Tariff Tangle: Tracing the Impact on the U.S. Economy and Housing | Dec. 9, 2024

Jim Glennon: 00:00:31

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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 keep the industry informed. Let's dive into today's episode. Thanks for being here everybody.

On this Monday we've got a really good session, really good podcast for you guys today. We talked a little, we foreshadowed it a little bit last week. As always, we'll have a quick economic update with Alex.

We're going to talk about the unemployment report that came out on Friday as well as some inflation data that's coming out this week. And then we're going to talk about tariffs. We're going to give you just some things to think about there.

There's lots of moving parts and there's really no experiment that we could look back on and say here's how things will work if tariffs are imposed. Right. So it's kind of an interesting thing.

Jeff McCarty: 00:01:39

To talk through and then talk about how those tariffs fall back into the things we just talked about. Unemployment, inflation, ultimately, mortgage rates. We'll hit on where they're at right now in just a minute.

Jim Glennon: 00:01:52

Yes, yeoman, welcome. Jeff, as always, and Alex and Kevin, all four of us will be, will be having that discussion.

And before we get into the economic update, just a couple stats that we thought were interesting this week. The OBMMI, which is the conventional 30 year interest rate is at 6.56, so down a little bit.

We had a good rally on Friday and just have had rates tick down a little bit and that's led to some volume pickup. We've seen locks up 20% month over month. So that's, you know, this time in December versus this time in, in November.

And then most of that's from refis, almost all of it. Purchases are pretty flat. So refis are up about 20% over last month and volume in general is up 40% roughly year over year.

So last December, as it normally is in the, you know, seasonal cycle is pretty slow. But this December is actually pretty healthy, even if you compare it to the last few months. So I think that's a positive for the mortgage industry.

And we also want to highlight our Summit that's coming up.

We've talked a bit about this, but want to make sure we're reminding everybody that our Optimal Blue Summit is in San Diego February 3rd through the 5th, coming up here in the first quarter. It's at the Marriott Marquee at the San Diego Marina. So please do check out our website, summit.optimalblue.com to check out the agenda.

Check out the speakers list which keeps growing. Check out the agenda and see if it's for you.

No matter what your role is within a mortgage bank, it's likely that you're going to have a track that you'd want to take at this event. So check it out. Please do register. As we've said before, we have some wonderful speakers internally.

We're bringing in a ton of folks from the aggregator world, the broker dealer world, the originator community, and also Tony Hawk. Tony Hawk will be there. So if for no other reason, Tony.

Jeff McCarty: 00:03:46

Hawk, 1.4 billion in video game sales. Tony Hawk.

Jim Glennon: 00:03:52

That's a stat. Yeah, that's a stat.

Jeff McCarty: 00:03:56

Pretty impressive.

Jim Glennon: 00:03:57

Very impressive. Very impressive. So, yeah, please join us there. All right, let's get into some economic discussion now. All right.

Jeff McCarty: 00:04:05

Welcome, Alex and Kevin.

Alex: 00:04:06

Hey, good morning, Jeff.

Kevin: 00:04:07

Morning, guys.

Jim Glennon: 00:04:08

Morning.

Jeff McCarty: 00:04:09

We have had a Friday was based off the employment numbers. On Friday we had a nice rally in mortgages. Rates are down.

Rates dropped almost an eighth day over day, which Kevin was just mentioning before the show was a really big move for what we see for a day over day move in rates. So again, some positive things.

Kevin: 00:04:29

Yeah, it doesn't happen very often, especially not now.

Jim Glennon: 00:04:32

The mortgage market has been generally boring of the interest rate market after the election. An eighth was a pretty big move that led to some decent block volume we saw.

Kevin: 00:04:42

Yeah, it feels like the market's just waiting for the page to turn a little bit. Everyone's just hanging tight end of the year until inauguration.

Jeff McCarty: 00:04:49

Yeah, I think so. Alex, can you walk us through what happened with the employment numbers on Friday specifically to lead to that drop in rates?

Alex: 00:04:58

Yeah, definitely. Really? We just kind of bounced back to the mean that we've been expecting the last quarter or half year.

Last month's was an extremely weak release, but it was caveated with the fact of the hurricanes impacting the southeast of the United States. You know, we saw 12,000 new jobs, like we said, drop in the bucket. Last month that was Revised up to 36,000.

