Is The Recession Over? Did We Have One?

Last week the Fed dropped interest rates by 50 basis points. That is the largest single drop in over a decade signaling an end to a potential recession. Or is it.

Today we will share our thoughts on what the rate drop means to business owners, along with other signs that may affect you.

[00:00:00.00] - Alice

Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:29.22] - Dan Paulson

Hello. Welcome to Books in the Biz, the coronavirus edition. My partner in crime, making him laugh, so I'll start coughing. Rich has apparently picked up COVID.

[00:00:44.22] - Rich Veltre

It's attached. I can't get rid of it.

[00:00:46.25] - Dan Paulson

It's the gift that keeps on giving. We'll just leave it at that. But besides COVID, we are going to talk about the fact that, hey, our government, the Fed anyway, decided to lower interest rates last week, dropped them by a whole half a point, which Rich, you're the financial guy. Is that a big deal or not?

[00:01:07.01] - Rich Veltre

It sure can be. I think that there's probably a lot of people out there who are sitting there saying, well, they dropped to half a point. So what? And the thing is, a lot of interest rates were already coming down in anticipation that they were going to lower the rate. So you were already getting some of the effects of a lower interest rate, and you probably didn't even know it. So there wasn't a whole bunch of, at least the way I saw it, people can tell me if I'm wrong, but I saw it as a little bit less of a fanfare that I was expecting because interest rates had already been coming down. The mortgage rates had already come down. They were all anticipating already that this was happening. The exciting part, I guess it's an exciting part, is that not only did they announced that they were coming down a half a point, I think they said another half a point by the end of the year, and then a point over the course of 2025. I think that was at least the, look, this is the prediction that's coming out, but it seems to be a little bit more authentic than Everybody just assuming what's going to happen.

[00:02:16.17] - Rich Veltre

It seems to be like, this is the plan. So it is a big deal. But I think, and I'll throw this out for us to discuss, right? But I think for me, For me, I've had so many things with this economy that's going on now that's not like anything else I've seen in my career, that I'm looking at it and saying, well, maybe this is a study point. Maybe this is, we'll see what happens and then see what the result really is because you feel like you should be excited. I bought my house and the house was seven and a half %. Now there's an opportunity to lower based on interest rate.

[00:02:58.27] - Dan Paulson

Well, let's talk about that, because part of what I titled this, besides the interest rate going down, was, are we out of recession? Well, I asked the all powerful God of Google that very question. And Google says, We were never in a recession. And to be honest, I don't know if we were or we weren't. I would say there were a lot of... There still are a lot of indicators that we were or we are. Probably one of the leading indicators that is not showing signs of that really has been unemployment. Unemployment, for the most part, has held strong, with the exception, well, we got to be careful of that because then they adjusted the numbers because they magically found 800,000 people who weren't working, and that changed everything. But still, it was relatively strong until recently we've seen it tail off or increased, depending on how you want to look at it. Also, Also, you look at inflation. Inflation has gone up. Cost of materials has gone up. Labor costs have gone up. There's a lot of other science that would normally say that, yes, we have been in a recession, maybe not a real serious one, but we've been in something because, I mean, Rich, you know this as much as I do.

[00:04:23.24] - Dan Paulson

The reason for raising and lowering interest rates is in essence, to either avoid or slow a recession. I don't think they ever avoid it. They might slow it, but then usually they get too carried away, and then that pushes us into a recession anyway. Backing off gives the feel that maybe things are easing up or they're trying to prevent a recession from going deeper. The other thing I think we need to talk about is what's really been the political ramifications of this? We are in an election year. Don't care which side you're on. If you want to make the economy look good, you try to do things to make the economy look good. So part of that would be lowering interest rates. So you know what, six weeks before election time?

[00:05:12.26] - Rich Veltre

Yeah. I think It bothers me. The fast, really quick, short term tweaking that helps somebody out. What's the long term effect?

[00:05:26.08] - Dan Paulson

Exactly.

[00:05:27.10] - Rich Veltre

Give me the idea of what the long term effect because the thing is, and I don't want to go in my political soapbox, but I'm going to do it anyway.

[00:05:36.11] - Dan Paulson

All right. It's that time of year.

