Simone Del Rosario: Falling interest rates may pique the interest of prospective homebuyers but experts don’t necessarily think it is going to “loosen” the market that remains tight.

The rate for a 30-year fixed mortgage averaged 6.09% for the week according to Freddie Mac. The dip comes as the Federal Reserve cut its benchmark interest rate 50 basis points Wednesday.

Mortgage rates have been slowly declining since hitting a 23-year high of 7.79% in October of last year.

I get it. Rates still seem like they are pretty high. But remember, for every 1 percentage point mortgage rates increase, that lowers buying power by 10 percent. And that’s a big deal when you look at the average price of homes sold in the U.S. since the Fed had its rates near zero starting in April 2020. See… they went way up!

But… I digress. The fact is, the housing market is so tight. Existing home sales fell 2.5% in August according to a release from the National Association of Realtors. And that’s with rates slowly falling throughout the month as pretty much everyone knew the Fed was going to start its rate-cutting campaign soon.

Will further rate cutting have the impact buyers are looking for. Let’s bring in Selma Hepp, Chief Economist at CoreLogic. Selma, thank you for being here, and you know, I’ll start there. Homeowner hopefuls have been putting off plans to buy for years. Are these lower rates going to be the entrance point they’re looking for?

Selma Hepp: I think the lower mortgage rates are certainly helping. Every time we saw mortgage rates come down, it did help spur some buyer demand. So for example, when you think about what happened after the Fed meeting last December, mortgage rates came down that certainly spurred housing market demand, same thing the year prior. So whenever we move closer to 6% and further away from 7% and even come down to 5% range, it does help with affordability. It helps with buyers budget, and it brings back that demand that we desperately have been needing in the housing market.

Simone Del Rosario: So here’s my question, then, is it possible that more affordable mortgage rates could actually drive up housing prices, since more buyers would be trying to enter the market?

Selma Hepp: Yeah, that’s that’s a question that keeps coming up because everybody’s worried that there’s so much pent up demand and not enough supply, meaning that as soon as mortgage rates come down, you’ll see more buyers coming in and pushing those prices higher. That’s certainly a possibility, but what we did see over the course of this year is more inventory of existing homes for sale, and that has helped put a lid on home price appreciation. And the other thing is, when you think about mortgage rates further coming down, it’s going to unlock, unlock some of that inventory that’s been locked in because mortgage rates were the difference was so high between where people locked in where mortgage rates were. So with that spread coming lower, I think we’re going to see unlocking of some of that inventory, so the balance between buyers and sellers is going to be better, and it’s going to keep the lid again on a rate of home price appreciation. So we certainly hope for that going forward.

Simone Del Rosario: Yeah, for sellers looking at the market right now, when would be a good time, an optimal time for sellers to enter the market?

Selma Hepp: Well, you know, that’s usually very individual decision. You know, depends how long you own the home depends. Are you moving to another place where home prices are more affordable or not? You’re staying in the area. And depends also, you know, what your family situation is a lot of time sales. Sellers are driven by change in family status. So they are either selling because they need a bigger home on there is a divorce situation, or maybe somebody is no longer around, and so that’s usually what drives sell. That’s the most frequent reason for for sales, but sometimes lower mortgage rates are helping. They do help sellers sort of feel better about their next purchase because it’s more affordable again. And I think definitely with mortgage rates coming down, it’s going to help with that. You know that that sense of like, How much am I giving up to buy my new home. So yeah, I think will help seller demand seller number of sellers in the market as well.

Simone Del Rosario: Yeah, because, you know, yes, selling a home is an individual decision and has to do with your personal life. But what we’ve seen over the years is people really holding on to their low interest mortgage rates and not moving on to the next home when they typically would. If they, you know, are adding to their family, they’re staying in those homes. So this could unleash, but at the same time, I believe the sellers would want to have at this, okay, at the same time, I believe sellers would want to have, you know, the best price they can get for their house since they’ve waited so long to be able to sell it. Yeah,

Selma Hepp: Yeah. That’s that’s often an interesting dilemma, because you want the more most you can get for your home. But then also think about of next home that you’re purchasing, that next seller is gonna want for the most for their home as well. So you know, that’s always a dilemma that sellers find themselves in, but you’re absolutely right in terms of length of tenure for sellers. Over the course of the last couple of decades, we’ve seen people staying in their home longer and longer because homes have become increasingly more unaffordable and there are fewer homes available for sale. So oftentimes what I hear sellers say is, you know, I do want to sell. I do want to move, but where am I going to move? There’s not inventory. There’s not something that fits my, my, my, what I’m looking for. And so they just end up staying put.

Simone Del Rosario: Yeah, and looking at what we’ve seen, we’ve seen such a huge range in what happened with interest rates since the Fed started hiking. Now we’re looking at these rate cuts. So obviously, these mortgage rates have been, you know, a large part of people’s decision making process here. But as you just pointed out to that’s not the only thing that is stalling the housing market. What are the things that are, you know, making the housing market more sticky, unable to really move as well. Why people are not able to get those first homes? What is it beyond the mortgage rates? Yeah,

Selma Hepp: Yeah. I mean, absolutely affordable. Affordability is the biggest one. But affordability, the lack of affordability, comes from the fact that we’ve under built for so long, particularly first time or entry level homes. So when people are, you know, trying to think about their first home or thinking about moving to another home, there’s fewer homes to choose from. So that’s holding people back a lot. And we definitely saw that. For example, in 2023 mortgage rates came down in early spring of 2023 and we saw a burst of buyers coming into the market, but there were not enough homes for sale. And that’s when home prices surged again, and we saw significantly more appreciation in the market because that imbalance.

Simone Del Rosario: And here’s the thing, with the Fed cutting rates, it’s not just the mortgage rates that are going to come down for prospective buyers, but it’s also people who are building, you know, construction loans. These things are going to be easier to get, they’re going to be cheaper to get, and hopefully that would spur some of this movement in new inventory. So we’ll see what happens. But thank you so much for bringing that down for us. Selma Hepp, Chief Economist at CoreLogic, thank you.

I’m Ray Bogan with Straight Arrow News, and I’m here with Jaime Lopera and Marcelo Perez, who are the CEO and managing partner of Elite Protection Solutions Corp based in Miami. We’re here to talk about protecting politicians and the challenges for the Secret Service. We’re speaking, of course, because there was a second assassination attempt against Republican presidential nominee Donald Trump at a golf course. 

Now, gentlemen, according to reporting, the acting director of the Secret Service told former President Trump that significant additional security arrangements and planning would be needed if he wanted to continue safely playing golf. Acting Director Ronald Rowe discussed the difficulties of securing sprawling golf courses near public roads and said that some of Mr. Trump’s courses were easier to protect than others. So what makes some golf courses easier to protect than others?

Marcelo Perez:

It depends on location, obviously. And that particular golf course where former President Trump plays, there are a lot of roadways there and there are a lot of open areas. And it’s accessible not just to the ground, but also up above via drones, helicopters, or airplanes. So that’s a definite consideration when you’re trying to secure somebody, the area in and of itself. If it was a more isolated golf course where there’s less foot traffic or vehicles that are allowed, then it would be a lot easier to secure.

Ray: 

We spoke the other day and you said protecting someone is about manpower and resources. Of course, resources require funding. So as business owners, when a client gives you a budget for a big project, what do you prioritize spending that budget on?

Jaime Lopera

The number one goal is to be able to plan and prevent anything from happening. We spend most of our resources and most of the money should go to planning and preventing. Because ultimately if you take care of that, then mitigating and responding should not take place. Most of our resources or the money should be allocated to the pre-phase. And this is where you’re planning. It’s your planning phase because the ultimate goal is to prevent any of these issues happening. 

