Mortgages, diesel and the US midterms

0:00Rob Armstrong: Never bet against the mighty American consumer. Those boys and girls and their wallets can take the heat in a way that ordinary mortals can only dream of. But it looks like some of the strain is starting to really show. Here we are, finance nerds, wondering when the wilting bond market will drag down stocks. And actually, it's imposing pain elsewhere on mortgage rates for American families. And Donald Trump, for it is he, is clearly spooked by the rise and rise in the cost of diesel. So spooked, in fact, that he says he's done a deal on the stuff with Russia. Let's see what comes of that. Today on the show, are we getting close to crunch time for the rock-solid American economy and the stock market, for that matter, right before congressional elections?

0:50Rob Armstrong: This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist at FTHQ in London, and I'm joined down the line by a prime cut of chest-thumping American optimism, the big man, triathlete Rob Armstrong.

1:09Katie Martin: Here I am thumping my chest. Let's see if the mic gets this.

1:12Rob Armstrong: I heard it. Yeah. That's heroic.

1:16Katie Martin: Me big ape.

1:18Rob Armstrong: now rob people keep saying that the u.s economy would be dead without all the ai spending and i think we should pause for just a moment to say that's not exactly bullshit but it's like bullshit ish isn't it it's bullshit adjacent yes uh the simple fact is that the american economy

1:42Katie Martin: is in expansion mode. And the number of parts of the American economy that are in expansion mode is growing. So if you do a diffusion analysis, and I just like saying the word diffusion analysis, because it's something that smart people say, you know, of profit growth or unemployment growth across different sectors in the economy, both of those are growing.

2:08Rob Armstrong: So if anything,

2:09Katie Martin: rather than narrowing just around the technology sector and the AI sector, the economy is broadening. Economic growth is broadening. So that is a very important thing. That's kind of point number one. Point number two is that if you try to measure the direct impact of AI investments and activity on the economy, something which turns out to be rather hard to do because it doesn't cut neatly across the things the government measures, if you know what I mean. It's a bit squishy and amorphous. It's not that big. So let me give you an example of this. There's a lot of talk about how many data centers we are building.

2:56Katie Martin: Well, the Census Bureau has a nice monthly report on construction spending. and it tells us that on an annualized rate, there's$85 billion of AI construction spending going on, which sounds like a very big number and indeed is a very big number,$85 billion. I don't have$85 billion, neither do you.

3:22Rob Armstrong: If we did, we wouldn't be doing this podcast, Rob, let's face it.

3:26Katie Martin: If you compare that to US GDP, which is$31 trillion?

3:34Rob Armstrong: Yeah.

3:35Katie Martin: $32 trillion. Sorry, I just looked it up. It's actually not that big a contributor either to the absolute number or to growth even though data center construction is growing at 70 % a year or something.

3:46Rob Armstrong: Yeah, but AI, it is an important contributor to growth, isn't it? It's just not the whole economy in and of itself.

3:54Katie Martin: Correct. So the Fed, our central bank, there's a Fed paper that has an estimate that basically says, if you look at all the investment in software and electronic equipment, and then you do the very important thing of netting out the impact of imports. Because remember, you build the data center, the main thing you're spending money on is all the chips that go in the data center. And those come from Taiwan. So you have those, putting those in is not a net plus to U.S. GDP. So you do that and you get maybe, I don't know, half a percent of GDP growth in the last year, which makes it a quarter of all U.S.

4:37Rob Armstrong: GDP growth in the last year coming from AI. That's not nothing. Not meaningless. It's not nothing.

4:42Katie Martin: It's not nothing, but it's not absolutely huge.

4:44Rob Armstrong: Yeah.

4:44Katie Martin: What is huge is people like me, Americans, buying things.

4:49Rob Armstrong: Yes. So the thing with Americans is...

4:52Katie Martin: That's basically all the rest of GDP growth.

