1 00:00:07,720 --> 00:00:12,080 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:12,240 --> 00:00:17,919 Speaker 1: I'm Joe Wisenthal, and sadly Tracy Ellaway is out today. 3 00:00:18,239 --> 00:00:21,400 Speaker 1: She is traveling, but I think I could sort of 4 00:00:21,480 --> 00:00:25,840 Speaker 1: imagine the conversation that we would have prior to bring 5 00:00:25,920 --> 00:00:28,880 Speaker 1: in our guests if she were here. We would probably 6 00:00:28,920 --> 00:00:31,720 Speaker 1: talk about how for the first time in a while, 7 00:00:32,159 --> 00:00:36,239 Speaker 1: we've been seeing market volatility lately, how a lot of 8 00:00:36,240 --> 00:00:40,360 Speaker 1: the stories that we've been discussing since the financial crisis 9 00:00:40,440 --> 00:00:43,720 Speaker 1: seemed to be mutating. And at the heart of these 10 00:00:43,760 --> 00:00:46,920 Speaker 1: big changes that we're seeing is a very important debate 11 00:00:47,000 --> 00:00:50,080 Speaker 1: about the economy, and that is whether we're really seeing 12 00:00:50,320 --> 00:00:53,040 Speaker 1: a pickup and inflation for the first time in a 13 00:00:53,040 --> 00:00:56,680 Speaker 1: long time. And so if you weren't aware, basically since 14 00:00:56,760 --> 00:01:01,640 Speaker 1: the crisis, we've been seeing this incredibly mellow inflationary environment 15 00:01:02,040 --> 00:01:06,040 Speaker 1: around the world, not much pricing power, not much acceleration 16 00:01:06,120 --> 00:01:09,280 Speaker 1: in wages or anything else like that. And of course 17 00:01:09,360 --> 00:01:13,800 Speaker 1: that's made central banks job very easy, because they're tasked 18 00:01:13,800 --> 00:01:17,280 Speaker 1: with maintaining stable prices or in the US, stable prices 19 00:01:17,319 --> 00:01:20,760 Speaker 1: and full employment. But if prices are just really stable, 20 00:01:21,280 --> 00:01:23,200 Speaker 1: then that makes it easy. They don't really have to 21 00:01:23,240 --> 00:01:26,520 Speaker 1: do anything for the most part. And so if we're 22 00:01:26,520 --> 00:01:28,280 Speaker 1: starting to see a turn, if we're starting to see 23 00:01:28,319 --> 00:01:32,440 Speaker 1: inflation really gained some teeth and accelerating prices and so forth, 24 00:01:32,920 --> 00:01:35,679 Speaker 1: then that raises the question of whether central banks are 25 00:01:35,680 --> 00:01:39,000 Speaker 1: going to really have to change their approach since the crisis. 26 00:01:39,400 --> 00:01:41,960 Speaker 1: And if central banks changed their approach since the crisis, 27 00:01:42,000 --> 00:01:45,839 Speaker 1: that could have potentially big ramifications for all sorts of markets, 28 00:01:46,440 --> 00:01:50,240 Speaker 1: risky assets, bonds, and so forth. So this question of 29 00:01:50,320 --> 00:01:54,560 Speaker 1: whether the uh, the Goldilocks era of inflation not too 30 00:01:54,600 --> 00:01:57,720 Speaker 1: hot not too cold is going to persist is top 31 00:01:57,760 --> 00:02:00,920 Speaker 1: of mind for a lot of people these is and 32 00:02:01,000 --> 00:02:04,600 Speaker 1: so answering this question is crucial, and so that is 33 00:02:04,600 --> 00:02:09,000 Speaker 1: what we're going to try to do on today's episode. So, 34 00:02:09,040 --> 00:02:12,120 Speaker 1: without further ado, I would like to bring in our guest. 35 00:02:12,480 --> 00:02:16,680 Speaker 1: His name is Michael Ashton of Enduring Investments, and he 36 00:02:16,840 --> 00:02:21,600 Speaker 1: is on Twitter at the Inflation Guy, and he tweets 37 00:02:21,840 --> 00:02:25,720 Speaker 1: very knowledgeably about inflation. Every time new data comes out, 38 00:02:25,919 --> 00:02:29,440 Speaker 1: he breaks it down, and there's probably nobody there's probably 39 00:02:29,480 --> 00:02:32,120 Speaker 1: nobody better to help us answer the question of what 40 00:02:32,240 --> 00:02:35,240 Speaker 1: the heck is going on and what's about to happen. 41 00:02:39,160 --> 00:02:41,200 Speaker 1: Michael thank you very much for joining us. Thank you 42 00:02:41,280 --> 00:02:43,519 Speaker 1: very much, Joe. It's good to be here. And I'm 43 00:02:43,560 --> 00:02:46,359 Speaker 1: I'm sure I speak for Tracy and saying that I'm 44 00:02:46,360 --> 00:02:49,880 Speaker 1: really sorry that I'm missing this. I feel very sorry 45 00:02:50,000 --> 00:02:54,200 Speaker 1: for Tracy that she's missing this huge She will be devastated, 46 00:02:54,560 --> 00:02:58,120 Speaker 1: but I'm very excited. Let's talk first about your background. So, 47 00:02:58,200 --> 00:03:01,639 Speaker 1: as I mentioned, you're the atflation guy. That's literally your 48 00:03:01,680 --> 00:03:05,960 Speaker 1: Twitter handle. You right, every time there's a new economic 49 00:03:06,080 --> 00:03:09,880 Speaker 1: data release that has the latest inflation data, you really 50 00:03:09,919 --> 00:03:12,320 Speaker 1: dive in and break it down and look, what are 51 00:03:12,400 --> 00:03:15,120 Speaker 1: the components, Why did it move higher, why did it 52 00:03:15,240 --> 00:03:18,280 Speaker 1: move lower? What's your background? How did you get to be, uh, 53 00:03:18,360 --> 00:03:22,200 Speaker 1: the inflation guy? Well, let's see. I I've I've been 54 00:03:22,240 --> 00:03:25,639 Speaker 1: in financial markets since the early nine nineties, I guess 55 00:03:25,639 --> 00:03:29,959 Speaker 1: since nine and I've spent a long time as a strategist, 56 00:03:30,600 --> 00:03:34,440 Speaker 1: fixed income strategists for a lot of the big shops 57 00:03:34,480 --> 00:03:38,480 Speaker 1: out there, bankers, trust, JP Morrigan, that sort of thing, 58 00:03:39,080 --> 00:03:44,440 Speaker 1: and then got into trading around two thousand for Barkley's. 59 00:03:45,160 --> 00:03:49,360 Speaker 1: And I was trading options for Barkley's when Barkley's, which 60 00:03:49,400 --> 00:03:52,480 Speaker 1: at the time viewed themselves as actually they styled themselves 61 00:03:52,560 --> 00:03:57,000 Speaker 1: as the inflation house. You know, at that time, inflation 62 00:03:57,040 --> 00:04:01,120 Speaker 1: derivatives were just getting started in Europe and they're just 63 00:04:01,160 --> 00:04:05,640 Speaker 1: case start in the US. And Barkley's said, you know, 64 00:04:05,720 --> 00:04:09,520 Speaker 1: we really need to get the US inflation derivatives market 65 00:04:09,640 --> 00:04:14,720 Speaker 1: going because that's good for Barkley's. And and I was, 66 00:04:15,000 --> 00:04:17,640 Speaker 1: you know, I had a good strategist background, a good 67 00:04:17,680 --> 00:04:20,240 Speaker 1: trading background. I spent a lot of time writing as 68 00:04:20,279 --> 00:04:24,120 Speaker 1: I do now and explaining things, teaching, training and so on, 69 00:04:24,520 --> 00:04:28,240 Speaker 1: and so I had a very good, uh well rounded 70 00:04:28,279 --> 00:04:32,719 Speaker 1: background to go and be be made the inflation guy. 71 00:04:33,880 --> 00:04:36,760 Speaker 1: So uh so you come to it from both a 72 00:04:36,839 --> 00:04:40,880 Speaker 1: theoretical with a theoretical background, but also the trading world background. 