Ray: 

The Secret Service is a government agency. Their budget is set by Congress and they have to make that money last for the entire year. Are there alternative ways of getting the job done for less? Let me give you an example. We know from the assassination attempt in Pennsylvania that the Secret Service uses drones for surveillance. What if there’s a scenario where they needed a drone but there wasn’t money in the budget for it – is there another way to get that same type of surveillance?

Jaime Lopera:

I just read an article in the news the other day that they’re talking about Congress actually augmenting the resources and emergency funding just for this. Because again, remember, depending on the location and depending where you are, the resources that you’re talking about are massive, especially for a golf course. Just to give you an example, the key components to protecting somebody, you’re going to need an advance team. That’s somebody who goes in and has to physically and visually inspect the location. They have to do all the preplanning –  making sure that they’re checking out all the entry points, they’re checking out all the personnel. So that’s just one aspect of it. 

Then you’re going to have a protection team. That’s the team that’s actually just making the movements and making sure that the person is where they need to be. Or they need to evacuate him or shelter in place, put him in a place where they can secure them while somebody else can get to them.

Then you’re also going to need a reaction team. Because remember the protection team is taking them away from danger, so the reaction team is dealing with whatever threat they have in front of them. 

And then on top of that, you’re to have a massive support team. That accounts for intelligence, your medical personnel, all that stuff. So when people think of this, the only thing that you see, or we see on the screens is just the couple bodyguards or the couple secret service people that are around the principal. We call them the principal that in this case it will be the president or the presidential nominee. So that’s all you see. But we don’t see the entire picture. The entire picture is a massive undertaking. And especially like Marcelo mentioned earlier for a place like a golf course, because now you’re in open space. So now accounting for all that stuff, now you gotta account for possible intrusions, right? Helicopters, drones or planes or just mere objects being tossed over a wall. Just again, I think when we speak on this topic, one of the main things that we have to do is open up the scope and look at everything that needs to happen in order for someone like that to be protected.

Ray 

iNews in the UK reported that law enforcement sources on both sides of the Atlantic warned that aggressive social media rhetoric and the ease of buying firearms has created a threat for both presidential candidates too large for the Secret Service to deal with alone. If the Secret Service can’t do it alone, who’s qualified to help them?

Marcelo Perez

They’re going to have to open up the scope and bring other resources. There are a lot of retired military personnel, law enforcement, retired law enforcement officers that are highly trained and highly skilled. I’ve been doing this for 37 years. I have a vast array of retired detective, law enforcement personnel who are more than happy and more than capable of assisting. They’re going to have to allow the public, the private sector to come in and at least augment them when it comes to the outside perimeter. I’m not talking about absolutely close quarter protection for the president, but what I am saying, who’s going to guard the parking lot that’s a half a mile away? Who’s going to guard the fence that could be 1500 to 200 yards away? That’s where the public sector can come into play and be able to assist them because there’s no way that they’re going to be able to allocate three, four, or five hundred, law enforcement personnel, Secret Service personnel to guard the president while he’s playing golf. But he can get security companies, investigative companies like ours to assist and to augment them and it’s cost effective.

Ray

It’s hard to protect against a lone wolf in part because they don’t communicate with collaborators. If someone hired you and said, have a potential threat detected from a lone wolf, what would you do to ensure their safety?

Jaime Lopera

Let’s talk about lone wolves. So if you look at the analysis, the data, most of these incidents are not just from a lone wolf. We just had a shooting in a school, right? And we learned that prior to that, the law enforcement knew about it. There were some issues. They talked to them. it’s you’re talking about the intelligence using the intelligence. Prior to these things happening. So I know we sensualize the word lone wolf. It does happen, but most of it, there’s already a history, there’s already a pattern. So we need to pay particular attention to that. But to answer your question, if we have intel that there’s somebody that’s gonna harm our principle, right? The idea again is always to prevent. So if we know that they’re gonna be at a location, if at all possible, switch the location, go somewhere else, or how you make an entry. If the public gets in front of the building and you know that that’s more dangerous, that’s why you have an advance team to make sure that you have different routes, different locations, to make sure that you are able to provide the most coverage for your principal.

Ray:

What would you do if someone hired you and said, were just attacked and now we’re concerned about a copycat?

Marcelo Perez: 

Well, absolutely, you take that absolutely serious. And once again, budget plays a big part in this because the more personal you have, the easier it is to secure someone. So depending on the budget and the time you have to prepare, that’s what’s really going to determine and dictate how safe you can keep your principle. Your principal also has to be educated. You have to speak to the principal and let him or her know that under certain circumstances, you may not be able to give that speech, or that lecture, or go play golf because your life is at risk. And sometimes you have to make tough decisions for them. And as long as they’re willing to understand that, then yes, you can keep them safe because ultimately that is the goal to keep them safe. 

Gautam Mukunda: Oh my goodness, Boeing is the leadership issue. So I have been obsessed by Boeing for, I think, almost 10 years now, largely because what has been going wrong at Boeing for, as I said, more than 10 years, was so perfectly emblematic of everything that has been going wrong in the American economy for much longer than that. But Boeing was just sort of the perfect story that explained everything. Hi, my name is Gautam Mukunda. I am the author of Indispensable: When Leaders Really Matter and Picking Presidents: How To Make The Most Consequential Decision in the World. I have taught on leadership and have been on the faculty at both Harvard Business School, the Yale School of Management, and Schwarzman College at Tsinghua University, among other places. I wrote an article about the financialization of the American economy that came out in, I think, 2014, about how the dominance of finance over the rest of the economy is destroying sort of, you know, the rest of the economy. And it started talking about Boeing because Boeing was the case of how this went wrong. Right. And then when I revisited the topic four years ago, I went back and I started talking about Boeing because Boeing was the example that we could use over and over again of every kind of the perfect example of making the worst possible decisions over and over and over again and being rewarded by Wall Street for it up until the very last second when everything falls apart.

Simone Del Rosario: Tell me about this. Why is Boeing the perfect example of this leadership failure and what I’m hearing from you is a lack of proper priorities?