[00:05:37.05] - Rich Veltre

The fact of the matter is, look, everything they do, if there is an effect, it's a short term effect, but it's going to come back and bite somebody at some point. The American people are not stupid. As a collective, we are not stupid. We get it. If you say to people, We have to do this because over the long term, this is what's going to happen. And the minute that it actually does happen and it turns out, then people trust you more. But you play these games all the time of moving numbers around and changing the way that you calculate something because it helps you out. And then essentially what you're saying is, American people, we think you're stupid. So we're just going to leave you to do what we tell you because you're the sheep and we're the farmer. Tired of it. I'm really tired of it. Because let's put it this way. You brought the interest rates down to 1, 2, 3% mortgages and the Fed funds rate, whatever that was for the whole extended period of time that you had it. All of us were like, wow, we can buy houses. That's great.

[00:06:45.06] - Rich Veltre

The price of the house is lower. Okay, what did it do the retirees that were trying to put their money in something safe and make four, five, six %? So half of the people got hurt by the fact that you were helping the other half of the people to buy houses. And now what are you doing? Now you're coming back and saying, well, the interest rate goes back to seven %. If you ask me, seven % is a reasonable middle number. Do I like that I have to pay seven %? Not really. But I'm not going to grumbble about it, because I'm not paying the 18 % that you and I talked about a few weeks ago, that our parents may have paid when they bought a house 30 years ago. So There's balance. Where's the balance? Somebody's got to find me a balance to make me understand it.

[00:07:35.06] - Dan Paulson

Well, I'd like to say that there is balance, but I think we tend to work things out of balance. I mean, if we... You're right, seven %. I look at the first mortgage I had, I was at eight %. I thought that was pretty good at the time. And then, of course, interest rates started dropping, and I was able to get less and less, and finally settled in somewhere around three %, I think it was. The problem is we've had, I'll call it free money, because if you're paying 2-3 % interest on something, it's basically free money. For so long, you've adjusted your other spending habits because you've had more money in your pocket, because you're spending less money on interest on major purchases. Now things shift back. Well, again, if you're locked in at three %, and you're in a 30 year mortgage, and you don't plan on moving, some things don't change. But Cost of food has gone up, cost of gas has gone up, other expenses have gone up, and that's in turn impacted you. On the business side of things, talking with businesses right now, some businesses are doing extremely well.

[00:08:46.09] - Dan Paulson

I don't know if I announced it on here, but I did a survey a couple of months ago, and I'm putting together and building a report off of it and doing the research on it. And for the most part, businesses seem to have weathered the last year pretty well. They're either at or above where they were at income-wise. But there's other things when you start looking into what was said in into some of the data that Inflation has taken a hit. It has influenced buying decisions, it has influenced their ability to grow. There was one client I talked with that for the first time in ease in construction, for the first time In several years, they've had to go out and do bid work. Usually the work was just coming to them. They were just taking orders. Now they're actually having to go out because certain projects have been pushed off or are not going through because, Again, interest rates, what cash flowed at three % doesn't cash flow at seven or eight %. So it's changing how much building is going on. I see a lot of that happening. I see things in manufacturing starting to ease a little bit.

[00:10:04.10] - Dan Paulson

Some companies, again, if they have certain parts that are needed, they're still growing strong. But there are other companies that are starting to see those sales taper off or level out. And that Two is a concern. So are we in a recession? Don't know. But there's definitely a wave of volatility that's happening right now that I don't think has been the case prior to the last couple of I see it the same way.

[00:10:33.28] - Rich Veltre

And I'm a little worried because I don't want to sit there and tell people, I know what's going to happen because I've seen this before.

[00:10:42.00] - Dan Paulson

We're supposed to make those predictions rich. That's why people listen to us.

[00:10:45.08] - Rich Veltre

I know, right? Cfo is supposed to be looking forward. He's supposed to be using all the data that he has and he's looking forward. And I'm looking forward going, I don't really know. Because think about it, right? Normally, you would sit there and you would say, okay, Interest rates go up. And when interest rates go up, the housing market slows down because fewer people can buy the houses at the higher price. That didn't happen. No.

[00:11:14.23] - Dan Paulson

It didn't happen. Same with cars. Really, until recently, homes and cars, you could keep raising the price and people kept buying.

[00:11:21.16] - Rich Veltre

And they kept buying.

[00:11:22.21] - Dan Paulson

And I don't know what they were buying with, but they kept buying.

