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Speaker 1: So it's very possible we're not going to get to

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Speaker 1: some realistic oil prices until this war is over, until

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Speaker 1: there's no more IRGC Islamic Revolutionary Guard Corps, until.

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Speaker 2: We have.

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Speaker 1: The straight fully opened the Strait of Hormuz. Now do

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Speaker 1: I think that takes a lot of bombs. It's gonna

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Speaker 1: take a fair amount of bombs. They will take troops

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Speaker 1: on the ground. I've already said this. You're already going

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Speaker 1: to see that because of taking the enriched uranium. I mean,

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Speaker 1: this is already happening there. You're going to see troops

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Speaker 1: on the ground. Now, are they gonna be an American

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Speaker 1: or Israeli? They're gonna be the French, because the French

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Speaker 1: have sent the aircraft carrier to Charles de GalF Will

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Speaker 1: this be the UAE or some conglomeration of Gulf states,

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Speaker 1: It could be all of the above. Tony Kats, Tony

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Speaker 1: Kats today, good to be with you. But oil prices

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Speaker 1: need to come down for well Republicans to have good

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Speaker 1: opportunities in the midterm. But more importantly, what is happening

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Speaker 1: in the Strait might be showing us and exposing an

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Speaker 1: issue that maybe is correctable. E. J. Antoni joins me

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Speaker 1: right now from the Heritage Foundation, chief Economist for the

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Speaker 1: Thomas Rowe Institute for Economic Policies and the Richard Astro

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Speaker 1: Fellow at the Heritage Foundation. He also goes by chief

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Speaker 1: economist and Kappo to two D Coppo over there and

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Speaker 1: good to be with you. This is actually, I think

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Speaker 1: a larger scale economic conversation. How the oil conversation engages

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Speaker 1: a mortgage conversation because the war doing I think a

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Speaker 1: one to two hit. And then are there changes policy

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Speaker 1: wise that we can be working on and thought process

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Speaker 1: wise in terms of trade that can make all this better.

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Speaker 1: But let's start where we are on a historical basis.

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Speaker 1: We woke up this morning, Well we'll talk about it

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Speaker 1: right now. Woke up this morning to West Texas rooted

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Speaker 1: a one hundred and six dollars a barrel, rent cruited

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Speaker 1: one hundred and ten dollars like ninety cents of barros.

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Speaker 1: Let's call it one hundred and eleven dollars, just for

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Speaker 1: the sake of rounding up the numbers on a historical

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Speaker 1: From a historical perspective, these numbers massively high or just

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Speaker 1: high based on recent events.

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Speaker 2: Well, Tony, it's a good question. But part of the

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Speaker 2: problem with trying to answer that is is there so

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Speaker 2: many other factors to take into consideration here. You know,

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Speaker 2: people are saying, why is why is the pump, why

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Speaker 2: is the price at the pump so incredibly painful right now?

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Speaker 2: For so many Americans. It's because we haven't had a

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Speaker 2: roaring economy for the last four or five six years.

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Speaker 2: Right ever since COVID, people have basically been falling behind.

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Speaker 2: And so it's again, it's not as if you're seeing

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Speaker 2: this price spike back in twenty nineteen when all, you know,

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Speaker 2: when for the most part, everyone's earnings were rising faster

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Speaker 2: than the overall price level. You know, folks are really

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Speaker 2: really hurting. They were hurting back in twenty twenty four.

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Speaker 2: That's why they re elected President Trump. Folks were still

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Speaker 2: hurting in twenty five. And yes, I understand that things

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Speaker 2: were getting better, but things were still not as good

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Speaker 2: as they were again four or five years prior. So

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Speaker 2: while these are not record high oil prices, while these

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Speaker 2: are not yet record high gas prices in terms of

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Speaker 2: the national average, it is still incredibly painful for a

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Speaker 2: lot of folks. I just think that's something we have

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Speaker 2: to acknowledge right now.

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Speaker 1: But that's an interesting argument and one that I have

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Speaker 1: to push back on. It's not that the prices are

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Speaker 1: too high, even though they're too high. It's that we

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Speaker 1: have less dollars or less value to the dollar, and

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Speaker 1: that's what makes it seem like it's so much higher.

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Speaker 2: Well, sure, absolutely, these two things are inextricably tied together. Right,

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Speaker 2: Why is the cost of living so high today? It's

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Speaker 2: specifically because the dollar has lost so much of its value.