4:55Rob Armstrong: First of all, you buy things, but also you buy loads of stocks. So that is where this AI investment thing and this incredible performance in AI-related stocks, that's where this connects with the American consumer in that way, right? Is that if these stocks were to take a big hit, that's a lot of American wealth that would get vaporized. And because Americans own stocks in a way that like normal people like Brits and Europeans don't, that would really hurt. And I don't know, I find myself feeling like, you know, can the last person to predict that there is a bubble in AI stocks and it's going to burst?

5:35Rob Armstrong: Can that person please turn the lights off? Like pretty much everybody is saying this is ridiculous at this point.

5:43Katie Martin: Well, Katie, let's start with the bubble and then we'll get to the popping. OK. So starting with the bubble, although stocks have sort of been going sideways for six months, we've had a mad rally before that. And American wealth is very high. And the general theory goes when you have a nice plump retirement account sitting there, you will spend more freely. There are tricky economic issues about measuring this. And here comes another 10 cent word, endogeneity.

6:16Rob Armstrong: Oh, my God. I said endogeneity.

6:20Katie Martin: On the radio. That basically means that the explanation is a tiny bit circular in this case. So, like, part of the reason stocks are up is because Americans spend so much money. They spend so much money because stocks are up and around and around you go. That's an issue. But let me just say in my own case, there is a wealth effect. These days, when I open up my retirement account and have a look, I think, man, I feel all right.

6:47Rob Armstrong: Yeah.

6:48Katie Martin: You know, things are going okay. And I like go out to dinner or whatever, feeling like I can afford to go out to dinner.

6:55Rob Armstrong: So FT bosses, if you're listening to that, that means the next pay rise should come to me and not to me. He obviously doesn't need the money. I do.

7:06Katie Martin: We can talk about the difference between U.S. and U.K. retirement schemes and why the U.S. way of doing it is better later. However, the point is there is a wealth effect. So you have to ask if, as everyone and his Claude assistant is predicting, the AI bubble comes grinding to a halt and we have a big chunk taken out of everyone's wealth. Does the consumer, not just the tech world, slow down very quickly and we get a recession or something very much like a recession?

7:40Rob Armstrong: and Rob stops taking Mrs Armstrong out for dinner. I will just say that the latest warning about the idea that AI is like a huge bubble and it's going to pop came from somebody who runs a semiconductor company. So talk about skin in the game. So the chief executive of Broadcom, which makes chips and stuff like that, he said at a conference, a lot of investors have no clue what they're investing in. Tick. This is correct. And then he said, he was talking about the whole like chips investment splurge. And he said investors set very extreme expectations only to find out that it's almost like they are in a casino.

8:24Rob Armstrong: Whoops.

8:25Katie Martin: What I like about this story is imagining somewhere on the side of that stage is that CEO's PR guy, you know, and the look on the communication director's face as the CEO compares investing in his industry to a casino.

8:43Rob Armstrong: Yeah. Also, what I like about it is that he made this casino comment and then the things that fell were chip stocks. So people were cashing in their chips, boys and girls.

8:53Katie Martin: Yes, nice one.

8:54Rob Armstrong: Yeah, baby. So, yeah, a lot of chip stocks had a bad day globally today. Korea, which is about as chippy as you can get as a stock market, nationally took a pretty big hit. I don't disagree with the guy. There is a certain kind of froth and frenzy around this thing. It does feel a bit like a casino sometimes. So yeah, if this thing goes belly up, then surely American consumers will notice. So look, there's that risk that we kind of know about. But things that are not just risks, they're like actual things that are actually happening right now are those two that I mentioned. They are mortgages and they are diesel.

9:29Rob Armstrong: So American mortgages are like really weird. They don't work like, for example, British mortgages. Rob, tell me when I'm wrong here. You lock them in for 30 years at a time?

9:39Katie Martin: Yes. Yes. Weird. We lock them in for 30 years at a time, which means people like me who got mortgages when mortgages were cheap six or seven years ago are doing very well. But whoever wants to buy a house now is doubly out of luck. Not only do they have to pay a mortgage rate, which for an average 30-year fix is now running at like 7.4%.