73 00:04:41,000 --> 00:04:45,799 Speaker 1: That's right, inflation derivatives. So inflation is an economic measure, 74 00:04:46,160 --> 00:04:50,480 Speaker 1: but derivatives are essentially instruments that people can use to 75 00:04:51,000 --> 00:04:55,120 Speaker 1: bet or hedge on specific outcomes in the economy. So theoretically, 76 00:04:55,560 --> 00:04:59,440 Speaker 1: you could construct a instrument that will pay off X 77 00:05:00,040 --> 00:05:03,640 Speaker 1: if say the CPI rises to two point five percent 78 00:05:03,760 --> 00:05:06,400 Speaker 1: next year or something like that. That's right, And actually 79 00:05:06,560 --> 00:05:09,440 Speaker 1: inflation derivatives generally pay off on the price level. And 80 00:05:09,520 --> 00:05:14,000 Speaker 1: we've tried a couple of times to create CPI futures. Actually, 81 00:05:14,040 --> 00:05:18,039 Speaker 1: one of my big flubs was in two thousand and three, 82 00:05:18,120 --> 00:05:22,200 Speaker 1: I persuaded the Chicago marke Until Exchange to launch CPI futures, 83 00:05:23,000 --> 00:05:25,400 Speaker 1: and I suggested they should look like euro dollars, and 84 00:05:25,440 --> 00:05:27,280 Speaker 1: it turns out that that's not at all the way 85 00:05:27,320 --> 00:05:29,719 Speaker 1: they should look. And so I was the market maker 86 00:05:29,760 --> 00:05:31,920 Speaker 1: for these these futures and they didn't really do anything 87 00:05:32,000 --> 00:05:36,200 Speaker 1: and eventually got delisted. But we figured out that rather 88 00:05:36,279 --> 00:05:39,000 Speaker 1: than trading on a rate in general, when you what 89 00:05:39,040 --> 00:05:41,440 Speaker 1: you're really trading is you're trading the price level. And 90 00:05:41,520 --> 00:05:43,719 Speaker 1: so you can obviously figure out the price level today 91 00:05:43,800 --> 00:05:46,280 Speaker 1: versus the price level ten years from now. We can 92 00:05:46,279 --> 00:05:49,200 Speaker 1: figure out what the rate is, and that's what goes 93 00:05:49,240 --> 00:05:52,160 Speaker 1: into yields and things like that. Is that expectation, but 94 00:05:52,160 --> 00:05:55,240 Speaker 1: it's really the future prices that you're trading. I don't 95 00:05:55,279 --> 00:05:57,359 Speaker 1: want to go too far down the rabbit hole with 96 00:05:57,440 --> 00:06:00,560 Speaker 1: inflation derivative, but anytime I hear about things like this, 97 00:06:00,720 --> 00:06:03,200 Speaker 1: I one of the questions that I always ask in 98 00:06:03,240 --> 00:06:06,760 Speaker 1: my mind is who are the natural sellers and buyers 99 00:06:06,800 --> 00:06:11,040 Speaker 1: of this product? So I could imagine that a fixed 100 00:06:11,040 --> 00:06:15,520 Speaker 1: income portfolio manager whose assets would stand to lose a 101 00:06:15,520 --> 00:06:19,200 Speaker 1: lot of money would want to protect against higher inflation. 102 00:06:19,839 --> 00:06:23,640 Speaker 1: Who is the natural seller of that protection. It's interesting. 103 00:06:23,680 --> 00:06:27,200 Speaker 1: I think the way that inflation derivatives are structured, you 104 00:06:27,240 --> 00:06:29,560 Speaker 1: really do tend to have an imbalance, and so the 105 00:06:29,600 --> 00:06:34,039 Speaker 1: supplier tends to be the government through tips, right, so 106 00:06:34,080 --> 00:06:36,680 Speaker 1: the government tends to be the payer of inflation. And 107 00:06:36,720 --> 00:06:38,960 Speaker 1: that's actually been one of the big problems with the 108 00:06:39,000 --> 00:06:41,760 Speaker 1: inflation markets over the years that lots of people and 109 00:06:42,040 --> 00:06:46,279 Speaker 1: most consumers, you know, we're exposed to headline inflation or 110 00:06:46,320 --> 00:06:48,000 Speaker 1: something which kind of looks like it, and that's what 111 00:06:48,080 --> 00:06:53,440 Speaker 1: tips pay. But the issuer side, incorporates, they aren't exposed 112 00:06:53,480 --> 00:06:57,000 Speaker 1: to headline inflation. They're exposed to uh, you know, if 113 00:06:57,040 --> 00:07:01,080 Speaker 1: your caterpillary, you're exposed to farm implements inflation or you know, 114 00:07:01,120 --> 00:07:04,680 Speaker 1: things like that. And so we haven't seen corporates issue 115 00:07:04,720 --> 00:07:07,719 Speaker 1: that sort of bonds. That's interesting. I hadn't thought about it. 116 00:07:07,720 --> 00:07:09,960 Speaker 1: So they are affected, but it's very a very narrow 117 00:07:10,000 --> 00:07:15,600 Speaker 1: slice of inflation. Let's uh fast forward a little bit 118 00:07:15,680 --> 00:07:20,240 Speaker 1: to the post crisis period, and why don't you describe 119 00:07:20,640 --> 00:07:24,480 Speaker 1: what we've seen in inflation in general over these last 120 00:07:24,520 --> 00:07:26,680 Speaker 1: several years, which I sort of set up the sort 121 00:07:26,720 --> 00:07:30,160 Speaker 1: of goldilocks scenario. Yeah, you know it. It really turned 122 00:07:30,160 --> 00:07:32,800 Speaker 1: out to be a wonderful thing for central banks, as 123 00:07:32,800 --> 00:07:36,200 Speaker 1: you alluded to. You know, if you're fighting fires and 124 00:07:36,240 --> 00:07:39,480 Speaker 1: you don't have to worry about any you know, nearby buildings, Uh, 125 00:07:39,600 --> 00:07:41,760 Speaker 1: then it it turns out to be much easier than 126 00:07:41,800 --> 00:07:44,080 Speaker 1: if you have to worry about everything else catching on fire. 127 00:07:44,200 --> 00:07:46,679 Speaker 1: And central banks didn't have to worry over the last 128 00:07:46,760 --> 00:07:50,200 Speaker 1: nine years about anything catching on fire. They could spray 129 00:07:50,320 --> 00:07:53,600 Speaker 1: their hoses whatever they wanted and not really cause any 130 00:07:53,800 --> 00:07:58,440 Speaker 1: inflationary problems. And so we've had this continued low inflation 131 00:07:58,560 --> 00:08:01,200 Speaker 1: A lot of people have called it initially after the 132 00:08:01,240 --> 00:08:07,080 Speaker 1: crisis that was caused by housing prices going down, But 133 00:08:07,160 --> 00:08:09,600 Speaker 1: even since then, as housing prices have come back up 134 00:08:09,600 --> 00:08:12,760 Speaker 1: and housing inflation has come back up, other prices in 135 00:08:12,800 --> 00:08:17,280 Speaker 1: the economy and mostly important goods, have tended to restrain 136 00:08:17,320 --> 00:08:21,640 Speaker 1: the overall level of inflation. How much of this restrained 137 00:08:21,800 --> 00:08:29,480 Speaker 1: inflation is essentially a matter of under utilization of economic resources. 138 00:08:29,480 --> 00:08:32,640 Speaker 1: So we've overbuilt a lot of houses prior to the crisis, 139 00:08:32,760 --> 00:08:35,800 Speaker 1: during that boom, and so then if you owned houses 140 00:08:35,840 --> 00:08:38,400 Speaker 1: for a long time, you didn't have much pricing power 141 00:08:38,400 --> 00:08:40,440 Speaker 1: on rent and so forth, they're selling your house, And 142 00:08:40,640 --> 00:08:43,360 Speaker 1: there was a lot of unemployment, and it's taken a 143 00:08:43,360 --> 00:08:45,560 Speaker 1: long time for unemployment to come down. So if you're 144 00:08:45,600 --> 00:08:49,280 Speaker 1: a worker, you don't have a lot of theoretical bargaining power. 