The Cost of Borrowing: How Personal & Public Spending Shape Interest Rates | June 16, 2025

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Welcome to Optimal Insights, your weekly source for real-time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize your profitability this week.

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Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, Vice President of Hedging and Trading Client Services at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. All right, everybody. Welcome. Today is Monday, June 16th. A lot going on that we want to cover with you today.

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You know, we always strive to bring you up to the hour current events. There's some of those going on this week for sure. We'll start with a market update. We'll cover, you know, what went on last week and some previews of some things going on this week, including the Fed meeting, which is probably the big piece of information this Wednesday. We'll touch on the escalation of the Iran-Israel conflict in the Middle East, of course. Markets seem to be shrugging that off.

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so far, just some energy price shocks, but something to keep an eye on. Could certainly bleed over into other parts of the world, bleed into other markets. And we'll talk a bit about, just get a little bit more in depth about some of the conversations we've had surrounding just how awash the world is in debt right now and how that's really contributing to keeping rates high. That means our own debt, personal loans, car loans, credit cards, things like that, but also just

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the government debt that's starting to really build and some things that are changing in the dynamics of the world that are causing a lot of governments, including our own in the US, to take on more debt and to run up deficits and how that's ultimately likely to keep rates higher for longer. The way of data, we saw the OB-MMI just still sticky around 6.8. I don't know that it's deviated more than an eighth from that over the past couple of months, but volume is still good. We're still seeing volume.

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healthy in the range of what we would have expected pre-COVID in terms of number of units or number of loans that are getting originated in the purchase and the refi space. All right, let's transition over to the team and talk a little bit about what's going on in the market. Okay, welcome James, Alex, Jeff. Let's wrap a little bit today, a lot going on. Even some things that changed our topic list a little bit that happened over late last week and then over the weekend.

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Why don't we just start with what happened last week in terms of economic numbers, starting with just had some inflation numbers, right? We yet to see the boogie man come from tariff worries, Yeah, Jim. So last week was inflation numbers, got CPI and PPI, and they really built upon a pretty rosy picture that we've been kind of developing the last two, three months now. CPI came in right at expectations at 2.4 % and PPI was a little bit under expectations, 2.8%.

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year over year. So it's kind of opening the door, I think, to conversations about if inflation is under control. As we've been talking about for several weeks now, the employment picture seems to be degrading at a not too decent clip or approaching that quarter million new unemployed each week. employment picture is fine, right? It's degrading a little bit. The initial claims numbers are getting a little bit worse week over week. But generally, the headline

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Inflation numbers are low, but it feels like some of that was driven by energy prices for a while. Energy prices have quietly been dropping since the beginning of the year. Even some of the metrics that don't include directly energy costs, energy costs lead into everything, right? It's an input to almost any kind of good or service because goods need to get from point A to point B or your restaurant has energy bills, this sort of thing, right? But then we have this conflict in the Middle East.

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that's starting to heat up late last week. Could that pull a rug out from under all of this, especially if part of the plan of the new administration was, okay, tariffs come in on paper, that could raise prices of goods. then meanwhile, are getting lower energy prices through things like deregulation and just sort of the natural trajectory of what energy prices had been doing. But now we have this escalation that could, could that derail all of this, right?

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I absolutely has the ability to derail all this if there isn't an off ramp for this conflict, which I think we can get into in a little bit more detail. But as you were saying, they always break out these inflation metrics with core and non-core, non-core including volatile classification such as energy and food. And if you look at the past few months, actually, core numbers have been lower. So those that exclude fuel have been even lower. So energy has been working in favor of lowering these inflation numbers, as you were saying.

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Late last week, we started seeing a little uptick in violence in the Middle East. We saw a little preliminary strike from Israel onto Iran, and then Iran is currently lobbing missiles back at them. They're going back and forth right now. think the G7 conference they're meeting this week, and then that's going to be a major topic for them to just discuss, just keeping everything under wraps and trying to, like I said earlier, just find an off ramp here because no one wants a conflagration and they're on opposites into the Middle East, so to say.

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There's a lot of people that can be dragged in. Honestly, sort of surprising. mean, it's pretty close to an all out war from how I'm reading it. So it's almost surprising we haven't seen a larger jump in crude oil prices. We definitely saw a jump over the weekend. It's coming back down today, but maybe people are optimistic. As you said, Alex, it will deescalate quickly with some of the talks and conversation. Yeah. As I said, there is, so Iraq separates Israel from Iran. And so I think that is really what has kept this from

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becoming a ground war really so far as it's been an air war. It's been missiles and planes in the air. perhaps we might be slightly blessed by geography here that it's keeping from expanding into a larger ground war. I agree with you, Jeff. think we saw initially oil prices shot up on Friday, but opening here on Monday, they're right where they were at on Friday. So the markets are seeing so far that it should just be an off ramp. Yeah. mean, the markets don't seem, other than like you said, oil prices jumping initially and holding those.

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those gains, other markets seem to be shrugging this off as if it will be something that deescalates quickly and maybe that's, we've been lulled to sleep over the past couple of times that Israel and Iran have lobbed missiles at each other. But I don't know, this does feel a little bit different. does feel like it wouldn't take much for this to break into something more substantial that would do more than just potentially obstruct the oil routes, which is the typical.

