AI, Debt, and a Social Security Shortfall. Should Your Money Plans Change? With Rob Berger

Afford Anything | Get Smarter With Money

The episode opens with a macroeconomic market update covering September's underwhelming jobs report, the Federal Reserve's unanimous rate hike to 3.75%-4.0%, and soaring Treasury

Key takeaways

• Rob Berger emphasizes that while AI makes skills like coding abundant, fundamental valuation metrics still dictate long-term market performance.
• The September jobs report added only 29,000 positions with unemployment ticking to 4.2%, signaling a cooling labor demand despite prior upward revisions.

Main topics

• September labor market data & ADP vs BLS discrepancies
• Federal Reserve rate policy & inflation metrics (CPI/PCE)

Notable quotes

"AI is not going to change it [the safe withdrawal rate]."

Conclusion

Listeners gain actionable frameworks for building resilient retirement

Transcript preview

Speaker 2 (0:00) The U.S. added only 29,000 new jobs in September, underperforming expectations. Meanwhile, inflation clocked in at 3.4 % over the last 12 months. And the Fed responded by hiking interest rates by another quarter point, the first rate hike since 2023. Mortgage interest rates hit a new high and bond yields are going bananas. We're going to talk about all of that and more in today's first Friday episode. Welcome to the Afford Anything podcast. the show that knows you can afford anything, not everything. This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship, acronym Double Eye Fire. I'm your host, Paula Pantai, the master's in economic reporting from Columbia. Every Friday, the first Friday of every month, we host a macroeconomic look at the markets, the economy, what's been happening in the economy over the last month. Welcome to the October, 2026, first Friday. Friday, macro markets, markets and macro economics episode. We'll start with the jobs report. It really did badly. The U.S. added 29,000 new jobs in its latest report, while the unemployment rate ticked up to 4.2%. That is a huge decline over what we've done in previous months, and it really underperformed expectations. In August, initially, the BLS had reported a job growth of 162,000 jobs. That number got revised down to 133,000. The good news is we're still growing. The bad news is not by as much as we thought we were. Two days prior to the BLS report, we get a little sneak peek by getting data from this other thing called the ADP report. ADP is a private payroll processing company. They report private sector employment. The ADP report showed that U.S. private sector employment increased by 90,000 jobs in September. So just so you know, the... the difference in methodologies. ADP is a private company. They're a really big private company. And so they're just looking at their own payroll data, but they're big enough that their payroll data is a very large data set. Based on their own data, they saw an increase of 90,000 jobs in September. The BLS, which has totally different methodology, they only saw an increase of 29,000. So we're getting a big discrepancy from these two data sources. The BLS samples roughly 119,000 businesses and government agencies covering 622,000 individual work sites. So that constitutes around 26 % of all non-farm employment, and they count total jobs. That's how they come up with their jobs data. Their numbers get revised three times after one month, after two months, and then annually. Sometimes those numbers do get revised upwards. That's less common, but it does happen. But a disappointing report this morning from the BLS. Turning our attention back to ADP and going into a sector breakdown, ADP saw that most of the jobs that were created, and this will be no surprise if you've listened to these First Friday episodes regularly, most of the jobs that were created were in education and healthcare. Those constituted about 55,000 new jobs. This is according to the ADP report. Leisure and hospitality was another 22,000 jobs. manufacturing 17,000 jobs, construction 15,000. Big loss in financial activities. That group lost 16,000 jobs. Overall, especially considering the huge disparity between the August report and the September report, and given the successive downward revisions that we've seen throughout the summer, we're seeing evidence of cooling labor demand. We're seeing that job growth has not been as strong as we previously thought. In September, we missed expectations by a huge margin. We further revised down July's numbers. So July figures were cut by an additional 31,000. Again, unemployment, as I mentioned, ticked up. It was at 4.1%. Now it's at 4.2%. So overall, we're seeing a slightly cooling labor market. That means that there is a argument. that the Fed might hold a rate steady at its October meeting. We'll talk more about that in just a moment because the big new, I don't want to spoil it, but the big news is what the Fed did in September. You know what? We'll talk about that next. On September 16th, the Fed raised interest rates by a quarter point. The Fed raised its benchmark interest rate to a target range of between 3.75 % to 4%. That is the first rate increase that the Fed has done since 2023. And it was a unanimous vote, which is crazy because Fed Chair Kevin Warsh has kept talking about how the Fed keeps having these good family fights. He's used that phrase multiple times. And in the last many, many Fed meetings, they have not been voting unanimously. There's always been some dissent. So to see a unanimous vote indicating the whole Fed is in alignment, like I guess those quote unquote good family fights that Warsh keeps talking about are actually constructive. So Fed raised interest rates at its September meeting and investors immediately started anticipating even more rate hikes in the future. So right after the Fed raised their rates, new projections from industry analysts and investors started showing that a lot of investors believe, analysts and investors believe they're going to