Fiscal Firepower and the Future of Interest Rates | Optimal Insights | July 7, 2025

Jim (: 00:18

Welcome to Optimal Insights, your host, Jim Glennon, Vice President of Hedging and Trading Client Services at Optimal Blue. Our clients 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. Welcome everybody. Hope you had a July 4th weekend. back here Monday.

July 7th, already deep into the hottest month of the year. I got a really good show today. As always, in the interest of keeping you informed, especially the things we need to know as originators and hedgers, going to talk about some market items today. So we're going to go with just one long segment here. We're going to give you a little market update on what happened last week. Of course, we had the jobs report, which was on an odd Thursday. Came in pretty healthy, probably shot down.

the thought of a rate cut here at the end of July by the Fed. So anyway, we'll dive a little bit deeper into that, but as we also look at just some of the items we've talked about on the podcast over the past couple of months, just these concepts that are kind of all coming together to put upward pressure on rates. And we'll put all of that kind of in a similar context. And then some thoughts on what might cause rates to fall. Like what would those scenarios look like? of rates, OBMMI.

Hovering around 6.7, so we had a little bit of a reprieve and then we bounced back up a little bit. Still below the average that we've seen here in the recent months, but just stubbornly above 6.5%. And again, after the jobs report last week, unlikely we'll get a cut, almost impossible to get a cut here at the next Fed meeting unless something significant changes. And even September's meeting, which has kind of been the one we've all been watching obvious opportunity to cut. think that one's in question as well.

Still odds are there will be a cut in September, at least if you look at the CME Fed tracker. So the money is on some sort of cut by then, but obviously it will depend on what happens with inflation related to tariffs. we'll talk a little bit about government spending. There's some big news on that over the weekend that you probably have heard about. Anyway, we'll get into all that and more here in a few minutes. Volume is still good though in our industry. Not a lot of lights flashing there. I know.

Last couple summers, we've all been a little bit disappointed with the home buying season, but seeing a decent uptick there over last year and also seeing refis continue to grow just as people need to unlock equity from their homes in different ways. So seeing the refi numbers pretty healthy this year and that's kind of tracking along with what the MBA has been predicting. right, let's go over and talk with Kevin and Alex about what's going on in the market.

Jim (: 03:01

All right, welcome, Kevin, Alex. Good to see you. Hope you had a good fourth weekend. And obviously we were all kind of paying attention to the news over the past four or five days, a lot going on. Let's just get into it. So Alex, important numbers, always the labor report is always an important one, right? And that kind of on its face, right? It was a very short trading day on Thursday. Unemployment report comes out 8.30 AM.

Eastern time and right off the bat, looks bad for rates, right? It looks good. Let's say it looks good for the labor market. Comes in a little bit hot, kind of in line with where we've seen it the last few months, but you've read a little bit deeper into it and there's some facts in there that I think are important.

Alex Hebner (: 03:46

Yeah, I hope you had a happy fourth as well. And on the face of it, as you noted just a moment ago, this labor report looked extremely strong when you look at the headline number and it really decimated any chances when you look at the CME FedWatch for rate cuts in July. It's 95 % for a stay in July now and 60 % in September. So just creeping down on that yeah, looking a little bit deeper beyond the headline number, looked really strong. 146,000 new jobs, well above estimates.

The unemployment rate, which was expected to tick up a tenth of a percent, stayed where it was at 4.1 percent. it looked really healthy. the caveat there is private payrolls, which is really the driver of growth in the economy, was only 73,000 of that 140. a big chunk of that remaining new public sector payrolls were in education space. this is really a seasonality effect in effect here, because this is the time of the year that school teachers are being hired.

for next year. I think it's great that we're hiring more teachers, get those teacher student ratios down. But on the face of it, I think this is like a one time standout month because they're not gonna be hiring more next month or the month after. definitely I think that cushioned a lot of the market reaction. By the end of the day, we were pretty flat in the bond markets. we'll just gotta keep an eye on Looking towards next week,

I'm going to continue to say, just keep an eye on that initial jobless claims that until we see an uptick, as we've been saying, until we see an uptick in the unemployment really no fire that needs to be addressed in regards to getting rate our industry. Our industry would love to see more volume and we're all dying for more volume. But from a full US economy standpoint, there's smoke, but there's no fire, as we keep saying.