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worry there is it just makes it little more dangerous to go through some of those already dangerous straits where the oil tankers go. Just that this could pull other countries and resources into a larger war. With the international shipping staying as it is. As Israel and Iran are lobbing these missiles back and forth, previously over the decades as Israel has gone to war, Egypt has been a large player, but after Camp David, have become much closer and

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We have not seen them in the news posing as any sort of threat to Israel immediately. So that does say that the Suez Canal would remain open. And so a lot of trade goods that are going through there, including oil, wouldn't slow down. Meanwhile, Iran, which is a major oil exporter, and Israel, whose largest oil facility was actually struck today, oil is the big shifter here. But the rest of the products are still going through the strait.

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Yeah, the straight to be concerned about, would say is probably more so the straight or Hormuz. That's the one that anytime Iran is angry about the situation in the Middle East, they'll threaten to shut that. That's again, a very tight shipping channel that they could easily close themselves. We keep some battle groups stationed there as well to offset that, but we'll have to see. As you were saying, Jim, we hope that there's an off ramp. always seems to be an off ramp, but that's just what's happened in the past. Some of the rhetoric that's been coming out of both sides has been so-and-so will burn, et cetera, et cetera. It does seem to be.

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A little more saber rattling. Yeah, a lot more saber rattling. So we'll definitely have to keep an eye on that. Hopefully by the time we're recording next week, skies are clear and peace has rained a little bit more. One other note I saw related to energy costs is this AI boom, of course, is causing an increase in demand for electricity throughout the world, but throughout our country.

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That's probably a little bit more of a long-term thing that we need to think about the supply side. Do we have the supply of electricity throughout our country to meet the demand? The article I read, the AI boom is not a cost-free boom. So something interesting to think about. It's actually something that comes up more, I feel like with perhaps you guys, younger generation, nieces and nephews, they talk a lot about it more. For some reason, it hasn't come up as much thinking about how costly and how much strain this puts on. Just the infrastructure.

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Yeah, exactly. I was just going say up until the AI boom began, think America was very much so meeting its own energy needs. We kind of learned our lesson from all the energy shocks going back all the way back to the 70s. The West Texas oil shale that they've been fracking, we've really become fairly self-sufficient in regards to energy. When we see these energy shocks in regards to the war in Ukraine or instability in the Middle East, a lot of times it's European energy prices that are rocketing up. We're a little more insulated here in the United States in regards to fossil fuels. As you were saying though, Jeff,

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As we're transitioning towards AI and just the massive energy resources that it needs, I think, you know, the average AI search takes, you know, three, four X, the amount of energy that, you know, a Google search previously would have taken. And as people are, you know, as Google rolls out these features where AI is the first thing that comes up, you can kind of say that each Google search is taking three, four X, the amount of energy that they previously did. So I've actually been seeing, you know, a renewed conversation in regards to nuclear energy. I think it was Microsoft made a.

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Yeah, Three Mile Island. think there was also another one somewhere in Illinois, maybe south of Chicago somewhere that they were planning to reopen. It was a nuclear plant that was going to be defunct essentially and they were just planning to reopen that just because they project that the energy needs are not going to met by conventional fossil fuels or renewables. So more to come there I think as well. Opening or reopening nuclear power plants is what seems to be at least the quickest avenue to significantly spiking

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the generation of electricity in the US and abroad as well. Is it temporary? I've read some articles about that too. Do these programs just get more efficient like anything else? They will not take nearly as much energy in the next decades or you're building infrastructure for something you may not need. Then other folks would say you need to focus more on renewables that are not nuclear. Anyway, that's definitely a story to keep an eye on because there's going to be a...

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scrounging for resources as there always is and AI is going to be a big player in that game. again, all these things, other parts of the boogeyman, as you said earlier, will these rising energy costs lead into the inflation numbers, keep interest rates up or are we going to see what we saw last week and see these numbers come in lower than what we keep talking about? Agreed. Still needs to play out. We're still not seeing the, can't see the effects of tariffs yet.

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I haven't seen the effects of Doge on the unemployment numbers yet, but I think, I guess we'll kick that can ahead to July. See what numbers look like then. Yeah. Credit where credit's due. think companies have stocked their warehouses in the lead up to those tariffs pretty sufficiently. We are around that cutoff mark where even if the warehouses were overflowing with goods, we're probably approaching the end of those stores and they will start to see incremental increase with the tariffs that are currently in place.

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Barring no deals being done beginning in July here, we're going to see those tariffs kick up in effect. So more to come there as we keep saying. Don't want to keep kicking the can, but more to come. All right. So this week, other than the Middle East conflict, what should we be watching out for? mean, there's the Fed meeting Wednesday. That's obviously huge. There won't be a change in rate, but the discussion around where the Fed is leaning currently, what the DOT plot looks like is going to be probably center stage for the rest of this week, right?

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Absolutely. Yep. Now you nailed the nail on the head there, Jim. It's a do not expect cut here. Don't expect one at the July meeting either. Really this one, watch the presser from Powell. See how he responds to the lines of questioning. I think that the drama surrounding him and Trump has really subsided as a lot of domestic politics has in the past few days. But yeah, they will be releasing a plot with this release just to see kind of gauge where each of the Fed members are at. This one is well-timed. We got the first halves.

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almost the first half's inflation readings. I think it's time to start seeing if the board members agree with us in that, know, inflation may be subsiding as the main pain point, but I could, you know, I could see them making the opposite argument that, you know, the tariffs introduced too big of a black box, too many question marks in regards to what the inflation picture is going to look like in the latter half of the year. So definitely watch that press conference and just, see, again, we can talk about it all day and what we think and what we're seeing, but at the end of the day, they're the ones that are, that are making the decision. So.