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Speaker 2: One of the functions of money is that it's basically

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Speaker 2: a yard stick, right You use it to measure things,

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Speaker 2: whether a yard stick is measuring distance or you know,

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Speaker 2: in this case, the dollars measuring value. Well, what happens

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Speaker 2: if you shrink a yard stick from from thirty six

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Speaker 2: down to eighteen inches and now it doesn't take one

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Speaker 2: hundred yard sticks to go from one end zone to

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Speaker 2: the other on a football field. Right now, it takes

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Speaker 2: two hundred because again you've shrunk your yard stick in half.

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Speaker 2: You need twice as many to cover the same distance.

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Speaker 2: Same thing with the dollar. You shrink the dollars worth

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Speaker 2: it's measuring you know again, it's a measuring tool, So

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Speaker 2: you shrink that in half. It now takes twice as

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Speaker 2: many to cover the same distance, or twice as many

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Speaker 2: to buy the same stuff. That's the phenomenon that we've

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Speaker 2: been seeing the last several years. That is in a

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Speaker 2: nutshell inflation. So look, you're absolutely right, the dollar is worthless.

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Speaker 2: That's why we have a cost of living crisis. It

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Speaker 2: started under Biden. It still has not yet been resolved.

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Speaker 1: What's causing that? Talking to EJ. And Tony, chief economist

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Speaker 1: at the Heritage Foundation, do we look at inflation, Do

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Speaker 1: we look at taris? Do we look at one compounding

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Speaker 1: the other? Is there another force that has made the

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Speaker 1: dollar hold less value?

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Speaker 2: Well, it's certainly the fact that the government is spending, borrowing,

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Speaker 2: and printing money that it simply doesn't have. Again, that is,

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Speaker 2: unfortunately something that is still ongoing today. Part of the

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Speaker 2: reason why bond markets have been throwing a fit lately.

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Speaker 2: While you're seeing yields as high as you are, especially

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Speaker 2: on things like the two year of the ten year,

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Speaker 2: even we're seeing it on the thirty year bond. It's

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Speaker 2: simply the fact that people are losing confidence the government

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Speaker 2: is ever going to get it spending under control. I

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Speaker 2: will say before the war, we actually were on the

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Speaker 2: right path. We still had a deficit, but the deficit

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Speaker 2: was shrinking. We were on a path to eventually getting

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Speaker 2: that deficit down to zero. And then after that, obviously

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Speaker 2: you can start running surpluses and pay down the debt.

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Speaker 2: But unfortunately now that has sharply reversed. We've done a

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Speaker 2: complete in total one to eighty. We're asking for this

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Speaker 2: huge Pentagon supplemental. We're asking for a one point five

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Speaker 2: brillion dollar budget for the Pentagon alone. I mean that

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Speaker 2: is going to cause severe problems. Look, the more the

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Speaker 2: government spends and borrows, the more stress it's going to

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Speaker 2: put on what we call the loanable funds market, basically

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Speaker 2: where you go to borrow money. Right, this is why

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Speaker 2: interest rates are ticking up. This is why, and it's everything.

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Speaker 2: It's not just government rates, it's consumer rates. Look at

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Speaker 2: the thirty year mortgage for example, that remains stubbornly high.

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Speaker 2: It's not because of the Fed, right, the Fed has

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Speaker 2: actually cut rates. Rather, it's simply because the government is

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Speaker 2: spending and borrowing too much money. Now to your point

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Speaker 2: on tariff's Look, at this point, the tariffs aren't doing

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Speaker 2: us any favors. I think the administration would be wise

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Speaker 2: to really put the entire terriff fight on pause. We

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Speaker 2: don't need a trade war. At the same time, we're

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Speaker 2: dealing with a kinetic war.

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Speaker 1: So you bring up, by the way, I'm always been

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Speaker 1: there on tariffs, tariffs should have been focused and strategic.

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Speaker 1: And I've never been a fan of the broad brush,

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Speaker 1: and people agree with me and disagree with me, and

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Speaker 1: we end up having a bourbon at the end of

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Speaker 1: the day. We're just going to leave that be not

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Speaker 1: a fan. But you bring up something interesting here about

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Speaker 1: where these numbers are. Let me give you as we're talking, right,

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Speaker 1: so we're kind of like midday at the start of

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Speaker 1: the week. The ten year treasury is at four point

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Speaker 1: five eighty seven. And the ten year is what we

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Speaker 1: base the thirty year fixed on, which is why we

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Speaker 1: have a thirty year fixed mortgage. What you go and

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Speaker 1: get a mortgage at of now back over six and

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Speaker 1: a half percent, and I'm telling you this is going

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Speaker 1: to creep its way back to seven percent. You've got

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Speaker 1: a two year treasury at four point zero five six.

