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[00:00:00] Lee Michael Murphy: Ladies and gentlemen. Welcome into your go-to podcast for your career and your finances. The free retiree show. I’m your host wealth manager, Lee, Michael Murphy, and alongside Macal sir. Geo Patterson. Good morning. What is up? Everyone? We don’t have our attorney, Matt MC. He got called into court today, but you got us too.

[00:00:19] Lee Michael Murphy: So we’re talking about is the economy crashing, people will know is the real estate market in downturn, the stock market. And when are those things going to get better? Sarge, what have you realized recently by looking at the news headlines, water cooler talk.

[00:00:32] Lee Michael Murphy: What are people concerned about with this economy that we’re in?

It’s weird. I get mixed signals. I feel like some people are super worried. Some people are saying we’re in a recession, some are not there’s inflation. there’s layoffs happening. the housing market is slowed, but like it’s hard to really know what’s true.

[00:00:52] Sergio Patterson: And what’s not. I think that’s something I struggle with is trying to figure out the right, Resource to trust.

[00:00:57] Lee Michael Murphy: There’s a lot of noise out there right now. Everyone’s talking, everyone’s got [00:01:00] opinion on it. You’re hearing,a lot of people on the real estate side, nothing’s wrong.

[00:01:04] Lee Michael Murphy: A lot of people on the,financial side are like, this is gonna be bad forever. you gotta figure out, who can you trust and, look at the data. And that’s what we do on this podcast. We try to look at people that are,academics and get their thoughts on it.

[00:01:15] Lee Michael Murphy: And then, of regurgitate,the data and, these people that are very bright, they actually know what they’re doing and try to give it to you guys. So yeah. How the thing

[00:01:22] Sergio Patterson: is slowed for sure. Right? I feel like houses are staying on the market longer than normal. Yeah,

[00:01:27] Lee Michael Murphy: absolutely.

[00:01:28] Lee Michael Murphy: It is, has come to, not a screeching hall, but it has slowed down significantly. at the time of this recorded, we’re, headed towards the late part of September. And, it’s definitely on everyone’s radar. People are talking about it. so for today’s podcast, what we’re gonna do is we’re gonna give you an economic update.

[00:01:44] Lee Michael Murphy: We’re gonna let you know, are we in a recession? People wanna know, we are also gonna let you know what needs to happen before things get better. and then we will also be talking about when things will get better. I think everyone wants to know, when is this gonna end? When is the pain gonna [00:02:00] stop?

[00:02:00] Lee Michael Murphy: Yeah. to start the big thing that, that has caused all this slow down in the market, in the real estate market is surge. Do you know it? See if you employee, if you learned anything. Oh, my gosh, Sarge, knocks it outta the park. Inflation. You just say inflation. I,

[00:02:15] Sergio Patterson: I use that for every question.

[00:02:16] Lee Michael Murphy: Inflation so the annual inflation rate right now in the United States, 8.3% for the last 12 months. And that’s ending in August and it was 8.5 for July nine, 0.1 for June. And this is according to the us labor department. And this data was published on September 13th. So we are headed the right direction, but still the numbers are super hot, in terms of where they should be.

[00:02:43] Lee Michael Murphy: The target we’re trying to get down to is 2%. That’s where the fed wants us to be. And they seem to be, fixated on getting those numbers down to where they need to. Also energy costs. so one trend that we’ve seen recently is it’s, come down over the last 90 days. So [00:03:00] we look at gas, there’s been a consistent drop in that.

[00:03:02] Lee Michael Murphy: So that’s good. That’s working in our favor. That’s good. retail sales, they unexpectedly increased 0.3%. and,that’s something that was unexpected and that’s surprising. Yeah. You might look at that as oh, that’s good. Right. But in the current environment, that’s not good.

because we’re trying to battle inflation. So we’ll get a little bit into that and why, that is not good news in the current state that we’re at. right now we have, blending rates. They’re above 6%. And that is what is mainly contributed to slow down in real estate is people don’t wanna pay so much, it’s close 38 to 40% that people are paying, more than they were last year when they got a house.

and that’s that’s definitely,

[00:03:41] Sergio Patterson: that’s like hundreds of thousands of dollars over time.

[00:03:42] Lee Michael Murphy: Right? Exactly. Yeah. So that’s slows down a lot of people that would be home purchasers and they’re like, I don’t wanna pay, 38% more than Johnny and that makes me angry. And so they just don’t buy, home prices.

[00:03:55] Lee Michael Murphy: They decline 0.7, 7% nationally [00:04:00] from June to July. Now, while that does not seem like a huge number, it’s the first fall in nearly three years. So it is a big deal and it’s the largest monthly decline in the last 11 years. So it is a hidden big deal. And right now most people are like, ah, everything’s still great.