145 00:08:50,120 --> 00:08:54,720 Speaker 1: Various versions of the same story of overbuilding, lots of 146 00:08:54,760 --> 00:08:58,240 Speaker 1: resources that are still being under utilized, and when resources 147 00:08:58,280 --> 00:09:01,839 Speaker 1: are under utilized, no one can really raise prices. How 148 00:09:01,920 --> 00:09:05,880 Speaker 1: much does that explain in your view, the muted inflation. Well, 149 00:09:05,960 --> 00:09:09,160 Speaker 1: I tend to push back a little bit on the whole, 150 00:09:09,559 --> 00:09:12,600 Speaker 1: on that whole notion, it's certainly true at you know, 151 00:09:12,600 --> 00:09:15,560 Speaker 1: in bubble periods, things like houses that got you know, 152 00:09:15,640 --> 00:09:18,400 Speaker 1: too expensive and then got very cheap, and and that 153 00:09:18,480 --> 00:09:24,720 Speaker 1: tends to cause ripples in in inflation. But over time, 154 00:09:24,960 --> 00:09:28,640 Speaker 1: what you're really looking at with inflation is what's happening 155 00:09:28,679 --> 00:09:31,280 Speaker 1: to the currency, you know, in general, what can you 156 00:09:31,320 --> 00:09:34,800 Speaker 1: buy over time? And that's not really caused by the 157 00:09:34,840 --> 00:09:38,480 Speaker 1: relative supply and demand dynamics, um, It's caused by how 158 00:09:38,559 --> 00:09:40,840 Speaker 1: much money is out there chasing how many goods. The 159 00:09:40,840 --> 00:09:44,120 Speaker 1: classic monitorist explanation of the thing you know all the 160 00:09:44,120 --> 00:09:46,680 Speaker 1: other things that you describe, and you know, shortages of 161 00:09:46,720 --> 00:09:48,880 Speaker 1: this or that or too much of this or that 162 00:09:49,320 --> 00:09:54,240 Speaker 1: cause relative price changes relative to the overall rising tide, 163 00:09:54,280 --> 00:09:56,560 Speaker 1: if you will. And so you know, we we have 164 00:09:57,200 --> 00:10:00,480 Speaker 1: these general forces on housing that have caused housing prices 165 00:10:00,520 --> 00:10:04,080 Speaker 1: to to escalate faster than incomes for a while. And 166 00:10:04,160 --> 00:10:07,840 Speaker 1: you have the strong dollar, and you have globalization that 167 00:10:07,840 --> 00:10:11,040 Speaker 1: that has tended to depress goods prices for a while. 168 00:10:11,600 --> 00:10:14,880 Speaker 1: But overall, over time, if you if you keep adding 169 00:10:14,920 --> 00:10:19,320 Speaker 1: money to the system, then the overall price level changes. 170 00:10:20,080 --> 00:10:22,640 Speaker 1: And this is this view that you espouse, the sort 171 00:10:22,640 --> 00:10:27,360 Speaker 1: of monitorist money driven view. It's not really the I 172 00:10:27,400 --> 00:10:29,200 Speaker 1: mean a lot of people at the FED would sort 173 00:10:29,200 --> 00:10:32,760 Speaker 1: of take my the way I said that, which is 174 00:10:32,800 --> 00:10:36,400 Speaker 1: this sort of more Phillips curve style. You're not going 175 00:10:36,440 --> 00:10:41,199 Speaker 1: to get inflation as long as you have capacity under utilization, 176 00:10:41,679 --> 00:10:44,319 Speaker 1: and that inflation will really kick in now or soon 177 00:10:44,679 --> 00:10:48,040 Speaker 1: once we finally are using everything and everyone is labor 178 00:10:48,040 --> 00:10:51,280 Speaker 1: bargaining power. So talk a little bit about this debate 179 00:10:51,360 --> 00:10:53,760 Speaker 1: and this sort of like because I think it's really 180 00:10:54,080 --> 00:10:59,040 Speaker 1: uh a fundamental ideological question about what causes prices to rise. Yeah, 181 00:10:59,080 --> 00:11:01,160 Speaker 1: I think it's really interesting. Obviously, when we go we 182 00:11:01,280 --> 00:11:04,600 Speaker 1: learn economics, we tend to focus on supply and demand curps, 183 00:11:04,840 --> 00:11:06,640 Speaker 1: and so we tend to think about the idea that 184 00:11:06,640 --> 00:11:09,719 Speaker 1: if you increase supply, you d decrease prices, and if 185 00:11:09,720 --> 00:11:12,640 Speaker 1: you increase demand, you increase prices. And I think that 186 00:11:12,760 --> 00:11:15,199 Speaker 1: the problem comes when you try to aggregate that to 187 00:11:15,320 --> 00:11:18,760 Speaker 1: the overall economy UM and I s l M curves 188 00:11:18,760 --> 00:11:22,080 Speaker 1: and there's lots of fancy Keynsian you know, macroeconomics to 189 00:11:22,120 --> 00:11:25,079 Speaker 1: go and describe what happens, but you sort of lose 190 00:11:25,160 --> 00:11:27,720 Speaker 1: the forest for the trees again. You start talking. You 191 00:11:27,840 --> 00:11:30,960 Speaker 1: take what are really micro effects and they don't really 192 00:11:31,000 --> 00:11:33,800 Speaker 1: aggregate very well. So when you look at the central 193 00:11:33,800 --> 00:11:38,360 Speaker 1: bankers around the world, ironically, I guess, since they're supposed 194 00:11:38,400 --> 00:11:41,480 Speaker 1: to be managing the money supply as you, you don't 195 00:11:41,520 --> 00:11:45,760 Speaker 1: have very many monitorous left. You have You had Daniel 196 00:11:45,800 --> 00:11:49,000 Speaker 1: Thornton at the St. Louis FED who's retired, and then 197 00:11:49,000 --> 00:11:51,760 Speaker 1: my friend Samuel Reynard at the Swiss National Bank who's 198 00:11:51,760 --> 00:11:53,959 Speaker 1: still publishing. But other other than that, there aren't any 199 00:11:53,960 --> 00:11:59,960 Speaker 1: publishing monitorus out there anymore. Does this differing framework explain 200 00:12:00,280 --> 00:12:04,120 Speaker 1: in your view why the FED has been basically persistently 201 00:12:04,160 --> 00:12:10,200 Speaker 1: wrong on inflation throughout this entire cycle. Incidentally, they've been, uh, 202 00:12:10,360 --> 00:12:13,199 Speaker 1: they've been pessimistic relative to what happened unemployment, So they 203 00:12:13,280 --> 00:12:16,880 Speaker 1: keep unemployment keeps falling faster than what they expect, but 204 00:12:17,000 --> 00:12:20,440 Speaker 1: they keep missing on the inflation front too, So they 205 00:12:20,480 --> 00:12:24,000 Speaker 1: expect inflation to come in higher than it does, and 206 00:12:24,000 --> 00:12:27,000 Speaker 1: then every time it comes out it disappoints them. Is 207 00:12:27,040 --> 00:12:30,000 Speaker 1: that error, in your view, attributed to what you see 208 00:12:30,040 --> 00:12:33,040 Speaker 1: as an incorrect model? Oh? Absolutely, I think that that 209 00:12:33,200 --> 00:12:36,280 Speaker 1: you can take an incorrect model and try to parameterize 210 00:12:36,280 --> 00:12:38,480 Speaker 1: it better and you still have an incorrect model. And 211 00:12:38,520 --> 00:12:40,920 Speaker 1: that's what's happened is every time they have a bad prediction, 212 00:12:41,480 --> 00:12:43,120 Speaker 1: they look at the model and they say, oh, well, 213 00:12:43,200 --> 00:12:45,520 Speaker 1: I guess you know the natural rate of unemployment must 214 00:12:45,520 --> 00:12:49,120 Speaker 1: be lower. Well yeah, or maybe that doesn't have anything 215 00:12:49,120 --> 00:12:51,120 Speaker 1: to do with it. I mean, it's possible. So what 216 00:12:51,320 --> 00:12:54,000 Speaker 1: is happening right now? Because as I set up in 217 00:12:54,040 --> 00:12:58,240 Speaker 1: the intro, after many years, it feels like the debate 218 00:12:58,320 --> 00:13:00,280 Speaker 1: is back and maybe for the first time in a while, 219 00:13:00,360 --> 00:13:03,480 Speaker 1: people think inflation could go meaningfully higher. Before we asked why, like, 220 00:13:03,520 --> 00:13:05,319 Speaker 1: would you agree with that that it feels like we're 221 00:13:05,320 --> 00:13:08,040 Speaker 1: at some sort of turning point at least into debate. Well, 222 00:13:08,200 --> 00:13:11,240 Speaker 1: certainly the debate has has uh and we see it 223 00:13:11,679 --> 00:13:14,199 Speaker 1: in our business every day with the amount of inquiry 224 00:13:14,240 --> 00:13:16,720 Speaker 1: we've gotten over the last couple of months is just 225 00:13:16,760 --> 00:13:18,920 Speaker 1: an order of magnitude different from what we had the 226 00:13:18,920 --> 00:13:23,960 Speaker 1: three months before that. So the Keynesians would say, we're 227 00:13:24,000 --> 00:13:28,080 Speaker 1: finally tapped out that you know why, we've been underestimating 228 00:13:28,120 --> 00:13:31,080 Speaker 1: how strong the labor market could get. But we were, 229 00:13:31,200 --> 00:13:33,240 Speaker 1: We knew it was going to get somewhere, and we're 230 00:13:33,240 --> 00:13:36,080 