2485: Economic Forecast and Labor Market Dynamics with Eric Basmajian

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I had that Northern Alabama rental near Huntsville that I bought a couple of years ago and got that property all set up for a lease option. I got premium rent on it because I put down a non-refundable deposit of $15,000 on it. So I'm getting at least $100 to $150 premium on the rent. That's for the first year. The second year it's gonna be $2,200. So first 30 days, you know, if something goes wrong, I'll take care of it. But after that, it's all on her to maintain it.

Welcome to the Creating Wealth Show with Jason Hartman. You are about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class. That will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self-made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer, and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial independence day. You really can do it. And now here's your host, Jason Hartman, with the complete solution for real estate investors.

It is my pleasure to welcome a returning guest back to the show, and that is none other than economist Eric Basmajian, EPB Research. I tend to get that backwards. It's great to have him back for some insights on the economy, the labor market, the housing market, and we'll unpack a bunch of these things for you. Eric, welcome back.

Thanks for having me back on. It's been a little while. It's good to catch up.

Yep, definitely, definitely. So, you know, it's been maybe, I don't know, 2 and a half years since you've been on the show. We haven't talked lately. I know you were publishing some pretty bearish stuff on the housing market before. And sounds like from our brief discussion before we started today, that you have turned maybe not bullish, but at least neutral. I don't know, where are you on the housing market?

Yeah, sure. So maybe it'd be helpful just to kind of reset the clock back to the pandemic. So, of course, we were, you know, Heading into the pandemic around 2019, the pandemic occurred. We had this massive amount of stimulus that occurred through 2021 and 2022. Interest rates stayed very low, and you know for 2020, 21, and 2022, it was you know a very extraordinary economic boom fueled by a lot of stimulus money that was going around. Then what happened is the Federal Reserve. you know, got the wave of inflation and they had to begin raising rates and tightening policy in 2022. And pretty quickly they raised rates 500 basis points. And what happened at that point, so when the Federal Reserve tightens monetary policy, for the guests that may not be familiar, what we do is we forecast business cycles for the purpose of forecasting the risk of recession over 6 to 12 months. The reason that we do that is because for investors, Asset prices generally tend to trend higher over time, and then there's periods of nastiness. You could say that just cluster around recessionary periods. That's why forecasting recessions or spotting recessions is attractive thing to do for investors because absent a recession, markets and assets tend to trend up. It's really only the recessions that cause the significant impairments of capital. So when we look at forecasting recessionary periods, they follow a very sequential sequence. Kind of every single business cycle that we have data for follows the same process. They have a little bit of nuances here and there, but predominantly a tightening of monetary policy leads to a slowdown in early ticket or early, what we would call leading indicators, things like building permits, the transaction volume of housing. So new home sales, existing home sales, That slowing of demand compresses the margins of residential home builders. For the most part, when residential home builders start to see their margins compress, they're forced to lay off construction crews. And then it's the early job losses in the construction and manufacturing sectors that create the downstream economic stress. So what happened was after the Fed raised rates, As you would expect, we got the decline in building permits, we got the decline in new home sales, we got everything that started to happen, and we got the decline in builder profit margins. So if I'm gonna share my screen here just to walk through. So what we're looking at here is on the left, home builder profit margins. This is aggregated from the top 15 publicly traded home builders. So you could see that going into the pandemic, profit margins were very stable around 10%. We had this big surge up to 20% at the pandemic. And right when the Federal Reserve started tightening monetary policy, you had the profit margins compress exactly like you would expect. So now at this point in the process, we were expecting as a result of the big decline in building permits, the big decline in new home sales, the tightening of policy, and what was the beginning of the decline in builder profit margins, that builders would begin lay off employees. We saw increases, very small increases in initial jobless claims, and should the builders have commenced larger-scale layoffs, it probably would have cascaded towards the normal recessionary process. But what happened, as you could see in the chart, is that the profit margins were so elevated, the highest level we've ever seen, that they went down 1,000 basis points from 20% to 10%. And at 10% today, we are still at the same level that we were before the pandemic. So builders have trimmed crews, they've stopped hiring, and they've done some things around the edges. But they never were forced to commence larger-scale layoffs as they would have in the past. So if you had builders had margins go down 10% from basically any other point in history, they would've went from 10 to 0 and you would've had larger layoffs. Now, pressure is still existing in the housing sector because of the build, and we're talking residential construction, not home prices, because the margins are still falling. But what's happened in the other parts of the economy is the Fed started to cut interest rates and we've started to see an acceleration in other areas rather related to AI capital spending.

Give, give, just note the time here. When, when, what period are you talking about now?