Gautam Mukunda: Yeah, so let’s go back in history a little bit. So why is Boeing so special? Why is Boeing so iconic? If you tell the story of aviation in the world, you are essentially telling the story of Boeing. That is how dominant it is, and it has been historically in the field. And what it was, the people would joke, but it was actually basically true, that Boeing was a collection of engineers dedicated to making great airplanes. And they would incidentally make money in the process of doing that. And in the process of doing that, they made enormous amounts of money because it turns out if you make the best airplanes in the world, you make lots of money. So then in the 1990s, when the United States had massive defense cuts because of the end of the Cold War, the United States government essentially forced Boeing to merge with McDonnell Douglas. McDonnell Douglas was a rapidly failing defense contractor. Boeing was an incredibly successful manufacturer of both civilian and defense airplanes. In the merger, one of the reasons, maybe the most important reason McDonnell Douglas was failing, was because it was run not by engineers, but by finance people, right? People who really, really cared about short-term profits and earnings per share. And they cared about that a lot more than they cared about airplanes. And so you took a bunch of engineers and a bunch of finance people and you put them in the same company. What do you think happens? The finance people, the ones who ran the failing company ended up in charge of the whole organization. In fact, the very bitter joke at Boeing by the time this was all over, was that McDonnell Douglas bought Boeing with Boeing’s money. So you took a successful company and a failed company and you had the people running the failed company ended up running the whole thing when it’s all over. This is not a recipe for success to put it mildly, right? But it gets worse from there. Because at the least, McDonnell Douglas was something that looked like a successful, you know, like not successful, but at least it was an aviation company, right? Like they built airplanes.The F-15, which is a McDonnell Douglas airplane, is probably the greatest fighter plane ever built. Like, they knew how to build airplanes, even if they weren’t nearly as good at it as Boeing was. But after a while, they went in and they got Jim McNerney, who was the CEO of 3M, and they brought him in to run Boeing. And what he was, was a Jack Welch product. He had been brought up in the Jack Welch system under GE. He went to 3M, which he crippled. And then he went to Boeing, which for all practical purposes, he destroyed. Because McNerney wasn’t an airplane guy at all, right? He was a Jack Welch guy, where the only thing that mattered was hitting those quarterly earnings, hitting that earning per share number, keeping the stock price going. That was what he focused on, not building airplanes. Right? So Boeing moves its headquarters from Seattle, where it’s right next to all the manufacturing, and it moves it to Chicago. Why? Because the CEO at the time says, I don’t want to be distracted from my job by the details of making airplanes. I am just dying to get this guy in a room and just ask him, what did you think your job was? Right? I mean, if the job of the CEO of Boeing is not building airplanes, what is his job? And I have genuinely no idea what his answer to that question would be. But McNerney essentially came in, right? And he said, we’re going to make this a GE-type style organization. And Jack Welch, the best biography of Jack Welch is named, The Man Who Broke Capitalism. Right? The man who broke capitalism. That’s why it has that title. And so Jack Welch took GE, when he took it over, the world’s greatest industrial corporation, and he turned it into a hedge fund that happened to own some factories. And it wasn’t even very good at running the factories. And he managed to keep the stock price going up because Wall Street loves the sort of returns that financial companies can produce. And he could pretend that it was an industrial company. It was like making money like a financial company, but he could pretend that it only had the risks of an industrial company. So he got this fantastic earnings multiple. GE stock became the most valuable company in the world. Jack Welch got paid almost a billion dollars to be the CEO of this company. But when he left, it was a hollow shell propped up by financial returns and accounting fraud. Right? And so then the financial crisis exposed what a catastrophe that was. Jeff Immelt had 16 years to put the pieces back together. He failed. Right? We went through one and we finally end it with Larry Culp having to unwind the whole thing. And Culp is, you know, one of the best CEOs in America. And he managed to sort of salvage something from the wreckage that looks like a very successful company. But that’s what he was doing. He was salvaging from the wreckage. That’s Jack Welch’s story. That’s what his proteges have done all over the world, all over the place. That’s what McNerney did at Boeing. And guess what? After McNerney, right? We had another Boeing CEO for a while. He was actually an engineer, but he was a product of this culture. And then they had Calhoun, who famously was also a product of GE. In fact, the books about GE used to say that of all of the Jack Welch guys, the one who was most similar to Jack Welch was Calhoun. So this is a story. So it is a story about leadership because you can point to the CEOs who failed over and over again, because their focus again was on making numbers, not making planes. But it’s not just a story about leadership. It is a story about a larger pathology in the American corporate sector that just devastated the American economy and turned it from an economy that was focused on making things to an economy that was focused on playing games with spreadsheets. And that story is why Boeing is the perfect example of everything that’s gone wrong. And Boeing is both maybe the worst example of it, but also the most pressing one because we all fly on Boeing airplanes and we really would like it when they don’t fall out of the sky.

Simone Del Rosario: Yeah, I would say that the scariest part about a Boeing that is unraveling is the fact that we rely on Boeing so much as a company to keep us safe, to get us where we need to go. And that’s a terrifying reality when you continue to see this massive company go after crisis after crisis within their own ranks, outside, safety issues. And I think about, what are the options out there? We really only have two viable options in the world. You have Boeing and you have Airbus. So what is the solution when you’re so heavily dependent on two companies to do it right? And one of them is going through a series of catastrophes.

Gautam Mukunda: So the solution is we have to fix Boeing, right? I mean, Boeing up until fairly recently was, every year, America’s largest exporter, right? It is a national champion. It is probably the most important manufacturing company in the United States with, you know, like, the only argument you could make for a rival for that is like Intel, which is a completely different type of manufacturing, right? And Intel is having its own disastrous struggles right now. Rooted, by the way, in the exact same causes, which is worth noting that Intel, the story of Intel’s failure is essentially indistinguishable from the story of Boeing’s failure. But in the case of Boeing, the answer is, there is no alternative but to fix Boeing because the United States has to be a player in very sophisticated aviation manufacturing. We should be very clear as to why that is, right? What Boeing does and Boeing suppliers do is push the absolute technological limits of manufacturing. If you want to work titanium, if you want to work carbon fiber, you start out doing that in the aviation sector and the technology that you develop in doing that spills over into the rest of the economy. So if you want the United States to be a world-leading manufacturing country, and that might be the only thing that both Republicans and Democrats agree on right now, the United States needs to be that, you cannot do that without Boeing. So the process of fixing that, right, is multifold. So one is they do have new leadership. Everyone in the industry seems to think that he was a really good choice. Right. I think, I think like, he has a background in aviation. He has success in operations. I think a lot of people were really hoping it would be Larry Culp, but Culp just did the genuinely heroic work of turning GE around. He probably wants to sort of enjoy the fruits of that, not take on another gargantuan turnaround project. If I were in his shoes, I would say like, you know, one of these is enough for a lifetime. That’s okay. But Ortberg, right? This is a good start, but we need to do a lot more than that. So one is we need to re-empower the FAA. A lot of the failures that happened in Boeing were because the American government had so crippled its own regulatory abilities, so defunded the regulatory agencies, so disempowered them and sort of outsourced all of this management to the companies. The idea that you could allow Boeing to regulate the safety of its own airplanes was an idea that only an economist could believe was the right one, right? Like this was a disaster and it was a disaster. It was a self-inflicted disaster. We have started to reverse that project, but I don’t think we’re done on it. There’s a lot more to be done there, right? But the second –

Simone Del Rosario: Let me interject before you get onto the second. So don’t lose your second thought here. But my question is, how did that balance happen? How did we allow Boeing to get so big that the government just trusted them to do whatever it is that they needed to do to the point that we are seeing such safety failures and really kind of drawing the curtain back on the type of culture that’s been there at Boeing, which has really changed away from, you know, safety and good engineering to we have all these whistleblowers talking about how these things were just pushed aside for speed.

Gautam Mukunda: Yeah, so the issue isn’t that we let Boeing get so big, right? We didn’t specifically cut these favors to Boeing. We did this across the board, all across the United States government, right? What did Ronald Reagan say? Government is not the solution, government is the problem, right? Now, sometimes government is the problem. I would be the first person to say that. I am a very enthusiastic capitalist. But sometimes government is the solution, right? And if your only answer to what the role of government is it should always be smaller and weaker, then you are just as wrong as people who say that it should always be bigger and stronger.

Simone Del Rosario: Don’t you think there was a particular blind eye to what was going on with Boeing? Like this is a company that has innovated so much, the government can’t possibly really know exactly what it is they’re doing over there and how they’re able to come up with these innovations, so just let them work.

Gautam Mukunda: I think people had faith that Boeing would get it right because it had such a long history of always getting it right. Or when it makes a mistake, sort of self-correcting and doing it because it had that culture, because it had that engineering excellence. Because like that’s what engineers do, right? Like they solve problems, they get it right. That is the culture of engineering. And I would say, we cut Boeing more slack than we did almost any other company, because it had earned more slack than almost any other company by being so good at what it did for so long. Right? Not just on the civilian side, but on the military side, the B-29 that dropped the nuclear weapons on Hiroshima and Nagasaki was built by Boeing. Right? Like these guys really changed the world. Not once, but many times over. So it is true that we gave more slack to Boeing than we did to almost anyone else. But that is just the most egregious example, again, of a much larger problem. If you look just broadly in the defense sector, for example, many of the problems that we’ve had, as you see in the American government, right, defense programs, always end up massively over budget and massively delayed. It’s because we essentially outsourced much of the management of these programs to the companies. We used to have huge pools of people within the government who knew how to manage complicated programs, and we essentially forced them all out. So it’s a great question because it’s exactly the same, right? It’s the same thing. Boeing is just the most egregious example of a much larger problem.