Jim (: 05:25

Mm-hmm.

Yeah, no, does feel like even with those nuances of the report, right, a little bit coincidental that there's all this local and government hiring this month. Still doesn't look great, but private payrolls are still building somewhat, even in the face of all these headwinds we keep talking about. So, yeah, where it was.

Alex Hebner (: 05:41

Yeah, it's good to see

seeing private payrolls expand, but that 73,000 in private payrolls that we saw was the weakest since October. in October was a jobs report that was heavily impacted by the Southeast storms that were happening last fall, September, and October. to see that week of hiring without a natural disaster or some natural input, a one-off situation, I think that is a definite sign of weakness there.

Jim (: 06:07

Right, right, just kind of scraping the bottom at this point. Waiting for that negative number potentially to come in late summer or fall.

before we get into big beautiful bill, tariff deadlines, coming up this week as far as numbers?

Alex Hebner (: 06:19

It's a pretty quiet

week. There's some consumer credit numbers on Tuesday. There's initial jobless claims. Again, I would really keep an eye on the initial jobless claims and consumer credit to an extent. That's gonna, I think we've seen the emerging trend of weaker consumer sentiment, consumer spending. if we start to see cracks in the credit model, those would all be more signs that the consumer is under pressure.

Jim (: 06:27

Mm-hmm.

Right. Yeah, the jobless number, the jobless claims number is a good one to watch it every Thursday, by the way. If you're listening, you did not realize that every Thursday that number comes out and it basically represents who have applied for benefits for unemployment benefits. So it could be a really good real time indicator of what the jobs market looks like.

Alex Hebner (: 07:01

Yep, far more timely than non-farm that everyone keeps an eye on, it's a good one.

Jim (: 07:06

Yep. But then next week, which we'll talk more about this next Monday, we do have the inflation numbers coming in, which really at this point should start showing some signs of tariff impact if it's going to happen, right?

Alex Hebner (: 07:20

Yeah, yeah, you would think so. They were, they were pretty strong last month. And by strong, mean lower in regards to inflation. but yeah, you would, you would expect to see some sort of tariff impact at this point. Again, we're, floating at lower tariff level, think. But, um, you know, the overall tariff level is of the 2024 import mix somewhere just a little bit south of 20%. I would expect to see some inflationary pressure there again, not everyone that loaded up their warehouses in the.

In the early spring, in anticipation of these tariffs, those warehouses are gotta be scraping the barrel. I keep saying scraping the barrel in this cast, but I would expect the same in regards to inventories.

Jim (: 07:57

Right. So everybody who kind of tried to stock up or dig through the corners of the warehouse to figure out what they could sell that they had bought before tariffs were pretty quickly imposed after the inauguration. Yeah, those goods have got to be gone or you'd think they'd start bleeding the tariffs into the price. So there's not such a shock when the new Nikes come in.

Alex Hebner (: 08:15

Right,

yep, yeah, and you see headlines every now and then about how Walmart is, or Walmart or Amazon, whoever it was, is notating what percentage of the price was being offset by tariffs. But yeah, I think by and large, it doesn't seem to have let in yet, but this is kind of the inflection point. A lot of economists were saying June, July, somewhere in there. We'll have to see. Something's gotta break at a certain point. But while we're on the topic of tariffs, today, today.

Jim (: 08:32

Mm-hmm.

Yeah, let's stay on this for a minute.

Alex Hebner (: 08:40

Yeah, today's the day. should be seeing those, ⁓ reciprocal tariffs going into effect today, but, over the weekend, they, that out to August 1st. So we've got an additional 23, 24, 25 days, for them to negotiate. and it was a blanket exemption. So, everyone across the board that doesn't have a trade deal yet, ⁓ is, is remaining at their, their current tariff levels and not, not the hot, not the very high ones that we saw put into effect on April 2nd. So,

They're still negotiating. They're getting close on some of the big ones, those Southeast trading partners. We got one done with Vietnam. ⁓ think it's Cambodia and Laos. lot of textiles come from there. think those would be big ones to get. then they got a framework out of London several weeks ago. It seems like a lifetime ago with all that happened during June, especially in the Middle East. But there is a framework there. It needs to be reviewed by Xi and Trump. And the fact that it's of bled away from the headlines, I kind of wonder if they're going to have to go back to the table on that one.

someone doesn't like something in there. Otherwise they would have signed it at this point because I mean they're looking for deals, right? And China's a big one. have to see. That one might be going back to the drawing board, but we'll see.