Speaker 1: finally hitting it and there really aren't any spare workers 231 00:13:36,200 --> 00:13:39,640 Speaker 1: left or very few, and that means that the people 232 00:13:39,679 --> 00:13:41,400 Speaker 1: that are in the labor market, there's a lot of 233 00:13:41,440 --> 00:13:44,800 Speaker 1: demand coming. They're gonna ask for wage increases, that they're 234 00:13:44,800 --> 00:13:47,000 Speaker 1: gonna go out and spend more on rent, and they're 235 00:13:47,000 --> 00:13:48,920 Speaker 1: gonna buy stuff that we can't build in all this 236 00:13:49,000 --> 00:13:52,080 Speaker 1: and we're finally seeing that. So what is wrong with 237 00:13:52,120 --> 00:13:55,760 Speaker 1: that story? Pretty much everything? But you know, I really 238 00:13:55,840 --> 00:14:00,360 Speaker 1: love the wage push inflation, you know, our hum It's 239 00:14:00,360 --> 00:14:03,120 Speaker 1: always sort of fun to me because if you think 240 00:14:03,160 --> 00:14:07,920 Speaker 1: about it, if wages caused inflation. Higher wages caused higher inflation, 241 00:14:08,400 --> 00:14:11,880 Speaker 1: then we would all love inflation, right, because our wages 242 00:14:11,920 --> 00:14:14,280 Speaker 1: would go up, and then prices would go up, and 243 00:14:14,280 --> 00:14:16,439 Speaker 1: so we that leaves us in a good position, right, 244 00:14:17,320 --> 00:14:20,160 Speaker 1: and businesses would hate it. And in fact we see 245 00:14:20,200 --> 00:14:23,920 Speaker 1: exactly the opposite, that some inflation is good for businesses 246 00:14:24,000 --> 00:14:26,400 Speaker 1: because they don't have to make wage adjustments right away, 247 00:14:26,440 --> 00:14:30,080 Speaker 1: so wages tend to follow inflation. Actually, I got to 248 00:14:30,120 --> 00:14:32,000 Speaker 1: give some credit to Bob Shiller. He wrote a paper 249 00:14:32,000 --> 00:14:35,960 Speaker 1: about that, probably thirty years ago when he surveyed people, 250 00:14:36,440 --> 00:14:38,000 Speaker 1: and in the name of the paper is something like, 251 00:14:38,000 --> 00:14:41,320 Speaker 1: why do people hate inflation? And it turns out that 252 00:14:41,440 --> 00:14:43,640 Speaker 1: we all know that if the prices go up, that 253 00:14:43,680 --> 00:14:45,400 Speaker 1: our wages aren't going to go up first, they're going 254 00:14:45,440 --> 00:14:48,480 Speaker 1: to go up afterwards. Do you think there's a inflation 255 00:14:48,560 --> 00:14:54,000 Speaker 1: fetishism to some extent where we forget that nobody really 256 00:14:54,080 --> 00:14:56,280 Speaker 1: likes to pay more for stuff, and we talk about 257 00:14:56,320 --> 00:14:59,600 Speaker 1: things like, oh, the fet is uh missed on inflation, 258 00:15:00,120 --> 00:15:03,920 Speaker 1: or inflation came in weak or whatever, as if people 259 00:15:04,080 --> 00:15:06,120 Speaker 1: just sort of have got into their minds that higher 260 00:15:06,160 --> 00:15:10,200 Speaker 1: prices are good. Yeah. It's it's strange too, because you know, 261 00:15:10,240 --> 00:15:13,440 Speaker 1: if you talk to somebody from South Africa or from 262 00:15:13,840 --> 00:15:16,680 Speaker 1: South America where inflation is higher, and they look at 263 00:15:16,680 --> 00:15:21,040 Speaker 1: our obsession with one in three quarters versus two and 264 00:15:21,080 --> 00:15:22,960 Speaker 1: a quarter, and they just laugh. I mean, it's just 265 00:15:23,040 --> 00:15:26,160 Speaker 1: absurd to be that, you know, focused on these these 266 00:15:26,200 --> 00:15:29,640 Speaker 1: little things. But I think that the general view in 267 00:15:29,720 --> 00:15:32,200 Speaker 1: the economics community, I guess I don't disagree with this 268 00:15:32,280 --> 00:15:35,760 Speaker 1: is that some small amount of inflation add some lubricant 269 00:15:35,800 --> 00:15:40,760 Speaker 1: to the economic system, allows you to decrease your real 270 00:15:41,000 --> 00:15:44,920 Speaker 1: costs without decreasing your decrease the real wages you're paying 271 00:15:44,960 --> 00:15:47,240 Speaker 1: without decreased the nominal wages you're paying, and so on. 272 00:15:47,520 --> 00:15:50,040 Speaker 1: I'm glad you brought in the international angle on this, 273 00:15:50,160 --> 00:15:52,920 Speaker 1: because I wasn't thinking about that. But I always have 274 00:15:53,000 --> 00:15:57,400 Speaker 1: found it to be pretty funny when you hear things like, oh, Japan, 275 00:15:58,240 --> 00:16:01,800 Speaker 1: they can't seem to generate any lation. Is this big crisis. Meanwhile, 276 00:16:01,880 --> 00:16:05,440 Speaker 1: unemployment is at thirty year loads said, they have a 277 00:16:05,480 --> 00:16:08,120 Speaker 1: standard of living that's the envy of the world, and 278 00:16:08,160 --> 00:16:10,760 Speaker 1: it's like that sounds like a pretty great problem to 279 00:16:10,880 --> 00:16:13,520 Speaker 1: have if the only if everything, If unemployment is really 280 00:16:13,520 --> 00:16:15,680 Speaker 1: low and they're one of the richest countries in the world, 281 00:16:15,880 --> 00:16:18,440 Speaker 1: and your big problem is that prices aren't going up. Yeah, 282 00:16:18,480 --> 00:16:20,640 Speaker 1: it doesn't really sound that bad. No, I've never I've 283 00:16:20,640 --> 00:16:22,600 Speaker 1: never really understood that. And I've asked people it's not 284 00:16:22,720 --> 00:16:25,600 Speaker 1: gonna I've asked guests on TV and other stuff, like 285 00:16:25,600 --> 00:16:27,560 Speaker 1: what's the big problem? And I have to say, I've 286 00:16:27,600 --> 00:16:31,040 Speaker 1: never totally heard as satisfactory answer to why it's so bad. No, 287 00:16:31,240 --> 00:16:35,360 Speaker 1: I think that, Uh, it is funny that that for 288 00:16:35,440 --> 00:16:38,760 Speaker 1: as good as that situation is, the Bank of Japan 289 00:16:38,920 --> 00:16:42,000 Speaker 1: is is working very hard to completely ruin the entire 290 00:16:42,040 --> 00:16:45,280 Speaker 1: future of Japan, right, I mean it's they really didn't 291 00:16:45,360 --> 00:16:48,240 Speaker 1: necessarily have to do anything. Actually, you know, going back 292 00:16:48,240 --> 00:16:49,800 Speaker 1: to the money supply, you know, the bank in Japan 293 00:16:49,840 --> 00:16:52,880 Speaker 1: for many years struggle with money growth in Japan being 294 00:16:52,920 --> 00:16:55,560 Speaker 1: around two percent or one percent, and that's the reason 295 00:16:55,600 --> 00:16:59,640 Speaker 1: they had low inflation. Now it's getting up to four 296 00:17:00,480 --> 00:17:03,880 Speaker 1: something more reasonable, and they're starting to see inflation. But 297 00:17:03,960 --> 00:17:07,720 Speaker 1: in the in the process, they've managed to completely nationalize 298 00:17:08,359 --> 00:17:12,760 Speaker 1: their financial may a very interesting experiment, right that. See 299 00:17:12,800 --> 00:17:15,359 Speaker 1: how all in the service of getting inflation from zero 300 00:17:15,480 --> 00:17:17,679 Speaker 1: to two. It does seem a little odd when you 301 00:17:17,680 --> 00:17:20,840 Speaker 1: put it that way. All right, let's go back to 302 00:17:20,880 --> 00:17:22,879 Speaker 1: the U. S and area. You you mentioned that the 303 00:17:22,960 --> 00:17:26,200 Speaker 1: last three months you've seen so much more inbound interest 304 00:17:26,280 --> 00:17:29,919 Speaker 1: in uh figuring out what inflation is going to do, 305 00:17:30,320 --> 00:17:33,800 Speaker 1: versus the three months prior. We're certainly talking about it 306 00:17:33,840 --> 00:17:38,439 Speaker 1: a lot more. Here. You've dismissed the Kynesian story, which 307 00:17:38,520 --> 