[00:11:25.13] - Rich Veltre

So now the prediction becomes, well, the interest rates will come down, right? And the market will start to stabilize. And the funny part, though, is now there's certain people who are saying, no, you know what it's going to do? It's going to cause the prices to go up again. Because The demand that's been pent up is now seeing the opportunity that they can go buy. So if there's somebody who wants to sell a house, they can do it, and they can still do it at the higher price. So you're going to keep the market up. It's unhered. I've heard of. I can't go back in my history and say... Now, I lived in the same house for 20 some years, so I didn't really follow the real estate market all that well. But I did, to a certain extent, follow value because everybody wants to know what's my house worth? And I can't necessarily tell you that they're wrong. I can't tell you, well, the housing prices are going to come down now. No, because it seems to have flip flops. And Maybe there's a lot of realtors who want to call in and discuss it with me, or you and me, or however.

[00:12:39.23] - Rich Veltre

But I think the market is weird. I don't have a better word for it. It's a little off. I don't know what to sit there and say, This is what's going to happen. So if I can't do that on something that's that big, it's like a one time purchase, how am I supposed to tell people what's going to happen on the smaller stuff?

[00:12:58.10] - Dan Paulson

Well, and there are some predictors with that, if you will. So let's take the real estate example. Big problem with the real estate is there is a shortage of inventory. We don't have enough homes or apartments to fill the needs that we have. Okay, well, then the argument is, well, why don't you build some more apartment buildings? Okay, good idea. Now let's go back to the interest rates again. If we're hovering around seven or eight %, what it's probably going to cost to borrow to build a multi-unit apartment complex, you got to rent that out at a high enough dollar value to get your interest, your maintenance, all those costs back, and then hopefully make a little bit of profit on top of it. And now you're still paying $3, $4,000 a month to rent an apartment somewhere. Same on the home side. Well, I want to buy a home. Well, there just aren't that many homes out there. So let's go build a home. Well, the building costs are still high. The money that you need to borrow just for the construction loan is still high. And then you're going to be in a higher interest rate loan coming out of that.

[00:14:07.01] - Dan Paulson

So now, instead of building a $250,000 home, you're at a $450,000 to $500,000 home. So you're back into that $3,000 a month range. And I think that's the biggest challenge. I know I've heard certain politicians talk about they're going to build 3 million homes. And I'm like, okay, tell me how. How are you going to do this? Because unless you are funding those projects, so now they become government projects, you and I know government doesn't tend to work the most efficient way possible. So how much are those 3 million units going to cost, whether they're individual homes or whether they're apartment complexes? And to me, it's like the snowball effect. We can't seem to get out of our own way because we continue to perpetuate the problem, like you were saying. We'll fix one thing now in the short term, and that might do a short term improvement, but long term is going to turn around bite us in the butt.

[00:15:07.13] - Rich Veltre

Yeah, I think, and I agree with you. I think on the residential side, it almost seems a little bit like it should be easier, right? Because you have plenty of people out there willing to loan money on houses. You have plenty of people out there who'll figure out how to make a mortgage payment. But what about the commercial side? Because Because the commercial side is still reeling. I was just talking to someone this morning who we were talking about the fact that commercial real estate is still in a state of flocks, and that has nothing to do. The interest rate is just a compounded problem. Because all of those people don't want to go to work in an office anymore. They all want to work from home. So reduce the demand like that for office space. Warehousing space might actually still be okay, but office space. And the thing is, apartment buildings are considered commercial. So you have all of these banks that are all shaken in their boots because of the commercial real estate. And all of a sudden, you say, well, I'm going to build an apartment building.

[00:16:14.04] - Dan Paulson

You giving you the money. Exactly.

[00:16:17.13] - Rich Veltre

Okay. So the bank's not running out to say, oh, you're building an apartment building? Great. That's fabulous. Let's put a commercial mortgage on it. Who's doing commercial mortgages? Anyway, so there's a split even there. You're not getting back to the root problem, right?

[00:16:33.21] - Dan Paulson

Right. And I'm guessing private equity is probably not going to be the best way to go because those interest rates are much higher. So you might be able to find a private equity group that's willing to lend you the money. But now you're back in the same boat. Instead of paying 8 %, you're probably paying 12 %. And then you're also having to do probably some share on revenue with that to guarantee their money back. And that gets really And a lot of those guys are still holding on to their money.

[00:17:02.17] - Rich Veltre

You might actually have to go to Tony Soprano and ask him for the money.

[00:17:07.24] - Dan Paulson

That's true. You do some work in as far as manufacturing and whatnot. What are you seeing as far as operation loans? Are they have any improvement there?