Jim (: 09:42

Right.

Yeah, it could be the biggest one, probably the biggest in terms of the headlines. But yeah, Vietnam got done, like you said, with these continued extensions of the deadline, we are actually seeing some deals get done. So I think that's encouraging. We're getting to a spot where we can just start doing the math and seeing what it does to the inflation numbers.

Alex Hebner (: 10:06

Yep.

Kevin Foley (: 10:07

Yeah, think, know, and we've talked about this before, but the average trade deal timeframe, historically, looking back is like a year and a half it takes to really do these deals. And so they're doing them at a highly accelerated timeframe. But seem like there's progress being made, Alex, think focusing on frameworks probably something that we're going to end up seeing more of because

allows you to kind of front load 80%, let's say of the agreement and then iron out that last 20 % behind closed doors. the market sees the headline, the market sees the momentum, and then a lot of the logistics, a lot of the painful things around how are going to handle this section of goods or that section of goods. At the end of the day, I think the markets are mostly looking for is there willingness to get something done? Can they agree in principle? And the headlines are really driving that.

So probably gonna see more of that later this summer, but it might not be the full scope of what we might normally see in a trade deal that might take longer, but the net effect is probably still gonna be the same.

Alex Hebner (: 11:12

Yeah, think frameworks are going to be the way a lot of countries are going to want to go, just because Bessent has indicated kick the can on this as long as they need to for each individual country, so long as they're negotiating in good faith. And I think having a framework, which doesn't, that's not tying you down to anything, but it does prove that you are negotiating, then you can come to the table with some sort of give. So ⁓ I'm with you, Kevin. I think we'll see a lot of frameworks.

Kevin Foley (: 11:34

Mm-hmm.

Yeah, think one other interesting thing to watch too, I know you mentioned now is sort of the inflection point for tariffs going to have an impact broad based on US goods. I think there was a lot of anxiety about this early on after tariffs went into effect, just given the size, the magnitude of the tariffs that are out there. You got to remember that those were rolled back significantly a few weeks. while there is still a net effect of tariffs,

It just gives I think, more flexibility, given that's much smaller magnitude, figure out ways to avoid passing those costs off potentially for longer or just kind of working through whatever logistics are to potentially avoid those on down the chain. So I think important reminder just that.

The tariffs are not the original tariffs that we're talking about. They've been scaled back significantly.

Alex Hebner (: 12:31

Yep. Scaled back and one of the Trump administration, one of their big talks they want to hit on is trans shipments. You know, this is, this was a big work around that China employed during the first trade war during, the first Trump administration where they would ship items first to Vietnam and then Vietnam would send them onwards to the United States. They're looking to address this with all these trade deals. In fact, in the Vietnam deal that was done, specifically, anything that is trans shipped via a higher rate there, but I'm with you. think.

Kevin Foley (: 12:56

Yeah.

Alex Hebner (: 12:56

While there's no frameworks in effect, I think a lot of companies are taking advantage of, they're looking at each individual country and where they can ship things through to get the lowest possible rate.

Kevin Foley (: 13:05

saw some headlines the last week or so about trans shipping. So maybe just sort of explaining what that is for the audience and kind of how this factors into the overall situation internationally. trans shipping is like you mentioned when you're moving goods from let's say China to Vietnam, then going to the US. But today there's a provision companies if

substantially changing the product within the country of Vietnam, let's say, they're going to get subject to the Vietnamese tariffs and not the Chinese tariffs, but the money flows the same way. I think there's some perception out there that there are a lot of companies who are saying that they're materially changing. exactly. But they're really just mostly just docking the ship and whatever that they do to get around it. They're looking

Jim (: 13:44

laundering.

Kevin Foley (: 13:55

scope of when tariffs from the originated country were applied and really limiting the scope of what it means to fundamentally transform the product or the widget what have Definitely that's a tricky thing to implement for sure once you start getting a little bit more into the weeds on that. definitely another thing to watch in terms of global shipping and how that might potentially affect supply chains or anything.