[00:04:23] Lee Michael Murphy: But when you peel back the layers, you realize there’s, that is something significant. And then the war, obviously there’s a war with Russia and Ukraine. And although the United States isn’t in it, we are funding that thing. So that’s a lot of money that could be used to stimulate our economy, create jobs over here.

remember we talked about, we had a podcast, way in the beginning about like we debated whether war was good for the economy or not. And we were trying to debunk the, the ideology, that war was great for economies. And I think, this has shown that it has not helped economies at all because you’re deploying [00:05:00] your resources into, tanks and bombs and weapons that, millions and millions of dollars that just go up in seconds and that could be used to create jobs.

that’s not helping us either.

[00:05:10] Sergio Patterson: I think it’s billions, right? That we’re sending. Oh yeah.

[00:05:12] Lee Michael Murphy: Yeah. it’s significant. So onto the major question, are we in a recession? Surge? What’s your thoughts? What do you think?

[00:05:19] Lee Michael Murphy: I think

[00:05:20] Sergio Patterson: By the technical definition of a recession, I would say, yes, we are in a recession.

[00:05:24] Lee Michael Murphy: Oh my gosh. You are so bright people. Don’t give you credit for how smart you are. we think you’re just a moron, but you are not friend. Thank you friend. you are you’re sharp. So yes. Serg Sergio is correct.

[00:05:35] Lee Michael Murphy: Student observation. Sergio. Yes. So Q1 GDP. So the way we define a recession is two consecutive quarters of negative GDP. And we had negative 1.6 GDP, Q1 and Q2 is being figured out, but it looks like it’s about a negative 0.6 GDP. But that’s not how everyone defines recessions. So according to the national bureau of [00:06:00] economic research, they have a different view on what it takes to be labeled a recession.

[00:06:05] Lee Michael Murphy: So they’re looking at, yes. Do we have, there should be one, there should be one definition. That’s how I feel. And I feel like technically definition, the way that we are defining it is the two consecutive quarters that, that counts. Right. But okay. not every single, like recession shows like a lot of the signs that we think of everyone on the sidewalk, with a cup in their hand.

[00:06:26] Lee Michael Murphy: Yeah. And there’s

[00:06:26] Sergio Patterson: yeah, there’s like the spectrum, right? oh, eight. Oh, nine I assume was like, yeah,

there’s a one, there’s a wide spectrum, but yeah, I got it. The way this national bureau of economic research looks at it, they looking at a significant decline in economic activity, but jobs are still good.

corporate earnings are still good and those are two big factors why they are not gonna call this a recession, which I see their point. so that’s where we are. I think technically we are, but we’re not feeling everything that’s involved with. The recession. There is a massive decline in,the market right [00:07:00] now.

you’re starting to see a lot of more, startups go up and smoke, more layoffs you’re hearing, on the street and the numbers are supporting that. but we’re not into this really crazy recession as of yet. And who knows if we’ll get there, but right now, things are not looking good. I can say that.

[00:07:17] Lee Michael Murphy: Yeah. So there’s potential

[00:07:18] Sergio Patterson: for it

[00:07:18] Lee Michael Murphy: to get worse. Yes, and that’s what a lot of the data is showing is, there’s a lot of things that could still get worse in this process.

[00:07:26] Sergio Patterson: The other thing that’s interesting is when you mention layoffs, what I’ve seen is they’re like quiet layoffs, like companies, a lot of the companies aren’t announcing it, but I’ve seen, without naming company names, I’ve seen people, just there’s groups of people being laid off, but it’s not all in the news.

[00:07:42] Sergio Patterson: So that, to me, that’s a red flag. When you see these smaller companies,Twilio, there’s a company at Twilio. They laid off a bunch Patreon. I don’t know if you know the company it’s like where, you can pay. If you’re an artist you can get paid by your fans.

 off 17% of their workforce. . And some other companies are doing these like smaller layoffs [00:08:00] that don’t make the news,

[00:08:01] Lee Michael Murphy: but they’re still,

[00:08:03] Sergio Patterson: it’s still very worrisome to me. So I just say be cautious out there.

[00:08:06] Lee Michael Murphy: Yeah. And, that’s the thing I’ve noticed also like a lot of the large companies, you’re hearing some chatter of hiring slowdowns, some layoffs, but it’s the smaller companies like the small, the mid-cap space.

there’s a lot of pain in that space that people aren’t talking about. yeah, I agree with you on that. when we look at housing has been a, the topic as of late, everyone wants to know what’s going on with that. everyone will say, year over year, things, prices are still up, saying that it’s up 11%, which is great.