So, so, uh, at the end of 2025— so at the end of 2025, the Fed was cutting rates in '24. Right. So towards the end of '25, we started to see a cyclical upturn in construction and manufacturing employment offsetting the weakness that we were seeing in residential. I mean, it was very small declines in residential employment, not very big. So the AI spending started to kick in. You had an increase in non-residential construction jobs. You had multiplier effects through manufacturing. And then you started to get an upturn in other parts of the economy, cyclical parts of the economy. So where we stand today is a labor market that has improved for basically everywhere except housing. But housing, the declines are just very, very, very small. So the other parts of the economy are starting to accelerate. And that's causing a retightening of the labor market. And when the labor market tightens, that puts recession risk pretty close to zero. So at the moment, we have increasing construction and manufacturing employment, which makes recession risk low. So the negativity that we had on the economy was based on the sequence playing out. And what ended up happening with the benefit of hindsight was the margins were so high, they were insulated, or they were able to kind of cushion this multi-year downturn without commencing the larger-scale layoffs that normally would have triggered a larger recessionary cascade.

Okay, some people are audio only, so I just want to explain what we're seeing. So there's 2 charts Eric is showing. One is Homebuilder Profit Margins Are Falling is the title, and it shows, you know, that they're lower than before. And then Corporate Profits Rise as a Share of National Income. Do you want to talk any more about the corporate side?

So on the, on the, on the right side of the chart, we're looking at economy-wide profit margins. So this is for every public and private corporation. And the reason we're looking at this one is because the ultimate sort of leading indicator or driver of recessions, as I mentioned, is that whole sequence I outlined for the home builders or residential plays out for the broader economy, but it plays out first in the housing sector because of the interest rate sensitivity. So when you have declines in home builder margins, and then that leads to job losses, in residential construction. Those people who become unemployed put stress on the rest of the economy and compress the rest of the economy's profit margins. And then it's like a series of dominoes,

right? One thing though, you keep talking about home builders, and I appreciate that because, you know, we're talking about real estate, right? Mostly. Of course, the broader economy is important too, but home construction compared to the overall economy is a pretty small part of the overall economy. So it kind of surprises me. It just kind of feels like you're making a leap from construction workers, which there's a shortage of, right? But, you know, if they get laid off, that's going to cause a recession. Isn't that a bit of a leap? Because compared to the overall economy, that's a pretty small part, right?

Yeah, I'm glad you mentioned that. So construction and manufacturing together—

Manufacturing, yes. Now that's a different story.

Yeah, yeah, yeah. Just construction. I'll tie it all together. So construction and manufacturing together Currently are 21 million jobs, which may surprise you.

That's significant.

It's a pretty big number.

So that's gonna be of the total jobs, which I think there's about, I don't know.

It's about 13%.

Yeah, I was gonna say 180 million jobs in America or something like that, right?

Yeah, about 160.

160 million, thank you. So there you go, that's your number. 21% of 160 million jobs is how much we're talking about.

There you go. So what's interesting though is that That percentage has fallen over time. So as a percentage of the private sector, it's about 13%. In the year 2000, which was 26 years ago, it was 17%. So it hasn't fallen that much from 2000 until now. So 17%, 13%. Mm-hmm. If you go back to every recession when, when they were a very much larger share of the labor force to even now when they're just 13%, Over 100% of the recessionary job losses come from construction and manufacturing. So if you have 21 million jobs and you lose 10% of the labor force, which would be small because it's such a volatile sector, that's still 2 million jobs against the rest of the economy, which is more than—

Was it— that was 21% or 21 million?

21 million.

Okay, got it.

21 million. So Homebuilders, of that construction manufacturing, that $21 million, residential construction is about $3, $3.5. So it is a small subset. But it's the, the reason that we focus on that is because it's at the bleeding edge of that $21 million. And there tends to be multiplier effects that go through. So when you build a lot of homes, you need a lot of washing machines and a lot of dryers and a lot of trucking,

dishwashers,

and that creates a manufacturing process.

So there's an interconnect.

Yeah, exactly. So there's an interconnectedness. connectedness between residential and manufacturing. So when you lose jobs in residential, that creates some pressure on manufacturing. And then you start to get to this kind of breaking point, which we've calculated somewhere between 300,000 to 400,000 job losses in the construction and manufacturing sector. When you hit that level, that's when there's enough kind of accumulated pressure where it creates downstream stress on the rest of the economy. And then that's what pulls down the profit margins in the, in the right-hand chart, which is total corporate profits. But what you could see is that because the margins were so high, homebuilders are so profitable in 2022 that we saw the monetary tightening and we only ended up losing about 150,000 jobs total in construction and manufacturing. So we did lose jobs. The sequence did play out as you would have expected. But instead of getting to that $300,000, $400,000, $500,000 level that would have created a lot of stress, you got to about $160,000. And then AI spending started to come, and that kicked off non-residential, that created manufacturing process. And those construction and manufacturing payrolls have now turned higher and now have exceeded the peak of the past cyclical upturn. So we now have sort of a rip-roaring upturn in those construction and manufacturing sectors, residential still being a little bit of a weak pocket. So because of that, you're not going to get any downstream pressure on the less interest rate sensitive parts of the economy, and thus overall recession risk is quite low, and that generally bodes well for asset prices.