00:17:43,360 Speaker 1: is that, uh, the unemployment rate finally hit a point 308 00:17:43,440 --> 00:17:46,760 Speaker 1: where there's not much more slack, and so you've dismissed 309 00:17:46,760 --> 00:17:49,360 Speaker 1: the sort of wage wage push story. Okay, so that's 310 00:17:49,400 --> 00:17:52,760 Speaker 1: not right. What is changing? Okay, So there's there's a 311 00:17:52,800 --> 00:17:55,480 Speaker 1: couple of different things here. One is that the increasing 312 00:17:55,520 --> 00:17:58,880 Speaker 1: interest in the last couple of months is mostly due 313 00:17:58,920 --> 00:18:02,120 Speaker 1: to the optics of inflation. You know optics. It looks 314 00:18:02,160 --> 00:18:06,159 Speaker 1: like inflation is suddenly accelerated. Well, it really hasn't. The 315 00:18:06,200 --> 00:18:09,040 Speaker 1: underlying level of inflation. If you look at you know, 316 00:18:09,440 --> 00:18:12,560 Speaker 1: median inflation, or you look at something that moves more slowly, 317 00:18:13,080 --> 00:18:15,280 Speaker 1: you see that inflation itself hasn't moved very much. But 318 00:18:15,320 --> 00:18:19,000 Speaker 1: what we're what's happening is that these we had all 319 00:18:19,119 --> 00:18:22,080 Speaker 1: these one offs, you know, cell phones, We've been talked 320 00:18:22,080 --> 00:18:24,440 Speaker 1: about a lot, but there's other one offs and they're 321 00:18:24,440 --> 00:18:27,520 Speaker 1: all fading, and so we had this decline and core 322 00:18:27,560 --> 00:18:30,240 Speaker 1: inflation that's just coming out of the data. You know, 323 00:18:30,320 --> 00:18:32,440 Speaker 1: the next six months, we're gonna have core inflation going 324 00:18:32,440 --> 00:18:34,359 Speaker 1: from where it is now to you know, up to 325 00:18:34,840 --> 00:18:37,679 Speaker 1: two point three two point four, and people are going 326 00:18:37,720 --> 00:18:39,760 Speaker 1: to think the sky is falling. But most of that's 327 00:18:39,960 --> 00:18:43,600 Speaker 1: an illusion. Inflation is going slowly higher, but it's a 328 00:18:43,680 --> 00:18:45,360 Speaker 1: lot of that's an illusion. That's why we're getting all 329 00:18:45,359 --> 00:18:48,119 Speaker 1: the calls. But the underlying process has sort of two 330 00:18:48,240 --> 00:18:51,200 Speaker 1: risks right now. One of them is is I guess policy, 331 00:18:51,240 --> 00:18:53,840 Speaker 1: and one of them is for the inflation dynamics as 332 00:18:53,880 --> 00:18:56,800 Speaker 1: a whole. The policy part we've been talking about a 333 00:18:56,800 --> 00:18:59,159 Speaker 1: lot the last couple of days that you know, the 334 00:18:59,560 --> 00:19:05,359 Speaker 1: risk when President Trump was was inaugurated was that it 335 00:19:05,520 --> 00:19:07,600 Speaker 1: was not you know, the Trump flation, We're going to 336 00:19:07,720 --> 00:19:10,520 Speaker 1: run the economy too hot. The risk was that we're 337 00:19:10,560 --> 00:19:14,480 Speaker 1: going to reverse globalization or at least stop it. And 338 00:19:14,520 --> 00:19:18,440 Speaker 1: globalization is a real it's the main reason we've had 339 00:19:18,440 --> 00:19:20,840 Speaker 1: such a great trade off of growth and inflation over 340 00:19:20,880 --> 00:19:23,040 Speaker 1: the last really since the fall of the Berlin Wall. 341 00:19:23,080 --> 00:19:28,760 Speaker 1: In the early ahead, explain the mechanism there so I 342 00:19:29,280 --> 00:19:31,680 Speaker 1: could think of a couple of different ways in which 343 00:19:31,760 --> 00:19:36,399 Speaker 1: theoretically globalization could reduce inflation. And so one of the 344 00:19:36,520 --> 00:19:39,239 Speaker 1: obvious ways is, Okay, well, you've just opened up all 345 00:19:39,240 --> 00:19:43,680 Speaker 1: these new manufacturing markets, and so if you want to 346 00:19:43,960 --> 00:19:47,359 Speaker 1: build a cell phone or you want to manufacture a 347 00:19:47,359 --> 00:19:50,480 Speaker 1: bunch of T shirts, then there's a factory with really 348 00:19:50,520 --> 00:19:53,320 Speaker 1: cheap labor in an emerging economy that could just do 349 00:19:53,359 --> 00:19:55,920 Speaker 1: it cheaper than you could in the US. So that's 350 00:19:55,960 --> 00:19:59,680 Speaker 1: one way I could see it reducing inflation. The other 351 00:19:59,760 --> 00:20:03,719 Speaker 1: me chanism it seems to me that globalization could reduce 352 00:20:03,880 --> 00:20:07,800 Speaker 1: inflation is that if there's no barriers on who could 353 00:20:07,840 --> 00:20:12,239 Speaker 1: trade with whom, then everyone just sort of operates at 354 00:20:12,240 --> 00:20:17,040 Speaker 1: the max efficiency, and capitalism is all about making the 355 00:20:17,040 --> 00:20:20,240 Speaker 1: economy more and more efficient and competing on wages and 356 00:20:20,320 --> 00:20:25,120 Speaker 1: that sort of cheap emerging market labor. Aside that any 357 00:20:25,119 --> 00:20:29,600 Speaker 1: economy that sort of faces fewer artificial constraints would just 358 00:20:29,640 --> 00:20:32,280 Speaker 1: sort of ring in efficiencies out of the system faster, 359 00:20:32,320 --> 00:20:35,320 Speaker 1: and that will do So what is the sort of 360 00:20:35,359 --> 00:20:37,320 Speaker 1: related you know, you mentioned since the fall of the 361 00:20:37,359 --> 00:20:41,680 Speaker 1: Berlin Wall, this extraordinary period of globalization, how did that 362 00:20:42,280 --> 00:20:45,199 Speaker 1: reduce inflation? Yeah? No, that you have it exactly right. 363 00:20:45,200 --> 00:20:49,320 Speaker 1: I think that capitalism is about arbitraging out these inefficiencies. 364 00:20:49,400 --> 00:20:53,639 Speaker 1: And and as you do that, uh, the the you know, 365 00:20:53,680 --> 00:20:56,040 Speaker 1: that allows you know, again, you can think about it 366 00:20:56,080 --> 00:20:58,760 Speaker 1: as a as a manufacturer. Let's think about someone who's 367 00:20:58,760 --> 00:21:02,080 Speaker 1: manufacturing T shirts, you know, and prior to the nineteen nineties, 368 00:21:02,119 --> 00:21:05,400 Speaker 1: we manufactured all our own apparel. Now we manufacture none 369 00:21:05,400 --> 00:21:07,600 Speaker 1: of it. And the reason we manufacture none of it 370 00:21:07,640 --> 00:21:09,960 Speaker 1: is that it turns out to be much cheaper for 371 00:21:10,000 --> 00:21:14,600 Speaker 1: the manufacturer to go and and make these T shirts overseas, 372 00:21:15,000 --> 00:21:19,520 Speaker 1: which allows one of two things to happen. Either as 373 00:21:19,560 --> 00:21:22,639 Speaker 1: the manufacturer, either I can lower prices for my T 374 00:21:22,760 --> 00:21:24,920 Speaker 1: shirts and get the same profit, or it can raise 375 00:21:24,960 --> 00:21:29,359 Speaker 1: profits that's found money. As you globalize, you have more 376 00:21:29,440 --> 00:21:31,440 Speaker 1: and more opportunities to do that, not just on the 377 00:21:31,520 --> 00:21:34,359 Speaker 1: labor front, but also you know, getting cheap other goods, 378 00:21:34,440 --> 00:21:39,199 Speaker 1: cheap inputs abroad as well. So, as you said, the 379 00:21:39,400 --> 00:21:43,760 Speaker 1: sort of remember right after the Trump got elected in 380 00:21:43,880 --> 00:21:48,919 Speaker 1: early November or sorry, in November, we saw a big 381 00:21:49,480 --> 00:21:52,680 Speaker 1: initials sell off and treasuries and people started talking about 382 00:21:52,920 --> 00:21:56,639 Speaker 1: Trump inflation and okay, is this going to change the tide, 383 00:21:56,960 --> 00:22:01,800 Speaker 1: and in your view, the key variable that may have 384 00:22:01,960 --> 00:22:05,600 Speaker 1: changed or that maybe changing under Trump is this is 385 00:22:05,600 --> 00:22:10,160 Speaker 1: the renewed relationship and the renewed trajectory of globalization or globalization. 