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Speaker 1: But you brought up, by the way, we should be

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Speaker 1: clear in March this was at three point four, so

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Speaker 1: now we're at four point zero five. You brought up

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Speaker 1: the thirty year bond, the thirty year treasury. Now this

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Speaker 1: is not my expertise at all, and I'd love for

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Speaker 1: you to walk down a little bit of the primrose

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Speaker 1: path here that right now, when we go back to March,

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Speaker 1: it was four point sixty three, it is now five

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Speaker 1: point one two six. That means the federal government is

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Speaker 1: paying out almost another full percent on this bond. Is

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Speaker 1: what does this tell us from the economics and is

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Speaker 1: this something you advise, hey, get into thirty year treasuries.

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Speaker 1: While you can.

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Speaker 2: Well on that last question for legal reasons, I'm not allowed.

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Speaker 1: To keep financial I don't give financial advice either. Check

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Speaker 1: check with anybody else.

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Speaker 2: But what I can tell you is is what the

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Speaker 2: markets are telling us by these yields, and it's basically

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Speaker 2: a vote of no confidence. The markets are increasingly pricing in.

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Speaker 2: Now that's the long end, right, but on the short

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Speaker 2: end of the curve you can see markets are clearly

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Speaker 2: pricing in not only a lack of interest rate cuts

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Speaker 2: from the Fed, but probably interest rate hikes in the

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Speaker 2: near future. Now, the probability on that depending on which

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Speaker 2: market you're looking at is still just under fifty percent,

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Speaker 2: but it was zero a short while ago. In other words,

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Speaker 2: nobody was expecting interest rate hikes and now we are.

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Speaker 2: But going back to the long end of that yield curve,

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Speaker 2: that thirty year bond again, people are clearly thinking that

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Speaker 2: this is going to be higher for longer that. Again,

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Speaker 2: although we were on the right path previously, we no

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Speaker 2: longer are, and it's going to be increasingly hard to

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Speaker 2: reverse this thing. You know, I don't know what exactly

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Speaker 2: the off ramp is for Iran. I don't know what

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Speaker 2: exactly the solution is here, but it does look like

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Speaker 2: you're going to have not just a temporary shock to

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Speaker 2: the system as a result of this, but rather a

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Speaker 2: permanent level change.

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Speaker 1: EJ is Is it your contention that Iran is the

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Speaker 1: not the perpetrator in all this, but the firing gun

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Speaker 1: and all this was it Tariff's Is there something else

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Speaker 1: at play that starts starts us down this road to

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Speaker 1: where we're seeing the economy at this SMA.

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Speaker 2: I think it's definitely the war with Iran. I don't

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Speaker 2: think there's I don't think the data points to literally

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Speaker 2: anything other than that, you know, for example, we had

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Speaker 2: we had earnings rising faster than prices before the war.

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Speaker 2: That has completely reversed. In fact, we've given up literally

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Speaker 2: half of the gains we've made in terms of real

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Speaker 2: wage growth under the second Trump administration. We've given up

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Speaker 2: half of those gains since the war started. That inflation

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Speaker 2: since the war started is running at an annualized rate

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Speaker 2: of over nine percent. I mean, think of that. That's

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Speaker 2: higher than the hottest annual inflation rate we had under Biden.

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Speaker 2: Not not the highest annualized rate from a single month,

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Speaker 2: but still there. These are incredibly fast price increases that

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Speaker 2: we're seeing. And the scary thing is tony the fact

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Speaker 2: that we're simply not out of the woods yet. Look,

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Speaker 2: even if you were to completely reopen the Strait today

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Speaker 2: and you're going to get the oil flowing in a

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Speaker 2: couple of weeks, right, and you get the oil market

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Speaker 2: real relatively back to normal in terms of supply, you

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Speaker 2: still are going to have a demand shock. So you're

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Speaker 2: going to replace the negative supply shock with a positive

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Speaker 2: demand shock, both of which cause upward pressure on prices.

