looks at core PCE which strips away food and energy. So, the oil price isn't even going to be reflected in the core PC. So the question has to be asked uh how extensive is the rise in oil going to be impacting the rest of the economy? In other words, the stuff that the Fed does look like core PCE including services, goods and other things, >> will they go up as an indirect result of the oil price going up? >> You're absolutely right. And um while while they focus on core PCE, it's difficult for them to ignore the headline numbers. And they actually made this mistake in 2008, in the middle of 2008, there was a huge increase in oil prices. And that caused headline CPI to rise into the 5% range. And again, even though it was headline, not core, the rise was so dramatic that you had a lot of Fed officials suggesting that maybe they should raise interest rates to combat the higher inflation. And you had a scenario in the middle of 2008 where the 2-year Treasury rate rose from 1% to 3% based on this uh change in language from the Federal Reserve, which was predominantly because of a headline rise in inflation. Of course, it went from 1% to 3% and then quickly to zero. Uh, but it is an uncomfortable spot for them if headline CPI is printing a 3, four, 5% number, even if it hasn't yet translated to core. But you're right that that translation will take several months as well. Uh, but it it does put a put them in an uncomfortable position and one that makes their uh the case for them to hold or cut interest rates much more difficult. Although that may uh be the right policy from a result of a supply sh side shock. >> All right. Well, let's finish off on your market outlook. Ultimately, how do you think capital markets are responding to recent events not just in the Middle East, but also the labor market and inflation uh developments that we discussed so far? >> Right. So where where we stand and what we've talked about in our client reports for the last several months is that because of the extremely high profit margins that we're seeing across the entire economy notwithstanding some of the cyclical pockets that are under some more pressure. Uh the economy is not immediately vulnerable to fall into recession. Uh it does have some of that buffer room. Now you can have a shock that overwhelms even the most resilient economy like the pandemic. If you lock everybody inside, it doesn't really matter what the initial conditions of the economy are. That shock is just so big it overpowers everything. But something like that aside, uh when you're walking into a shock, you want to understand what the initial conditions of the economy are. And where we are today is we do have some slowing momentum in some of the cyclical sectors, but we have these really high economywide profit margins. That puts the that puts the economy in a situation where uh there's there's some some slowing and there should be some accommodation from the Federal Reserve as a result of that. Uh but there's not a uh massive layoff cycle that's likely around the corner because of those high profit margins. And if you're not going to have a layoff cycle and a recessionary development that occurs in the next couple of quarters, uh then you know we would believe that the large cap indexes uh would remain fairly resilient even in the face of a shock like this. Um so we're not super pessimistic on large cap equity indexes uh unless there a recession uh develops which we don't see as the base case given those high profit margins. Of course, we'll see how this situation develops. We have no predictions about how the war is going to go. All we can say is that going into this um into this shock. We have a very uh you know minor slowdown going on through it's been a long slowdown in terms of the fact that it's been going on since 2023. So the duration of this slowdown in the cyclical sectors has been long and drawn out, but it's been shallow in terms of magnitude. and these really high economywide profit margins aren't going to uh lend itself to an immediate mass layoff cycle uh that would put equity markets at a real crash type of a risk. So, um we're not super super bearish on the the indexes. Obviously, the war there's going to be a lot of headlines. There's going to be a lot of volatility. Um but unless you have that big layoff cycle, equity indexes, the big large cap, you know, blue chips should be fairly resilient. >> I mentioned you have a YouTube channel. So tell us a little bit about where we can find your work and uh what we can expect from your work coming up. What are you working on now? And um maybe give us a teaser of your next report. >> Sure. So uh best places to find the work that we do are definitely YouTube. So if you're watching this on YouTube, just EPB research. We put out a lot of videos and uh you we try and do a good job with the animations to make things easy to follow along. Uh also on Substack, you know, we post very similar things that we do with these videos just in written form. Those are the two best places to learn more about the framework that we use. Um, and uh, all of those things will ultimately lead you to our website where we have some some client-f facing reports. Um, and really what we're focusing on over the next several months is trying to really explain and tie out the sequence of economic events because what we feel is the problem is when these shocks occur like a geopolitical event like this uh, everyone becomes, you know, an oil trader or a geopolitical expert. Uh and really what we should do is we should see how does this event uh transmit through the sequence of economic events the dominoes that always fall because those dominoes always fall in the same order. So what we really want to emphasize and what we're trying to do in our reports is is outline to uh to readers and viewers what that sequence looks like. What are those dominoes? What order do they normally fall in so that we can kind of uh follow that progression along the way. you know, the Fed raises interest rates, you don't go uh uh not go to a restaurant because of that. But if the Fed raises interest rates, that causes a slowdown in the housing sector and you lose your job as a construction worker, that unemployed construction worker may then pull back on some service related spending. Those are the things that we're trying to highlight through some of our public facing videos and work. And uh we hope that it's it's helpful. >> Yeah, that lag factor is important. All right, we'll follow up more uh next time. Eric, thank you so much. And yeah, as you can see, I've subscribed. Yours is one of the few channels on YouTube. Uh my official channel is actually subscribed to. So, everyone should check out EPB Research. Subscribe like I have. Thanks so much, Eric. We'll see you next time. >> Appreciate it. I appreciate the support, David. >> And thanks for watching. Don't forget to like and subscribe and use my code lin when you sign up to Koshi. Remember, new users when signing up using my code will get $10 deposited to your account when you trade $10. Link in the description or scan the QR code here.