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lean on their opinion more so than mine. Yeah. At this point, we'll be halfway through the year really putting into question whether we see any cuts this year right now, right? I mean, one cut maybe is what's priced into the cards. Yeah. FedWatch has at least one priced in by end of year. If you combine the chances for, if you're looking at December, it's about 70%, 40 % chance of two cuts, 30 % chance of one cut. So we are still expecting cuts this year, but at the same time,

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we were expecting cuts around this time now and those bets have been pared back quite a bit. So again, we just got to have to wait for the picture to develop a little bit more before seeing. All right. Otherwise, not huge numbers coming up this week. We've got retail sales. Obviously you want to watch for if spending habits have changed at all with the tariff discussions or with employment or with the debt situation. Yep.

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Yeah, we're several weeks away from the next major unemployment report that first Friday of July. But, know, aside from the weekly unemployment, new unemployment numbers, I think, you know, retail sales is one place we could look, you know, 6 % of the economy is retail consumption spending. If we start seeing those numbers being paired back on retail sales, that could tell you, know, consumers are in a pinch. Consumers are starting to maybe put a little bit more in the bank because they're foreseeing issues down the line. So see if that comes in weeks, see how that's doing.

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It is the third week of the month. is a relatively slow week regarding data. We get some building permits, new builds, how those are looking. As we say every month, don't look for that to be us digging ourselves out of the supply hole in regards to housing. But home builders are one of those first to pull back when they see the red flag of the recession waving. So if we see those numbers drastically decrease, that could be a sign that home builders are pulling back because again, they don't want to be sitting on inventory that they built during a...

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bull market during the good times when no one has the money to splurge on a new home. Right. Otherwise, keep your eye on the initial jobless claims numbers. That's what you can look at week to week between the official unemployment reports. Those are legit numbers that reflect folks that are applying for unemployment benefits and those have been ticking up over weeks lately and that's a good indicator of where the job market might be. All right. So what is all of this?

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that we've just talked about. In addition to just some of the fairly major changes in the world that have gone on the past six months, and you can probably even go before that, what do all these things mean in terms of interest rates, especially in the mortgage market? We've got consumer debt higher than it's ever been. If you look at credit cards or whatever you want to look at, consumers in the US currently have higher

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debt balances than we've ever had by quite a large margin. At the same time, you've got delinquencies that are ticking up slightly, but nothing near what we saw during the great financial crisis or anything like that, just sort of natural escalation and delinquencies that are coming off of the huge amounts of savings that we saw during COVID. You can also call savings paying off debt, just kind of reducing debt counts as saving.

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And then, I mean, just to set it up nationally and internationally, governments are running up deficits at a pretty record pace. And some of that has been somewhat recent and somewhat related to some of the, you know, the de-globalization that we've talked about on this podcast before, where you have members of NATO that are now a little bit more worried about protecting themselves rather than other countries kind of coming to protect them or to help.

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in this larger coalition, just with some of the rhetoric that's gone on, whether it's having to do with tariffs or just generally this general theme of de-globalization over the past years. I don't know. What do you guys think? Where do we start to have this conversation? You might want to start with the individuals, right? So as you were alluding to with credit card debt and all this creeping up, I was seeing the numbers on average, if you were to spread out over every American.

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everyone has about $6,500 in debt, which for you and Jeff sitting here, you could take that, pay that off. But if Alex and I were given a $6,500 bill at dinner, I don't really know what I would do with that on a Friday night. It would be an enormous amount to be hit with. So whenever you look at the savings of an average American, those are always kind of scary numbers. What even as an average skewed by the upside,

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quency number, while it's not: 2008

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It's something like 12 % of Americans have them. And with the administration rolling back the Biden era pause, there's a lot more people who are tightening their belts and looking at this. So I do think credit card debt, of course you're seeing more delinquencies. There's a huge payment that people have not been making for the past four years that suddenly this age group is having to make again. Right. Yeah. You've got to start with the individual. You know, we talk about inflation, but then if you talk about how much debt

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Each individual has, and you think about what an interest rate on a credit card is, right? Forget about 7 % mortgages. You're talking 20 plus percent. You're paying for that. That carton of eggs cost 40 % more than it did a year ago, but you're probably going to pay 60 % interest on it because it's going to take you several years to pay it off. All of this just creates more more stress on every individual out there. think a major example of that pain point in this

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pushing people further and further to the margins is, you know, this, this buy now pay later, which is really, think games team and probably the last two years, you know, I don't really know if anyone who was using, you know, a payment plan for, you know, those everyday purchases, I guess a credit card, can think fit almost as it's not, but you know, some of these might not pay layers that they, function like a credit card. know, you make payment in full from your bank account to the, you bought from in 30 to 45 days, you know, a credit billing cycle. But a lot of these are, they're essentially just short-term consumer loans. You have.

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two, three month payment plans, but they go out 12, 24. 24 months is two years to buy and a lot of the discourse was around, who's using this to buy your Chipotle at the end of the day? There's jokes to be made in there, but also at the same time, if this is a real pain that people are feeling, how close to the margins are so many people? And it just bears something to think about how much pain is being felt and as to what James said, how much people are needing to tighten their belts or they've tightened their belts so much that...

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years, but: 2008

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It's the exact same idea. It's just a different way of doing a loan. And something that I found interesting about, know, Kalarna is the main example of these buy now, pay later. But if you are failing to pay that, they can hit your credit score. They can report that to the credit companies and that can take you down. But if you are paying perfectly on time, they cannot, there's no reporting there. So you actually can't upwardly push your credit score by a...