Still drop in the bucket, but a revisement up is always positive. And then we saw 227,000 new jobs on Friday. So Again, just that return to mean job market remains strong.

When you look at headline numbers again, it all comes back to the emerging story about, you know, the Federal Reserve and making sure they're fulfilling their dull mandate. Waller, he's the St. Louis president. He had a speech last week where he was extremely dovish.

He wanted to start addressing employment concerns that he was seeing. I was reading some commentary from Chris Maloney who we had on about a month ago.

Now he expressed concerns that, hey, we're not done with inflation but we are seeing a dovish tilt to the Fed right now and the economy appears to remain strong. There are, if you dive into the report, there's some maybe pauses for concern. Nothing too crazy yet.

I think one that really pops out to me is in the last year we've seen about 500,000 new people added to those working part time for economic reasons.

So essentially what that means in bureaucratic speak is that your hours have been cut at work from full time work down to something that's considered part time.

So right now we've got about four and a half million folks in the economy who are not working full time when they would prefer to be working full time. I'd say that's something to keep an eye on and as always, unemployment.

But for the time being for the vast majority we seem to remain in a strong position.

Jeff McCarty: 00:06:36

It feels like we're just waiting for momentum in either direction really at this point. Right. So we're looking at those part time numbers, we're looking at delinquencies and those are kind of maybe ticking up.

Is it going to, you know, really start to fall off a cliff where we, you know, those types of things that we do see going into recessions, are we going to be able to stem that off and continue to go into this soft landing we've been talking about for a long time?

Alex: 00:07:02

Yeah, definitely. I think there's at the very, you know, on the margins, I'd say that there are some, some concerns. Six and a half, seven coupons.

I was seeing some, some commentary from BOK last week.

Six and a half, seven coupons, which is really the top, the coupon stock, what we originated, even when rates are at their highest, you know, very few amount of seven and a half out there, but they do exist. But for those six and a half and seven coupons in the VA space, there's a 10% serious delinquency rate at the moment.

So that's definitely something to keep an eye on. I mean that's 10% of folks in those coupons are 90 plus days, so three months payments late on their mortgages. So I would keep an eye on that space.

Kevin: 00:07:37

VAs are always a little interesting too with the 0% down and just overall different terms and kind of catering to a different market as well, right?

Alex: 00:07:47

Yeah. Definitely not reflective of the whole. For sure.

Like you said, Kevin, the underwriting standards are different and there's carve outs for those borrowers.

Jeff McCarty: 00:07:56

All right, so before we get into tariffs and a much broader macroeconomic conversation, just specifically, what else do we have going on this week in terms of numbers? We got some big inflation numbers this week, right?

Alex: 00:08:08

Yeah, that's the headline number I think anyone in the mortgage industry should keep an eye on. Again, flip side of the coin for the Federal Reserve. Keep an eye on inflation. We have CPI Wednesday followed by PPI on Thursday.

PPI is the one that the Fed really consults. They consult both. But ppi, the cost of doing business essentially for businesses, see what direction that travels in.

It's expected up a few tenths of a percentage point, 2.3% year over year. That would land us above 2% inflation again. Again, that's something that they've expressed that they're comfortable with.

Kevin: 00:08:42

Good.

Jeff McCarty: 00:08:42

Thanks for the short term economic update. So again, broadening this out, Jim, you want to set the stage for us today. What's going on with tariffs right now?

Jim Glennon: 00:08:51

Yeah, yeah, we're going to try to, you know, feed you some information about this so you can kind of draw your own conclusions. I don't think there's any precedent to what is being talked about right now.

You know, tariffs were a major tool and we'll get into some history about it. But you know, a major tool back in hundreds of years ago when, you know, our nation was first founded.

But lately there's been little experiments with major tariffs for the major developed nations, other than some of the tariffs we've had on China, for instance, for the past five years or so. So what's proposed now in the new administration is going to be five to ten times what those numbers look like.

There's obviously speculation on what will actually be rolled out and how quickly and when and what the effects will be and what the intentions are. Right. Is it really just to increase tax revenue or will there be some use of tariffs to accomplish other political goals?

We will find out, but we'll give you all those things to think about here.

Kevin: 00:09:46

Yeah, and I think it's interesting and someone might say, hey, why are a bunch of mortgage folks talking about tariffs and what we want to do as well as bring it back to the world in which we live in with mortgages and interest rates.