Okay, so I want to make a couple of footnotes. That was really interesting. The first footnote is it's kind of an odd situation we find ourselves in when we are residential real estate investors. Here's why. Because the homebuilders are complaining that ICE is raiding their construction sites and deporting their workers, right? So God forbid they'd have to pay American-level wages instead of indentured servant wages, you know, and hire Americans. Right. The construction workforce is massively aging. Okay. 30 years ago, you'd go see 20-year-olds working on construction sites framing houses, and now they're all 50. It has been 30 years. Okay, imagine that. They are under severe pressure, the builders. But what's interesting is if they have worker shortages, if they have layoffs, and the builders are not excited about the economy and their future right now, so they're kind of pulling in the reins. And slowing down and putting the brakes on their production process. All of that makes the housing shortage worse, which makes it better for investors. You know, it's kind of an ironic sort of scenario. You know, you hear this negative news, builder profit margins are down, builders aren't building as much. That just makes the housing shortage worse. And I want to show you a chart that's interesting. And this is something I recently shared on my show. I'd love to get your comments. It's more specific than yours. You aggregate I haven't aggregated all the builders. This is just KB Homes. Okay. I ask people as investors or as buyers, consumers, right? When do you want to buy something? Do you want to buy something when the seller's got a giant profit margin and they're really sticking it to you? Or do you want to buy something when the seller is stressed and they want to unload their product, their widgets, right? Well, this is KB Homes gross margin. Now, this is gross. You didn't say if your margins were net or gross. I think they're gross from the kind of numbers I'm seeing.

Pre-tax profits. So it was a little bit further down the sheet than just the gross, but pretty close.

Yeah. Okay. So here's KB Homes gross margin. And this is 26 years of this, right? So you see that way back in about 2000, it was 19.8%.

Yep,

the market was booming before the Great Recession or the Global Financial Crisis, whatever you want to call it. Their margin got up to 27.4%. Then it went negative with the mortgage meltdown and the Great Recession, and it came back, you know, circa 2010-11, right, to where they're at the historically normal levels, 17.5%, 18% in here, right? And then it kind of trickled down again right around the 2016 election, mid-2010s. And then in the pandemic, it went way up again, 26.7% again, right? And then now it's down at 16.5%. So I can tell you we work with lots of builders. Our clients are buying properties all over the country from these builders that we recommend. We're pre-negotiating deals. We're getting them to buy down the interest rates, throw in appliance packages, upgrades, incentives. The builders are making deals, and it's, it's great because the builders— interestingly, it's such a bifurcated market we're in where the builders are in a completely different economy than resale home sellers.

Exactly right.

Exactly. Because they, they have short-term debt that's very expensive, and the, the 140 million homeowners have very cheap long-term COVID-era debt, and they're completely unmotivated to sell. That's right. It's a very strange phenomenon we're in right now.