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Speaker 2: The demand shock is going to come from all of

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Speaker 2: the reserves that we've been depleting to try to cope

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Speaker 2: with losing a fifth of the world's oil supply. All

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Speaker 2: of those reserves now have to be replaced. So again,

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Speaker 2: you had this huge draw down in supply and you've

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Speaker 2: been digging into your reserves to counter that. Now all

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Speaker 2: those reserves have to be replaced, which marks a huge

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Speaker 2: increase in demand. So prices are not going to go

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Speaker 2: back down to pre war levels anytime soon. And then

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Speaker 2: on top of that, you have all of the supply

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Speaker 2: chain knock on effects from this war. You are going

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Speaker 2: to see a ton of different shortages in a lot

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Speaker 2: of basic materials or raw materials. And the difficulty there, Tony,

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Speaker 2: is that it's going to affect countless different production processes

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Speaker 2: throughout the global supply chain. I mean, what happens when

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Speaker 2: you have a shortage of something basic like copper, like aluminum,

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Speaker 2: like you know, again really really basic components here, like

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Speaker 2: light calls, things that go into countless plastics, pharmaceuticals. I mean,

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Speaker 2: it's everything from from car parts to the components of

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Speaker 2: your cell phone and everything in between, synthetic fibers in

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Speaker 2: your clothing. I mean, I really can't. It would take

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Speaker 2: us a couple of hours to go through all of

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Speaker 2: the different products that we're going to start seeing shortages

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Speaker 2: on in the supply chain.

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Speaker 1: And we've also seen shortages of helium because of this,

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Speaker 1: and helium is a very important component in the making

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Speaker 1: of chips and semiconductors. Talking to ej Antoni, chief economist

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Speaker 1: of the Heritage Foundation, this all now falls on the

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Speaker 1: shoulders of Kevin Walsh, the new FED chair, who has

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Speaker 1: a discussed for a while that we can bring down

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Speaker 1: rates as long as we reduce the balance sheet and

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Speaker 1: take these mortgages and other things we have off of

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Speaker 1: the books. That's how he discussed it. I don't know

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Speaker 1: if that's going to happen, but you're now advising the

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Speaker 1: FED chair. You're Kevin wash sitting in the chair. It's like, okay,

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Speaker 1: it's now your ship. This is called the Titanic and

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Speaker 1: the iceberg is right in front of you, and it's

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Speaker 1: also mostly surrounding you. What are the steps that you

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Speaker 1: think the FED needs to take here?

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Speaker 2: Well, I think the FED needs to The FED needs

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Speaker 2: to basically not make the same mistake they did previously

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Speaker 2: when we had an oil shock, which was to say, oh,

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Speaker 2: prices are up, we need to hike rates. This is

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Speaker 2: a non monetary phenomenon. You don't hike rates when you

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Speaker 2: see prices going up independent of the money supply, because

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Speaker 2: here's what effectively happens, Tony. If there's the same quantity

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Speaker 2: of money out there, right, what ends up happening is

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Speaker 2: people spend a lot more on energy and they have

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Speaker 2: less money to spend elsewhere. Demand for other products falls,

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Speaker 2: and they're where you see prices compensate as a result

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Speaker 2: of that. So although you may see the overall price

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Speaker 2: level go up again, that is not a monetary phenomenon.

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Speaker 2: That is not inflation in the strict sense of the word.

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Speaker 2: I mean people still say it's inflation because it represents

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Speaker 2: a cost of living increase. We are made poorer as

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Speaker 2: a result of that. But you can't fix a non

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Speaker 2: monetary problem with monetary tools. That's how you make things worse,

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Speaker 2: not better. So what the FED needs to do is,

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Speaker 2: as they sometimes say, they need to look past the

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Speaker 2: oil shock and try to look at what what of

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Speaker 2: the price increases we are seeing today, what is due

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Speaker 2: to monetary factors like having too much money in the system,

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Speaker 2: and what can be done about that? Not what can

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Speaker 2: be done about the overall price level.

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Speaker 1: We're gonna have to dig into that another time. EJ.

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Speaker 1: And Tony, that was a mouthful that requires more attention.

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Speaker 1: We'll get into it. Heritage Foundation EJ Antoni, chief Economist.

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Speaker 1: I appreciate you more to get to I'm Tony Katz

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Speaker 1: and this is Tony Kats today