Because ultimately what happens at the macroeconomic level or geopolitical level will have an effect, or certainly could have an effect on our business and what we're all doing in the mortgage industry, right, by.

Jim Glennon: 00:10:15

Way of jobs, by way of potential inflationary pressure from tariffs, gdp, just production in general.

der the microscope going into: 2025

Jeff McCarty: 00:10:37

I guess we start the discussion with just kind of a history of tariffs. Alex, you want to be our economic historian here for a little bit?

Alex: 00:10:44

For sure, for sure. This is the stuff I love and I'll try and keep it brief, but I could talk about this all day.

Tariffs have actually like a long and storied history in US Politics.

r hundreds of years, up until: 1913

And there were also political and economic arguments mainly made by Alexander Hamilton, who, as many of us know, was a founding father.

His argument was essentially that to protect what he considered infant industry in America, which was, you know, at the time, America was a commodity exporter, an agriculture economy for the most part. But he saw a future in where America had an industrial base.

At the time of the nation's founding, really the only country that had an industrial base was the UK and so Alexander Hamilton said, we have to protect our industries. We really can't compete with the UK Actually, George Washington's second bill he ever signed into law was a tariff.

And it amounted to about 20, 25% tax on incoming goods into the United States.

years up until kind of the: 1920

hamilton's argument that we need to protect our industry, you know, create a home industrial base, kind of was, was justified. Essentially then you have the World War periods You know, tariffs were still, you know, that I could go on all day.

war that, that emerged in the: 1930

And then after World War II we really switched gears.

he world's industrial base in: 1946

And so we became a big proponent of free trade since we had that industrial base and our companies were able to compete anywhere in the world very, very competitively.

And so out of that you saw, you saw gatt, which is the General Agreement on Tariffs and Trade, out of World War II, which eventually became the WTO, what we know today as the World Trade Organization and nafta, which essentially what you can think of as all of this was building towards was the United States needed to expand its markets. Domestic consumption was simply not enough, so we had to export our excess goods outward.

There's, there's been time periods in the United States where both have been necessary and you know, it's kind of flip the coin. Where, where are we right now? I couldn't tell you. We have a strong industrial base, but we've also seen that industrial base degrade in ways.

So that's where today's arguments come from.

Kevin: 00:13:40

Well, I certainly feel like I'm, I'm ready for my AP History exam after that lesson. Alex, thank you.

Alex: 00:13:46

So I just checked the timer. I was like.

Kevin: 00:13:50

That was good. I thought that was great.

Conventional wisdom, I think lately has been fairly anti tariff, fairly pro free trade, with the idea being that the more barriers you have to free trade, the more that you're ultimately going to increase prices on the consumer.

You know, if you're able to buy things cheaply, let's say in China or Thailand or whatever, and import those to the US that creates more people pay less for that and that creates more income to be able to spend on goods and services and other things helping the American economy. And you could also argue that if you're going to not have free trade in effect, you're kind of not leveling the playing field.

Kind of, as you alluded to, kind of propping up, let's say, American industries, which may not be as competitive in certain areas compared to industries in other countries which could in economic theory lead to a lower quality of goods or lower quality of manufacturing or what have you. It seems like lately certainly there's been a much more pro free trade bent really from both political parties up until very recently.

And so now we're sort of getting into a new era where we've had some tariffs in the past, there is promises for more, and it's a little bit like what does the future hold in store?

I know, Jeff, you've kind of, you were talking earlier about kind of how the world has changed in the last decade or so to sort of set the stage for this new era.

Jeff McCarty: 00:15:27

Yeah. You know, just to reiterate some of your points, I think there pretty strong historical evidence for some of the things you were talking about.

You know, what happens when you increase tariffs in terms of raising prices. Overall productivity goes down. You know, consumer spending does go down because of those increased values.

But you know, from a non economic perspective, I think one of the things we look at a lot is kind of just the geopolitical perspective. And it seems like that that is where a decent amount of this rhetoric right now is coming from.

You know, not just kind of economic winners and losers where in the short and medium term some will win, some will lose.

But geopolitically we're using this as a tool, whether it's to, for its effects on immigration from Mexico or the fentanyl crisis, or just to put more pressure on. I think China is obviously the biggest player outside of the US in this discussion.

And China being, I guess to put it very simplistically, our main opponent at this point. If there are opponents, obviously sometimes we're with them.