That, that's exactly right. And I, I wanted to show a couple of charts here to kind of tie in the point and sort of clarify a little bit of the position that I'm making, because I'm glad you mentioned that. There's, there's a difference between the residential construction market, and the reason that I focus there is specifically because of its impact on the recessionary process versus home prices, which, as you know better than I do, is much larger in the existing home market than the new home market. So what I'm showing here on this chart is the 2 categories that make up overall residential construction. On the left is what they call residential specialty trade contractors, plumbers and electricians that are designed specifically for residential. And then on the right is residential building employment, which is both new builds as well as remodeling. So you could see, and I'm not using the 2008 example as a proxy for what could happen, I'm just suggesting the magnitude of the swings where when you add them together, you had about 3.4 million jobs in 2006. And that drops to about 1.9 million. So you lost over a million jobs in a category that was just basically 3 million. So you lost 33% of the employment. Extreme scenario. As you could see in the, these 2 charts, the, the sequence made sense in terms of the run-up in builder employment. And then when the tightening and slowdown happened in the construction market, you've seen them cool off their employment. But you could see that the magnitude of the drops in employment were very, very small, not enough to create the larger stress that I was referring to. And this is the ultimate chart, which is the left-hand side, and you could see the ebbs and flows that have happened in the economy. So on the left-hand side, we're looking at total construction, residential and non-residential, plus manufacturing, which adds up to 21 million jobs now. And then on the right is the private sector excluding those cyclical jobs. So on the right-hand side, the private sector, when you when you remove construction and manufacturing, jobs just increase all the time. There's almost never a downturn in the labor market outside of the cyclical sectors. Very, very, very small, insignificant as far as the recessionary process. In the left-hand chart, you could see the slowdown that happened, and it did come. Where jobs started to decline in the construction and manufacturing sector. We lost about 160,000, and then we had this V-bottom acceleration to the point where now it's rising and it's exceeded the prior peak. The decline came with rate cuts, the recession fears. It stopped before it got to that sort of point of entropy, and now it's accelerated and turned higher. So this is what's putting recession risk close to zero, because unless you have a labor market downturn, you can't have a recession. And a labor market downturn almost only comes from construction and manufacturing. So we have an environment now where there's problems in the economy. There's, there's injustices and issues to be, to be sure. But as far as investors are concerned, if there's a recessionary pocket, that's a problem. And there's very low probability historically of a recession when you have construction and manufacturing jobs turning higher. So this chart encapsulates the more bearish to bullish pivot that I've made in the research process and the outlook of potentially having a recessionary pocket to now having a very low recessionary window.

On a little bit of a side note here, I just got to hearken back to what you told me before we started today, which I live and I comment on this all the time. As humans, we survived for eons based on our ability to see negativity in the environment. That's what kept us alive. But when the Industrial Revolution came along, and then the tech revolution after that, and the information revolution, the world just completely changed. But our old brains still operate the same. You know, it takes a long time for them to adapt to the new world. Sure does. It's going to take, you know, another 1,000 years. You commented on it, and everybody comments on this, when your outlook turned more positive, you just didn't have as many viewers and listeners as you did. And people started criticizing you and trolling you more, just like me, because you, you were just telling them the data, and the data is, is positive. Can you comment on that? Yeah, it's a soft thing. If

there's one thing I am, it's a little robotic to the process that I follow. And the process that I follow emanates from the construction and manufacturing sector, because that's just what drives all of the swings in the economy. Mm-hmm. So when those construct— when we, when we went through this process, and then construction and manufacturing payrolls coming down, I had to be on alert for recessionary windows, because that's the textbook sequence in which recessions develop. But true to my process, if those jobs or that part of the economy starts to accelerate, Historically speaking, there's such a low probability of recession that I have to go with that. But you know, as I've become more bullish in the outlook, I'm getting a ton of pushback on the AI being a bubble and the calling out parts of the economy that could be negative or could be dangerous. And there are certainly you know truthful elements to some of this type of stuff. You know, so the AI spending, all of it may not be profitable, but in the in the moment, at this very moment. it's creating a positive tailwind in the economy. There could be a bust later down the road, and we'll see that through our process, as it will emanate negatively through construction and manufacturing the same way as right now it's emanating positively. But I have to stay true to the framework, because it's grounded in a ton of research and a ton of historical data that if there's an upswing in construction and manufacturing payrolls, probability of recession is low. And if there's not a recession, asset markets, for the most part, Pretty good environment.

Yeah. So a couple comments on that. You know, when it comes to data centers, the problem with data centers is that it, it takes a lot of people to build them, but not many people to run them. So jobs— the jobs don't last. And do comment on the thing that really concerns me about the quote-unquote AI bubble, and that is the incestuous nature. And it's sort of above my pay grade. I mean, I don't analyze this stuff all day, but I you know, read about it a little bit and study a little of these tech companies trading with each other. They basically made their own economy with, you know, Nvidia sells chips and then OpenAI provides them a contract and yada, yada, yada. This does not seem real, but they get to count the revenue twice or more than twice, really. What's your take on that?