Simone Del Rosario: Talk to me, is Kelly Ortberg the right guy? You said people are feeling like he is. He is replacing a finance guy. He does come from an engineering background and has exhaustive experience in aerospace and also was critical in a merger, which I think they like from the financial side. Is he the right guy or can one single CEO make a dent in the culture that has been set at Boeing for a long time?

Gautam Mukunda: Sure, I absolutely believe one single CEO can do it. If I didn’t believe that leaders could have such a large impact on organizations, then I would have wasted my life, right, since I’ve spent most of my professional life studying leadership. And we have plenty of examples of that, of a single CEO doing that. The best example, ironically, is from Boeing. It’s Alan Mulally, who left Boeing, went to Ford, and rescued them before the financial crisis. And if you want to know what encapsulates, in a single sort of paragraph, why Boeing was a disaster, it’s that it had maybe the best leader in American business working inside Boeing and he had to go somewhere else to be the CEO. I mean, what’s a worse indictment of a management culture than that? So yes, Mulally did it at Ford, you know, Culp did it at GE. I absolutely believe that someone else can do it. I don’t envy Kelly Ortberg, this job, right? It is herculean because Boeing has been on the wrong path for a very, very long time, for more than, you know, more than 24 years since the merger. But yes, he has the right background. He has a history of doing these things. And I’ll say this, he has a safety net, which no one’s going to talk about, but exists, which is the U.S. government is never going to let Boeing fail. Right? It’s not, it is a national champion. It is far too important. So if at the end of the day, things go badly and they need to be bailed out, the U.S. government is going to go be there for them because there simply is no other option.

Simone Del Rosario: How are these failures impacting their government operations, their government contracts? A lot of the public failures that we are seeing are on the commercial side. But now we’re seeing an FAA and a Congress that is really waking up to all of the repeated failures, especially safety failures happening on that commercial side. How might that impact their relationship with the government?

Gautam Mukunda: So the first thing I’d say is, well, the failures that make the front page of the newspapers are on the commercial side. The failures on the defense side are just as bad. They are just as serial. They are just as constant. They are disastrous. Boeing, for example, had the contract for mid -air refueling tankers, right, and was years behind schedule and unbelievably over budget. And they delivered planes that the Pentagon actually had to sort of declare a safety hole because they found debris in the fuel tanks, right? Not once or twice, but over and over and over again. So many of those most egregious stories that are coming out of Boeing are actually not from the civilian side. They’re just as much from the military side and from the government contracting side. And we’re seeing right now, right, we have two astronauts trapped in orbit because Boeing failed in a task that SpaceX has been able to execute successfully on for quite a long time. So I think everyone’s assumption. So if Boeing is found criminally liable for violating the consent decree that it agreed to after the 737 max crashes, in theory, Boeing could face severe sanctions and limitations on its ability to work with the government. I think the common belief is that, that will be waived just because Boeing is so critical as defense contractor that the U.S. government essentially doesn’t have the option of not buying from them. But, that being said, so I talked to people, I have, you know, when I have written articles, it just blows my mind. I have written articles about Boeing and had people reach out to me as whistleblowers saying like, this is my experience at Boeing. This is how bad it is. Like, however bad you think it is, and you’ve been beating this drum for 10 years, it’s actually worse than you think. Right? I had somebody prepare for me like an hour-long PowerPoint presentation that he took me through of what he had seen while he was at Boeing. It was nightmarish. And so what I sort of emphasize from that, right, is the government side will only be fixed when Boeing as a whole is fixed. But within the government, right, the defense, the program managers who used to kind of trust Boeing to get it right, that is gone. And they will tell you they do not trust Boeing to get it right. So, you know, I say a very close friend of mine was a very senior program manager in the government on a gigantic government program. When he saw me writing about the stuff, he called me up and said, let me tell you about my experiences with Boeing. And they were awful, right? So that word has gone around and that trust has eroded quite deeply. And I think it’ll be, like even assuming Ortberg succeeds, it will be a generation before that is rebuilt.

Simone Del Rosario: Because you have these contacts, because people are coming to you from behind the scenes to say, this is my experience at Boeing, this is what it’s like for me working there, this is what I see. Can you describe to me what is the culture there? What are you hearing about what it’s like on the ground to be working at Boeing and trying to pull off these massive projects?

Gautam Mukunda: Absolute obsessive focus on making day-to-day numbers and a complete unwillingness to hear of anyone in senior management to hear from anyone lower down that this is not working, right. There’s absolute unanimity, everyone I have spoken to, and you read about this, right, this shouldn’t shock you if you’ve been reading about Boeing, right, that these guys are not interested in anything other than people below them telling them everything is fine. All right. It is a deeply pathological culture.

Simone Del Rosario: So what is Ortberg’s to-do list? How can he right this ship?

Gautam Mukunda: So he started off in the right way. And I was thrilled to see this, where he said, I’m going to work out a Seattle because you know, I need to be close to the plants and my job is making planes. That’s the ideal best start, right? Good job. The second is I think he needs to come out and say like, Hey, this is going to be a long problem, right? Like, we are the greatest aviation company that has ever been created and we will be that again, but we’re not going to be that again next quarter. So Jeff Bezos’ first investor letter to shareholders, I always talk about it to my students, right? Because he says, look, we are going to run this company for the long term. And if you are not comfortable with that, you should invest with someone else, right? He needs to be willing to say that to investors, right? I’m going to deliver great results to you, but it’s not gonna be the, great financial results aren’t coming next year. Because if I did deliver them next year, I wouldn’t be doing my job. I wouldn’t be fixing the company the way it needs to be fixed. If you are not comfortable with that, you should invest with someone. I hope he uses language that explicit and pushes back on that. Once he does that, once you’ve done that, you’re not just one engineer at the top, one CEO. He needs to bring these people from all through the company, either internal, and there’s still great engineers at Boeing, right, whether it’s internal promotion or bringing in from the outside, he needs to rebuild a culture that is centered around, our job is making great airplanes. Right? And sort of say, if you are not interested in doing that, don’t work here. Right? Like just say, if what you’re really motivated by is making your bonus, there are lots of companies where you can do that. Here, you should be interested in making something great that flies. Third, what I would say I really think he is, you rally people around doing great things. Boeing used to be an institution that people were loyal to because it was Boeing, because it was one, because it treated its people really well. That loyalty has been eroded deeply, right? So both in terms of reestablishing it, like you have engineers going out on strike at Boeing, right? Not because they want better pay, but because they were just trying to be free to do their jobs better, right? If I were him, I would be sitting down with the head of that engineering union to be like, ask them, what do we need to do differently? Because it’s pretty clear that you guys were sending warning bells when no one else was. So maybe you have some good ideas about how to fix it. But what he needs to do is announce a new airplane. So Boeing has not made a new clean sheet airplane since the 787, which was a really long time ago. Calhoun amazingly said that Boeing would probably not do another one for another 10 years. And he said, we wouldn’t even start one for another 10 years. And remember, once you start one, it’s another 10 years after that before you actually launch the plane. So he essentially said that two generations of Boeing engineers were never gonna build a new airplane. So there’s a reason Richard Aboulafia, who is the best aviation analyst in the world, Richard would say that, you know, Calhoun was the best Boeing CEO Airbus could have hoped for. Right. And, in this particular scenario, what he needs to say is, you know, one is they need to launch a new airplane because if they don’t, they’ll forget how. The particular skills involved in building a new airplane need to be refreshed every generation or you just will lose the skill, the capacity to do it. But second is, you could get people excited. What engineer right now, what brilliant aeronautical engineer who had the choice between SpaceX and Boeing, would pick Boeing? Right now, I think that would be a hard, you’d be really, really hard pressed to find someone who would do that. He needs to turn Boeing back into where it’s the first choice, not the last one. And that would come about from saying we’re gonna build a new airplane and it’s not gonna be, you know, copycat of Airbus’ latest thing. It’s going to be new and it’s going to be great. It’s going to be better than anything else anyone else in the world could build. It’ll be the airplane that only Boeing could build. And there are openings in the market to do that. He has an opportunity.