386 00:22:10,320 --> 00:22:13,399 Speaker 1: That's exactly right. I wrote that actually right after he 387 00:22:13,480 --> 00:22:16,119 Speaker 1: was elected in our quarterly piece, that if you go 388 00:22:16,200 --> 00:22:18,480 Speaker 1: through all the things that he'd said on the campaign trail, 389 00:22:18,600 --> 00:22:21,399 Speaker 1: most of them would have no meaningful long term impact 390 00:22:21,480 --> 00:22:23,879 Speaker 1: on inflation. We don't really know about the appeal of 391 00:22:23,920 --> 00:22:27,159 Speaker 1: Obamacare what that would do exactly, but um, you know, 392 00:22:27,160 --> 00:22:29,360 Speaker 1: in the long run, probably not huge. But the one 393 00:22:29,400 --> 00:22:32,160 Speaker 1: thing you can really do is put the Berlin Wall 394 00:22:32,200 --> 00:22:34,960 Speaker 1: back up. Now he can't do that obviously, but but 395 00:22:35,000 --> 00:22:36,960 Speaker 1: you know, we're sort of seeing that not just we're 396 00:22:36,960 --> 00:22:39,439 Speaker 1: talking about our own wall. Of course, Well yeah, exactly right, 397 00:22:39,480 --> 00:22:42,120 Speaker 1: we're putting a wall back up. And but it isn't 398 00:22:42,160 --> 00:22:44,600 Speaker 1: just us either. It's you know, Europe is having you know, 399 00:22:44,960 --> 00:22:48,440 Speaker 1: many more cross border conflicts, and the general trend to 400 00:22:48,600 --> 00:22:54,000 Speaker 1: globalization looks like it's at least coming to a slowdown. Anyway. 401 00:22:54,119 --> 00:22:56,679 Speaker 1: The interesting thing to me about this pivotal role that 402 00:22:56,720 --> 00:23:01,320 Speaker 1: Trump plays in the inflation story is that central banks 403 00:23:01,400 --> 00:23:03,760 Speaker 1: or the Fed seems totally out of the picture on 404 00:23:03,800 --> 00:23:07,159 Speaker 1: this question. And so it's the central bank's job to 405 00:23:07,640 --> 00:23:12,680 Speaker 1: lift inflation or maintain stable prices. And central banks, to 406 00:23:12,720 --> 00:23:17,560 Speaker 1: some extent, really pride themselves on having defeated inflation over 407 00:23:17,600 --> 00:23:21,760 Speaker 1: the eighties and nineties and two thousands, and they congratulate 408 00:23:21,800 --> 00:23:25,240 Speaker 1: themselves on sort of maintaining very low inflation expectations, which 409 00:23:25,240 --> 00:23:28,960 Speaker 1: they say then feeds back into low inflation. But according 410 00:23:29,000 --> 00:23:33,040 Speaker 1: to your story, there are other really big factors that 411 00:23:33,080 --> 00:23:35,640 Speaker 1: are completely unrelated to the central bank, and maybe it's 412 00:23:35,680 --> 00:23:38,879 Speaker 1: someone on the political side that could actually get the 413 00:23:38,920 --> 00:23:41,240 Speaker 1: inflation right back up to where they want. Yeah, look, 414 00:23:41,240 --> 00:23:45,840 Speaker 1: I think the central bank power is uh is exaggerated 415 00:23:45,840 --> 00:23:48,240 Speaker 1: in their own minds, and in reality, you know that 416 00:23:48,440 --> 00:23:50,439 Speaker 1: if the only thing you have is a hammer, everything 417 00:23:50,440 --> 00:23:52,040 Speaker 1: looks like a nail. And the only thing that the 418 00:23:52,080 --> 00:23:55,719 Speaker 1: central banks can really do, other than you know, police 419 00:23:55,760 --> 00:23:58,720 Speaker 1: the financial system make sure it doesn't collapse, is maintain 420 00:24:00,320 --> 00:24:04,040 Speaker 1: money in reserves, and it turns out that doesn't do everything. 421 00:24:04,680 --> 00:24:06,920 Speaker 1: You know, The one thing they can do over time 422 00:24:07,000 --> 00:24:09,720 Speaker 1: is raised or lower the price level, and that's kind 423 00:24:09,760 --> 00:24:11,520 Speaker 1: of all they can really do. And that's you know, 424 00:24:11,960 --> 00:24:16,000 Speaker 1: Greenspan used to say that that, you know, by maintaining 425 00:24:16,040 --> 00:24:18,359 Speaker 1: low and stable inflation, that's the best thing the Fed 426 00:24:18,400 --> 00:24:22,880 Speaker 1: can do to to create better long term growth. Let's, 427 00:24:23,119 --> 00:24:27,080 Speaker 1: you know, the other policy lever that Trump could pull 428 00:24:27,520 --> 00:24:31,760 Speaker 1: besides the globalization could be something on the fiscal front. 429 00:24:31,800 --> 00:24:36,600 Speaker 1: And we've seen an unexpected or we're in we're going 430 00:24:36,640 --> 00:24:39,560 Speaker 1: to see an unexpected positive fiscal impulse that I think 431 00:24:39,600 --> 00:24:42,520 Speaker 1: a lot of economists weren't expecting. Part of it is 432 00:24:42,520 --> 00:24:45,960 Speaker 1: the tax cuts. Part of it is also the elimination 433 00:24:45,960 --> 00:24:49,240 Speaker 1: of the budget caps from the dead sailing in. That's 434 00:24:49,280 --> 00:24:52,639 Speaker 1: a lot of money going into the economy theoretically, a 435 00:24:52,640 --> 00:24:56,720 Speaker 1: lot of new funding for domestic programs. Again, I guess 436 00:24:56,760 --> 00:24:59,280 Speaker 1: this gets back though to the sort of Candian equation, 437 00:24:59,320 --> 00:25:01,920 Speaker 1: because the way we'll talk about that is this is 438 00:25:01,920 --> 00:25:03,320 Speaker 1: a lot of new money at a time when we 439 00:25:03,359 --> 00:25:06,360 Speaker 1: don't have we don't have a lot of spare resources. 440 00:25:06,560 --> 00:25:09,040 Speaker 1: But on the fiscal side, is there Does that do 441 00:25:09,160 --> 00:25:11,720 Speaker 1: much in your view to lift inflation? No, not really, 442 00:25:11,800 --> 00:25:14,320 Speaker 1: because um, you know, and it can it can change 443 00:25:14,359 --> 00:25:17,080 Speaker 1: the texture, the near term texture of inflation, but can't 444 00:25:17,080 --> 00:25:20,119 Speaker 1: really change it that much. You know, to go spend money, 445 00:25:20,119 --> 00:25:22,320 Speaker 1: the government has to borrow it. And so they have 446 00:25:22,359 --> 00:25:24,960 Speaker 1: to take dollars from somebody. And you know, whether it's 447 00:25:25,000 --> 00:25:27,240 Speaker 1: they're taxing it from you to spend it somewhere else, 448 00:25:27,320 --> 00:25:29,400 Speaker 1: or they're borrowing it from you to spend it somewhere else, 449 00:25:29,440 --> 00:25:32,280 Speaker 1: the dollars are are neutral. You know, the amount of 450 00:25:32,320 --> 00:25:35,920 Speaker 1: liquidity in the system doesn't change. Uh. And so yeah, 451 00:25:36,000 --> 00:25:40,159 Speaker 1: we can favor one industry over another industry. Um. And 452 00:25:40,240 --> 00:25:43,800 Speaker 1: we can change with tax policy. We can change you know, 453 00:25:43,880 --> 00:25:47,520 Speaker 1: the near term contours, but we can't really change the 454 00:25:47,640 --> 00:25:50,159 Speaker 1: level of inflation very much with fiscal policy. It's difficult 455 00:25:50,200 --> 00:25:52,600 Speaker 1: to do other than other than by well, I guess 456 00:25:52,600 --> 00:25:55,000 Speaker 1: this is really fiscal policy, but putting up trade barriers 457 00:25:55,000 --> 00:25:57,480 Speaker 1: will do it. This is a really contentious point, this 458 00:25:57,640 --> 00:26:01,000 Speaker 1: question of the fiscal dominance and whether it can change 459 00:26:01,000 --> 00:26:04,560 Speaker 1: their trajectory. And I have my own personal audio syncretic views, 460 00:26:04,560 --> 00:26:05,800 Speaker 1: but I don't want to, like, I don't want to 461 00:26:05,800 --> 