Jim (: 14:18

Yeah. I mean, how do you police that? If you're not proactive about it, you kind of have to wait for someone, for a bad actor to stick out. And then I guess you put sanctions on that, that bad actor, right? Rather than have actual inspections in these foreign ports, trying to figure out if like, yeah.

Kevin Foley (: 14:28

Right.

Yeah, we're not in there. Yeah, we're not in Vietnam to

go say, they materially changing this or not?

Jim (: 14:37

Are they just changing the label on it and saying that, now it's made in Vietnam and send it, send it along. hard to say how that all that's going to work out.

Alex Hebner (: 14:43

That's exactly what they were doing during the

first administration. The first administration was a gold mine for Vietnam because it's right over the border from China a lot of capital inflows from China as they build factories there to make their goods there.

Jim (: 14:48

Mm-hmm.

Right. This could be a boon for some of those countries, but once again, if it's done the right way, if they're actually making some, like you said, making changes, the textiles come from China and the shirt gets made in Vietnam. You get Vietnam's tariff structure, right?

Alex Hebner (: 15:12

Yep. They're looking to close that loophole at the end of the day.

Jim (: 15:14

Yes.

anything else on tariffs for today? We will be talking about it again next week, ⁓ I'm sure of that.

Alex Hebner (: 15:19

I'm sure we will. ⁓

this is just kind of coming out this morning, but Trump threatening additional 10 % tariff on countries aligning themselves with the, the bricks block. That's kind of the, the non-dollar denominated block out there in the stands for Brazil, Russia, India, China, and, ⁓ Singapore, maybe South Africa. are right, Kevin. yes, just kind of a third kind of making the world a little more multipolar in a way,

Jim (: 15:36

Mm-hmm.

Kevin Foley (: 15:38

Africa, I think.

Alex Hebner (: 15:46

Their biggest complaint is the dollar denominated system throughout the world. anyone moving in that direction, getting threatened with an initial 10 % today. But we'll have to see if that comes to any sort of fruition.

Kevin Foley (: 15:56

Yeah, interesting, interesting story behind this too, look at the value of the US dollar in 2025, it's off to worst year, I think 50 years or so, it's down about 10 the year. so the way that I think about this kind of have pressure hot potato that you can sort of pass around to different countries. And so we've had this hot potato for the last few years.

Jim (: 15:56

Yeah.

Kevin Foley (: 16:22

The US dollar has been very strong. went up substantially, I like, I forget the exact amount, but more than it's dropped. that was when we saw interest rates go up and everyone was going into treasuries and looking to pick up some of that risk for a yield. And it's since pulled back. But when the US dollar pulls back, that actually

of exports that currency pressure to other nations. So don't want to have an overvalued or slightly overvalued currency because that's going to hurt your exports. There's all sorts of issues in terms of central banks being able to that with reserves and what foreign currency reserves do they have. it's an important thing to call out.

Why are we seeing the BRICS announce this, our response to this? The broader background context is the falling US dollar. down. In some ways, it's beneficial for us. I think there's some arguments on both sides of whether it's good or bad, but I think relative to the last few years, it's a good thing. how that's affecting other countries to expect based on on more of that currency pressure.

Jim (: 17:33

Yeah, it's all the backdrop of, know, maybe there is some strategic allowing a slight devaluation of the dollar, but at the end of the day, we need it to be the reserve currency of the world, or we have much bigger problems than a little bit of inflation from tariffs or whatever, you know, or a growing deficit. I it would obviously make things worse, why the administration announced this potential additional tariff on nations that dropped the dollar, because that would obviously have a big impact on

the supply of dollars that are out there and start to devalue the dollar even more if you see the BRICS countries walking away from it completely.

Alex Hebner (: 18:10

And I think a lot of the parallels you see people trying is to the 1980s and there was an official kind of devaluing of the US dollar that occurred a lot of our partners, France, Japan, in the 1980s were complaining the dollar was way too strong and that resulted in the Plaza Accords where they, it wasn't like this where the market was kind of dictating that the dollar was going to come down but it was much more central bank out there with goal of

lowering the ⁓ value of the dollar relative to those partners.