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taking on these short-term loans, but you can definitely damage it. So there's kind of a risk implicit in doing these buy now, pay later schemes. That's interesting. I didn't realize that they don't report unless it's a negative report. Only to the down, yes. Yeah. I mean, it's more debt, it's more delinquency, it's more opportunity for delinquency and all of these things are going to push rates higher, right? I mean, that's how credit card rates are calculated.

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Chase or whatever the bank, what do they have to pay in general to cover any losses from delinquent borrowers? So we've got the individual covered. Then let's talk again about just international debt. We know that the big beautiful bill is at least on paper running up quite a deficit. We will hit a record deficit again this year no matter what. The effects of it might be different down the road, but that's on paper. We're going to borrow a few extra trillion then we're making.

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this year, then you see that from other countries. We don't hear as much about it here in the US, but if you get out there and you read, you will see that other countries are spending more on things like defense is a huge one. There's also just generally just less socialization of certain costs going on as we de-globalize. What are you all hearing about that other than just the high level? I'm a big fan of looking at the scariest website. Have you ever seen the usdeckclock.org?

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That thing will really keep you up at night. Actually, this making me laugh. They have a section for Doge. Apparently, you've saved $520 billion. That's a little incredulous to me. But at 36, nearly $37 trillion in debt, the United States is 122 % of GDP, maybe even a little bit higher than that. That's definitely a concerning figure. I know we talked about this about a week ago that

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When people would talk about the debt, you used to be able to look at it and say, oh, well, 75, 80 % of GDP. We're nowhere near name a Soviet block country. We can compare and it still looks good. At 122, we are among the worst. And it's definitely a frightening thing to look at. It doesn't feel like we're towards making those austerity moves that would cut this down. It feels like we're attempting to grow our way out of it.

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But with the interest on the debt being about as high as we pay for the military, which is a notoriously large number in America, it seems difficult to think that we could really grow our way out of this and not have to make some cuts somewhere. Some sacrifices. Yeah, I think you the nail on the head. I mean, it's a trillion dollars we're spending on just debt service, right? So that alone, just the debt that's already out there, we're going to increase that number.

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To do that, we will have to issue more debt and there's not necessarily more buyers out there, more demand for this debt. We just keep going deeper below GDP. I'm with you and we've talked about it before where you used to be able to take comfort in looking at numbers and say, yes, we have a record amount of debt, but we're the largest economy in the world. As a percentage of our economy, it's relatively low. You can't say that anymore. Now, we're definitely borrowing more than what we're making. As a nation,

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And we are up there with some countries that are notoriously edged in a bad spot like Greece, The countries that have actually defaulted before. We are not in a spot, it does not feel like we were in a spot where we could literally default, but just the fact that so much supply is coming online, so much debt needs to be financed that rates at this point, it doesn't feel realistic that rates go, like the 30 year mortgage goes below 6.5%.

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Certainly not below six. I'll call that. We've been calling it, but I don't see how it's possible without some sort of major intervention like from the Fed, which could happen, but they'd have to have a real good reason. Just a really brutal unemployment picture or a major dislocation in markets. Even I don't know that a war at this point, a much larger scale war than what we're seeing, don't know that that would put a dent in interest rates, could even make them worse because defense spending across the globe continues to increase.

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Anyway, we're not painting the merosiest picture, but I think we're all pretty realistic about rates at this point and that's what we're looking at. If anyone is still wondering at home, why are rates stubbornly high and how long is it going to be that way? That's basically the answer is there's not a reason for rates to drop and they'll probably stay here and go higher over the next five plus years. Yeah, tying it back to the inflation numbers, mean, there's so many other things out there besides just the raw inflation numbers that are going to keep.

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those rates stubbornly high. So the amount of debt coming online this year, the amount of debt that needs to be refinanced this year, I'll play into the picture. then just every year that we don't address the debt issue, every year we kick the can on that, it narrows the options available to us. We've talked about austerity on this call today. And at a certain point, even austerity won't cut it. As James said, a lot of the times the debt is pitched as it'll grow the economy in some way, shape or form. some of that debt absolutely does.

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Some of that debt does not, some of it is wasteful spending. But at the same time, like I said, every year that we kick the can on this and don't address it and keep living the high life, which come back to the personal. Living on debt like that, living beyond your means, you live in the high life, but at a certain point, you'll come down to reality. I think the one thing to keep in mind that's different between you and I and our credit cards and the US government is the US government issues their currency. default is, I think we said that word one time, default is

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of the global economy since: 1945

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Like I said, there's limited options and none of them are great. I just hope we can come to our senses sooner rather than later. Agreed. Well summed up, honestly. Yeah, the dollar, maybe we'll do a whole episode on the dollar. mean, the status of the dollars, the reserve currency across the globe has been called into question more than I've seen in my lifetime, just over the past six months. You can see it with the price of gold going up and generally the US dollar weakening versus other.

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versus other currencies. Again, some of that is de-globalization, some of it is taking on too much debt. yeah, a story we will continue to follow and share with all of you. All right, gang, great discussion today. Thanks for the time. Thanks for the wisdom and we'll do it again soon. Okay, let's wrap this thing up. Thanks so much, Alex, Jeff, James. Great conversation today as always. Moving forward, we will continue to keep you all informed about what's going on. But that's it for today.

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00:02

Welcome to Optimal Insights, your weekly source for real-time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize your profitability this week.