raise rates by another quarter point before the end of the year. So the current expectation is that the Fed rate is going to be between 4 % to 4.25 % in that range by the end of this year. But today's jobs data actually decreases the likelihood that they'll raise rates at their October meeting. So we'll see. I mean, we'll know by the next First Friday episode. The Fed's going to meet again just before Halloween on October 27th and 28th. And that will be their second to last meeting for the year. After that, their final meeting of the year is going to be December 8th and 9th. Before I move on, just a quick reminder as to what the Fed rate is. So the Fed sets a target rate that banks charge one another when banks loan each other money overnight. So how this works is Bank A might loan some money to Bank B overnight, super short-term loan, and the Fed sets a range, and that range is currently between 3.75 % to 4%. The Fed sets a range of the interest rates that Bank A would charge Bank B for that overnight loan. And that overnight rate is the foundation for the cost of money throughout the system. Like how much does money cost? That rate is the foundation for it. It is the benchmark. So if you then decide to go get a loan from a bank, if you decide to get a HELOC or a small business loan, Or if you take out a new credit card and you're thinking about what the interest rate on your credit card is, which you shouldn't because you should pay it off in full. But if that's the type of thing you pay attention to, that rate is going to sit on top of that Fed rate. Now, if it's a credit card, it's going to sit on top of it by a lot. If it's a HELOC, it's going to sit on top of it by a little bit. But the Fed rate is the baseline. And by the way, the way that the Federal Reserve holds that rate in place is by setting... what it pays banks in order to keep their cash at the Fed, because a bank is not going to lend to another bank for less than the amount that they make from the Fed. That's how that whole system works. And that's why it's a really big deal that the Fed just raised rates for the first time since 2023. I hope that explanation emphasizes why that's such a big deal, because it means stuff's going to get more expensive. Sorry, it is. And it's ironic because the whole reason that the Fed raises rates is to battle inflation. But in order to battle inflation, stuff has to get more expensive. The cost of money has to get more expensive. Because if something's expensive, then you use less of it. So if the cost of money is expensive, then you borrow less of it. That's at least the theory. Businesses take out fewer small business loans. Homeowners don't take out HELOCs to do a kitchen renovation. That cools the economy, which cools inflation. Speaking of which. New CPI data drops. The Consumer Price Index comes from the Bureau of Labor Statistics, the same people who give us the jobs report. And the latest CPI data, information released in the month of September that covers the rate of inflation as of the month of August, shows that inflation over the previous 12 months was at 3.4%. That's the headline inflation number, so it includes everything. If you strip away food and energy, like groceries and gas, If you remove those two elements and look at what's called core inflation, which is inflation minus groceries and gas, that was only 2.4%. The cost of food and the cost of energy Speaker 1 (9:29) made up a huge portion of that headline inflation number. Speaker 2 (9:33) So that's the latest CPI data. Meanwhile, there's another set of data. It's called the PCE, the Personal Consumption Expenditures. It's data that's released by a different government agency, the BEA. the Bureau of Economic Analysis. The PCE data is what the Fed looks at when they're thinking about inflation. And their latest report shows that RealPCE increased 92.8 billion in August. That is a rate of six-tenths of a percent at a monthly rate of six-tenths of a percent in the month of August. For the previous 12 months, it found identical results to the CPI. It found 3.4 % year on year. as of August. And if you strip away groceries and gas, core PCE, so everything excluding food and energy, that was 3%. So headline PCE and headline CPI are both at 3.4%. Meanwhile, core PCE is 3%, core CPI Speaker 1 (10:35) is 2.4%. Speaker 2 (10:36) What does all of that mean? It means... Headline inflation, no matter which survey you look at, headline inflation is 3.4%. That's inflation that includes everything that you buy. There is a little bit of disagreement as to how much of that is attributable to groceries and gas. And if you use one set of results, the CPI, it says it's a really big deal. If you use a different set of results, the PCE, it says kind of a big deal. But where they both converge, where they both agree is that Headline inflation is 3.4 % over the last 12 months as of August. And that is about a percentage point and a half higher than where we want to be. And that is why the Fed raised interest rates. Now, this might have an impact on our trade. Speaker 2 (11:24) Prior to the Fed's decision, the president demanded that the Fed cut interest rates and threatened that if they don't, then he's going to cut off trade with the countries with which the U.S. maintains trade deficits. So he wrote, and this is an exact quote, quote, lower the rate or I'll stop trading with countries with which we have a deficit, end quote. And we do have big, big trade deficits with many, many countries, with dozens of countries. including some of our top trading partners. And the higher our interest rates are, the more we pay, according to the president, for each point of interest in this country that we pay that costs $650 billion. He stated, quote, some countries are paying half a point and we're paying four points and yet we're a much stronger credit than they are, end quote. So his position is that the U.S. should be paying the lowest interest rate in the world. We are extremely creditworthy as a nation