Credit Market Meltdown, Hirings Collapse; Is 2008 Repeating? | Eric Basmajian
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people are missing about $5,000 of real income. Hadn't we stayed on that trend. So for a family of four, that's $20,000. When you have a supply side shock, you have higher prices and lower growth like we mentioned. And the Fed really has uh an ambiguous response to that. From from a very high level, tariffs are attacks. So, the higher the tariff level, uh, the the more tax basically you're pushing in the economy. >> A wave of private credit redemptions have been hitting Wall Street over the last couple weeks, spooking investors and markets alike. What is going on? Are we on the precipice of another financial crisis? Is this the beginning of a bigger credit crisis? And what's next for the labor market? Will we get more layoffs in 2026 than in 2025? What's next for wages? What's next for the housing markets? We'll talk about all this and much more with Eric Basmajian, founder of EPB Research. This video was sponsored by Koshi. It's a fully regulated platform that lets you trade on realworld events from economic data to political outcomes. Sign up and use my code lin link in the description down below or scan the QR code here. New users will get $10 deposited to your account when you trade $10. Traders can put money down on the favorite teams, events, elections, and more in all 50 states, including California and Texas. and over 140 countries. Eric, good to see you again. >> Good to see you, David. It's been a few months since we talked. Glad to be back. >> Yeah, you've been away uh for personal reasons and I'm happy that you're back. I'm happy you're good health. Uh we've missed you and we're glad that you're back online and uh helping us out with more information. Everybody should check out EP Research. He's put out some great content and also his YouTube channel. Great content there. Links down below. Eric, uh you've been talking about the housing market on your YouTube channel. We can touch on that. But first, let me just bring up some pieces of news that I mentioned in the introduction. So, a lot of big shops on Wall Street, Morgan Stanley, uh, Cliff Water as well, and JP Morgan are restricting redemptions at private credit funds. So Morgan Stanley uh seeing funds um a flurry of bad news following several credit issues in recent months has drawn fresh scrutiny to the roughly $2 trillion private credit market according to US News as investors questions the question the health of loan portfolios and the resilience of borrowers in a high interest rate environment. Morgan Stanley Private Credit said in a letter to investors that the North Haven Private Income Fund returned roughly $169 million or about 45.8% 8% of investors tender requests for the quarter. Cliffwaters $33 billion private credit fund redemptions reached 14%. Meanwhile, in the same week this week today, JP Morgan's uh marked down to restrict lending to private credit uh continues. So JP Morgan is marking down the value of certain loans to private credit players. Uh the move from the largest US lender extends a flurry of jitters across a roughly $2 trillion private credit market. earlier this week. Tell us about what you know of the situation so far and why there's been so many redemption requests. >> So, we have had quite a quite a string of these headlines on private credit the past couple of weeks, right? >> Yeah. Um if if you recall, we also had a pretty um a pretty long string of these uh similar headlines back in 2022 2023 more related to real estate funds when there was the uh huge increase in interest rates from the Federal Reserve uh in 2022 that caused uh a big slowdown in the real estate market specifically on the multif family and commercial side. and we saw a lot of uh gates and redemptions from a lot of real estate related uh uh funds as well. We're seeing something similar now. It appears that this is more related to the software space uh and and things of that nature. Where where all of this sort of comes together is is through the labor market. So whenever the labor market is relatively strong or uh or somewhat stable, you can get a flurry of these headlines and they don't generally spiral into systemic events. Uh but when the labor market starts to really deteriorate and people uh start to redeem uh money for uh because they need liquidity uh and reasons like that, that's when it becomes much more of a problem. So if we go back to 2022 2023, the economy was still adding uh a pretty significant amount of jobs. There was definitely weakness in certain pockets of the economy, but the economy was adding jobs and the unemployment rate while it was uh rising, it was rising really slowly and from a very low low level. We were in the 3% range on the unemployment rate. uh today we see uh a continued slowdown in the labor market and you know the way that we judge the labor market is primarily through the cyclical sectors construction and manufacturing first that that's what always leads the downturns and as of now we have about 120 130,000 job losses in those sectors. uh but that started back in 2023 2024. So it's been a very very slow uh decline in the labor market in those sectors and the unemployment rate uh is either creeping up extremely slowly or remaining relatively stable depending on the month that you look at. So we have some downward momentum in the labor market and we certainly have still some pockets of weakness in the interest rate credit sensitive sectors of the economy. But in my view we don't have um a deep enough or broad enough uh deterioration