00:26:08,520 Speaker 1: get into that here. But I'll let's go back to 462 00:26:08,600 --> 00:26:13,040 Speaker 1: what's happening right now in inflation. When you look at 463 00:26:13,600 --> 00:26:16,760 Speaker 1: let's say we get the next CPI report, what are 464 00:26:16,800 --> 00:26:18,159 Speaker 1: you going to be looking at. I mean, one of 465 00:26:18,200 --> 00:26:19,960 Speaker 1: the things that you do on Twitter. Which is really 466 00:26:19,960 --> 00:26:22,159 Speaker 1: great is you really dive into the data and you 467 00:26:22,240 --> 00:26:26,760 Speaker 1: look at rent and healthcare and various trimmed mean measures 468 00:26:26,960 --> 00:26:29,840 Speaker 1: of breaking down the CPI report. What are you doing 469 00:26:30,040 --> 00:26:32,640 Speaker 1: when you look into all this stuff? How come? Okay? Sure, 470 00:26:32,680 --> 00:26:35,760 Speaker 1: so I'm an inflation nerd. There's you know, someone's got 471 00:26:36,160 --> 00:26:38,520 Speaker 1: it's been said and it's yeah, exactly, somebody's got to 472 00:26:38,560 --> 00:26:43,359 Speaker 1: do that. Um, you know, the BLS produces two hundred 473 00:26:43,359 --> 00:26:48,000 Speaker 1: and eighties some different subcategories of inflation. Um, you know, 474 00:26:48,080 --> 00:26:53,320 Speaker 1: so you know eggs, uh, you know fresh you know, 475 00:26:53,600 --> 00:26:56,320 Speaker 1: which they aggregate up into fresh food, which aggregates up 476 00:26:56,320 --> 00:26:59,640 Speaker 1: into food which you know. So so you can really 477 00:26:59,680 --> 00:27:02,160 Speaker 1: break down when you get the headline number, it really 478 00:27:02,240 --> 00:27:05,360 Speaker 1: doesn't tell you a whole lot, because it can be 479 00:27:05,840 --> 00:27:08,479 Speaker 1: a big thing moving a little or a little thing 480 00:27:08,520 --> 00:27:10,359 Speaker 1: moving a lot, and so it's important to kind of 481 00:27:10,359 --> 00:27:14,400 Speaker 1: look down at those little pieces, um you know. Recently, 482 00:27:15,240 --> 00:27:17,560 Speaker 1: what I think the story is going forward over the 483 00:27:17,600 --> 00:27:22,720 Speaker 1: next few months is what happens to um used autos, 484 00:27:22,760 --> 00:27:26,919 Speaker 1: but also what's what's happening to medical care, So medical 485 00:27:27,000 --> 00:27:30,760 Speaker 1: cares in services ex housing. It's kind of roughly a 486 00:27:30,840 --> 00:27:34,679 Speaker 1: quarter of the of the CPI pie is services ex 487 00:27:34,800 --> 00:27:38,639 Speaker 1: housing less rents of shelter, and medical care is an 488 00:27:38,680 --> 00:27:41,880 Speaker 1: important part of that volatility wise. So you know, if 489 00:27:42,119 --> 00:27:44,920 Speaker 1: medical medical care had been going down for the last year, 490 00:27:44,960 --> 00:27:47,240 Speaker 1: so we think that's one of those temporary things, and 491 00:27:47,280 --> 00:27:49,760 Speaker 1: so in the last month or two it looks like 492 00:27:49,800 --> 00:27:52,000 Speaker 1: it might might be hooking back positive, and so we're 493 00:27:52,000 --> 00:27:55,399 Speaker 1: gonna watch for that see that hook continues. And then 494 00:27:55,480 --> 00:28:00,000 Speaker 1: the other about another quarter of overall inflation is core goods, 495 00:28:00,240 --> 00:28:02,760 Speaker 1: and once the dollar has gone down for a while, 496 00:28:02,880 --> 00:28:05,159 Speaker 1: you expect core goods to go positive. Core goods have 497 00:28:05,200 --> 00:28:08,679 Speaker 1: been in deflation forever, uh and so we would expect 498 00:28:08,680 --> 00:28:10,320 Speaker 1: that to start going a little positive. And so those 499 00:28:10,320 --> 00:28:12,919 Speaker 1: are sort of the big, well, the big little pieces 500 00:28:12,960 --> 00:28:17,000 Speaker 1: that we look at. How do you protect against because 501 00:28:17,080 --> 00:28:19,200 Speaker 1: as you say, there's so much data, there's so many 502 00:28:19,240 --> 00:28:22,720 Speaker 1: ways to look at some time series and lop off 503 00:28:22,800 --> 00:28:27,000 Speaker 1: something like we're gonna look at uh CPI services X energy, 504 00:28:27,080 --> 00:28:29,119 Speaker 1: which was a something we were focused a lot on 505 00:28:29,240 --> 00:28:33,520 Speaker 1: during the oil crash and and all that stuff, because okay, 506 00:28:33,560 --> 00:28:36,400 Speaker 1: that's that's an idio styne credic one time factor. How 507 00:28:36,400 --> 00:28:41,480 Speaker 1: do you guard against essentially finding the series that fits 508 00:28:41,480 --> 00:28:44,080 Speaker 1: a narrative. Sure, if you take everything out that went down, 509 00:28:44,160 --> 00:28:46,880 Speaker 1: it goes up right. Well, you know, you have to 510 00:28:46,920 --> 00:28:48,880 Speaker 1: have a general you have to have a longer term view. 511 00:28:48,960 --> 00:28:52,800 Speaker 1: I think of what's you know, what's driving a particular series, 512 00:28:52,840 --> 00:28:55,320 Speaker 1: And I think that economists tend to have a longer 513 00:28:55,440 --> 00:28:58,600 Speaker 1: term view of what's driving inflation, but they don't really 514 00:28:58,600 --> 00:29:00,360 Speaker 1: have a view of what's driving a pair. And so 515 00:29:00,400 --> 00:29:02,640 Speaker 1: this last month we had this big jump in apparel 516 00:29:02,680 --> 00:29:07,200 Speaker 1: prices month on month, and and lots of economists said, oh, 517 00:29:07,240 --> 00:29:09,600 Speaker 1: you know, that's that's gonna be reversed next month. But 518 00:29:09,640 --> 00:29:11,600 Speaker 1: if you have a longer term view, you'll notice that 519 00:29:11,680 --> 00:29:13,920 Speaker 1: the prior few months that had been really really low, 520 00:29:14,120 --> 00:29:16,640 Speaker 1: and so we're actually just back on trend. And so 521 00:29:16,680 --> 00:29:18,320 Speaker 1: we don't think that's going to do anything, But you 522 00:29:18,400 --> 00:29:21,160 Speaker 1: have to have This is the reason that I delve 523 00:29:21,160 --> 00:29:23,520 Speaker 1: into the numbers as much as I do, is you've 524 00:29:23,560 --> 00:29:26,200 Speaker 1: got to have some idea of over a longer time 525 00:29:26,240 --> 00:29:29,960 Speaker 1: frame than last month, what happened to the numbers? Yeah, 526 00:29:30,040 --> 00:29:33,200 Speaker 1: you mentioned eggs, and they feed out how do they 527 00:29:33,520 --> 00:29:35,200 Speaker 1: tell the price of eggs? They just go to a 528 00:29:35,240 --> 00:29:37,920 Speaker 1: grocery store and look, what is the process. Yeah, I 529 00:29:37,920 --> 00:29:39,480 Speaker 1: mean it's it's it's pretty close to that. You know. 530 00:29:39,520 --> 00:29:44,120 Speaker 1: They obviously different sorts of prices are gathered in different ways, 531 00:29:44,240 --> 00:29:46,640 Speaker 1: but to some extent, all the grocery store stuff is 532 00:29:46,720 --> 00:29:49,480 Speaker 1: really still done by people walking around a grocery store 533 00:29:49,520 --> 00:29:53,120 Speaker 1: with you know, the electronic equivalent of clipboards and looking 534 00:29:53,160 --> 00:29:56,000 Speaker 1: for the same thing they bought last month and saying, okay, 535 00:29:56,080 --> 00:29:58,320 Speaker 1: now here's the price. And you have lots and lots 536 00:29:58,360 --> 00:30:01,520 Speaker 1: of people doing that over many, many different goods, and 537 00:30:01,560 --> 00:30:03,560 Speaker 1: then they all send it back to the BLS, who 538 00:30:03,680 --> 00:30:05,880 Speaker 1: goes and does their little mathy thing on and gets 539 00:30:05,880 --> 00:30:08,480 Speaker 1: the right answer. But what's interesting is it seems