Yeah, there's— look, there's— I'm not a forensic accountant and I can't go through the statements of all of these companies and call out. I mean, people have tried to do this. And there's credible people sounding the alarm on some of these transactions may not be up to par or whatever the case is. But what I want to go back to as an economist is when I look at corporate profits in the whole economy, we can disaggregate or untangle what goes into corporate profits. Mm-hmm. And there's a couple of wonky macroeconomic things. But by and large, when the government— all else equal, when the government runs a deficit, that's positive for corporate profits. When household savings declines, that's positive for corporate profits. And when businesses invest, that's positive for corporate profits. So someone's investment is somebody else's revenue. Right. And this is just part of the macroeconomic equation. And what I find somewhat interesting is that for the entire post-GFC period, we had extremely low investment, private sector investment. And that was viewed negatively, as it should be. You know, we want companies to invest because that's really the basis of productivity. So we had very low investment. Now we're starting to see huge accelerations in private sector investment, which per the macroeconomic equation, in the short run will supply a lot of profits to the economy. But we don't like that either. I'm not saying that this is all going to turn out to be positive, or all this investment is going to turn out to be a great thing. But businesses investing is positive for profits as a whole. And right now we're doing a lot of investing. My hunch is that the concentration of the profits has more to do with the fact that the economy itself is just super concentrated outside of AI. I mean, we had the situation where The big companies were the lion's share of the S&P before the AI boom. If you look at industry consolidation and, you know, every industry, it's just consolidating up. So if Amazon and Meta are using AI, they're going to use it to a scale that's so far above everyone else in the economy. So I'm not quite as worried about it. And if I do get worried about it, it's because I'll see some of the aftereffects or blowback of the investment hangover come through the sequential process that we follow, and it will come through. I mean, there were huge booms in investment in 1999 through computer equipment, and it was a massive rise, but then we did see a hangover. So if that hangover comes, we'll see it, and I'll certainly be negative then. But on the way up, it's up, and right now we're, we're still up.

Yeah, very interesting. You know, you do study employment in the labor market a lot. And I would love to get your take on AI is going to take all our jobs. You know what, where do you come in on that?

Yeah, so the labor market is, is definitely a place that I've been catching some, some heat as far as my analysis, and, and I can understand why. So as we just covered in the labor market before, we had a downturn in construction and manufacturing, and now we have an upturn. So that's generally a positive. But what we're looking at on this chart is initial jobless claims. Now, I get a lot of heat for publishing initial jobless claims because people say it's not an accurate indicator, but initial jobless claims are measuring something very specific, which is layoffs from a covered employee. So someone who's a W-2 employee that's covered by unemployment insurance, are— after they get fired, are they filing a jobless claim? And that's what it's picking up. And right now, this is basically at the lowest level in history, which is suggestive that layoffs in the economy are extraordinarily low. This is confirmed by the BLS JOLTS data. They have a layoff series, and in the, uh, non-farm payrolls report, we can get layoff rates. So triangulating layoffs in the economy from various different sources confirm that layoffs are extremely low. So if you have a job, The probability of getting laid off is not super high at the moment.

One, one thing maybe we just want to add to that, you know, a layoff wouldn't be counted if the person goes and gets a new job right away.

Correct. Well, well, it wouldn't be counted if they don't file a jobless claim. But in the—

Of course they have to file unemployment.

But in the BLS jobless data, that would be counted. You would see them move from employed to unemployed and then unemployed to employed unless it happened intra-month.

Right. Right. I'm saying it might happen very quickly. They might have already been talking to another employer.

That's possible. And if it's a voluntary quit, so they leave, they're talking to an employer and they quit, they would have a data set for that on the quits rate. So that wouldn't be—

But they can still file a jobless claim if they have a severance package, right? They can still file.

The details of that, I'm not sure. I'm not sure if they can file, if they have a severance. I believe if they get laid off, maybe after the severance wears off, they can file a claim. But we have the jobless claims series is picking up the actual claims. And some people say, well, some people aren't filing a claim because the benefits are too low. And there's some plausibility there, although the data suggests that's a little bit thin. But if you get laid off and you don't file a claim, it's true that you won't get picked up in the jobless claims data, but you will be picked up in the BLS JOLTS series of a layoff. So triangulating all of them, we see low layoffs. And this is consistent with things like you're saying, where some of these industries are tight on labor. So you're not going to lay people off if it's tough to find somebody. But on the flip side, what we're looking at here is the continued jobless claims. Per initial claim. So once you file an initial claim, you're— that's the initial filing. And then if you file again week after week after week, or you stay on the claims, you're a continuing jobless claim. So what the continued to initial ratio tells us is how long the average person is staying on the claim. Yeah. And that's about 8.7 weeks now. And when you go back to 1967, This 8.7 weeks is higher than 88% of the readings. So what this tells us is that getting a job is very difficult. So the hiring market is very soft. This is the no-hire, no-fire labor market that people are talking about in data. Right. And that data is, is true. So what's happening is if, if you are employed, the layoff rate is historically low. But if you're trying to find a new job, it's very, very, very difficult. And where this falls in our analysis is it falls primarily on the younger cohorts, because when you graduate and you move into the labor force, you're much more sensitive to hiring conditions than an incumbent who already has a job. So younger people must interact with the hiring market, whereas incumbents or older workers generally have a job. And what we've seen is when the labor market had the slowdown from, you know, '23 to '25, or '23 to early '26, as we were calling out with those construction and manufacturing flows, we saw the unemployment rate for under 24 go from 7.2 to 10.5. So a 300 basis point increase.