in the labor market where some of these headlines are likely to spiral uh into a more systemic type of an event. >> Well, can you just comment on the headline numbers? So last Friday, uh the jobs numbers came in. Non-farm payrolls fell by 92,000 for the month compared with the estimate for 50,000. Here's a chart compiled with CNBC showing the uh monthly job creation since 2022. And payroll numbers are very noisy as you know. They they change up and down from one reading to another. But can you just comment on the overall trend that you're seeing here in 2022 and what this means? >> Yeah, absolutely. So as I mentioned the trend in the labor market is certainly one of uh loss of momentum or or slowdown in the labor market and we can see that in the payroll numbers and again I specifically like to focus on the cyclical areas uh of the labor market construction manufacturing and certain subsectors within that like residential construction and we're seeing outright job losses in those sectors albeit the magnitude of those job losses is pretty small uh as I mentioned about 100 150,000 over uh a 2-year period. So, the monthly loss is is is at a trickle really. Uh on the flip side of those payroll numbers though is the unemployment rate and the unemployment rate uh takes into consideration obviously both the job gains and losses as well as the labor force. It's a ratio and that ratio that unemployment rate is not actually revised heavily. it's hardly revised at all where those non-farm payroll numbers are revised very significantly. So, while we're seeing a slowdown in the payroll numbers and the slowdown is concentrated in those cyclical sectors, that's definitely a warning sign and it's a sign that interest rates in the economy and monetary policy is restrictive uh to the interest rate sensitive sectors. We're not seeing a commensurate increase in the unemployment rate uh just yet uh which is not as alarming. Now the unemployment rate is uh at the second highest level of this cycle. I believe it printed about 4.44% in the last reading, but it's been in a really uh tight band for the past several months. And you would have probably expected the unemployment rate to rise more given the drop in payroll numbers that we've had. So some of this is because of a slowdown in labor force growth. So labor market is definitely weakening. The weakness is concentrated in those cyclical areas. That's definitely a warning sign. But the unemployment rate itself hasn't uh started to accelerate in that nonlinear way that's more characteristic of uh traditional recessionary uh conditions. Well, I think the average consumer just wants to know whether or not his real wage, his or her real wage, is going to improve or deteriorate throughout the year. In other words, changes in living standards. What are some leading indicators you look at to gauge whether or not our salaries and our wages are going to beat inflation this year? >> Yeah. So, on a year-to-year basis, it can be kind of difficult to judge that because, of course, the swings in oil prices will drive the headline inflation numbers, and that is what factors into some of these real wage or or real um uh income calculations. But on a broader sense and we did a video on our YouTube channel uh on this uh about you know where income has gone or where growth has gone in the United States and the longer term trend is not very optimistic for the average person's real income or real wage because ultimately real income is tied to productivity. Uh and in order to achieve sustained increases in productivity growth uh you need to have uh investment in the economy, private investment in structures, equipment, infrastructure, machinery and over the last several decades we've invested less and less into our uh private infrastructure and that's suppressed the level of productivity growth. So over the past um several decades from you know roughly the 1960s until 2007 we had real income that grew at about a 1.8% 8% pace for that entire period and people became accustomed to that pace roughly two% call it uh and when you project your future income forward you know you say okay I'm going to be roughly here in 10 or 12 years and that factors into people's decisions when making purchases like a home or family formation uh after the 2008 crisis and the compounding effect of this lower and lower investment that has dropped that real income growth has dropped dropped from a 1.8% trend to a 1.3% trend. And that doesn't sound like a lot, and that's not something that you can really feel on a year-to-year basis, but when you compound that over 10, 12, 15 years, the average person ends up 10 12 15% worse off than they would have been. And in that video, we calculate the delta. And on a per capita basis, people are missing about $5,000 of real income had we stayed on that trend. So for a family of four, that's $20,000. So a family of four, let's say, that was sitting there in 2005 and 2006 projecting out where they would be in the future has a deficiency of about $20,000 in real terms, which uh is is pretty significant. and that hole has been plugged with with debt for the most part. So, uh the long-term trajectory on real income is not uh super optimistic so long as we continue to maintain an environment of low private investment. And the reason we have low private investment is mostly because it's being crowded out by a larger and larger uh government sector. Jack Dorsey's block just announced 4,000 employees to be laid off in uh in February. That's roughly half his workforce, Eric. Um, and let's talk about the broader trend of tech layoffs that have been happening ever since last year. Uh, I'm going to pull up a prediction market for you to comment on. This is from Kowi. It's a prediction market based in the US. And it says here, more tech layoffs in 2026 than in 2025. Traders are predicting 74% chance, 73% chance. Now, that there's going to be more layoffs this year than last year. Is this an AIdriven narrative as more tech companies trim down their workforce in favor of AI or is this a symptom of the broader labor market slowdown even outside tech as well? >> Yeah, I think I think it's twofold. So there's certainly you know some AI component to this but we also have to remember that coming out of the pandemic the COVID uh boom that we had there was a huge increase in hiring particularly through