like 540 00:30:08,520 --> 00:30:11,960 Speaker 1: it the measurement of inflation is not particularly sensitive to 541 00:30:12,000 --> 00:30:16,120 Speaker 1: exactly how you gather these things. The billion in the well, 542 00:30:16,320 --> 00:30:18,440 Speaker 1: you know, so the billion prices project a m I T. 543 00:30:18,800 --> 00:30:21,080 Speaker 1: You know, you might have heard about they've gather all 544 00:30:21,120 --> 00:30:25,280 Speaker 1: their prices online and and you know, you can't gather 545 00:30:25,400 --> 00:30:30,520 Speaker 1: some things online very well. But nevertheless, when they do that, 546 00:30:30,560 --> 00:30:33,240 Speaker 1: they get almost exactly the same figure that the BLS 547 00:30:33,320 --> 00:30:36,000 Speaker 1: comes up with doing it the old fashioned way. And 548 00:30:36,040 --> 00:30:38,120 Speaker 1: so it turns out that there's a lot of complaint 549 00:30:38,160 --> 00:30:41,160 Speaker 1: about you know, uh, you know what you do with 550 00:30:41,240 --> 00:30:45,240 Speaker 1: substitution if if something is not available this month that 551 00:30:45,360 --> 00:30:48,720 Speaker 1: was available last month, and how you hadonically adjust things. 552 00:30:48,760 --> 00:30:50,440 Speaker 1: A lot of complaint about that, but at the end 553 00:30:50,440 --> 00:30:51,760 Speaker 1: of the day, it turns out not to make that 554 00:30:51,840 --> 00:30:56,000 Speaker 1: much difference. Interesting to wrap up, I mean, as you said, 555 00:30:56,040 --> 00:30:59,440 Speaker 1: the big question or the reason your phone is ringing 556 00:30:59,480 --> 00:31:02,200 Speaker 1: off the hooks. People want to know what's coming next. 557 00:31:02,320 --> 00:31:05,840 Speaker 1: Are we about to see a turning point or has 558 00:31:05,880 --> 00:31:08,040 Speaker 1: there been a lot of noise that's a result of 559 00:31:08,120 --> 00:31:11,080 Speaker 1: some screwing numbers a year ago that's making the year 560 00:31:11,080 --> 00:31:13,560 Speaker 1: over year figures look weird, or in the case of 561 00:31:13,600 --> 00:31:18,280 Speaker 1: the recent CPI report, is it's something about apparel price 562 00:31:18,440 --> 00:31:21,520 Speaker 1: is just compensating for the months earlier. Why don't you 563 00:31:21,560 --> 00:31:24,240 Speaker 1: give us a forecast or sort of tell us what 564 00:31:24,280 --> 00:31:26,640 Speaker 1: you think is happening now? Sure, well, look, I think 565 00:31:26,680 --> 00:31:28,720 Speaker 1: that you know, I sort of gave you the short 566 00:31:28,840 --> 00:31:32,280 Speaker 1: term contour. I think that the longer term. You know, 567 00:31:32,280 --> 00:31:33,720 Speaker 1: we have these two risks, and one of them was 568 00:31:33,760 --> 00:31:36,080 Speaker 1: the policy risk we talked about, but the real risk, 569 00:31:36,160 --> 00:31:38,120 Speaker 1: the big risk. And by the way, I think that 570 00:31:38,200 --> 00:31:41,240 Speaker 1: investors should look at risks and they should manage risks. 571 00:31:41,280 --> 00:31:43,720 Speaker 1: They shouldn't listen to me and what I think is 572 00:31:43,720 --> 00:31:46,040 Speaker 1: going to happen. They should be you know, everyone should 573 00:31:46,080 --> 00:31:48,800 Speaker 1: recognize you have inflation risks, and you haven't seen it 574 00:31:48,800 --> 00:31:50,480 Speaker 1: for twenty years, but you still have that risk, and 575 00:31:50,720 --> 00:31:53,120 Speaker 1: particularly when it's cheap too heads, you should do so. 576 00:31:53,880 --> 00:31:55,800 Speaker 1: But the bigger, longer term risk is that, you know, 577 00:31:55,840 --> 00:31:58,320 Speaker 1: we know that inflation has these long tails. We know 578 00:31:58,440 --> 00:32:01,520 Speaker 1: that over the last time of years, you know, a 579 00:32:01,520 --> 00:32:03,520 Speaker 1: third of the time that inflation was over four, it 580 00:32:03,560 --> 00:32:08,320 Speaker 1: was also over ten. And and there are inflation dynamics 581 00:32:08,400 --> 00:32:11,080 Speaker 1: which which caused that to happen, you know, And and 582 00:32:11,120 --> 00:32:13,840 Speaker 1: the risk right now is that we've had this period 583 00:32:13,880 --> 00:32:18,120 Speaker 1: since the early nine of a virtuous cycle of lower 584 00:32:18,160 --> 00:32:22,040 Speaker 1: interest rates causing lower money velocity, which causes lower inflation, 585 00:32:22,240 --> 00:32:26,120 Speaker 1: which causes lower interest rates and so on. And we've 586 00:32:26,120 --> 00:32:28,360 Speaker 1: seemed to have come to the end of that cycle. 587 00:32:28,720 --> 00:32:30,640 Speaker 1: And if and and and the risk now is that 588 00:32:30,840 --> 00:32:35,200 Speaker 1: normalizing interest rates kicks in the vicious cycle of all 589 00:32:35,240 --> 00:32:38,440 Speaker 1: those things going in reverse. And if that happens, then yeah, 590 00:32:38,480 --> 00:32:43,200 Speaker 1: it's not necessarily this cycle's concern. It's one or two 591 00:32:43,320 --> 00:32:46,080 Speaker 1: or three cycles down the road. You go to three percent, 592 00:32:46,160 --> 00:32:48,280 Speaker 1: then you go to five percent, and you know, and 593 00:32:48,280 --> 00:32:50,640 Speaker 1: and we don't have central bankers who believe that, and 594 00:32:50,680 --> 00:32:54,520 Speaker 1: they aren't doing the right things to counteractive. Michael Ashton 595 00:32:54,680 --> 00:32:58,040 Speaker 1: of Enduring Investments the Inflation Guy on Twitter, thank you 596 00:32:58,120 --> 00:33:00,520 Speaker 1: very much for joining us. Great to be here. Thank 597 00:33:00,520 --> 00:33:15,760 Speaker 1: you very much. Well there you haven't folks. Tracey is 598 00:33:15,840 --> 00:33:19,600 Speaker 1: not here, so I have nobody to banter with. But 599 00:33:19,840 --> 00:33:22,960 Speaker 1: I really enjoyed that conversation, obviously, and I think this 600 00:33:23,080 --> 00:33:25,720 Speaker 1: is a topic about which all of us are going 601 00:33:25,760 --> 00:33:28,480 Speaker 1: to be very focused on, at least for the next 602 00:33:28,480 --> 00:33:31,680 Speaker 1: several months, as we see whether this is some sort 603 00:33:31,720 --> 00:33:34,880 Speaker 1: of temporary uptick we've seen an inflation due to some distortions, 604 00:33:35,080 --> 00:33:37,720 Speaker 1: or whether we really are on the verge of some 605 00:33:37,800 --> 00:33:41,560 Speaker 1: sort of inflation tail risk or a new paradigm or 606 00:33:41,600 --> 00:33:46,720 Speaker 1: a new uh meaningfully new trend. And so hopefully we'll 607 00:33:47,240 --> 00:33:50,280 Speaker 1: revisit this on the podcast at some point and we'll 608 00:33:50,320 --> 00:33:52,560 Speaker 1: actually have an answer. Just kidding. None of these questions 609 00:33:52,560 --> 00:33:54,640 Speaker 1: ever truly get answered. We just try and get a 610 00:33:54,640 --> 00:33:58,600 Speaker 1: little smarter over time. Anyway, This has been another episode 611 00:33:58,680 --> 00:34:01,520 Speaker 1: of the Odd Lots podcast. As I'm Joe Wisenthal. You 612 00:34:01,520 --> 00:34:04,280 Speaker 1: can follow me on Twitter at The Stalwart. You can 613 00:34:04,360 --> 00:34:08,160 Speaker 1: follow my co host, Tracy Alloway on Twitter at Tracy Alloway. 614 00:34:08,480 --> 00:34:11,600 Speaker 1: You can follow Michael on Twitter at The Inflation Guy, 615 00:34:11,800 --> 00:34:16,880 Speaker 1: and please follow our producer on Twitter tofur Foreheads at Foreheast, 616 00:34:17,200 --> 00:34:20,280 Speaker 1: as well as the Bloomberg head of podcast, Francesco Levy 617 00:34:20,680 --> 00:34:23,280 Speaker 1: at Francesco Today. Thanks for listening.