Jim (: 18:37

Well, speaking of of the dollar, kicking the can down the road, all the things we've been covering here, big, beautiful bill passed on the 4th of July, it signed on the 4th of July as was the goal of the administration. that drama is essentially done. Now it's, think, just up to the representatives to kind of sell it.

Alex Hebner (: 18:42

You

Jim (: 19:01

to the nation before the next election, right? Like what all was in this thing? Everyone's still kind of digesting that everything happened so quickly. Certainly for me reading about it every day and what's getting cut out, what's getting added, what's getting changed as it moved through the house and Senate and the final votes, a lot going on there. But at the end of the day, it technically increases the deficit over what the deficit would have been over the next few years, over the next 10 years. So it's adding debt to...

to the world that needs to be purchased by someone. So we'll get to that here in a minute. But generally speaking, what all was in this bill that's of note, do you guys think, to our industry or just in general to the defense? $180 billion, I think, added to defense spending every year, which is obviously an important component. There were a lot of other pieces in there that had to do with tax cuts and just further investment in infrastructure.

Kevin Foley (: 19:45

Mm-hmm. ⁓

the Tax Cuts and Jobs Act of: 2017

either next year or the year after, essentially going to go away. So relative to current law, big beautiful bill increases deficit. So keeps the tax cuts in place and it adds more to debt than if the tax cuts had expired. But essentially, it's really just keeping those in place.

that's generally what the markets were expecting speaking. If we're in a situation where all of a sudden all of those tax cuts went away and went away 100%, that would be a pretty significant fiscal tightening would happen. So when we hear that we're adding to the debt, it's important to understand that this is relative to tax cuts that were going to expire. And if those had expired all at once,

probably would not have been a great thing. that said, I think there's a very strong argument that the tax cuts that are in place now and are set to continue are unsustainable relative to our actual fiscal spending. And in the big, beautiful bill, are spending cuts, pretty significant spending cuts to...

ative to current law today in: 2025

there's an argument to be made that this is kind of fiscal tightening because it's keeping the tax cuts in place that are there today, but then next year, there's going to be a reduction in spending. Right. Versus we're seeing today. So end result is you kind of have inflation pressures a little bit on both sides.

Jim (: 22:08

some counterbalance to it. Yeah.

Kevin Foley (: 22:19

You have an inflation reduction pressure due to the reduction in spendings, specifically around Medicaid. And then you have pressures that are pro-inflation due growth potentially from the tax cuts and then also just from increasing the debt, which that is kind of the big story, I think that.

this bill doesn't tackle and leaves unresolved. know, the US among developed nations, particularly among large nations is really right at the top in terms of its debt to GDP ratio. of the US, which is at about 125%, you know, debt to GDP, you have Japan, which were about six times the size of Japan. And then Greece and Italy, Greece, not really a big economy. And, you know, Italy were

think about four times the size of Italy. we're really, relatively speaking, there really is a problem to solve there, this bill does not tackle. But those are some of the big you're seeing coming as a result of this bill passing.

Jim (: 23:27

Yeah. I mean, like you said, so that's very important point is that in the parallel universe of if the administration were to do nothing, we would have had tax cuts that would have expired and we would have just kind of had a default of the deficit, yes, increasing taxes could be seen as something that's not great, but at the same time, at what point do you start cutting into the deficit? you do find yourself in the company of

A handful of developed nations that have deficits as high as ours or debt versus GDP that's as high as ours, and even a bunch of undeveloped countries like parts of Africa where either their inflation is out of control or they're just trying to grow themselves out of just to become a bit more of a developed nation. There's just no political will out there to reduce deficits at this moment.

obviously lot of debates on why that is and how that works and perpetuating these tax cuts could actually help us grow as a nation in terms of GDP and grow the other side of the equation, right? Instead of reducing the deficit, increase our actual output, which with things like AI and other, creating jobs and things like that, that's certainly how the US has become the largest economy in the world.