this tech sector. So there was certainly some overhiring that happened in the tech sector. So some of these declines that we're seeing are a correction of the overhiring. Now companies may blame that on the AI or efficiencies but you know I think uh I think Jack Dorsey's company uh my numbers may be slightly wrong but I think they tripled or even quadrupled their headcount from you know the before the uh or right around when the pandemic started to the peak and then they've cut some uh employees now but I still believe that they have a higher headcount today than they did at the start of the pandemic. you know, my numbers may be slightly off, but there's definitely a correction in overhiring that's happening. But I also think that the uh the AI movement uh has been concentrated and the adoption has certainly occurred probably more um uh quicker in some of these tech sectors. uh but when we piece this together for the broader economy and I always try and come back to the sequence of uh the way that the business cycle plays out uh the tech sector uh while they're high-paying jobs they're generally not the sector that leads economic downturns or contributes significantly to economic downturns. generally high-skilled employees and they have a higher propensity to be taken up in a new job if they've been laid off. Secondly, since it's not an interest rate sensitive sector for the most part, the job losses there tend to be more idiosyncratic. Whereas when you see the job losses coming through construction and manufacturing, those are directly tied to change in monetary policy. And those are the job losses that have more of a tendency to ignite a self-reinforcing cycle. So I'm not as concerned in a business cycle standpoint from uh increased layoffs or job losses in the tech sector as I would be if I saw uh a more significant or an accelerating pace of job losses in the more cyclical areas of of the labor market. So maybe we're not gaining a bunch of jobs, but according to the most recent reports, uh we're not losing a lot of jobs either. So this is from uh Reuters. The number of Americans filing new applications for unemployment benefits fell last week, suggesting labor market conditions remained stable even after the economy shed jobs in February. For now, the low level of layoffs evident in the report from the BLS on Thursday should give the Federal Reserve from room to keep interest rates unchanged for some time according to the author. So uh this is the uh we're talking about the initial claims. Initial claims for state unemployment benefits slipped 1,000 to 213,000. So, how do you rectif reconcile uh I guess low number of initial claims to low payroll growth? I it just seems like, you know, yes, we're not gaining jobs, but not a lot of people getting laid off either. Is that is that accurate to say? And there's just equilibrium in the labor market. >> The the framing of that is absolutely correct. So, the term that many people are using is this no hire, no fire economy. Um, so what we're seeing is a very very low level of hiring. And the reason we're seeing a low level of hiring is because the Federal Reserve has raised interest rates and the current level of monetary policy is fairly restrictive for those interest rate and credit sensitive parts of the economy. And we know this because if you look at something like mortgage rates, mortgage rates are compressing or restricting the volume of transactions in the housing sector. We have a very low level of existing home sales. We have a fairly low level of new home sales. So the current level of monetary policy is restrictive for those interest rate and credit sensitive sectors. So those sectors aren't doing a lot of hiring and those are the sectors that really caused the big swings or amplitudes in the labor market. On the flip side, the economy has and this is a artifact of the pandemic and a lot of the stimulus that we pushed through the corporate sector as a whole uh that may be skewed by some of the bigger companies but if you take corporate profit margins they're at the highest level uh basically in history. Now, some sectors like the residential sector are seeing compressing margins, but as a whole, corporate profit margins are at the highest level we've ever seen going back many decades. >> So, if corporations have very high profit margins, and they're experiencing a slowdown in business conditions, they're not as inclined or they're not as under as much pressure to lay off employees in order to preserve that profit margin. So they have more of a buffer. They can sort of absorb more of a decline in profit margins before they're forced to do layoffs. Um so in previous economic cycles, let's say if profit margins in the corporate sector were 8% and they started to fall, you don't have a lot of room before those profit margins get really close to zero and you have to do a lot of layoffs to sort of preserve some level of profit margin. Today in the corporate sector across the whole economy we're up at 16%. So if corporations saw a 200, 300, 400 basis point drop in margin or a compression in margin. Uh that's not that's concerning to them. They may stop hiring like we've seen, but they don't have that gun to their head to fire large amounts of people to protect uh profit margins that are cascading towards zero. And that's the dynamic that we're in where these companies where they have these really insulated profit margins. The profit margins are starting to come down because of this slowdown we're experiencing. And what they're doing is they're just saying we're not going to hire people uh but we're still not under a significant amount of pressure to fire people. So that's why we're seeing uh this dynamic play out. And the way it shapes shapes out in the data is we see a low level of initial jobless claims because that would be more capturing recent firings. Uh and we just see a very slow pace or a flat pace of payroll gains because there's just not a lot of hiring going on. So it actually does make perfect sense when you square all the data together. the the the question going forward will be uh do profit margins continue to compress and do they compress enough to where companies have to begin laying people off and perhaps some of these geopolitical tensions with the increase in oil prices may add additional pre pressure to those profit margins that