For workers under 24 years of age?

Correct.

Okay.

It only increased— it increased less than 1 percentage point for people 25 and older. Both directionally were soft because hiring was soft, and there were some job losses in construction and manufacturing. As those jobs turned around and started to improve, we've seen unemployment rates come down for both cohorts. But what we— we still are in a labor market that has a historically challenging hiring situation, but historically extremely low layoffs. It's a very unusual environment. You know, people can theorize about why this is, maybe AI. We can't derive the exact correlation. But what we do know is that weak hiring disproportionately impacts the younger workers. And I think most people in their, in their day-to-day life, or if they have kids that are in those years, can understand that it's a difficult hiring market, but it's a very low layoff market. And that's the state of the labor market at the moment.

Eric, I want to make a connection because that sounds very similar to the housing market. And here's why. Okay, we have a housing market where sales are low and slow, right? Sales volume is slow, but sellers won't sell their properties because their mortgage is just way too good a deal. I mean, the debt-to-income ratio for existing homeowners now averages about 17%. They're so comfortable. And that doesn't even count the 40% of people that have no mortgage at all. They own their property free and clear. And then the hiring market, if you will, the sales market is slow. So that's just like the real estate market.

Kind of first-time homebuyers, you got to go and buy a new home, those transaction volumes are depressed. And sort of where our worlds collide is really does come through that labor market. Because as you mentioned, those mortgage rates are low, debt-to-income is low. The only thing that really creates forced selling in the housing market, just like the equity market or anything, is job losses. If people lose their job, it kind of doesn't matter how low your mortgage is, you're going to be in a more stressed situation.

I'm so glad you said that because I did a study on that, you know, 3 and a half years ago, 3, 3 and a half years ago, when I was not sounding the alarm on the housing market, and I turned out to be right. And Every doomer out there was just trolling me and criticizing me like crazy. They said, oh, the one thing Jason is totally missing, no matter what he says, is the elephant in the room is the job market. And we are going to see higher unemployment. And when we do, there's going to be a glut of houses that come up for sale. And that's going to crash the prices, that's going to crash the market. And I took that criticism into account. And I got on Zoom with one of our lenders that we've worked with for many years. And I said— his name is Joe— I said, I want you to open up your underwriting software just the way you'd underwrite a new loan. And I got some— you know, it's hard to get an exact number on this, but I got some reasonable numbers on what unemployment insurance pays. It depends on your state and your prior jobs, a million things. But, you know, I got some reasonable numbers on that. And I said, I want you to take this fictitious couple They've got 2 car payments that are somewhat reasonable. They've got 1 student loan. They got a little bit of credit card debt. They own a house. They both become unemployed, and they're just collecting unemployment insurance from the government that will last 6 months. And during every recession, they always increase the benefits and make it last longer, right? Mm-hmm. During a crisis. And so could they qualify for the mortgage they already have? With just unemployment insurance, right? Turns out the screen went green after we put in all the numbers because their debt-to-income ratio was fine. They can qualify for the mortgage they already have only because they have such a cheap COVID-era mortgage, whether they purchased or refinanced during the COVID era. They're safe. So, right, I don't—

Point well taken. However, what I'd say is, when we were looking at, you know, individual situations, but when we're looking at aggregates, the household savings rate right now is about 3%. So in aggregate, there's not a huge cushion between what comes in and what goes out. And if someone loses their job, the mortgage may be the last thing that they stop paying. Maybe they stop paying a credit card first, or maybe they stop paying a car loan first. Point is that what we define in the economy as credit stress, which is loans going delinquent, definitionally can't happen without job losses. Mm-hmm. A weak hiring market is not sufficient to create broad credit stress. But if job losses accumulate— and back to the construction and manufacturing point that I made— is there's sort of a point of entropy of accumulated stress. And when we use construction and manufacturing, it's somewhere between 300,000 and 500,000. We only got to 160,000. So you were definitely correct. And I think part of the reason is we just never had— we had basically 50% of the accumulated stress historically necessary to create some of that credit stress. And that credit stress could show up in autos or other things first. But now that the job market is improving from the layoff standpoint, hiring is still tough. Mm-hmm. But from a layoff standpoint, the probability that you have credit stress, whether it's in homes or autos or anywhere else, is certainly significantly lower.

Yeah. And, you know, that's a very good point that you make because I have made that disclaimer that the vast majority of things I talk about in the content I create is based on the relationship of the people to their house.

Correct. Totally.