Simone Del Rosario: Okay, so what does he do about the 737 MAX?

Gautam Mukunda: I mean, the 737 MAX is like, it’s where Boeing’s money comes from, right? It is a phenomenally profitable airplane. My guess would be that that airframe is at its limit, so they cannot iterate it any further, but they’re gonna keep selling 737 MAXs. They are flying again. They have the two, the nine and the 10 that they still haven’t gotten FAA approval for. My assumption is that they will get it, but they also need to be very explicit that this is, you know, this far and no further, right? We have taken that airframe not just to its limits, we’ve taken it far past its limits. And so obviously it is demanded, they need to have absolute assurance that they have made the fixes necessary. The note that the 737 Max’s safety record is like something you would see out of the 1960s. Its rate of serious incidents is something that no other equivalent modern airframe even approaches. So they need to get that under control to put it mildly. That is a very, very serious problem. This is not just a story about two airlines in Africa. There are many, many similar incidents. But once they do, they say, look, we’re going to keep, though obviously the world’s aviation markets demand seven more 737 Max’s, but we’re going to have something better and we will have it as soon as we possibly can.

Simone Del Rosario: You talked about how important it was that Kelly Ortberg said, I’m going to work out of Seattle. This is where the planes are built. I’m speaking to you as someone whose home base is in Seattle. So I’m very familiar with the tension that was created by Boeing leaving Washington state. How much of that led to Boeing’s problems? How much of that move disrupted a culture at Boeing? And would there be a move back?

Gautam Mukunda: I’d say it is both cause and symptom. Right? So clearly taking the leaders of the company and moving them out of Seattle did not help the situation. But those leaders of the company would not have helped the situation if they were in Seattle anyways. Right? You only make that move if you’re not interested in the planes in the first place. Right? I was saying, you know, if Alan Mulally had been the CEO of Boeing when this kind of problem happened, he would have been out on the shop floor with a wrench saying, you know, tell me what went wrong so I can help you fix it. Right. Like, you couldn’t imagine him, you know, that his answer would be, let’s give a press conference from Chicago or Virginia now, which is where they just moved again. Like it’s just inconceivable that he would have done that. I think Alan would laugh at you if you suggested that that would be there. His response would be anything but get out on the shop floor. I would love to see them move the headquarters back to Seattle. I think that would be a great idea. I don’t know if he’ll be able to do that in the short term. And so many of Boeing’s profits are driven from its government business that there’s certainly an argument for them having a very large presence in Northern Virginia. But at the end of the day, Boeing is the company that built the 747. That’s what made Boeing Boeing in the eyes of the world. And I think their focus should be back in all the plants in Seattle. The other thing I’ll just sort of add to that is one of the many legacies of the GE sequence was putting the plants over and over again in non-union states, so they didn’t have to deal with those union workers who would, you know, insist on having time to do their jobs right and sort of inconveniences like that. I would think it would be really helpful for Boeing to say, we’re not going to do that anymore. Like, we’re going to work with our unions, we’re going to build our planes in Seattle, we’re going to build planes in places where the workers are, you know, have enough independent stature that they can tell us when we’re making mistakes.

Simone Del Rosario: We talked about this a little bit before, but I’ll go back to this idea of a duopoly in the skies. We have Boeing and we have Airbus. They’re not in antitrust trouble because they’re not stifling competition. Why can’t there be more competition in this space?

Gautam Mukunda: So I mean, there’s the Embraer, right? So there are companies that are trying to enter this market. But the basic reason, I think, is just that the capital costs of building a new airplane are so gargantuan, and the profitability of them is so marginal, right? So you have to remember, Warren Buffett famously said that when the Wright brothers launched their first airplane, some enterprising capitalist should have done us all a favor and shot it down. Or Richard Branson famously said, the best way to become a millionaire is to start out as a billionaire and then invest in an airline. Right? This is an industry that for all of its wonderful spillover effects and how excellent it really is, is sort of historically, economically, unbelievably unprofitable. Most of Boeing’s airplanes have actually not made money from what we can tell, right? So two is probably, I mean, in some economically parational world, it’s possible that two is pushing it, right? The global economy may actually not be able to support more than like one and a half of these airplane manufacturers, given the current state of what it takes to build these airplanes. That may change. Right? Like, like you could imagine changes in technology and have sort of different, you know, new engine technologies, there are lots of things, discussions like that, that might allow a new entrance to enter in that space. But I actually wouldn’t bet on it. Outside of a couple of companies that are in the space right now, there’s a reason that it’s so hard to enter it. And there are a bunch of barriers to entry that make it very difficult to break out of that duopoly system. Your first airplanes always lose money, always. What you’re counting on is what we call the learning curve, right? That as you keep making them, you get better and better at making them and your costs go down and eventually you start making money. But it takes a long time and you don’t always, right? If your plane just fails, right? So Lockheed Martin, which has just exited the civilian aviation market, know, the L-1011, the L-1011 never made money because they just didn’t make enough of them to ever go down the learning curve. You know, Douglas had the same problem. That’s why they exited the civil aviation market as well. So you need a lot of scale in order to actually to make an airplane profitable. Even Boeing, when it dominated the industry, didn’t do it with all of its planes.

Simone Del Rosario: So are you surprised that Airbus hasn’t been able to capitalize on this moment a little bit more to capitalize on Boeing’s failures?

Gautam Mukunda: I mean, they’ve capitalized on it a fair amount, right? They have the largest market share they’ve ever had. If I recall correctly, for the first time in history, last year, there were more like plane minutes of Airbus planes flying than Boeing planes. Like that had never happened before. First time that did. But the answer is Airbus is capacity constrained too. If there’s one lesson that everybody should take out of this, that’s sort of important for lessons for things that go beyond aviation, it’s that manufacturing is hard, right? Manufacturing is really hard. And the more complex a system is, the debt difficulty does not scale linearly, it scales exponentially. So we see this all the time, right? Tesla makes cars that have sort of lots of amazing characteristics, but their manufacturing quality is actually quite, even to this day, even after they’ve been in business for 20 years, their manufacturing quality is pretty poor by the standards of say the big three or certainly by Japanese manufacturers. And it’s not because Tesla’s bad at what they do. It’s because manufacturing is difficult. Airbus is having this problem, right? Like if they could, I’m sure they would love to increase their production by 20 or 30% and make up for all the people who really don’t want to buy Boeing airplanes right now. But they can’t. They are at max and I’m sure, and the investments that it would take to increase their capacity by so much would not pay off for some years. And by the time they scale up, aviation market could look a lot different.

Simone Del Rosario: Final thoughts?

Gautam Mukunda: Boeing is really, really important. And there are individuals who profited hugely from Boeing’s failures, who should be held responsible, at least morally, for what they did. But at the end of the day, this is not a story about individuals. It is about an entire system that went haywire and stopped doing what it was supposed to do, stopped producing, in the case of Boeing, producing great planes, but in the case of the country as a whole, creating an economy that worked for every American and became one that was about playing games with numbers and that profited only a tiny handful of us. Boeing’s problems will not be fixed at Boeing. They will be fixed if we re-engineer the entire economy to go back to the economy that made the United States the best place to live in the world. One centered on actually making things and on services that are value added, not on playing games with spreadsheets on Wall Street.