could accelerate some of the things that are going on. But in an environment with very high profit margins, these companies have been able to maintain this low higher low fire environment for really the last 2 years or so. One sector that really isn't doing well is the auto sector. I'll just read you a few stats from some earnings reports that came out recently. BMW full year 2025 pre-tax earnings fell uh by 5% to 9.9%. Oh, that's sorry. Guidance has lowered further from 5 to 10%. pre-tax earnings fell 10 billion euros. Toyota net income fell 25% in the first 9 months of the fiscal year. Uh Ford um missed earnings. The uh fullear adjusted EBID was 6.8 billion with an eBay margin of just 3.6%. Um they've adjusted guidance downwards. Uh General Motors, they've lost billions of dollars in their EV strategy. Now they're changing course. Atlanta, same story. Um, Porsche just released uh earnings down, I think something like 90%. Uh, same thing with Mercedes. And a lot of these companies that are European have manufacturing plants in the US, but they're still talking about how tariffs are hurting their margins and their sales. Now, I'm just citing one industry to illustrate your point. I wonder if this is also a function of consumer strength not being there to absorb higher costs because these automakers are plainly saying they're going to start passing on costs to consumers this year and their sales might be a reflection of that. What do you think's going on here? Yes. So, I'm glad you brought that up. So uh we we look at profit margins um for the whole economy and then we also break down profit margins in what we believe are the two most important sectors which I continue to reiterate are the cyclical areas of the economy construction and manufacturing. uh in uh in several videos that we've done on YouTube as well as I believe the pinned article on my Substack uh we try and create these flowcharts of the economy to show um the cyclical areas and and where the most uh leading and vulnerable sectors are. Um so when you look at the economy, construction and manufacturing are the two most cyclical. But within those two sectors and let's focus on manufacturing for this example, you have durable goods manufacturing and non-durable goods manufacturing. Non-durable goods would be things like food, uh beverages. Uh that's not as cyclical. There you go. That's great. that that's not as cyclical as your durable goods manufacturing. Your durable goods manufacturing are your machinery uh and of course your autos. So autos really do fall into one of the most cyclical areas of the economy. And uh when you look at profit margins across these sectors, autos have the lowest profit margin of all the sectors that we can look at. So you're seeing job losses in auto manufacturing. You're seeing a slowdown in business equipment investment, which is one of the spokes on the bottom of that chart there. Business equipment investment, one of the subcategories of that would be transportation equipment or the auto sector. So it does make perfect sense that that would be one of your canaries in the coal mine or one of your leading sectors that would experience the slowdown first because it's interest rate sensitive on both ends. both from the producer side as well as the consumer side. And you make the point uh uh very well that as consumers begin to get squeezed on this real income, uh they're not going to be able to absorb the price increases that these companies are going to try and pass through. So, if they try and pass through these price increases, you're either going to see a drop in sales, which we're starting to see, or if the companies try and eat it, a further compression in margins. And the problem for the auto sector more so than any other sector in the economy is they don't have any buffer room to absorb that profit margin. They're really close to zero already on their profit margins. So that's why job losses are beginning uh in motor vehicle manufacturing which is the category uh and that is probably going to continue. So that is a sector that is of concern in the economy. If let's say tariffs were dropped this year and the Supreme Court ruled against Trump's tariffs earlier this year as you know uh Trump is still maintaining that he's going to have some tariffs but we we know that the Supreme Court ruled against them. What happens if we have lowered tariffs throughout the year? Uh are we going to get an improvement in margins or do you expect no change? >> So um a drop in margins would be a positive thing for the economy. Now, uh I think we Yeah, we we talked on the show several months. >> Uh yeah, a drop in a drop in tariffs would be a positive for the economy. I think we talked when these tariffs were originally being floated. There are reasons for why you may want to implement tariffs and I don't want to go into all of those reasons, national security and etc. But from from a very high level, tariffs are a tax. So the higher the tariff level uh the the more tax basically you're pushing in the economy whether that ends up being absorbed by companies or consumers it doesn't really matter that the level of tax in the economy is going up. So if if tariffs are maintained or increase that would be a negative for the economy. If we drop tariffs uh that would be a positive thing for for the economy. Um now, uh it may increase the deficit because we've had some some increase in revenue from from some of these tariffs, but that's some of a separate discussion. But the bottom line is these tariffs are not helpful to the economy from a standpoint of economic growth. Uh so if we were to remove tariffs, that would be a net benefit to to the economy. Uh increasing tariffs would be would be a net negative. >> Now, let's talk about housing a little bit. You've also covered this on your own channel. Uh, can we just give an update here? I want to pull up a text or a tweet rather that you made recently. There's still negative forward pipeline for single family and multifamily residential construction, but far less so than in 2024, 2025. What are we looking at right now, Eric? You made this tweet uh just today, earlier today. >> Sure. So when when we're looking at uh housing and and a big focus of mine when we talk about housing is really housing construction as compared to housing prices. Of course we cover h uh home prices and and and uh