Or the people to the house they might buy. It's not in relationship to their student loans, their credit card debt, or their car loan. Okay, so this chart on the screen is mortgage delinquency rate that no matter what anybody says, it seems to overall just keep going down every time I read a report. This one's a couple months old.

That's right.

I just pulled it up. I, I didn't prepare it for the interview. It was just in my general slide deck. You know, mortgage delinquencies are extremely low. So I think you're right that the last thing they would stop paying on is the mortgage because the mortgage is such a good deal. And the, the other ironic thing about all of this is And this is just weird. Like, nobody can comprehend this idea. The higher mortgage rates go, the bigger the delta gets between the 25% of the people that have a 3% or less mortgage or 65% of the people that have a 4% or lower mortgage, the literally the better deal their mortgage becomes.

That's right.

That's right. Right. Like, that's counterintuitive. But a lot of people have to think that through to get it. They think, oh, the higher rates go, the worse it is for everything. No, their deal actually got better. Okay. Because it's less replaceable.

No, you're right that they'll hang on to that by all means necessary. At some point you have no income, of course. But—

And they've got huge equity cushions. We didn't even talk about the amount of equity they have. They have giant equity cushions. And granted, some of that could evaporate in bad times, but a lot of it has to evaporate. I mean, I don't have the equity cushion chart handy. I could find it in a few minutes.

Yeah, I know that it's historic, and I think that your point is well taken. Essentially, what this boils down to, and the service that we provide, is the recessionary forecasting through the process. Because like you're saying here, home prices, other than select pockets that have regional issues themselves, broadly speaking, will trend higher in absence of recession. If there's a recession, that's the highest probability you could have of a decline in home prices. Yeah. and equity prices. At the moment, that risk is quite low. While you turned out to be correct, and there was no recession, we certainly were trending in that direction from '22 to '24. There was an increase in the unemployment rate, there were certainly pockets of the economy that, that were stressed, you know, a couple pockets of the housing market, but that may be regional and supply related. Point being is that if the recession developed, there could have been pressure. No recession developed before those things started to reflect and turn higher. Now that they have turned higher and recession risk has gone from perhaps elevated to now back to low, you're still in a, you know, more or less a smooth sailing environment, broadly speaking, for assets.

Yeah, yeah. And we didn't even get into the housing shortage discussion, but, you know, another topic. And the demographics coming at the housing market are huge. There's lots of people that need housing, so that, that's good too. But Eric, before you go, Just tell us, you know, what you do. You offer a monitoring service and reports and stuff to mostly like hedge funds and institutional type investors, right?

Yeah. So we work with hedge funds, some, some real estate investment firms, private equity, institutional investors primarily. And then we do work with some high net worth individuals. And, and what we're trying to do is business cycle forecasting, alerting our investors to the probability of recession risk over the next 6 to 12 months, and how that would impact asset prices. I would say about 2/3 of our business are focused more on the liquid asset markets like interest rates and equity prices. And then a third are focused on some of the more illiquid stuff like private credit and real estate. All those assets tend to have, broadly speaking, good overall positive returns in non-recessionary environments, and then lots of turbulence in the recessionary environments. Which is why that's the area of interest. And that's the service that we provide. And we work with clients on an individual basis as well as a subscription service. And we have a free trial available for 7 days. So people can come check it out, see the service, and jump on a call with us too.

What's the website?

It's epbresearch.com. And then you can find everything there. And, you know, I appreciate what you do a lot. And congrats to you for staying strong through that. recessionary period and you got that call right. We try and go both ways. We call it like we see it. You know, when there's a downturn, we want to make sure that we alert clients to that so that they can protect their capital. And then when there's no recession on the horizon, we want to be super clear about that as well, because like you know better than anyone, most of the news flow is negative out there. So it can be just as hard to stay invested during positive times as it is to prepare for the potentially negative times. And we do the best that we can providing the information so that we can help clients in both of those environments.

I agree. I want to ask you before you go to speculate on something, I'll get to that in a moment. Sure. But you just reminded me of that great quote that I cannot remember exactly by Warren Buffett. But basically he said, the basic idea is he said, if you want to be a great investor, you have to have the ability to do nothing for long periods of time and just be bored. Right?

That's right. That's right. Because, you know, we do go through periods in the economy where there are elevated risks, and people should be aware of that. But we do go through also 2, 3, 4-year clips where recession risk stays low. And the toughest thing is to be aware of that and to combat the negative news flow that will come for all 4 of those years without question.

Right? Yeah, exactly. And so, you know, that's what I say to our investors, just sit tight, just operate your properties, collect your rents, raise your rents when you can, you know, and do that. But Eric, when I asked you about that, Will AI take all our jobs question. You know, you pulled out some charts and you talked about the immediate situation, which was great. But I'd like you to maybe just, if you would, and you probably don't have a chart for this, it's just gonna be your opinion.