[00:17:23.17] - Rich Veltre

I can't necessarily say there's improvement. There is definitely riding the wave. Is definitely some degree of cut other costs because the interest rate or the interest costs are now taking over a piece of the PnL that they didn't have to worry about before. I think there's definitely slow down. I would not say that it's still... I don't see gangbusters anywhere. I just don't. I don't see that level of production. I just see moderate production, at least in the industries that I've seen and the products that I've seen. I don't see anybody really running like crazy. I think if you're connected somehow to health care, you probably have it a little bit better. That seems to be a buzzword that if you're making medical devices, et cetera, then there's always seems to be room for that. But core materials, I don't see as much. I see things moving a little bit slower.

[00:18:35.19] - Dan Paulson

Yeah, I talked to a banking friend of mine the other day. And if you want to hear the Oh, Woe is me, talk to a banker or talk to a farmer, because it never seems to be good. But the banker said, well, the half point interest rate was nice for them from a CD side of things because they could lower their CD rates. I said, so what does it mean for the other stuff? He's like, there really isn't a half point isn't going to make a bit of a difference now. People aren't rushing out to refinance. They're not going to really change anything because the costs of doing so are high enough that it doesn't justify the savings that you would have at the interest rate. So it's really going to take another probably full point or two down before we really start seeing any movement that way. And then we're getting back in that 4 to 5 % interest rate And now there's enough of a gap that it seems to justify things. But he didn't seem to think that there was going to be much momentum one way or the other. I haven't talked to any mortgage brokers, but the few that I have heard about If you were locked in at one of the highest rate situations, like eight %, you're now at what, five and a half, six %?

[00:19:52.11] - Dan Paulson

It might be enough that it's moving people to refinance at that lower rate, because usually if you're a full two points down your current interest rates. There's justification to refinance at that point.

[00:20:05.22] - Rich Veltre

Yeah, I said the same thing. I've been using myself as an example that's real. I'm not lying. I bought my house a year, a year and a half ago, and it was at seven and a half %. So I think at that point, I was not at the top top, but I was definitely high up. So for me, I've looked at it and said, a two point drop probably is not enough to cover the fact that I have to go through all the closing costs again.

[00:20:34.16] - Dan Paulson

Yes.

[00:20:35.18] - Rich Veltre

But the other alternative, and I haven't really gone too crazy because it hasn't started to come down yet. But if you were going to take me from seven and a half to five and a half on a fixed, that might be enough. But the other thing to look into is if I'm going to do a fixed, and then if there's a possibility of jumping to an arm and losing a little bit more on the interest rate, then I'm just repeating history because that's what I did in my old house. I bought it at a six or something % fixed, and then not too long after that, I was able to get to a five, one arm. And when I got to a five, one arm, I dropped it down into the fours, I think. And then the fix kept coming down. So I finally settled in somewhere around three % or three and a quarter. I said, just give me a fix, and I don't ever want to talk about it again. And because I had dropped enough, I went from a 30 year to a 15 year. And I was paying that house off like it was nothing.

[00:21:31.26] - Rich Veltre

So I'm looking for this saying, okay, you know what? Let's repeat history here. I'll start out a little bit high. I got the house that I want for the rest of my life. Let's just work on how do we get rid of that mortgage so that when I get to a retirement age, if there is one, if I get to a retirement age, then maybe I just work to pay the real estate taxes in Jersey. Which is like a mortgage in and of itself. Exactly. Exactly. Curious last question for you. I think this is the last question anyway. But I was thinking about it as we were talking about interest rates, and I said, It's funny. At this point, interest rates went up so much to try to help the individuals, right? Right. Well, interest rates went up to try to stop inflation. But when I think about it, the IRS rates, interest rates on stuff that is not paid on time is all keyed off of those same rates, and the US debt is calculated on the same rates. So when we raise rates like we did for the last few years, what did we do to the economy?

[00:22:47.28] - Dan Paulson

Because that's a good question.

[00:22:49.18] - Rich Veltre

Because the US budget, there was a while where they were saying 30 or 40 % of all money that we put into the US government is going to pay all the debt that they have.

[00:22:59.05] - Dan Paulson

Right.

[00:22:59.29] - Rich Veltre

So what number? I haven't heard that number in a little while. And I wonder if that's a, here we go, conspiracy theory. Is that number been hidden? Because what now are we paying? All the taxes we're paying right now, are they now going to pay 50 %? Is 50 % of all of our dollars going to pay for the debt that all these guys don't have control over?