the implications of that. But the real uh focus is housing construction because that's really the engine of the economy. That's really one of the biggest swing factors. So this chart here is is really a take on housing construction. So what we're looking at is uh the level of housing starts minus the level of housing completions. So if you're starting less than you're completing, then the pipeline is is is shrinking. If you're starting more than you're completing, you're building a backlog that's going to have to be uh constructed. So uh if you look at the uh the the chart on the right is multif family. It's a little bit more of a clear picture because the swings are a little bit larger. You can see that in 2021 and 2022 starts were vastly exceeding um completions which meant that we were building a huge backlog in multif family construction which set off this really big boom in housing construction, housing employment and that's what caused a lot of the vibrance in the economy in 21 and early 22 as well as a lot of the inflation pressure. Uh then that dynamic started to flip where interest rates went up. So starts dropped, but we were com completing all of the housing that was under construction, those apartments that were under construction. And that delta, that imbalance dropped to -300 orgative -400,000 units. And that set off a huge decline in the pipeline of housing construction. And that's what's caused this big downturn in the housing part of the economy. It's largely why the Federal Reserve has had to cut interest rates. Uh it is a big reason why we've seen some of the pulse of inflation come out certainly in this part of the economy. Uh but now as the Fed has cut interest rates and things have uh again changed, we're seeing both on the single family and multif family, those are kind of going back to the zero level. When you take the two of them and put put them together, which I've done in uh some of my client reports and in some different charts, we're still at a slight net negative. So, we still have a little bit of a negative pipeline going forward, meaning that housing construction or housing uh construction activity is still going to come down over the next several months, but it's going to come down a lot slower than it did in 24 when there was a, you know, a really aggressive decline in housing construction activity. So, it's coming back closer to an equilibrium, but we still have some some net negative in the pipeline going forward. So, you know, housing, employment, housing, uh, uh, residential home builders, their margins, those are still going to be under pressure. Um, that's a sector that is still probably in need of a little bit more monetary policy support. >> When you have negative forward pipeline, what does that imply for future prices? >> Presumably, that means changing in inventory. Yeah, go ahead. >> Yeah, so it's it it it can depend, right? Because this is it plays out in a sequence. So you can look at both angles of course where if you have you know less pipeline then there's eventually going to be less supply and that could cause prices to go up in the future. Um but really the the impact on prices uh through the lens that we look at it is through employment right so if if you have a big decline in let's say the housing construction pipeline and that causes a big decline in housing construction employment and then a decline in employment in all of the associated industries and that causes the ripple effects where the labor market broadly slows down the unemployment rate goes up then you're going to have a situation where home prices come down. So, we look at home prices really um both at uh from an employment standpoint as well as um a supply or a month supply level. Month supply in the in the single family home market is still um imbalanced in in the sense that uh there's a high month supply. So, month supply is about seven seven and a half balanced is about six. So when month supply is higher, that generally means prices are going to be softer. But you have to have this huge caveat when you're talking about home prices that that 7.5 month supply is a national average. That could be nine in some areas and two in other areas that you know average together to be to be seven, seven and a half or whatever the case may be. So we do have a really bifurcated market in terms of home prices. Uh most of the softness in home prices which we do see some softness in home prices are coming mostly through the sunb belt parts of Florida, Texas. Um but in the northeast and midwest that month supply is actually much lower than that national average and you still have some pretty high prices there. And this is entirely because there's really no building that goes on in the Northeast and the Midwest. all of the construction, that pipeline that we talked about, it's really all across the sunb belt of the of the country. >> Okay. Well, just today, uh, major news coming out of, uh, Congress here. We have a new bill that's been passed. Senate passed this major housing affordability bill by Warren and Tim Scott. Uh, the Senate passed a bill Thursday aimed at boosting the supply of housing and bringing down prices, making a rare bipartisan breakthrough on a major issue. Uh such a big bipartisan vote is increasingly unusual in Congress. The bill aims to tackle a major affordability issue for voters ahead of the midterm elections. Uh it's uncertain if it can pass the House as is and President Donald Trump still has to sign for it. Uh signal he's not interested in the package as he is passing separate voting legislation. Uh basically it aims to um this housing bill seeks to cut inspection days for the department of housing uh by uh and uh key to the uh bill is um preventing Wall Street from buying up single family homes. Have you had a chance to look into this and uh analyze or just think about how this may impact supply of housing? I haven't looked into this bill specifically, but of course, we've heard over the past several weeks and and and month or two, the uh banning institutional buyers of single family homes, it's not going to be a significant driver of what's going on in the housing market. That's not the main problem. Uh I'm actually uh generally opposed to anything that gets in the way of of free markets. Uh so that something like that would likely have unintended uh consequence. uh I