10:05Rob Armstrong: Yikes.

10:07Katie Martin: They won't have many houses to choose from because lucky jerks like me are not leaving our 2.5 % mortgage until we are carried out feet first. Yes. So the amount of inventory around to buy, the liquidity of the market and the size of the market is just terrible.

10:25Rob Armstrong: And am I also right in thinking that American mortgages are not portable, right? So if you decide to move, you have to start all over again and get a whole new mortgage at whatever the new rate is. Is that right? Correct.

10:35Katie Martin: That's why I'm never leaving the house because I can't take the mortgage with me, right?

10:40Rob Armstrong: So, and that mortgage rate is predominantly set really by U.S. government bonds, which faithful listeners to the Unhedge podcast will know have been put through a mincing machine over the past few months, which is why your mortgage rate is now about 7.4%. Back in 2021, it was about a little over two and a half. Even a year ago, it was about six and a half. Rob, do you know what that is? Yeah. That is people.

11:10Katie Martin: Charts on the radio.

11:12Rob Armstrong: Charts on the radio. Now, we sang a little song about charts on the radio a couple of podcasts ago, and then listeners clearly thought that Rob's singing was so bad that they made actual jingles and sent them in. And I think someone is going to press a button and play that jingle right now.

11:34Katie Martin: Can we say who sent that in?

11:36Rob Armstrong: We are much indebted to a listener called Roderick McLeod who sent that through. Roderick, you're not on your own. Other people sent stuff through, but we decided to use yours today.

11:46Katie Martin: It had less obscenities than the other ones. It did have slightly fewer obscenities.

11:50Rob Armstrong: Let's hear it again. Charts on the radio.

11:55Katie Martin: Okay, what's interesting about the U.S. 30-year mortgage chart, which we are now discussing on the radio, is that it absolutely exploded between 2022 and 2023 when we had that first big spike in rates. And then it sort of flatlined and everybody calmed down. Right. And for much of last year, rates were coming down. And with this, as with so many economic indicators, what matters is not the level so much as the rate of change. Psychologically, it's about whether things are getting better or worse.

12:32Rob Armstrong: Yeah.

12:33Katie Martin: But then we had this latest bout of inflation, which had something to do with economic growth, something to do with the war, whatever. And the 30-year mortgage rate has gone from six-ish to seven and a half-ish.

12:45Rob Armstrong: Yeah.

12:46Katie Martin: Just in time for midterm elections.

12:49Rob Armstrong: And a little segue here, shuffling my paper. Speaking of like psychologically important numbers, the cost of diesel has gone kind of haywire, hasn't it, over there? And again, like Donald Trump is saying this is all Ukraine's fault because it's bombing Russian oil refineries. But like, I don't know, Iran seems to have something to do with it.

13:11Katie Martin: Something to do with the refinery capacity is the crucial thing. So just as it becomes very expensive for you to buy a house, if you are a farmer or a trucker, for example, or any kind of professional driver who has his own business, a logistics company, the price of diesel is up very sharply indeed. And this puts you in an extremely foul mood. And this is an interesting point. If you had just said it's going to be October of 2026 and mortgage rates are going to be flying and the price of fuel is going to be flying, you wouldn't predict that the economy would be as strong as it seems to be right now.

13:58Katie Martin: If you look at industrial surveys, employment reports, whatever you like, the economy is holding up really well. So there is this excellent economist called Don Rissmiller of Strategas. Strategas is a Wall Street research firm. And Rissmiller calls what we're experiencing right now peak headwind. And I like this not just because, Katie, you hate the word headwind, but because it's a particularly apt phrase. And he says, the list of economic shocks has become substantial. Higher oil prices, tech bottlenecks, aging demographics, tariffs, central bank tightening, higher long-term rates, the U.S. fiscal impulse turning negative, and debt fears abroad, as in France.

14:48Katie Martin: So, like, all this stuff is raining on you, and we're just chugging along here in the United States, and it's pretty impressive.