00:18

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, Vice President of Hedging and Trading Client Services at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. All right, everybody. Welcome. Today is Monday, June 16th. A lot going on that we want to cover with you today.

00:48

You know, we always strive to bring you up to the hour current events. There's some of those going on this week for sure. We'll start with a market update. We'll cover, you know, what went on last week and some previews of some things going on this week, including the Fed meeting, which is probably the big piece of information this Wednesday. We'll touch on the escalation of the Iran-Israel conflict in the Middle East, of course. Markets seem to be shrugging that off.

01:18

so far, just some energy price shocks, but something to keep an eye on. Could certainly bleed over into other parts of the world, bleed into other markets. And we'll talk a bit about, just get a little bit more in depth about some of the conversations we've had surrounding just how awash the world is in debt right now and how that's really contributing to keeping rates high. That means our own debt, personal loans, car loans, credit cards, things like that, but also just

01:48

the government debt that's starting to really build and some things that are changing in the dynamics of the world that are causing a lot of governments, including our own in the US, to take on more debt and to run up deficits and how that's ultimately likely to keep rates higher for longer. The way of data, we saw the OB-MMI just still sticky around 6.8. I don't know that it's deviated more than an eighth from that over the past couple of months, but volume is still good. We're still seeing volume.

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healthy in the range of what we would have expected pre-COVID in terms of number of units or number of loans that are getting originated in the purchase and the refi space. All right, let's transition over to the team and talk a little bit about what's going on in the market. Okay, welcome James, Alex, Jeff. Let's wrap a little bit today, a lot going on. Even some things that changed our topic list a little bit that happened over late last week and then over the weekend.

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Why don't we just start with what happened last week in terms of economic numbers, starting with just had some inflation numbers, right? We yet to see the boogie man come from tariff worries, Yeah, Jim. So last week was inflation numbers, got CPI and PPI, and they really built upon a pretty rosy picture that we've been kind of developing the last two, three months now. CPI came in right at expectations at 2.4 % and PPI was a little bit under expectations, 2.8%.

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year over year. So it's kind of opening the door, I think, to conversations about if inflation is under control. As we've been talking about for several weeks now, the employment picture seems to be degrading at a not too decent clip or approaching that quarter million new unemployed each week. employment picture is fine, right? It's degrading a little bit. The initial claims numbers are getting a little bit worse week over week. But generally, the headline

03:46

Inflation numbers are low, but it feels like some of that was driven by energy prices for a while. Energy prices have quietly been dropping since the beginning of the year. Even some of the metrics that don't include directly energy costs, energy costs lead into everything, right? It's an input to almost any kind of good or service because goods need to get from point A to point B or your restaurant has energy bills, this sort of thing, right? But then we have this conflict in the Middle East.

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that's starting to heat up late last week. Could that pull a rug out from under all of this, especially if part of the plan of the new administration was, okay, tariffs come in on paper, that could raise prices of goods. then meanwhile, are getting lower energy prices through things like deregulation and just sort of the natural trajectory of what energy prices had been doing. But now we have this escalation that could, could that derail all of this, right?

04:47

I absolutely has the ability to derail all this if there isn't an off ramp for this conflict, which I think we can get into in a little bit more detail. But as you were saying, they always break out these inflation metrics with core and non-core, non-core including volatile classification such as energy and food. And if you look at the past few months, actually, core numbers have been lower. So those that exclude fuel have been even lower. So energy has been working in favor of lowering these inflation numbers, as you were saying.

05:16

Late last week, we started seeing a little uptick in violence in the Middle East. We saw a little preliminary strike from Israel onto Iran, and then Iran is currently lobbing missiles back at them. They're going back and forth right now. think the G7 conference they're meeting this week, and then that's going to be a major topic for them to just discuss, just keeping everything under wraps and trying to, like I said earlier, just find an off ramp here because no one wants a conflagration and they're on opposites into the Middle East, so to say.

05:46

There's a lot of people that can be dragged in. Honestly, sort of surprising. mean, it's pretty close to an all out war from how I'm reading it. So it's almost surprising we haven't seen a larger jump in crude oil prices. We definitely saw a jump over the weekend. It's coming back down today, but maybe people are optimistic. As you said, Alex, it will deescalate quickly with some of the talks and conversation. Yeah. As I said, there is, so Iraq separates Israel from Iran. And so I think that is really what has kept this from

06:15

becoming a ground war really so far as it's been an air war. It's been missiles and planes in the air. perhaps we might be slightly blessed by geography here that it's keeping from expanding into a larger ground war. I agree with you, Jeff. think we saw initially oil prices shot up on Friday, but opening here on Monday, they're right where they were at on Friday. So the markets are seeing so far that it should just be an off ramp. Yeah. mean, the markets don't seem, other than like you said, oil prices jumping initially and holding those.

06:44

those gains, other markets seem to be shrugging this off as if it will be something that deescalates quickly and maybe that's, we've been lulled to sleep over the past couple of times that Israel and Iran have lobbed missiles at each other. But I don't know, this does feel a little bit different. does feel like it wouldn't take much for this to break into something more substantial that would do more than just potentially obstruct the oil routes, which is the typical.

07:11

worry there is it just makes it little more dangerous to go through some of those already dangerous straits where the oil tankers go. Just that this could pull other countries and resources into a larger war. With the international shipping staying as it is. As Israel and Iran are lobbing these missiles back and forth, previously over the decades as Israel has gone to war, Egypt has been a large player, but after Camp David, have become much closer and

07:39

We have not seen them in the news posing as any sort of threat to Israel immediately. So that does say that the Suez Canal would remain open. And so a lot of trade goods that are going through there, including oil, wouldn't slow down. Meanwhile, Iran, which is a major oil exporter, and Israel, whose largest oil facility was actually struck today, oil is the big shifter here. But the rest of the products are still going through the strait.