don't know the specifics of the bill itself um but you know generally the problem that we have is uh a lot of our housing policy in the country has been has been designed uh around uh reducing supply but also stimulating demand. So when you have lower supply and stimulating demand of course you get prices that that that go up. Um, you know, I don't know any the details of this bill. doesn't sound like there's anything in there that's really going to dramatically increase the amount of supply. But we have to think about all of the provisions in real estate that are very pro-demand, including, you know, all the depreciation benefits, the 1031 benefits, the step up in basis benefits, uh the Federal Reserve owning, you know, close to $2 trillion of mortgages on their balance sheet, um you know, uh exemptions on capital gains when you sell a primary residence. uh you know and I'm not saying anything specific about these policies uh you know uh on an individual level but when you take them all together they are very very very favorable demandside policies for housing in our country and when you meet that with any level of supply restriction which does occur more on a local level specifically northeast and midwest uh midwest like I mentioned of course you're going to have prices that rise and those price rises are going to be very very sticky. So, uh we we have a really uh demandside stimulative bend in our housing policy and in certain uh you know local jurisdictions, we're not uh really uh increasing supply very much and I don't think this bill in particularly addresses either of those issues in a way that's going to materially move the needle. >> Looking ahead now, the Federal Reserve is meeting next week. Uh what do you expect the FOMC to do in light of recent price action with oil following the Iran um war uh among other factors that we talked about in the labor market? >> Sure. So they're definitely not going to change policy at the at the meeting uh next week. Um, but what I think is important is about a month ago, so the middle of February, the market was pricing in a certainty of two rate cuts this year with some probability of a third rate cut this year. So, the market was in between two and three rate cuts for 2026 about a month ago. Fast forward to today and the market is uh less than one rate cut. So, we've gone from let's say almost three to less than one. big shift in in the past month. Most of that, if not all of that, is a result of the uh spike in oil prices around the Iran war because the last payroll report we got certainly wouldn't have been supportive of tighter monetary policy. When we think about supply shocks or oil shocks as we're experiencing now, whenever you have a supply side shock, uh what that does is it increases price but it reduces growth. And this is just a simple aggregate demand aggregate supply model. So when you have a a a reduction in supply, you're going to get higher prices and you're going to get lower growth. That's gonna that's the net result of what we've seen so far as as we have the facts today. Uh the problem for the Federal Reserve is that the increase in price or the increase in inflation will show up faster than the reduction in growth based on the way that the data is reported. So if you have a huge spike in oil prices, that's going to show up in next month's CPI. But the impact to growth or the impact to employment may not show up for three, four, five months. So for the next couple of uh months or the next uh Federal Reserve meeting or two, you are going to see a higher inflation rate, but maybe not as much of a change in growth. And that's going to um that's why uh the interest rate market has really pushed out the uh expected rate cuts into the future because the inflation is going to show up faster than the than the drop in growth. Although both will occur. Now the problem for the Federal Reserve or the worst case scenario is sometimes what we see what we saw during the pandemic is when you have a supply side shock you have higher prices and lower growth like we mentioned and the Fed really has uh an ambiguous response to that. They don't really have a good case to raise rates or lower rates because they have a dual mandate of inflation and growth and the net result of that will be higher prices and lower growth. However, sometimes policy makers recognize that and they see the lower growth component of it and respond to that with demand side stimulus. And that's what we saw during the pandemic. We had a huge contraction in supply. So the initial reaction was higher prices, lower growth, dramatically lower growth, recessionary growth and they responded to that with huge demand side stimulus. So then you have less supply, more demand, and that results in higher prices, higher growth, and then the Fed has to tighten aggressively into that. Uh we don't have any facts that suggest that that's going to be the policy. It's certainly possible that that's the policy, but but you can envision a world where oil prices go up and politicians respond by doing, you know, tax moratoriums or sending out checks to deal with higher oil prices or whatever, you know, scenario we can make up. But as we stand today, all we have is an oil price shock or a supply shock. That's going to be higher price, lower growth. the Fed shouldn't really have a material tightening bend to that policy other than the inflation is going to show up in the data a little bit faster than the um than the negative growth and that ultimately could be a problem for them if they maintain a tighter policy because of that. >> Well, we have to remember that the Fed looks at core PCE which strips away food and energy. So, the oil price isn't even going to be reflected in the core PC. So the question has to be asked uh how extensive is the rise in oil going to be impacting the rest of the economy? In other words, the stuff that the Fed does look like core PCE including services, goods and other things, >> will they go up as an indirect result of the oil price going up? >> You're absolutely right. And um while while they focus on core PCE, it's difficult for them to ignore the headline numbers. And they actually made this mistake in 2008, in the middle of 2008, there was a huge increase in oil prices. And that caused headline CPI to rise into the 5% range. And again, even though it was headline, not core, the