Alex: 00:16:39

It's a good point, Jeff. I think trade policy, monetary policy has become a major tool for the US in regards to achieving our foreign policy goals for the past few decades.

Our list of sanctioned individuals, those that anyone in the US cannot transact with anywhere in the world, has just increased because that's how we put pressure on people essentially because we're more of a, an outright conflict, diverse country. I think the Cold war created the situations for that. But there's those that we realize we still have to transact with.

They're too big to cut out of the global system. That is, China is the best example of that.

And so, and so tariffs are kind of that, that middle ground where, you know, we can play with it to achieve our aims.

Jim Glennon: 00:17:20

Yeah, I mean, some folks will say even the threat of tariffs will be used to accomplish some of these Political goals. Right. Whether it's certain countries such as China violating the rules of the World Trade Organization or stealing trade secrets.

Alex: 00:17:33

Right.

Jim Glennon: 00:17:34

There's been accusations out there about those sort of things.

You know, the fentanyl, as you, as you mentioned, Jeff, you know, somehow threatening these tariffs to get countries to mobilize on certain issues that affect us directly. It came up even today there was an article about Nvidia. The Chinese government is going to be, is going to be investigating Nvidia being a monopoly.

And that's the sort of thing that could act as retaliation if we were to impose certain types of tariffs on a country.

So there's just a lot of moving parts here that you wonder if some of this is basically threats to accomplish other goals or if we're really talking about putting 60% tariffs on all of our trade partners.

Kevin: 00:18:21

Yeah. So let's go through.

So if we look at conventional wisdom and we were to take some of the statements that have been made, the incoming administration sort of at face value, you know, we're looking at broad based tariffs across the board from some of our biggest trading partners, you know, Canada, Mexico and you know, additional tariffs from China.

I think there's a lot of conventional wisdom out there that would say, okay, because of that you're going to everything that you import now is going to cost 25% more or 10% more, what have you.

And you haven't even gotten to what about things that we might be importing from other countries or from Europe or you know, what's going to happen there. But if we're looking at broad based tariffs across the board, that could lead to higher inflation.

If that leads to higher inflation, that's going to lead to higher interest rates and to bring it back to the mortgage industry. That's where it affects us.

Because if we get into this high inflationary environment, the Fed would be likely acting to tame inflation by raising interest rates. And obviously that's going to have a net negative effect on the housing industry and on the mortgage industry specifically.

So definitely some cause for concern there according to conventional wisdom.

But in a lot of cases we've seen new arguments that certainly I've been noticing entering the fray about how conventional wisdom may not be accounting for everything. And just one example of that.

And then curious to get your guys feedback on this, but someone on the more leading tech figure on the right just kind of following both sides of the discussion, Mark Andreess, who he's one of the founders of Netscape and close with Elon Musk and he's been involved per reporting in the new administration and in some discussions.

But he's put out there some more nuanced arguments that I think are somewhat interesting, which you could have situations where it's not necessarily just you're going to be paying 10% more or 25% more, but that you could have things like currency devaluation happening if you have the new administration promoting a strong doll or if you have other countries weakening their own currency.

And what that does is it net reduces the cost of the goods, let's say, by that 25% and then you've got that 25% that goes directly to the US Treasury. It's not necessarily a straight one for one argument, at least that he's putting out there.

But again, I think, Jim, back to your original point is this is just an environment where we don't really have a historical precedent for.

Jim Glennon: 00:21:06

Yeah, I mean you're talking what you just mentioned there. If it becomes a currency valuation war, I don't know.

I mean there is a situation where we could essentially export inflation to another nation that we trade with, right. By making their dollars are cheaper, our dollars strengthen. We have more buying power in China, for instance, but they end up with inflation.

And there's also just the idea that there's margins out there, right. There's profit margins that some of these businesses are making and some of those margins might be shrinking.

So you don't necessarily have a dollar for dollar increase. If you impose 10%, you're not necessarily going to pay 10% more. That can come out of several different pockets.

Kevin: 00:21:47

Right.

If you're a country that's reliant on your manufacturing and export base, you might be willing to accept a lower margin just so you have that existing market share.

ings are going to be great in: 2025

So I don't know what that says about me.

Jim Glennon: 00:22:14

But yeah, it's we're trying to give everybody all sides of this, right.