Simone Del Rosario: What companies right now are headed down Boeing’s path that need to hear that warning more than others?

Gautam Mukunda: Intel. Right. So Pat Gelsinger, the CEO of Intel, he doesn’t need me to tell him this story. He knows exactly that this is the right, this is what he has been trying to do is to unwind this. But Intel, just like Boeing, spent two generations prioritizing short-term shareholder value and not investing in R&D and it’s paying the price right now.

Simone Del Rosario: And who’s lapping Intel because of it?

Gautam Mukunda: And you know, Nvidia, AMD, right? So TSMC out of Taiwan is actually manufacturing chips. And if Intel, there’s a really question, and I don’t know the answer, right, is whether it makes sense for…So the United States must have a leading edge fab, right? It must, it is strategically critical that it have that. At the moment, it doesn’t because Intel has not been able to keep up with TSMC. It has not come close to being able to keep up with that. And had you told anyone when Andy Grove was still alive, that Intel would one day not be the leading chip manufacturer in the world, he probably would have killed them on the spot, right? Like just unacceptable. But now that is just true. Whether it makes sense for Intel to be an integrated company that both designs chips and manufactures them is less clear. And I guess we’re gonna, you know, we need to know more about that. But that question, so I’ll tell you another one that’s not a manufacturing company, but it’s really striking, Amazon.

Simone Del Rosario: Okay, why’s that?

Gautam Mukunda: The experience of shopping on Amazon. I was like a very, very early customer at Amazon way back in the day. And the experience of shopping at Amazon for years was fantastic. You didn’t just shop at Amazon because it had better prices. You shopped on Amazon because it was easy to find what you needed. You could trust the reviews and you get what you wanted right away. And now when you go on Amazon, what you see is hordes of promoted products, some of which, many of which, may be counterfeit. Like the experience of shopping on Amazon has degraded massively. And that is because they are focused on the fact that they can make huge amounts of money from sponsored placements. They can make huge amounts of money from advertising. They can make huge amounts of money by fulfilling other people’s orders without the guarantee of quality that they actually know that they’re selling, right? There are actually cases of American football players who bought, high school football players who bought football helmets on Amazon, and got brain damage because they were counterfeit and did not have proper concussion protection. Right? So if you wanted a company that’s that has learned all of the lessons of Boeing in exactly the wrong way, Amazon’s choice to sacrifice its central competitive advantage of just being a great place to shop for short term profits, however vast they might be, I think that’s a mistake.

Simone Del Rosario: This has been an incredible education. Thank you so much for your time today. I hope to talk to you soon.

Simone Del Rosario

More than 30,000 Boeing factory workers overwhelmingly voted to walk off the job Friday. 

96% of the Pacific Northwest workers from the International Association of Machinists voted in favor of the strike after rejecting a tentative agreement between Boeing and the union. 

Jacqueline Vaden: I’m ready. I’ve been preparing for this for a while. I honestly don’t think we’re going to be out that long. It’s not a win-win for nobody when you go out on strike, but you got to do what you got to do.

Simone Del Rosario: Picketers said they were confident they wouldn’t be on strike too long. They rejected a deal that would have given 25% raises over four years. The union had pushed for 40%. 

Boeing’s last strike was in 2008. It lasted for eight weeks and cost the company $100 million per day in deferred revenue. 

I want to bring in Richard Aboulafia, Managing Director of Aerodynamic Advisory. Richard, it is never a good time to lose 33,000 workers, but why is this moment in particular bad time for Boeing?

Richard Aboulafia: Well, there’s good and bad news, really the bad first for your question. They are way behind in aircraft deliveries and losing market share fast to Airbus. And a lot of their customers are deeply aggrieved, understandably, by this. And of course, there are doubts about their core product line in terms of, shall we say, the reliability of the manufacturing process. So to have a strike come on top of all of this is not good.

Now the positive news is that for the first time in several decades, they actually have a CEO who understands the industry and I think can behave appropriately.

Simone Del Rosario: Okay, so you’re bullish on Kelly Ortberg, but how does this look for him? I mean, he’s just been on the job for a few weeks now and you couldn’t make a deal work with the union.

Richard Aboulafia: Well, yeah, I mean, but remember he did get a deal with union management. I think both union management and Boeing management were a bit blindsided by the perhaps understandable anger that had built up in the workforce after several decades of maltreatment. But now hopefully they can work together to understand what needs to be done to get the workers happy and back to work. So I tend to be pretty optimistic. know, that last strike you mentioned, you know, the CEO at the time, McNerney, his ambition was to break the back of labor. He never saw the value of cooperation. He was interviewed on, I believe, or heard on a live mic saying, you know, the workers will still be cowering or something vaguely amateurish and kind of childish like that. Kelly Ortberg is the exact opposite. So I think this is going to be handled a lot faster.

Simone Del Rosario: But Boeing had told employees earlier this week that they didn’t really hold anything back with this offer that was on the table, saying they put it all out there. In fact, reports earlier this week said that they thought that they would be able to avoid a strike. So what happened between what we thought would happen, what all the talk was out there? You said they reached a deal with union leadership versus a 96% vote to go on strike.

Richard Aboulafia: Yeah, bit of a disconnect there, that’s for sure. Clearly, everyone involved perhaps underestimated the level of grievance that had been built up and a determination to show that they did in fact hold the cards this time. But the very fact that Boeing management issued a statement saying, we’re going to go right back to the negotiating table means that maybe they didn’t have everything. Obviously, they’re talking again.

Simone Del Rosario: Yeah, I mean, they didn’t say best and final. They clearly aren’t walking. The 33,000 workers are the ones that are walking at this point. Let’s dig into some of that disgruntled behavior, if you will. The union accusations, they said that there was discriminatory conduct, coercive questioning, unlawful surveillance, and unlawful promise of benefits. These are really strong words against Boeing. What’s the culture been like? And I would assume this really predates, obviously, the Kelly Ortberg era, but certainly there’s a lot of space between the union and the company here.

Richard Aboulafia: Yeah, and just a lot of bad blood under the bridge to mix metaphors. You had a couple decades of management by people who frankly weren’t aerospace people for the most part. They were one size fits all, when in doubt, cut costs people. They were from the Jack Welch General Electric School of Management. They knew the cost of everything and the value of nothing. The results, well, they speak for themselves, a lot of ill will and a culture that’s gone badly wrong.

Even if half of these accusations are correct, that’s really bad. So I understand completely where the workers are coming from, but hopefully they also realize that Kelly Ortberg has only had a couple of weeks on the job to try to change the culture, and it’s a long road ahead towards getting it back. And hopefully they can find accommodation on what matters most, probably wages, and getting back some of their lost ground.

Simone Del Rosario: How do you think that this strike is going to most affect the company in the immediate term?

Richard Aboulafia: Well, in the immediate term, you know, it kind of reminds me of the Spirit AeroSystem strike that we saw back in June 2023. Everyone was shocked and prepared for the worst and Spirit is the producer of the entire body of Boeing’s mainstay product, the 737. It lasted three days. Basically, you had a person at the helm, Tom Gentile at Spirit, who said, look, this is the fact of life and I’ve got some damage to repair. And it was good in three days.

To this day, I have to remind people of this happening because no one cares anymore, right? I’m kind of hoping it’s a return to that, but no guarantees.

Simone Del Rosario: 

What about some of the highlights to the deal? Obviously the company’s not going to be taking away some of those perks that are in there. They’re going to be sweetening the deal for the union to come back and come back to work. What did you think were some of the highlights of the agreement that didn’t get ratified but was out there like building a new plane in Seattle?