Sure.

Speculate on the longer term. I mean, look at, let's think about it this way. 2030 is 4 years away, less than 4 years. Okay. ChatGPT, the version of it that hit big was 4 years ago.

Yep.

So we're kind of about halfway through the AI thing, if you will. I mean, AI has been around for decades, but, you know, the version of it we all think of. Okay, we're about halfway through. What's the employment market gonna be like by 2030? You know, it's very hard to know. I mean, what is our future like? Are we all gonna work, you know, 10 hours a week instead of 40 or 50? Yeah. You know, I kind of think it's like Elon says. I think we're gonna have a lot more abundance. Human needs are insatiable, you know, we just, we just want more stuff all the time, right? Uh, no matter what we get, we want more. So, you know, we may keep working as much as we do, but certainly a lot of these redundant, repetitive, boring tasks are being replaced by the machines.

What do you think? That's right. So, uh, if you can see my screen here, I do have a chart that may add a little bit of context. So You know, trying to answer the question here of like, is the— is there any productivity to this? And what we find is on my Twitter, I have a thread where I have a bunch of charts, but just talking out loud through some of the stuff is that there are basically 3 sectors that have adopted AI in some capacity. And we're talking even these sectors have adopted them less than 50% as measured by these surveys. So finance, technology, and professional services, which would be things like maybe accountants, right? So of those 3 sectors, that's what I'm graphing on the left. That's the productivity measured as output per worker. And then on the right is the rest of the private economy, which is every other sector that for the most part has not adopted AI at all. So what you can see is there's a very clear inflection in productivity right around the adoption of these AI models. But the left 3 sectors are 15% of total payrolls. So most of the economy has not adopted it, and they're not really seeing any changes in productivity, which is not really changing any labor flows. So what I'm, what I'm getting at in this chart is the productivity gains of AI in the sectors that have adopted them appears to be very real. As that technology sort of bleeds out into the rest of the economy, the rest of the economy will likely see similar productivity gains, and that could cause a displacement of labor. The economics answer is that if the productivity gains occur, they may cause displacement of workers. Those firms will become more profitable, and then they'll reinvest that money back into the economy, or they'll dividend it to shareholders who will then spend the money. And then there will be a reuptake of employment in the other areas, which we don't know. They're unseen. And that's the scary part about economics is the benefits and the creative destruction process involves destruction. And the destruction is very uncomfortable. And society generally doesn't like that part. So I think what tends to happen, we've seen it in Europe to a larger extent than here, but we do see a lot of it here, is we go to great lengths to blunt some of that destruction process, and that in turn blunts some of the creative process on the other side. So I think that left to its own devices, AI is yielding productivity gains. And if the economy adopts it as a whole, there will be a large displacement of jobs from various sectors. But left to its own devices, the economy will reabsorb those places in an area of new demand. Unless we intervene too aggressively and prevent some of that, which is my fear. So I have this feeling that there's going to be productivity gains, there's going to be a displacement of labor, but then the government may step in to blunt some of that process. And then there's going to be a little bit of a delay or preventing the reuptake of labor. And you end up with a a state that, you know, generally has a larger social safety net, which I can understand why we want to go in that direction, generally speaking, as a country. But I'm not sure it's, it's to the long-run benefit.

It's like the dockworkers strike in Southern California years ago, where the companies wanted all the workers to start using iPads. And the dockworkers, the union said, no, we're only going to use clipboards and paper, because we want to make sure the job is as inefficient as possible, right? So we need as many workers as Yeah, and

I don't know if I was super— if I did that explanation justice. And so I know I make some people upset with that analysis, but just being true to economics is that, you know, we've gone through this process throughout history. You know, we used to be like 90% agricultural labor, and obviously that's changed. So we do change and adapt over time. And I want to be super sensitive to the periods of time where that labor does get displaced are difficult. And You know, we maybe try and find some ways to make that process easier on people and families. But in the long run, we do, I believe, want to let the technology advance. So I would say that it's not going to take all of our jobs and that there will be no jobs left. I just think there's going to be a large reshuffling. And it's an open question about what we do during that reshuffling.

Yeah, absolutely. It takes a, it takes a couple of years to readjust things and reshuffle. Absolutely. Well, Eric, it's always Super interesting to talk to you. Thanks for joining us again. And, uh, you gave out the website and, uh, people can get your newsletter there and follow you on YouTube and so forth. Okay, appreciate it.

Yeah, thanks for coming on. We're on the same side this one. Maybe next time we'll be on a different side, but we might be.

We'll see.

All right.

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