08:06

Yeah, the straight to be concerned about, would say is probably more so the straight or Hormuz. That's the one that anytime Iran is angry about the situation in the Middle East, they'll threaten to shut that. That's again, a very tight shipping channel that they could easily close themselves. We keep some battle groups stationed there as well to offset that, but we'll have to see. As you were saying, Jim, we hope that there's an off ramp. always seems to be an off ramp, but that's just what's happened in the past. Some of the rhetoric that's been coming out of both sides has been so-and-so will burn, et cetera, et cetera. It does seem to be.

08:36

A little more saber rattling. Yeah, a lot more saber rattling. So we'll definitely have to keep an eye on that. Hopefully by the time we're recording next week, skies are clear and peace has rained a little bit more. One other note I saw related to energy costs is this AI boom, of course, is causing an increase in demand for electricity throughout the world, but throughout our country.

09:01

That's probably a little bit more of a long-term thing that we need to think about the supply side. Do we have the supply of electricity throughout our country to meet the demand? The article I read, the AI boom is not a cost-free boom. So something interesting to think about. It's actually something that comes up more, I feel like with perhaps you guys, younger generation, nieces and nephews, they talk a lot about it more. For some reason, it hasn't come up as much thinking about how costly and how much strain this puts on. Just the infrastructure.

09:30

Yeah, exactly. I was just going say up until the AI boom began, think America was very much so meeting its own energy needs. We kind of learned our lesson from all the energy shocks going back all the way back to the 70s. The West Texas oil shale that they've been fracking, we've really become fairly self-sufficient in regards to energy. When we see these energy shocks in regards to the war in Ukraine or instability in the Middle East, a lot of times it's European energy prices that are rocketing up. We're a little more insulated here in the United States in regards to fossil fuels. As you were saying though, Jeff,

10:00

As we're transitioning towards AI and just the massive energy resources that it needs, I think, you know, the average AI search takes, you know, three, four X, the amount of energy that, you know, a Google search previously would have taken. And as people are, you know, as Google rolls out these features where AI is the first thing that comes up, you can kind of say that each Google search is taking three, four X, the amount of energy that they previously did. So I've actually been seeing, you know, a renewed conversation in regards to nuclear energy. I think it was Microsoft made a.

10:28

Yeah, Three Mile Island. think there was also another one somewhere in Illinois, maybe south of Chicago somewhere that they were planning to reopen. It was a nuclear plant that was going to be defunct essentially and they were just planning to reopen that just because they project that the energy needs are not going to met by conventional fossil fuels or renewables. So more to come there I think as well. Opening or reopening nuclear power plants is what seems to be at least the quickest avenue to significantly spiking

10:58

the generation of electricity in the US and abroad as well. Is it temporary? I've read some articles about that too. Do these programs just get more efficient like anything else? They will not take nearly as much energy in the next decades or you're building infrastructure for something you may not need. Then other folks would say you need to focus more on renewables that are not nuclear. Anyway, that's definitely a story to keep an eye on because there's going to be a...

11:29

scrounging for resources as there always is and AI is going to be a big player in that game. again, all these things, other parts of the boogeyman, as you said earlier, will these rising energy costs lead into the inflation numbers, keep interest rates up or are we going to see what we saw last week and see these numbers come in lower than what we keep talking about? Agreed. Still needs to play out. We're still not seeing the, can't see the effects of tariffs yet.

11:57

I haven't seen the effects of Doge on the unemployment numbers yet, but I think, I guess we'll kick that can ahead to July. See what numbers look like then. Yeah. Credit where credit's due. think companies have stocked their warehouses in the lead up to those tariffs pretty sufficiently. We are around that cutoff mark where even if the warehouses were overflowing with goods, we're probably approaching the end of those stores and they will start to see incremental increase with the tariffs that are currently in place.

12:27

Barring no deals being done beginning in July here, we're going to see those tariffs kick up in effect. So more to come there as we keep saying. Don't want to keep kicking the can, but more to come. All right. So this week, other than the Middle East conflict, what should we be watching out for? mean, there's the Fed meeting Wednesday. That's obviously huge. There won't be a change in rate, but the discussion around where the Fed is leaning currently, what the DOT plot looks like is going to be probably center stage for the rest of this week, right?

12:57

Absolutely. Yep. Now you nailed the nail on the head there, Jim. It's a do not expect cut here. Don't expect one at the July meeting either. Really this one, watch the presser from Powell. See how he responds to the lines of questioning. I think that the drama surrounding him and Trump has really subsided as a lot of domestic politics has in the past few days. But yeah, they will be releasing a plot with this release just to see kind of gauge where each of the Fed members are at. This one is well-timed. We got the first halves.

13:25

almost the first half's inflation readings. I think it's time to start seeing if the board members agree with us in that, know, inflation may be subsiding as the main pain point, but I could, you know, I could see them making the opposite argument that, you know, the tariffs introduced too big of a black box, too many question marks in regards to what the inflation picture is going to look like in the latter half of the year. So definitely watch that press conference and just, see, again, we can talk about it all day and what we think and what we're seeing, but at the end of the day, they're the ones that are, that are making the decision. So.