Richard Aboulafia: Yeah, there are a couple of things that I think were positive. There was a request for a return to a structured pension. It wasn’t in the cards, but they had a pretty generous 401k increase. There was kind of a, it was an if we launch a new product in the next four years of the contract that we will build it in Fugit Sound. That was good for some, maybe other people said, well,

What if they don’t launch it in four years? I think, however, the elimination of the bonus and the fact that they didn’t reach the headline numbers that other people have reached with their unions in the aerospace industry, the 40 % range, was probably the big standout for most people.

Simone Del Rosario: Richard Aboulafia, Managing Director at Aerodynamic Advisory. Thank you so much for your thoughts on this today. We’ll be following the strike closely.

Simone Del Rosario: That cup of coffee is part of your morning routine, but at night, farmers are working overtime trying to keep your coffee safe from crime. 

See, coffee prices are so high right now, thieves are targeting coffee farms in Uganda, a coffee farmers association is reportedly urging farmers to hire security guards and dogs and bring on bees. Yes, bees to keep the thieves away. 

And there’s one type of coffee in particular that’s getting this unwanted attention. 

Is it in your cabinet and will your coffee order get more expensive as a result? I’m joined by Steve waterage, Head of Research for Tropical Research Services. 

Steve, you often work in African nations. Are you hearing about these theft problems and who’s getting targeted?

Steve Wateridge: I must say it’s the first I’ve heard of coffee being stolen from farmers, but you’re absolutely right. Robusta prices are as high as they’ve been since 1977 nearly at record highs. So, you know, there is an incentive, and I’m sure that, you know, farmers will do everything they can, not only to improve production, but also to make sure that the production they have gets sold by them and not by someone else.

Simone Del Rosario: What surprised me the most about what’s happening right now is specifically with instant coffee. You mentioned Robusta bean prices, and they’ve searched 65% this year. Where’s the demand for this? And is this exactly the way I’m thinking about it? Instant coffee, like you’ve got a packet and you put it in some hot water. Well,

Steve Wateridge: Basically, we’ve had a problem with coffee supply. For the last four years, the Brazil crop has massively underperformed. It started as a Arabica problem, the higher priced coffee. The Arabica crop suffered from drought and frost for two consecutive years in 2223 Arabica prices went to a huge premium over Robusta, and that led to a very significant demand shift we saw in 2023 we saw 10% increase in demand for robusta Coffee as people switched from higher priced Arabica to low price Robusta. Unfortunately, we’ve still had another two years of supply problems. We’ve had problems with Robusta crop in Uganda, in Vietnam, in Brazil, and we’ve still got problems in Brazil and Central America with the Arabica crop. So although we’re not, we’re not drawing stocks anymore. We’re certainly not building stocks. And there’s basically a shortage of coffee, and that’s why we’re seeing, you know, prices rise to such high levels. And at the moment, it’s Robusta. There will come a point, if Robusta continues to rally and Arabica doesn’t, people will shift back towards Arabica, but then we just shift the problem from Robusta to Arabica. What we need is actually more coffee being grown around the world to increase supply.

Simone Del Rosario: So the price difference with what was happening with Arabica was so significant that it did, in fact, switch consumer behavior.

Steve Wateridge: Exactly. There was a big shift in Brazil in the internal market, but also internationally. We saw more robust usage in North America, in Western Europe, and at the moment, Robusta is still slightly cheaper than Arabica, so there’s no incentive to shift back, as I say what basically, what happened is that we had an Arabica problem. Initially consumption shifted it into a Robusta problem, but the way we solve it is by keeping prices high enough for long enough to incentivize higher production

Simone Del Rosario: and with Robusta, I mean, this was an option that consumers turn to because it was the cheaper option. Now, with prices going up in the futures, at least so much, has that price been passed on to consumers already,

Steve Wateridge: The most recent price rises probably haven’t, and they will do eventually, and that’s a function of price. That’s what the market is telling us, that if we if we can’t increase supply because of continual weather issues, and this is one of the big problems we have in coffee. Historically, we’ve had weather problems, but they’ve resolved themselves very quickly. This time we’re. Actually facing the fifth consecutive poor Brazil crop in a row, which is unprecedented. You know, temperatures are higher in the last five years in Brazil than they were 10 years ago, and they were higher than they were 10 years before. There’s less rainfall in the coffee producing areas than in the last five years than you know, the previous 10 years, and that was lower than the previous 10 years before. So climate is changing in Brazil and in other places around the world, and that is basically making crop failures more frequent.

Simone Del Rosario: So will we continue to see these, you know, inflated prices when it comes to coffee, until we get a good weather year, or is there another way to get supply to reach the demands that’s needed?

Steve Wateridge: No, it’s basically that’s what we need. We, if we, you know, we need a good weather year to give a bumper crop to replenish stocks, then we can move prices down to more reasonable levels, near a cost of production where farmers make a living, but at the moment, they’re making fantastic margins, and we’re seeing a big expansion in production in Brazil, in area under production. The problem is that the output is not reaching its full potential because of these weather issues.

Simone Del Rosario: Last time we spoke, we were talking about high cocoa prices. You study cocoa and coffee. Now we’re dealing with high coffee prices as well. Is it the same thing plaguing these two different crops?

Steve Wateridge: Yeah, I cover cocoa and coffee and cocoa prices have even been, have been even crazier than coffee. In cocoa, it’s nothing to do with climate it’s actually long term structural issues that need to be resolved. But in coffee, you know, most people, whenever a crop fails, they always talk about climate change and the impact, and sometimes they over exaggerate, and I think that’s been the case in cocoa, but in coffee, there is definitely an issue. You know, we are potentially on the cusp of the fifth consecutive poor crop in Brazil, which is, as I say, unprecedented. And we’ve got the data to show that in the coffee producing regions in Minister ISS Brutus Santo, the climate has changed over the last 25 years, and it’s not changed for the better.

Simone Del Rosario: All right. Steve Wateridge, Head of Research for Tropical Research Services, thank you so much for coming on and sharing your expertise with us.

Steve Wateridge: Thank you.

Simone Del Rosario: Let me ask you about what we’re looking at moving forward when it comes to Fed rate cuts and fed decisions. You’ve already said that you believe that September’s meeting next week will be a 25 basis point cut. What is, what is the next year, year and a half look like if they can keep the economy kind of running the way that it is we have, you know, after the September meeting, the next meeting doesn’t come until the two days after the election, so there’s a little bit of time there. But then what are we seeing into 2025, and beyond.

Joseph Wang: So the market is pricing in a very, very aggressive, fed cut cycle, so aggressive that the market is pricing by the end of next year, the overnight rate will be below 3% so that’s from 5.5% today below 3% next year. Now that’s a very aggressive rate path, policy expected policy pricing by the market, and that seems to assume a significant deterioration in the economy. Now let’s look at the big picture, though. Now the most recent GDP statistics in the US were revised upwards from 2.8% annual growth rate to 3% so the economy is actually growing fine. There’s really no indication that we would just suddenly go from 3% to a recession where we grow, we don’t grow, we shrink jobs reports again slowing, but we’re still creating over 100,000 jobs a month. When we’re in a recession, we don’t create 100,000 jobs a month. We lose 100,000 jobs a month. And so the pricing the market seems to be pretty aggressive. From my perspective, I think there’s too much doom and gloom being priced in my best my base case expectation is that rather than having a series of huge cuts that the market is assuming that we have some steady 25 basis point cuts, and maybe the cut cycle ends, let’s say around three and a half percent, rather than below 3% I say this because, by all indications, the economy continues to have momentum, and there’s a good case to be made that rather than falling into recession, we really are just normalizing now. One other thing that I would mention is that something that’s happening today that hasn’t happened before, is that we have tremendous amounts of fiscal spending. The government is expected to have a fiscal deficit of about a couple trillion dollars, basically forever, and when you have the government spending so much each year, that’s very supportive of demand, it’s upward pressure on inflation. It’s not a very good management of the currency, but it is supportive of demand. And so when you have that kind of, I guess, fiscal spending, I think that’s a good. Tailwind. Now, one other thing to keep in mind is that what happens in November could have very big implications for macro policy. We have two candidates with very, very different visions of the world. Again, we also have to look at Congress to see whether or not they are able to carry out their different visions of the world. So there’s a lot of uncertainty there. But based on what I see right now, the economy is still okay, and the rate cuts in the markets are too aggressive. We’ll have some, but it doesn’t seem like we would have so many, because it doesn’t seem like at the moment that we are tumbling into recession.