[00:08:35] Lee Michael Murphy: But when we look at the short term,June slid by on average $10,000 on home prices. home data takes a little while to unfold. So even though we’re in September, we’re still looking at a lot of the data that, that came out in the beginning of summer. But, right now there is a lot of signs of a slowdown and, If we look at price cuts, I took a few of the major markets and took a look at what cities were getting price cuts.

[00:08:59] Lee Michael Murphy: [00:09:00] So if we look at city like Boise, Idaho, recently 70% of the homes received price cuts. That’s July number. So all these are July number Denver. We got 58% of homes received price cuts, salt lake city, 56% Phoenix in San Diego. We both 50% Stockton, California close to us. 47% receive price cuts. Wow. so these are, people, they put their home on the market.

[00:09:25] Lee Michael Murphy: They’re hoping to get top dollar and then it’s just not happening. And before, oh, almost a half a year ago, it was bidding wars, Yep. That’s not happening anymore. So it is shifting into a buyer’s market. Gradual.

[00:09:37] Sergio Patterson: Oh, see that locally too here in Gilroy. two houses by next to us are, they started off selling for about a million and now they’re down to about 9 48 and they still have not sold over and it’s

[00:09:48] Lee Michael Murphy: been over a month.

[00:09:50] Lee Michael Murphy: Yeah. Price drop areas, from the high, it looks like, San Francisco dropped roughly, 7.4% at the time of this recording. San Jose, California [00:10:00] dropping 10%. That’s crazy. yeah. Yeah. And then LA dropping 4.3 Denver at, 4.2. So yeah, there’s change out there.

[00:10:10] Lee Michael Murphy: There’s change in the winds scary

[00:10:12] Sergio Patterson: times, but, it’s not all bad yet, right? Like we’re hanging on, stock. How are stocks Lee?

[00:10:17] Lee Michael Murphy: What’s the market looking like? So right now stocks are, they’ve had a resurgence over the last. Couple months. So they bottomed out around June. We’ve seen some life, but recently due to some of the economic activity, that’s come out.

[00:10:29] Lee Michael Murphy: The market’s gone back down the other way. It’s not as bad as it was in June, but it’s headed that direction right now. and so let’s just talk about, what needs to happen before things get better. I think that’s what people wanna know. just tell us how are things gonna get better?

this is the sobering reality of the situation. so Serg, when you think of like the federal reserve, do you think they want to see you do well? Or do you want to, do you think they want to see us not do well?

[00:10:52] Sergio Patterson: I think they want to see the economy do well, so they want us out there spending

[00:10:57] Lee Michael Murphy: money.

[00:10:58] Lee Michael Murphy: So this is the reality [00:11:00] that I think that everyone needs to come to grips with right now. They do not want us to do well overall. They want the economy to flourish and people to make money and to create jobs. But the reality of the current environment is they don’t want us to do right now, because if we do well, that only adds to the inflation problem, inflation isn’t under control.

[00:11:22] Lee Michael Murphy: So they know that home purchases need to stop so this is all by design. They want to make it expensive, for people to borrow, they want 401k balances to drop. They’re not gonna say that, but the more money you have in the 401k balance, your investment accounts, that’s more money for you to spend, which leads to inflation.

[00:11:41] Lee Michael Murphy: They, and here’s the other thing that’s gonna be like, just really sober to hear. They want people to lose jobs. That’s they’re not gonna ever say that, but when there’s layoffs and there’s less jobs there that handles the inflation problem. So the chaos

[00:11:58] Sergio Patterson: actually decreases inflation. [00:12:00]

[00:12:00] Lee Michael Murphy: Yes in this situation.

[00:12:01] Lee Michael Murphy: We had this, student loan, thing that just passed and that’s not helping our situation right now. And, by the way, we’re gonna have, student debt, lawyer, Joshua Cohen on, in a couple episodes to talk about student debt, but we won’t get, we won’t go down that rabbit hole today, but he’s an amazing resource on that.

[00:12:15] Lee Michael Murphy: But things like that, aren’t helping the current state of the economy. and the reality is right now, they don’t want the economy to grow because they need to get inflation under control. And that is gonna be getting it to that 2% target. and it’s that over

[00:12:29] Sergio Patterson: eight,

[00:12:30] Lee Michael Murphy: right? Right now. Yes is

[00:12:32] Sergio Patterson: it getting it to, is that even feasible?