13:54

lean on their opinion more so than mine. Yeah. At this point, we'll be halfway through the year really putting into question whether we see any cuts this year right now, right? I mean, one cut maybe is what's priced into the cards. Yeah. FedWatch has at least one priced in by end of year. If you combine the chances for, if you're looking at December, it's about 70%, 40 % chance of two cuts, 30 % chance of one cut. So we are still expecting cuts this year, but at the same time,

14:24

we were expecting cuts around this time now and those bets have been pared back quite a bit. So again, we just got to have to wait for the picture to develop a little bit more before seeing. All right. Otherwise, not huge numbers coming up this week. We've got retail sales. Obviously you want to watch for if spending habits have changed at all with the tariff discussions or with employment or with the debt situation. Yep.

14:52

Yeah, we're several weeks away from the next major unemployment report that first Friday of July. But, know, aside from the weekly unemployment, new unemployment numbers, I think, you know, retail sales is one place we could look, you know, 6 % of the economy is retail consumption spending. If we start seeing those numbers being paired back on retail sales, that could tell you, know, consumers are in a pinch. Consumers are starting to maybe put a little bit more in the bank because they're foreseeing issues down the line. So see if that comes in weeks, see how that's doing.

15:21

It is the third week of the month. is a relatively slow week regarding data. We get some building permits, new builds, how those are looking. As we say every month, don't look for that to be us digging ourselves out of the supply hole in regards to housing. But home builders are one of those first to pull back when they see the red flag of the recession waving. So if we see those numbers drastically decrease, that could be a sign that home builders are pulling back because again, they don't want to be sitting on inventory that they built during a...

15:46

bull market during the good times when no one has the money to splurge on a new home. Right. Otherwise, keep your eye on the initial jobless claims numbers. That's what you can look at week to week between the official unemployment reports. Those are legit numbers that reflect folks that are applying for unemployment benefits and those have been ticking up over weeks lately and that's a good indicator of where the job market might be. All right. So what is all of this?

16:16

that we've just talked about. In addition to just some of the fairly major changes in the world that have gone on the past six months, and you can probably even go before that, what do all these things mean in terms of interest rates, especially in the mortgage market? We've got consumer debt higher than it's ever been. If you look at credit cards or whatever you want to look at, consumers in the US currently have higher

16:45

debt balances than we've ever had by quite a large margin. At the same time, you've got delinquencies that are ticking up slightly, but nothing near what we saw during the great financial crisis or anything like that, just sort of natural escalation and delinquencies that are coming off of the huge amounts of savings that we saw during COVID. You can also call savings paying off debt, just kind of reducing debt counts as saving.

17:15

And then, I mean, just to set it up nationally and internationally, governments are running up deficits at a pretty record pace. And some of that has been somewhat recent and somewhat related to some of the, you know, the de-globalization that we've talked about on this podcast before, where you have members of NATO that are now a little bit more worried about protecting themselves rather than other countries kind of coming to protect them or to help.

17:45

in this larger coalition, just with some of the rhetoric that's gone on, whether it's having to do with tariffs or just generally this general theme of de-globalization over the past years. I don't know. What do you guys think? Where do we start to have this conversation? You might want to start with the individuals, right? So as you were alluding to with credit card debt and all this creeping up, I was seeing the numbers on average, if you were to spread out over every American.

18:14

everyone has about $6,500 in debt, which for you and Jeff sitting here, you could take that, pay that off. But if Alex and I were given a $6,500 bill at dinner, I don't really know what I would do with that on a Friday night. It would be an enormous amount to be hit with. So whenever you look at the savings of an average American, those are always kind of scary numbers. What even as an average skewed by the upside,

18:42

quency number, while it's not: 2008

19:12

It's something like 12 % of Americans have them. And with the administration rolling back the Biden era pause, there's a lot more people who are tightening their belts and looking at this. So I do think credit card debt, of course you're seeing more delinquencies. There's a huge payment that people have not been making for the past four years that suddenly this age group is having to make again. Right. Yeah. You've got to start with the individual. You know, we talk about inflation, but then if you talk about how much debt

19:41

Each individual has, and you think about what an interest rate on a credit card is, right? Forget about 7 % mortgages. You're talking 20 plus percent. You're paying for that. That carton of eggs cost 40 % more than it did a year ago, but you're probably going to pay 60 % interest on it because it's going to take you several years to pay it off. All of this just creates more more stress on every individual out there. think a major example of that pain point in this

20:09

pushing people further and further to the margins is, you know, this, this buy now pay later, which is really, think games team and probably the last two years, you know, I don't really know if anyone who was using, you know, a payment plan for, you know, those everyday purchases, I guess a credit card, can think fit almost as it's not, but you know, some of these might not pay layers that they, function like a credit card. know, you make payment in full from your bank account to the, you bought from in 30 to 45 days, you know, a credit billing cycle. But a lot of these are, they're essentially just short-term consumer loans. You have.

20:39

two, three month payment plans, but they go out 12, 24. 24 months is two years to buy and a lot of the discourse was around, who's using this to buy your Chipotle at the end of the day? There's jokes to be made in there, but also at the same time, if this is a real pain that people are feeling, how close to the margins are so many people? And it just bears something to think about how much pain is being felt and as to what James said, how much people are needing to tighten their belts or they've tightened their belts so much that...

21:08

years, but: 2008

21:37

It's the exact same idea. It's just a different way of doing a loan. And something that I found interesting about, know, Kalarna is the main example of these buy now, pay later. But if you are failing to pay that, they can hit your credit score. They can report that to the credit companies and that can take you down. But if you are paying perfectly on time, they cannot, there's no reporting there. So you actually can't upwardly push your credit score by a...