Kevin Foley (: 24:37

Mm-hmm.

see how it ultimately ends up playing out both economically and politically. I do think one big headline coming out here is doesn't seem like we're quite resolving the debt and deficit issue head on. at the same time, like you mentioned, as a result of this pro-growth there's a lot of interesting nuggets in there could potentially move the needle. just have to

to wait and see kind of as they're implemented. But a few things relevant to our industry that I be good to highlight were provisions in the bill. Now, these relatively speaking, I would say are more minor provisions. So sort of swamped by the tax cuts or spending cut conversation in terms of their magnitude. ⁓ Exactly, yes, yes.

Jim (: 25:30

sure they're relatively inexpensive compared to some of these other monster provisions.

Kevin Foley (: 25:35

Right. When you think about housing or mortgage industry, think these for folks to be aware of. the first is the bill actually has the largest housing credit expansion in 25 years. it raises the low income housing tax credit. And this is really a way to stimulate. It goes to developers, but it's a way to stimulate.

low income housing. So it gives easier access for financing for developers. So they have to put less cash upfront. the net effect should be incentive to produce more low income housing, which is a good thing. second item is, and this is a pretty interesting one, the Veterans Housing Fund via a buyback tax. So bill introduces a 1 % excise tax on corporate stock buybacks for firms

net worths greater than $10 billion. And it takes that money and that goes to a fund to support housing programs for homeless veterans. And that they project is going to be to the tune of around $12 to $15 billion over 10 years, so a billion and a half or so. And that will be distributed via grants, ⁓ stimulating housing construction as well.

interesting things there and then also something that's been talked about often, but the SALT SALT cap deduction. So state and local taxes. also if you're a homeowner property taxes. Previously with the Tax Cuts and Jobs Act, that cap was 10K and that's gone up to 40K. So you can now deduct up to 40K for your state and local taxes as well.

There was important component for technology that didn't make it into the bill, was stripped, AI regulation freeze. So was a provision in there at one time that would prevent any state entity from regulating artificial intelligence and that was removed. that would have created one federal standard for AI regulation that ultimately was taken out.

interesting things in there. think for the audience to be aware of one other one I'll throw in there and this is for anyone who is homeowner and thinking about going solar the there was a provision in place today if you I'm gonna add solar to your home or by you know, Tesla Tesla Powerwall get you know, battery powered backup for your home that is expiring at the end of the year you want to you get solar installed,

get yourself a home battery backup. got to do that before the, you got to have it installed before the end of the year or else that goes away. So if you're thinking about doing it, probably get on that and then, you know, take advantage of that 30 % off.

Jim (: 28:13

Yeah, same way. Same with the electronic electric vehicle credit that expires as well. that's a pretty big difference because that was, you know, nine grand for a lot of folks, which you buy one of the more affordable electric vehicles and it kind of pays for it, at least for the first few years. Yeah. So a lot of those things were expenses, you know, for the, for the federal government and those will drop off. So that's part of the, you know, potential savings side. And yeah, as you mentioned with salt, lot of this just sort of, there's like a tide.

Kevin Foley (: 28:17

Yep. Yep.

Jim (: 28:42

kind of is pushing a little bit more and goals ideas and responsibility back to the states, which is interesting. That was, as I recall, ⁓ was a theme in the first Trump administration was states' rights being a bit more of an emphasis, which typically happens with Republicans, right? Smaller federal government, that needs to be, a lot of times needs to be taken up somewhere else. It tends to be the states or the local municipalities.

Kevin Foley (: 28:59

Mm-hmm.

Right.

Yeah. One last thing I'll throw out there too is case anyone was curious about this, the major housing and mortgage trade groups are all on the record in support of the bill. So that includes NBA, the National Association of Realtors, the National Association of Home Builders and several others. So they're all on record in support of the provisions in the

big, beautiful bill. Generally speaking, that's to be expected for significant piece of legislation to pass. Trade groups come out in that is on the record supported by our industry, housing industry, and others.