[00:12:33] Sergio Patterson: I know we’re gonna wrap this episode up, but, is 2% even

[00:12:36] Lee Michael Murphy: real. Absolutely. It is, it just takes time. Right. It takes time. And that’s the other thing is, when they make these monetary policy changes, the people want instant results, but that’s not how monetary policy works. It takes on average about 18 months.

[00:12:51] Lee Michael Murphy: So they stopped their bond buying program. They started raising the fed funds rate, all those things don’t really solve [00:13:00] the inflation problem or even begin to right away. It takes time. So they started this the beginning of this year. we’re looking at still, probably towards the end of this year before even a lot of these things even start to take effect.

[00:13:13] Lee Michael Murphy: So I’m not panicking. I feel like right now this is what I expected, it is painful to go through this sort of stuff.

[00:13:21] Sergio Patterson: Yeah. I think it’s really interesting to. The dynamic between inflation and companies who are profiting because of inflation, right? They’re make technically they’re making their products are worth more.

[00:13:33] Sergio Patterson: I’m spending more. Now. Now, if we get down to 2%, that’s gonna be a potentially four X decrease. My money’s gonna be worth way more. And then company profits would be lower since things aren’t as

[00:13:46] Lee Michael Murphy: expensive. Yeah. if those profits would go down,

[00:13:50] Sergio Patterson: I’m always wondering companies are, do they want, do they, it’s in interesting.

[00:13:54] Sergio Patterson: I

[00:13:55] Lee Michael Murphy: guess dilemma. yeah, the companies right now, their interest in the federal reserve interests, aren’t [00:14:00] aligned so that’s that they’re on opposite sides of the table, unfortunately. And so that’s one thing I was thinking about this last week, where when we put this episode together, I was like, it’s just crazy to think that right now, the federal reserve, our government doesn’t want us to be financially successful, but that is the absolute truth of what we’re going through.

[00:14:19] Lee Michael Murphy: So when will things get better? So here’s my answer. No one knows no one really knows. I know no one wanted to hear that, but that’s the truth. but there here’s some things that I would be aware of if I were you, the federal reserve is expected to reduce their rates by the first or second quarter of next year.

[00:14:36] Lee Michael Murphy: So that’s early 20, 23. That is going to definitely soften everything that we’re going through. as rates go, I think the economy follows. So that is something to think of. another thing to think of is that from 1945 to 2009, the average recession lasted about 11 months. Right? So we’re technically that six month.

[00:14:58] Lee Michael Murphy: Maybe we’re in the middle of the [00:15:00] ball game. It could go longer. It could be shorter. I’m just giving you some numbers of historical data and how things have played out in the past. and the blunt answer of when things you’re gonna get better is when inflation goes down is if inflation goes down, valuations will go up with all asset with pretty much majority of asset classes.

[00:15:21] Lee Michael Murphy: So that’s what we need. That was

[00:15:23] Sergio Patterson: gonna be my question is what does it mean when things get better? So it means when inflation goes down,

[00:15:28] Lee Michael Murphy: better means, okay. Yeah. So in this situation, there’s always that we can spin this. We can look at like different scenarios and different aspects of the economy to figure out what’s going on, but when you wanna simplify what we are going through right now, it comes down to one thing.

[00:15:42] Lee Michael Murphy: What is that inflation number? If inflation numbers are high and hot, they’re gonna keep tightening. As inflation numbers come down, which they will come down. You gotta have faith. They will come down. We’re in the red hot months too. this is historically when inflation is super hot anyways.

[00:15:58] Lee Michael Murphy: Got it. and we saw slow down [00:16:00] in real estate that generally never happens in this August September time. but it did and you’ve seen fuel prices go down for 90 plus days. Yep. And now we’re heading into the winter months and that should also set the stage for significant improvement winter and going into next year.

[00:16:16] Lee Michael Murphy: So everybody, I know it’s not the,the news. You wanna hear that I was gonna tell you that it’s gonna get better by tomorrow, but that ain’t the situation. hang in. We’re also gonna be giving an episode coming up, like on how to deal with recessions. we’ll be coming out with that in the next few weeks.

[00:16:32] Lee Michael Murphy: So stay tuned for that. We’ll let you know exactly what you can do, how to survive this. And, don’t lose your wits. stay calm and remember, this is also the opportunity time. People always look at it as I gotta be fearful. I gotta be scared.

[00:16:46] Lee Michael Murphy: This is where people make the money too. Right. Everyone thinks they’re making money when evaluations are high in real estate stocks, but where do you make your money is when everyone is fleeing. All right. So just, stay calm and continue to [00:17:00] invest. This two shall pass.

[00:17:02] Lee Michael Murphy: That’s all we got for today. Everybody you’ve been listening to the free retiree show so long for now