22:05

taking on these short-term loans, but you can definitely damage it. So there's kind of a risk implicit in doing these buy now, pay later schemes. That's interesting. I didn't realize that they don't report unless it's a negative report. Only to the down, yes. Yeah. I mean, it's more debt, it's more delinquency, it's more opportunity for delinquency and all of these things are going to push rates higher, right? I mean, that's how credit card rates are calculated.

22:33

Chase or whatever the bank, what do they have to pay in general to cover any losses from delinquent borrowers? So we've got the individual covered. Then let's talk again about just international debt. We know that the big beautiful bill is at least on paper running up quite a deficit. We will hit a record deficit again this year no matter what. The effects of it might be different down the road, but that's on paper. We're going to borrow a few extra trillion then we're making.

23:03

this year, then you see that from other countries. We don't hear as much about it here in the US, but if you get out there and you read, you will see that other countries are spending more on things like defense is a huge one. There's also just generally just less socialization of certain costs going on as we de-globalize. What are you all hearing about that other than just the high level? I'm a big fan of looking at the scariest website. Have you ever seen the usdeckclock.org?

23:32

That thing will really keep you up at night. Actually, this making me laugh. They have a section for Doge. Apparently, you've saved $520 billion. That's a little incredulous to me. But at 36, nearly $37 trillion in debt, the United States is 122 % of GDP, maybe even a little bit higher than that. That's definitely a concerning figure. I know we talked about this about a week ago that

23:57

When people would talk about the debt, you used to be able to look at it and say, oh, well, 75, 80 % of GDP. We're nowhere near name a Soviet block country. We can compare and it still looks good. At 122, we are among the worst. And it's definitely a frightening thing to look at. It doesn't feel like we're towards making those austerity moves that would cut this down. It feels like we're attempting to grow our way out of it.

24:26

But with the interest on the debt being about as high as we pay for the military, which is a notoriously large number in America, it seems difficult to think that we could really grow our way out of this and not have to make some cuts somewhere. Some sacrifices. Yeah, I think you the nail on the head. I mean, it's a trillion dollars we're spending on just debt service, right? So that alone, just the debt that's already out there, we're going to increase that number.

24:54

To do that, we will have to issue more debt and there's not necessarily more buyers out there, more demand for this debt. We just keep going deeper below GDP. I'm with you and we've talked about it before where you used to be able to take comfort in looking at numbers and say, yes, we have a record amount of debt, but we're the largest economy in the world. As a percentage of our economy, it's relatively low. You can't say that anymore. Now, we're definitely borrowing more than what we're making. As a nation,

25:23

And we are up there with some countries that are notoriously edged in a bad spot like Greece, The countries that have actually defaulted before. We are not in a spot, it does not feel like we were in a spot where we could literally default, but just the fact that so much supply is coming online, so much debt needs to be financed that rates at this point, it doesn't feel realistic that rates go, like the 30 year mortgage goes below 6.5%.

25:53

Certainly not below six. I'll call that. We've been calling it, but I don't see how it's possible without some sort of major intervention like from the Fed, which could happen, but they'd have to have a real good reason. Just a really brutal unemployment picture or a major dislocation in markets. Even I don't know that a war at this point, a much larger scale war than what we're seeing, don't know that that would put a dent in interest rates, could even make them worse because defense spending across the globe continues to increase.

26:23

Anyway, we're not painting the merosiest picture, but I think we're all pretty realistic about rates at this point and that's what we're looking at. If anyone is still wondering at home, why are rates stubbornly high and how long is it going to be that way? That's basically the answer is there's not a reason for rates to drop and they'll probably stay here and go higher over the next five plus years. Yeah, tying it back to the inflation numbers, mean, there's so many other things out there besides just the raw inflation numbers that are going to keep.

26:52

those rates stubbornly high. So the amount of debt coming online this year, the amount of debt that needs to be refinanced this year, I'll play into the picture. then just every year that we don't address the debt issue, every year we kick the can on that, it narrows the options available to us. We've talked about austerity on this call today. And at a certain point, even austerity won't cut it. As James said, a lot of the times the debt is pitched as it'll grow the economy in some way, shape or form. some of that debt absolutely does.

27:20

Some of that debt does not, some of it is wasteful spending. But at the same time, like I said, every year that we kick the can on this and don't address it and keep living the high life, which come back to the personal. Living on debt like that, living beyond your means, you live in the high life, but at a certain point, you'll come down to reality. I think the one thing to keep in mind that's different between you and I and our credit cards and the US government is the US government issues their currency. default is, I think we said that word one time, default is

27:49

of the global economy since: 1945

28:17

Like I said, there's limited options and none of them are great. I just hope we can come to our senses sooner rather than later. Agreed. Well summed up, honestly. Yeah, the dollar, maybe we'll do a whole episode on the dollar. mean, the status of the dollars, the reserve currency across the globe has been called into question more than I've seen in my lifetime, just over the past six months. You can see it with the price of gold going up and generally the US dollar weakening versus other.

28:48

versus other currencies. Again, some of that is de-globalization, some of it is taking on too much debt. yeah, a story we will continue to follow and share with all of you. All right, gang, great discussion today. Thanks for the time. Thanks for the wisdom and we'll do it again soon. Okay, let's wrap this thing up. Thanks so much, Alex, Jeff, James. Great conversation today as always. Moving forward, we will continue to keep you all informed about what's going on. But that's it for today.

29:16

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