14:55Rob Armstrong: That is wind blowing at your head right ahead of the midterm elections, which are when? Early November?

15:02Katie Martin: Yes, the 3rd of November. Now, look, eventually this stuff ought to take a toll. So maybe we will get a slowdown to the U.S. economy in the face of all this.

15:12Rob Armstrong: Yeah.

15:12Katie Martin: If these headwinds keep blowing in our face.

15:19Rob Armstrong: Yeah. Speaking of wins, so would you describe this as what I would call squeaky bum time for Trump ahead of the election? Do you think voters are going to punish him for these things? I'm just asking you to, like, guess.

15:33Katie Martin: I think in America, everybody had already decided who they're going to vote for years ago. It's only really a question of how many people on either side say the hell with it and don't vote on that particular Tuesday.

15:50Rob Armstrong: Okay.

15:51Katie Martin: Right. Nobody in America ever changes their mind. Changing your mind is extremely un-American activity. so but uh you know this stuff if it makes you feel grouchy maybe it makes you stay home on that tuesday you know if you're a trump voter and maybe the anti-trump people do turn out but you know the misadventures we've had with polls and political predictions over the last decade or two make me very humble on this topic so we'll just have to see there might be some people who

16:24Rob Armstrong: don't spend the diesel on driving their truck to go and go and vote either way listeners you've had jingles you've had headwinds you've had the whole lot we're gonna be back in just a second with long short okie doke it is time for long short that part of the show where we go long Short a thing we love or short a thing we hate. Rob, what are you saying? I was, I remain, and I am.

16:57Katie Martin: Limit short. The Finance Bro vest. Which is a fuzzy or quilted item that for some reason people think is appropriate to wear at work and to signal that you work in finance now. Yeah. And this item has come in for a lot of hell on this show and elsewhere, but it's got to come in for more.

17:23Rob Armstrong: Yes.

17:24Katie Martin: Because in our own newspaper, Katie, there is a piece today called The Best Gilet, which is what you people call these vests, The Best Gilet for Finance Bros. Yes. And there is no Best Gilet. They must all be destroyed. This is my view.

17:41Rob Armstrong: The good thing about this piece is that the whole tone of it is dripping with scorn for the gilet. And it's very much, if you must wear one of these things, here are some acceptable ones. Some of them are like£4 ,000. Like, what the hell? These are coats with no arms. Why would you spend£4 ,000 on this?

18:00Katie Martin: Yes. If it has no arms,£3 ,000 is my absolute limit.

18:04Rob Armstrong: The arms are extra.

18:06Katie Martin: Don't wear these things. They make you look silly. Katie, what do you have today?

18:09Rob Armstrong: Stop wearing gilets. I am short, performative smoking. I know that you're familiar with this story. So the chief technology officer at Palantir, one of these kind of big American tech companies, he said in an interview at the weekend on CBS News' Face the Nation on Sunday that apparently some AI researchers are taking up smoking as a lifestyle flex to demonstrate that they truly believe that AI will cure cancer.

18:44Rob Armstrong: So, look, this is dumb. Stop doing this. If you want to smoke, it's a free country, whatever. But, like, if you're doing it to demonstrate, like...

18:55Katie Martin: Your confidence in the future of AI's medical breakthroughs.

18:58Rob Armstrong: You're in the AI cult. Then this is one of the stupidest things I've ever heard of. Are people actually doing this in real life?

19:05Katie Martin: Let me just say, Katie, if AI actually discovers ways to prevent lung cancer and emphysema, I am taking up smoking and smoking heavily. I would like to note for record, I loved smoking cigarettes. If there was no health consequences, I would light my first cigarette the instant my eyes opened in the morning and put out my last just before I retired to bed.

19:30Rob Armstrong: Yeah, but at least you're waiting for AI to actually sort it out first rather than just like spinning the wheel and saying it's okay, AI will come and save me. I don't know. I just think this is some of the stupidest stuff I've ever heard in my life. If you want to hear more Stupid Stuff listeners, we will be back on Thursday. So listen up then.