rise was so dramatic that you had a lot of Fed officials suggesting that maybe they should raise interest rates to combat the higher inflation. And you had a scenario in the middle of 2008 where the 2-year Treasury rate rose from 1% to 3% based on this uh change in language from the Federal Reserve, which was predominantly because of a headline rise in inflation. Of course, it went from 1% to 3% and then quickly to zero. Uh, but it is an uncomfortable spot for them if headline CPI is printing a 3, four, 5% number, even if it hasn't yet translated to core. But you're right that that translation will take several months as well. Uh, but it it does put a put them in an uncomfortable position and one that makes their uh the case for them to hold or cut interest rates much more difficult. Although that may uh be the right policy from a result of a supply sh side shock. >> All right. Well, let's finish off on your market outlook. Ultimately, how do you think capital markets are responding to recent events not just in the Middle East, but also the labor market and inflation uh developments that we discussed so far? >> Right. So where where we stand and what we've talked about in our client reports for the last several months is that because of the extremely high profit margins that we're seeing across the entire economy notwithstanding some of the cyclical pockets that are under some more pressure. Uh the economy is not immediately vulnerable to fall into recession. Uh it does have some of that buffer room. Now you can have a shock that overwhelms even the most resilient economy like the pandemic. If you lock everybody inside, it doesn't really matter what the initial conditions of the economy are. That shock is just so big it overpowers everything. But something like that aside, uh when you're walking into a shock, you want to understand what the initial conditions of the economy are. And where we are today is we do have some slowing momentum in some of the cyclical sectors, but we have these really high economywide profit margins. That puts the that puts the economy in a situation where uh there's there's some some slowing and there should be some accommodation from the Federal Reserve as a result of that. Uh but there's not a uh massive layoff cycle that's likely around the corner because of those high profit margins. And if you're not going to have a layoff cycle and a recessionary development that occurs in the next couple of quarters, uh then you know we would believe that the large cap indexes uh would remain fairly resilient even in the face of a shock like this. Um so we're not super pessimistic on large cap equity indexes uh unless there a recession uh develops which we don't see as the base case given those high profit margins. Of course, we'll see how this situation develops. We have no predictions about how the war is going to go. All we can say is that going into this um into this shock. We have a very uh you know minor slowdown going on through it's been a long slowdown in terms of the fact that it's been going on since 2023. So the duration of this slowdown in the cyclical sectors has been long and drawn out, but it's been shallow in terms of magnitude. and these really high economywide profit margins aren't going to uh lend itself to an immediate mass layoff cycle uh that would put equity markets at a real crash type of a risk. So, um we're not super super bearish on the the indexes. Obviously, the war there's going to be a lot of headlines. There's going to be a lot of volatility. Um but unless you have that big layoff cycle, equity indexes, the big large cap, you know, blue chips should be fairly resilient. >> I mentioned you have a YouTube channel. So tell us a little bit about where we can find your work and uh what we can expect from your work coming up. What are you working on now? And um maybe give us a teaser of your next report. >> Sure. So uh best places to find the work that we do are definitely YouTube. So if you're watching this on YouTube, just EPB research. We put out a lot of videos and uh you we try and do a good job with the animations to make things easy to follow along. Uh also on Substack, you know, we post very similar things that we do with these videos just in written form. Those are the two best places to learn more about the framework that we use. Um, and uh, all of those things will ultimately lead you to our website where we have some some client-f facing reports. Um, and really what we're focusing on over the next several months is trying to really explain and tie out the sequence of economic events because what we feel is the problem is when these shocks occur like a geopolitical event like this uh, everyone becomes, you know, an oil trader or a geopolitical expert. Uh and really what we should do is we should see how does this event uh transmit through the sequence of economic events the dominoes that always fall because those dominoes always fall in the same order. So what we really want to emphasize and what we're trying to do in our reports is is outline to uh to readers and viewers what that sequence looks like. What are those dominoes? What order do they normally fall in so that we can kind of uh follow that progression along the way. you know, the Fed raises interest rates, you don't go uh uh not go to a restaurant because of that. But if the Fed raises interest rates, that causes a slowdown in the housing sector and you lose your job as a construction worker, that unemployed construction worker may then pull back on some service related spending. Those are the things that we're trying to highlight through some of our public facing videos and work. And uh we hope that it's it's helpful. >> Yeah, that lag factor is important. All right, we'll follow up more uh next time. Eric, thank you so much. And yeah, as you can see, I've subscribed. Yours is one of the few channels on YouTube. Uh my official channel is actually subscribed to. So, everyone should check out EPB Research. Subscribe like I have. Thanks so much, Eric. We'll see you next time. >> Appreciate it. I appreciate the support, David. >> And thanks for watching. Don't forget to like and subscribe and use my code lin when you sign up to Koshi. Remember, new users when signing up using my code will get $10 deposited to your account when you trade $10. Link in the description or scan the QR code here.