Q2 Economic Update, Deed-In-Lieu, & More

release edition [030]

read time [6 minutes]

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Today at a Glance:

Q2 Update: The U.S. Economy
Deed In Lieu: Tick Tock
Weekly Listen: Richard Werner

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Economy

If you're an economic watch dog like me, then you already know this past week brought a number of economic releases. Many of these are worth reviewing, so let's dive in.

First, PCE (Personal Consumption Expenditures) came in at 2.6%, and was up 0.3% MoM. For better or worse, the Fed watches this metric carefully. As shown below from the BEA here, the top three components of the consumer spending change in June were healthcare, housing, and gasoline.

To me, this data doesn't necessarily signal inflation given the (lack of) health in America, the fact that many people relocate for work or familial reasons during the summer, and that people travel more during the summer months.

Next, we got the Q2 2025 GDP figure of 3.0% annualized, which beat expectations of 2.6%, and came in 0.50% higher than Q1 2025. But the underlying components (shown below) weren't very impressive. Imports dropped, which is good at face value (it means that tariff policies are working), but not when lower imports are coupled with softening consumer spending and negative investment.

Then, yesterday we received July jobs figures, and they weren't pretty at just +73K. Adding fuel to the fire was the fact that May and June were both revised downward by -258K jobs. Ouch.

In fact, I would not be surprised if someone lost their job over this pattern of egregiously over-stated job figures followed by large negative revisions. Oh wait...

The results?

The BLS Commissioner (Bureau of Labor & Statistics) was fired yesterday by President Trump.

Treasuries rallied meaningfully, with the 2YR Note rallying by nearly 28 basis points on Friday alone.

The stock market was down -1.60% to close the week.

All told, it seems like the market is waking up to the reality that the Fed may not be as data driven as they claim, and that the U.S. economy is weaker than it otherwise should be, due in large part to restrictive monetary policy.

After all, energy prices (oil) are down meaningfully over the past 6 months, real wages continue to grow, tariff income continues to increase, and the U.S ran a surplus budget in June for the first time in many years. These all point to a strong economy and strong domestic consumer, and yet, jobs are soft and consumption is weak.

My key takeaway:

Don't just headline read. Think critically.

Here are a few things I'm thinking about:

To start, native born jobs have grown by nearly +2M over the past year (including +383K in July), while foreign-born workers are down -1.5M since April. The labor force appears to be is shifting, which is a net-positive for domestic GDP (more on this below). Yes, job losses are occurring, particularly in government (ever heard of DOGE?), tech (ever heard of A.I.?), and retail. Much of these job losses are occurring because companies are weary of the underlying economy and because consumers are weary of discretionary spending.

I know President Trump posts about "Too Late" Jerome Powell often, but the data I'm seeing validates the downward pressure that Trump is putting on the Fed. I'm of the opinion that a lower FFR (i.e. 2.75%) would be stimulative in a productive, but not inflationary, manner to the U.S. economy, because of the GDP growth that would ensue. But I suppose only time will tell.

As I mentioned last week, the only way that America can avoid the current debt trap it faces is to "run hot" with positive real growth (GDP > inflation) and negative real rates (interest rates < inflation).

Secondly, higher interest rates can lead to higher inflation. I know this sounds counterintuitive, but look into it objectively and I think you'll be surprised. Why? Because higher rates put downward pressure on corporate borrowing, hiring, and production, which leads to lower supply at ever-higher prices until consumption is no longer sustainable. This means that the most recent mid-July CPI ex shelter at 2% (shown below) is justification for why rates need to be cut.

P.s. you can find more empirical evidence on the relationship between growth and interest rates here, courtesy of world-renowned economist Richard Werner, or here if you'd like to read about The Fisher Effect from economist Irving Fisher.

Fourth, because of what I've shared above, the Fed is now objectively late to cutting rates. Objectively speaking, the Fed cut 50bps in September 2024 based on worse data than what we've seen in the recent months. If they cut then, why aren't the cutting now?

Lastly, the native born worker shift above means that more dollars are likely staying inside the U.S. and therefore stimulating our GDP. Every dollar that enters our economy can lead to ~$5 in GDP according to the multiplier effect. Estimates here show that the U.S. lost ~$200B to global remittances in 2021. Adjusted for inflation and based on additional immigration since 2021, the remittance figure could have been ~$300B in 2024, potentially leading to GDP growth of up to +$1.5T.

In summary, it's important to remember that the economic machine is complex, has many parts, and operates across many industries and sectors simultaneously. I don't pretend to have all the answers, but I hope the above has you thinking about both what's happening under the surface and the implications of what's happening including second or third order consequences.

Deed In Lieu

A deed in lieu, very simply, is when the owner of a property hands back the keys to the lender in exchange for forgiveness of any unpaid or unpayable debt owed.

This can be a faster, more cost effective process than going through foreclosure.

Why do I mention this today?

Because I got to see under the hood of a deed-in-lieu recently, and it isn't pretty.

Here's a rough example of what I saw (details changed for anonymity).

This was an older vintage (50+ years old) property acquired in Q4 2022 at peak pricing with floating rate financing at ~60% LTV in a market with record new supply coming online and amid an aggressive interest rate hiking cycle. While the rate was hedged for 3-years, the NOI was not, and the NOI suffered mightily trying to compete with a rapidly growing supply.

Today, nearly 3 years later, the property might be worth 90% of the loan amount, and any attempt to modify the loan by right-sizing it would require a capital contribution equal to 30-40% of the original equity.

To make matters worse, the micro-location was far inferior to the competitive set, which only made operations more challenging as supply came online, rents softened, and concession wars heated up.

This story is not an isolated one. In fact, I believe there will be hundreds (or thousands) of properties that face this same fate over the next 18-36 months. Because although I haven't mentioned it recently, the loan maturity wall hasn't gone anywhere.

Keep an eye out for more DIL (Deed In Lieu) occurrences.

Outstanding loans must be paid back, one way or another.

Weekly Listen

The week's listen is one of the more fascinating podcasts I've heard. Richard Werner, a world-renowned economist mentioned above, was a guest on Tucker Carlson's show recently, and the conversation was captivating.

If you're interested in learning more about the history of the Federal Reserve, or the interconnected relationships between a country's banking system and it's future prosperity, then you'll definitely enjoy this episode.

You can listen to the full episode here.