[00:23:25.25] - Dan Paulson

So I don't know. The last number I heard, and I apologize, I don't have that information up, but I thought in one article I read, the US government collects five trillion dollars in taxes. Across the board. We spend just on interest in a year now, a trillion dollars in interest. So 20 % of our tax dollars are going towards interest. But that's not all, because we might be collecting five trillion, we're spending seven. So here's the real problem. We spend more than we bring in. If you and I did that, we'd be out of business in no time. The government wouldn't be really happy with us because, of course, then it makes it difficult to pay your taxes and whatnot. Nobody in the election cycle is really talking about the true problem. They're They're talking about different ways that they will spend our money, but they're not talking about how they're going to reduce debt, and not deficit, debt. There is a difference. Most people, they focus on, well, I reduce the deficit by $1.7 trillion. Wonderful. That just means you spent $1.7 trillion less, but you still spent more than you took in. So we're still building on top of the debt.

[00:24:54.08] - Dan Paulson

So how are we? I think before we wrap up, though, we should We're going to talk about, because we're going into quarter four now. So I'm pretty sure some of the next couple of episodes, we're probably going to be talking about what to do in quarter four. We're in an election year, interest rates are dropping. What are you advising people? And this is not, you have not hired us, do not use our advice. This is just examples. So there's the legal stuff out of the way. But what would you advise people to start looking at? Or what are you advising your companies to start looking at when it comes to this fourth quarter of the year with everything going on?

[00:25:36.04] - Rich Veltre

Well, I basically am looking to have all of my client companies take a look at how the next three months will work towards what they think their ending results will be for 2024. Realizing that they're estimated, realizing that they're a little bit of guesswork and a little bit of understanding of who's going to place orders with you if you're in that manufacturing thing, who's going to utilize your services for the next three months? Get a picture of how you're actually going to end up the year. And smaller companies are going to focus that on, well, what are my taxes going to be? And the middle or bigger companies, I think you have to start looking at, regardless of who the election is, because we've said this before, it really doesn't have a big impact. The end of the year is the end of the year. You have three more months to decide what your numbers are going to look like. Those numbers, more and more nowadays, because data is available, determine what banking relationship you're going to have, what funding you're going to be able to accomplish. Those are the types of things that I think people at this stage of the year should be looking at.

[00:26:43.27] - Rich Veltre

What do you think it's going to look like for the rest of the year? And then you should take the leap of faith and do a little bit longer dive into what does 2025 look like? What do you think you're going to be able to do next year? Can you beat this year? Did you have something that happened this year that you want to make sure you highlight in your head so that when you do 25 planning, you say that might not happen again? So you want to make sure that you've set 2025's plan, assuming that any anomalies don't happen. So I'm telling people to get into planning mode. Forget the past. Let the water under the bridge keep going. You can't get it back. So take a look at forward as opposed to backward.

[00:27:26.20] - Dan Paulson

Pretty much the same on my end. So now it's looking at operationally, what's working, what's not, who's working, who's not, and trying to figure out a more efficient path forward because we still have a number of issues to address. We don't know what the future is going to bring. We can speculate, but there's no way we're going to guess it right. If we could, we wouldn't be sitting here talking on a podcast. Hiring is still going to be a problem. So you need to either find better ways to hire, you need to better train your people up, and you need leadership along the way. And that leadership is going to be hard to come by. So you might need to look at alternatives to how you would traditionally implement leadership in your organization. And we've talked about fractional in the past, and I think that is going to become more and more of an issue going forward is if you want talent and experienced talent, you're not going to have them full-time, but you're going to be able to get better quality that's going to help develop your current skill sets or your current talent pool up to be better than they are now at the rate you're going.

[00:28:33.16] - Dan Paulson

I think now is a great time to go through and strategy development. So if you're in a position of growth or you want to be in a position of growth, what are those areas or verticals that you can now tackle that maybe you didn't worry about before? Because everything in the last three months, for the most part, settles in a little bit. The election is going to stir things up a little bit more than normal, maybe. But really, again, it's not going to make that much of a difference. So take the advantage of the time right now to get your ducks in the row and make sure that you are best set. So when the next taxi rolls around, you're already implementing tactics that are going to get you to where you want to be.

[00:29:16.25] - Rich Veltre

Good advice.

[00:29:18.25] - Dan Paulson

Excellent. All right. Well, I think that takes care of it for today. You get better, and hopefully, you didn't cough as much?

[00:29:29.18] - Rich Veltre

No, I didn't do too bad.

[00:29:31.11] - Dan Paulson

I didn't do too bad. You didn't do too bad. You didn't cough as much as you thought you were going to.

[00:29:35.09] - Rich Veltre

I have my finger on the mute button. I have my finger on the mute button.

[00:29:38.25] - Dan Paulson

You're ready to go. You're ready to go. We need that four second delay so you can get out right there.