I think if you look at just the conventional wisdom in the history, you're going to see folks just point to the inflationary pressure, the reduced innovation, right?

There's if there's tariffs on all foreign goods, there's going to be an advantage to domestic businesses and those businesses may not have to work so hard to compete. Right. If they don't have to pay these tariffs. So there's just these different negative connotations.

Jeff McCarty: 00:22:40

Right. On the other hand, so do a classic economist. On the one hand.

On the other hand, domestically, you know, going back to George Washington, if we're increasing revenue, the federal government, that certainly helps the federal deficit, which reduces inflationary pressure and hopefully reduces interest rates. You know, so there's, there are a lot of factors going into this. My take is on the whole the US is going to come out as a winner, right?

The US Economy is so strong right now, we can do some of those things like export inflation and things like that. So in the short to medium term, the US comes out as a winner.

It's just how much are you willing to give up in terms of long term productivity losses for the US to become relatively stronger? I think on the whole the global economy suffers.

You know, the US Economy probably suffers some, but probably less than the relative than the rest of the world. If we increase tariffs is my take.

Jim Glennon: 00:23:41

nger than it was in the early: 1800

We can kind of push this thing in a certain direction and come out on top as a nation. I think there's some folks who subscribe.

Kevin: 00:23:56

To that even relatively speaking post pandemic.

Just looking at how the US is able to tame inflation, more or less not fully, but to a larger extent than in other countries and have real GDP growth that's really been, as I know, as the economist put it recently, the envy of the world when you compare it to the struggles that they're having in China or stagnation in Europe, that's happening. So it's interesting and kind of going back to your point, very spicy hot take Jeff, on how this is all going to play out and very in line with.

There's actually a study that was done because there have been tariffs since the first Trump administration, some of which still in effect. And there was a study done that's been shared in circles.

Again more kind of on the right leaning spectrum of the conversation where the a damage that was inflicted on China versus the US was three times as great.

So again pointing to it does seem like it's not necessarily all self inflicted wounds or maybe there is a little bit of pain, but it ultimately causes more pain on the other side which if you think about it just in terms of an overall negotiating tactic or trying to be the 900 pound gorilla in the room just swinging your weight around to get your geopolitical advantage there. There could be some saliency into this overall argument.

Jim Glennon: 00:25:31

And since the election, too, there's been. The rhetoric was hot and the numbers were huge during the election.

But since then, members of the cabinet have come out and said, this is going to be very tactical. There's going to be layering in of these tariffs. It's not just going to be a 60% overnight tax on everything that comes into this country.

So I think there's a little bit of reality check there as well. So, yeah, I mean, to bring this all the way back around, right.

Jeff McCarty: 00:25:59

So what are mortgage rates going to do because of.

Jim Glennon: 00:26:03

And what is, you know, another thing we didn't touch on is that there are certain sectors, right. We're talking about this very macro, but there's certain industries that directly affect housing as well.

Like it was pointed out that a ton of our lumber to build houses, which most home sales right now are new builds. Right. Comes from Canada. Tariffs on Canada equals tariffs on lumber equals housing prices going up even more. Right. What does that do to affordability?

And then there's the interest rate piece, which is probably what we're all most concerned about.

And yeah, we don't know where rates will go, but if inflation does rear its head as a result of tariffs or for any reason, you're going to see rates increase. That is, history will tell us that that over and over again.

Jeff McCarty: 00:26:48

So, yeah, it's really watching the effects on inflation and the overall health of the economy.

Jim Glennon: 00:26:54

If the economy is not strong and we see unemployment become a bigger problem, we actually could see rates decrease as a result of tariffs, which is kind of a mind blower.

Kevin: 00:27:05

Yeah, brave new world out there for sure.

Jeff McCarty: 00:27:08

All right, well, there you have it. I don't think we came up with any answers at all, but it was a fun conversation about all the potential effects of tariffs. So thanks, guys.

Jim Glennon: 00:27:18

Definitely good stuff.

Alex: 00:27:20

Thank you.

Kevin: 00:27:21

Thanks.

Jim Glennon: 00:27:22

Okay, let's wrap this thing up. Great podcast today, team. Really appreciate you doing the research and having the conversation. Thanks for listening, everybody.

Make sure you register for our summit and watch the inflation numbers this week. A lot of good information there coming out in the econ world. And 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. Don't forget to follow us on LinkedIn for more updates and to access our latest video episodes.

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