Jim (: 29:51

Right. we've talked about a lot here today. And I will add one more thing that kind of piles on the mountain of debt that's going to be online here in a very short period of time. Right? So we have tariffs raising tax revenue. So that's on one side. That could actually reduce deficits, also could increase prices. So there's a tug of war being played there. We have the big, beautiful bill, which

kicks the can down the road in terms of deficits. There's also, and this is kind of with all the drama about tariffs and the big, beautiful bill and other things going on in the world recently, may have been a little under the radar, but I find it fascinating that just the agreement that NATO has agreed, all the members of NATO have agreed to significantly increase their defense spending from what was kind of like a, as I understand it, kind of a fluffy 2 % target.

up to a flat 5%. of that can be non-lethal spending and there's some negotiations that happened there, but at the end of the day, it's 5 % of GDP, which is potentially a doubling some NATO nations that were just skirting along around 2%. So that's an enormous amount of debt that may need to flood the market. That's not all deficit spending, but a lot of it is, right? As you mentioned, pretty much all developed nations are working at some sort of deficit right now.

including us.

Kevin Foley (: 31:13

Yeah, no, think that's a really important point to highlight. so if we also even take a step back and look at macro US versus Europe in 2025, think two major headlines, that headline and then German government also signaling a significant boost to their own defense spending have really moved the needle Europe in terms of both bond yields.

going up as a result of that, but also asset prices. Year to Europe is a better place to be than US assets, partly of those headlines stimulating their domestic economies with additional spending. Now that's sort of like a both sides of the coin thing because some more stimulation is good, too much is not good, European asset prices, European stock indices are outperforming US.

stock indices fairly significantly, even though the US is now back up hitting all-time highs for some of the major stock indices. So a lot of interesting things going on in Europe this year. And I think the NATO headline is really just adding to that story.

Jim (: 32:20

Yeah, revving up the engine, This is all potentially pro-growth if it's done the right way. When there are government contracts that come along with a lot of this, there's a lot of trade that's going to happen. You know, not everybody makes their own tanks and missiles and jets, right? So there's a lot of trade that's going to be sparked by this. it's, think I did a little quick math earlier. It is roughly a doubling. Like the NATO budget defense spending right now is about 1.5 trillion. We're like two thirds of that, the US is.

But that should double over the coming years. You'd be talking about a $3 trillion budget for defense just across the NATO nations, which is a majority of the developed world, other than basically China and Russia, pick up the rest of what gets spent on these sort of goods. So yeah, we'll see how that gets taken down. But at the end of the day, it's going to add more debt onto the market. We're adding more through just

Kevin Foley (: 33:04

Mm-hmm.

Jim (: 33:16

continued deficit spending and somebody needs to buy that debt, right? That's the punchline of all of this is if, know, the Fed can affect short-term rates overnight, literally, and that might happen here in the second half of the year, but long-term rates are largely determined by supply and demand and there's just a ton of supply of bonds on the market right now and for the foreseeable decades. So it's likely that those yields will need to be fairly high unless you have some kind of circumstance where the Fed is forced to come back in and buy bonds or you have

Deficits that do get reduced and you actually have, you know a tightening supply at some point right now just feels like everybody's pro growth. Everybody's gonna be chasing You know that that growth machine for the next 10 years and that's just gonna keep you know, keep rates, you know mortgage rates Unfortunately, probably between six and seven percent

Kevin Foley (: 34:04

Yep, think that's a big takeaway there is it seems like at this point, there's potential for mortgage rates to move up in the same way that there is the potential to move down. So we're sort of just in that space where it really could go either way. But so far this year, it's fairly consistent.

Jim (: 34:24

Yes. And the short-term rates do drop. Those arms are going to have legs, Kevin. We're going to bring that back.

Alex Hebner (: 34:29

You

Kevin Foley (: 34:31

Yes, sir. Yes, sir.

Jim (: 34:34

All right, anything else, gentlemen?

Alex Hebner (: 34:36

Happy birthday Jeff McCarty. We're without our fourth wheel today. I hope you're listening ⁓ on your birthday. Happy birthday.

Jim (: 34:38

Yes.

You may have noticed Jeff is not with us today. He's off today. I'm not sure because of his birthday, but today is Jeff McCarty's birthday. Happy birthday. All right. Thanks everybody. Thanks Kevin. Thanks Alex.

Alex Hebner (: 34:54

Thank you.

Kevin Foley (: 34:55

Yep. Thanks, guys.

Jim (: 34:57

All right, let's wrap this thing up. Great show. Appreciate you, Alex, Kevin. Good conversation, a lot to think about, and a lot more coming up. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thank you again for tuning in to Optimal Insights.