and a strong country and a very creditworthy country should mean a lower interest rate. He holds the position that we should be paying the lowest interest rate on earth. Kevin Warsh and the rest of the Fed unanimously voted in the opposite direction. The Fed has a dual mandate. So the Fed's job is to manage both inflation and unemployment. And a strong jobs report, which is what we thought we had for the month of August. Strong jobs means that the Fed doesn't have to worry as much about unemployment. And so if we have a strong jobs market, that means that the Fed then has more leeway to raise rates. So the Fed declined to officially comment on the president's remarks. Kevin Warsh did say, quote, short-term interest rates are the predominant tool to achieve the dual mandate, end quote. So it sounds as though Warsh is. narrowly thinking about exactly the dual mandate, which is the Fed's job. And time will tell as to whether or not this will result in halting trade with some of our trading partners, at least with the partners with whom we have a deficit. Meanwhile, here are two things that we do know. Number one, we know bond yields are going bananas. In September, the bond yield hit a 22-year record. The 30-year treasury yield hit it, broke a 22-year record. The 30-year treasury yield hit 5.5%. That's its highest level since June of 2004. And the 10-year note jumped to 5.223%. And that, we haven't seen that since June of 2007. That was on September 25th. When that happened, again, that was September 24th, 25th. When that happened, everyone was freaking out because we haven't seen a 30-year bond yield like that since 2004. And I thought that was going to be the end of the story. But yesterday, literally yesterday, the 30-year yield hit 5.69%. That was October 1st. That is the highest spike that we've seen. So bond yields climbed past 5.6 % on September 29th. By September 30th, they were at 5.64. And then yesterday, they hit 5.69. And as of today, as of this morning, they're down a little bit. They're at 5.61. Recording this on Friday, October 2nd. It's currently just Speaker 1 (15:00) before noon in New York. Speaker 2 (15:02) Why is this such a big deal? Like, why are we all freaking out about the fact that the 30-year and 10-year treasury yields are so high? Number one, that poses a huge risk for the stock market. Because if you can get what is essentially a risk-free 5.7%, then why wouldn't you pull money out of stocks to buy bonds? In fact, this is not an investment recommendation. That's just... It's kind of a rhetorical question, but I mentioned on this podcast, I used to have an all equities portfolio. And very recently, a couple months ago, when 30-year yields started going high, I think it was at 5.2%, I pulled money out of some of my stocks in order to buy bonds. Again, not telling you what to do, but I personally am going to buy more bonds because if I can get nearly 5.7%, on something as safe as a 30-year treasury, why would I not do that? So high bond yields are risky for the stock market because to justify holding onto a stock, you have to expect that the risk premium is worth it. You have to expect that that stock is going to deliver and that it's going to deliver such big gains that it's worth the risk. And if enough investors decide to pull money out of stocks and buy long-term bonds instead, that's bad news for the stock market. So that's one reason why it's a big deal. And the other is mortgage rates. Mortgage rates are largely based on the 10-year treasury. Right now, the current average interest rate on a 30-year fixed rate mortgage is roughly 7.44 to 7.51%. Freddie Mac puts out a weekly survey and the Freddie Mac's survey data that was released yesterday, October 1st, pinned the weekly baseline average at 7.28%. This big Huge surge in bond yields means mortgage rates have just experienced their largest weekly jump in four years. So again, mortgage rates are based off the 10-year treasury. 10-year treasury is really high at this moment. And the 10-year, it often trades like right around nominal GDP and nominal GDP is higher today because of inflation. As we just talked about, inflation's at 3.4%. You know, if we expect that inflation is going to be 3.4 % over the next 10 years, I'm not saying it will be, but like, let's say that you're, let's say that that is your starting assumption. And then you also expect that real GDP will be 2 % and you put that together and now you're at 5.4 % up to 5.5%. Like it's not a surprise that the 10 year is trading where it is. And if that's where the 10 year is trading, then add a couple more percentage points to that. And we end up with. mortgage interest rates at 7.5%. We need inflation to come down so that bond yields can come down so that mortgage interest rates can come down. In the meantime, if you're shopping for a home, you're facing 7.5 % 30-year rates. And that probably means that if you're an existing homeowner, you are locked in, golden handcuffed to your 3 % mortgage on... If you do have to move, you are likely going to end up holding onto that property so you can keep that mortgage. And so we're seeing a lot more people become quote unquote accidental landlords, unintentional landlords, because you don't want to give up that low interest rate mortgage. And then if you have to move like for family or for a job or something, maybe you rent for a while, we're seeing an increase in rental demand. We're seeing a lockup in the housing market. It's a... low buy, low sell, like just a low volume of transactions situation in the housing market right now. But because we're supply constrained, prices stay high. So for anyone who is a current homeowner and you become an accidental landlord, if that's your situation, or if you know someone who's in that situation, we have a free guide. It's around some of the biggest mistakes that beginner rental property investors make. And if that's you, again, if you're an accidental landlord, which more and more people are becoming, you know, they