Simone Del Rosario: Can we talk about what the what the base rate is and should be moving forward. We had such low interest rates for so long, and I think there’s a good argument to be made that after the Great Recession and the many years that followed, we didn’t move quickly enough to start to normalize that situation. So for a lot of people, they’ve felt a very low interest rate environment for a very long time. You’re saying you see a rate cut campaign that ends around three and a half percent compared to a more aggressive market prediction of 3% is there a good argument to be made for the Fed’s rate to be higher than what would be considered normal before in in, you know, a healthy economy.

Joseph Wang: Yeah. So what you’re talking about, what you’re referring to, is what economists refer to as the quote, unquote neutral rate. That’s the rate where the Fed thinks that the interest rates are neither stimulated the the economy or slowing it. Now, during the pandemic, before the pandemic, between the great financial crisis and the pandemic era, we had very low interest rates. I think it’s important to look at that era in the context of history. Now having 0% interest rates is a historical anomaly before the great let’s say before the financial crisis, interest rates were around four and 5% and everything functioned fine. So I take the view that that post financial crisis era of 0% interest rates was very much an anomaly. And going forward, we’re going to have a world where interest rates don’t go back down to zero, maybe stay around three and a half percent, as I noted before. And there’s a couple reasons for that. One is that we have some inflationary pressures that are happening through demographics. Now, as we all know, the US, the US population, is aging. Now I think aging population is something that is inflationary. The way that I think about it is, imagine right now if half the country immediately retired tomorrow and then went on Carnival cruises and played bingo the whole day and lived off Social Security. Well, we have, if you have half the people just stopped working and just continue to consume, continue to go to restaurants. Who’s going to do all the work, right? So that is going to put demand for labor, demand for all sorts of goods and services, but because they’re not working, that’s going to reduce the supply. Now, as we move into an aging society, there’s going to be fewer people working, but those people who retired continue to consume, and so that’s going to shift the supply and demand dynamics to be more inflationary, especially when it comes to wages. If you have a more inflationary world, you’re going to need to have higher interest rates to entice people to not to consume immediately so as to leave those goods and services to someone else. The second thing I think that is happening today is that, as I discussed before, there’s tremendous amounts of deficit spending that is inflationary all things equal. So we’re going to need to have higher interest rates to kind of tap that down.

SIMONE DEL ROSARIO:

Inflation in August cooled down to 2.5% for the year, the lowest consumer price reading since February 2021. Declining energy prices really helped push that down. Gas prices are 10% cheaper than they were a year ago.

The Federal Reserve is almost certainly going to start cutting rates next week. Remember they hiked rates to levels not seen in decades to try to bring down inflation. Now the labor market is getting softer and inflation is way off its peak, it’s time to ease conditions out there and bring down those interest rates.

But the Fed isn’t saying mission accomplished anytime soon when the target inflation rate is 2%, because they aren’t looking at the 2.5% reading, they look at core inflation, which strips out more volatile food and energy prices. And core CPI is still at 3.2%, thanks in large part to rising shelter costs.

Is 2% core inflation attainable? I asked the Fed Guy Joseph Wang as the latest inflation numbers came out.

JOSEPH WANG | THE FED GUY
Yeah, I think we might be in a new higher inflation regime. So we have to be careful. The future does not always look like the past. Over the past 20 years, we’ve had a world where inflation was pretty stable around 2% but it wasn’t always like that. Now, before the quote, unquote Great Moderation period, we were in the 1970s and 80s, where inflation was volatile and sometimes very high. I think we’re heading into an era where inflation is probably going to be more volatile at higher than it was in the past. That’s certainly what the CPI is telling me, now looking on a year over year basis, we’ve been above 3% for some time, and honestly it looks kind of stuck there. Now we could have recessions that temporarily bring them down, but I think the next time we have a recession, maybe we just have tremendous more stimulus checks and so forth, and that makes it surge again. So I think the future is going to be a world where inflation is going to be higher and more volatile. And that’s, you know, that’s something that we have to going to get used to.

SIMONE DEL ROSARIO | STRAIGHT ARROW NEWS BUSINESS CORRESPONDENT
Fed Chair Jerome Powell gets asked this a lot. He loves to slap this down, which is the 2% target rate out of out of the way should we be looking at a 3% target rate? The economy has been doing very well comparatively to longer periods of time, I know that we are seeing some softening in the labor market, but for so long, the economy seemed to really be pumping along. And to your point, we’ve been really stuck right around this 3% level for some time. So that brings up the question, is the 2% target outdated at this point? Should we be looking at a 3% target? I know that Jay Powell hates this. He’s like, ‘No, we are a 2% target regime.’What what are you hearing? Are you hearing anything different? Are they sticking to those guns or because we continue to see inflation at this level you don’t want to trigger a recession just to get it down to 2%

JOSEPH WANG:
Yeah, so we have to realize that the 2% inflation target, it’s nothing magical. It’s nothing set in stone. It’s a decision made by people. Now, in the Fed’s case, it was decided in 2012 to have an inflation target of 2% does it have to be that way? We could easily change it. Now I think it’s helpful to understand why we might want to change the target. So traditionally speaking, economists think there’s a trade off between inflation in unemployment. So they would think that if we have 3% inflation, in order to get 3% inflation down to 2% we have to have a bit of a recession, we have to have the unemployment rate go up a little bit. So ultimately, whether or not we decide to have a higher inflation target is a political decision as to whether or not the government can tolerate a temporary recession. When inflation was around 4% and it looked like it would have come down, there were actually many people, influential people, writing columns in big newspapers saying that, ‘hey, why don’t we just change the inflation target so that it’s 3% or maybe a little bit more, instead of 2%’ they were saying this because they did not want the political costs of high of having temporarily higher unemployment, of creating a recession. So whether or not we change the inflation target is ultimately going to depend upon the political appetite for economic weakness. Now honestly at 3% inflation, I think that’s close enough to two that people would just kind of struggle and say, ‘Yeah, it’ll eventually get there, and they won’t have to change the target.’ But the next economic cycle, when we have an upswing, maybe inflation goes back to 4%, maybe a little bit more, depending on who’s in power, maybe they don’t want to take that risk of having a recession to get inflation down, and maybe at that time, we’ll have some serious conversations within the government whether or not they could change the inflation target. Now, to your point about what the Fed people have been talking about now, definitely they would never say that they’re going to raise the inflation target, but at the moment, they aren’t having a discussion about their framework, and that’s due to be released in a couple years. Now, there are former Fed speakers who are whispering that, ‘you know, instead of having a 2% inflation target, what if we have something called an inflation band?’ So what that means is that, you know, my target is not 2% point, but maybe it’s 2% plus or minus 1% so that means that inflation is 1.5% that’s within the band. It’s okay. If it’s 2.5% or even 3% that’s okay as well. So that could be a way to by sleight of hand, increasing inflation target simply by tolerating inflation higher than 2% because it’s still within the band. That is something that people discussed before in the Fed, and now they’re discussing again, and I don’t know what they will ultimately decide. I think it might depend upon just how easy they think it is to maintain 2% in the coming years.