WEBVTT - For The First Time In Years, Why People Are Suddenly Talking About Inflation Again 0:00:07.720 --> 0:00:12.080 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:12.240 --> 0:00:17.919 I'm Joe Wisenthal, and sadly Tracy Ellaway is out today. 0:00:18.239 --> 0:00:21.400 She is traveling, but I think I could sort of 0:00:21.480 --> 0:00:25.840 imagine the conversation that we would have prior to bring 0:00:25.920 --> 0:00:28.880 in our guests if she were here. We would probably 0:00:28.920 --> 0:00:31.720 talk about how for the first time in a while, 0:00:32.159 --> 0:00:36.239 we've been seeing market volatility lately, how a lot of 0:00:36.240 --> 0:00:40.360 the stories that we've been discussing since the financial crisis 0:00:40.440 --> 0:00:43.720 seemed to be mutating. And at the heart of these 0:00:43.760 --> 0:00:46.920 big changes that we're seeing is a very important debate 0:00:47.000 --> 0:00:50.080 about the economy, and that is whether we're really seeing 0:00:50.320 --> 0:00:53.040 a pickup and inflation for the first time in a 0:00:53.040 --> 0:00:56.680 long time. And so if you weren't aware, basically since 0:00:56.760 --> 0:01:01.640 the crisis, we've been seeing this incredibly mellow inflationary environment 0:01:02.040 --> 0:01:06.040 around the world, not much pricing power, not much acceleration 0:01:06.120 --> 0:01:09.280 in wages or anything else like that. And of course 0:01:09.360 --> 0:01:13.800 that's made central banks job very easy, because they're tasked 0:01:13.800 --> 0:01:17.280 with maintaining stable prices or in the US, stable prices 0:01:17.319 --> 0:01:20.760 and full employment. But if prices are just really stable, 0:01:21.280 --> 0:01:23.200 then that makes it easy. They don't really have to 0:01:23.240 --> 0:01:26.520 do anything for the most part. And so if we're 0:01:26.520 --> 0:01:28.280 starting to see a turn, if we're starting to see 0:01:28.319 --> 0:01:32.440 inflation really gained some teeth and accelerating prices and so forth, 0:01:32.920 --> 0:01:35.679 then that raises the question of whether central banks are 0:01:35.680 --> 0:01:39.000 going to really have to change their approach since the crisis. 0:01:39.400 --> 0:01:41.960 And if central banks changed their approach since the crisis, 0:01:42.000 --> 0:01:45.839 that could have potentially big ramifications for all sorts of markets, 0:01:46.440 --> 0:01:50.240 risky assets, bonds, and so forth. So this question of 0:01:50.320 --> 0:01:54.560 whether the uh, the Goldilocks era of inflation not too 0:01:54.600 --> 0:01:57.720 hot not too cold is going to persist is top 0:01:57.760 --> 0:02:00.920 of mind for a lot of people these is and 0:02:01.000 --> 0:02:04.600 so answering this question is crucial, and so that is 0:02:04.600 --> 0:02:09.000 what we're going to try to do on today's episode. So, 0:02:09.040 --> 0:02:12.120 without further ado, I would like to bring in our guest. 0:02:12.480 --> 0:02:16.680 His name is Michael Ashton of Enduring Investments, and he 0:02:16.840 --> 0:02:21.600 is on Twitter at the Inflation Guy, and he tweets 0:02:21.840 --> 0:02:25.720 very knowledgeably about inflation. Every time new data comes out, 0:02:25.919 --> 0:02:29.440 he breaks it down, and there's probably nobody there's probably 0:02:29.480 --> 0:02:32.120 nobody better to help us answer the question of what 0:02:32.240 --> 0:02:35.240 the heck is going on and what's about to happen. 0:02:39.160 --> 0:02:41.200 Michael thank you very much for joining us. Thank you 0:02:41.280 --> 0:02:43.519 very much, Joe. It's good to be here. And I'm 0:02:43.560 --> 0:02:46.359 I'm sure I speak for Tracy and saying that I'm 0:02:46.360 --> 0:02:49.880 really sorry that I'm missing this. I feel very sorry 0:02:50.000 --> 0:02:54.200 for Tracy that she's missing this huge She will be devastated, 0:02:54.560 --> 0:02:58.120 but I'm very excited. Let's talk first about your background. So, 0:02:58.200 --> 0:03:01.639 as I mentioned, you're the atflation guy. That's literally your 0:03:01.680 --> 0:03:05.960 Twitter handle. You right, every time there's a new economic 0:03:06.080 --> 0:03:09.880 data release that has the latest inflation data, you really 0:03:09.919 --> 0:03:12.320 dive in and break it down and look, what are 0:03:12.400 --> 0:03:15.120 the components, Why did it move higher, why did it 0:03:15.240 --> 0:03:18.280 move lower? What's your background? How did you get to be, uh, 0:03:18.360 --> 0:03:22.200 the inflation guy? Well, let's see. I I've I've been 0:03:22.240 --> 0:03:25.639 in financial markets since the early nine nineties, I guess 0:03:25.639 --> 0:03:29.959 since nine and I've spent a long time as a strategist, 0:03:30.600 --> 0:03:34.440 fixed income strategists for a lot of the big shops 0:03:34.480 --> 0:03:38.480 out there, bankers, trust, JP Morrigan, that sort of thing, 0:03:39.080 --> 0:03:44.440 and then got into trading around two thousand for Barkley's. 0:03:45.160 --> 0:03:49.360 And I was trading options for Barkley's when Barkley's, which 0:03:49.400 --> 0:03:52.480 at the time viewed themselves as actually they styled themselves 0:03:52.560 --> 0:03:57.000 as the inflation house. You know, at that time, inflation 0:03:57.040 --> 0:04:01.120 derivatives were just getting started in Europe and they're just 0:04:01.160 --> 0:04:05.640 case start in the US. And Barkley's said, you know, 0:04:05.720 --> 0:04:09.520 we really need to get the US inflation derivatives market 0:04:09.640 --> 0:04:14.720 going because that's good for Barkley's. And and I was, 0:04:15.000 --> 0:04:17.640 you know, I had a good strategist background, a good 0:04:17.680 --> 0:04:20.240 trading background. I spent a lot of time writing as 0:04:20.279 --> 0:04:24.120 I do now and explaining things, teaching, training and so on, 0:04:24.520 --> 0:04:28.240 and so I had a very good, uh well rounded 0:04:28.279 --> 0:04:32.719 background to go and be be made the inflation guy. 0:04:33.880 --> 0:04:36.760 So uh so you come to it from both a 0:04:36.839 --> 0:04:40.880 theoretical with a theoretical background, but also the trading world background. 0:04:41.000 --> 0:04:45.799 That's right, inflation derivatives. So inflation is an economic measure, 0:04:46.160 --> 0:04:50.480 but derivatives are essentially instruments that people can use to 0:04:51.000 --> 0:04:55.120 bet or hedge on specific outcomes in the economy. So theoretically, 0:04:55.560 --> 0:04:59.440 you could construct a instrument that will pay off X 0:05:00.040 --> 0:05:03.640 if say the CPI rises to two point five percent 0:05:03.760 --> 0:05:06.400 next year or something like that. That's right, And actually 0:05:06.560 --> 0:05:09.440 inflation derivatives generally pay off on the price level. And 0:05:09.520 --> 0:05:14.000 we've tried a couple of times to create CPI futures. Actually, 0:05:14.040 --> 0:05:18.039 one of my big flubs was in two thousand and three, 0:05:18.120 --> 0:05:22.200 I persuaded the Chicago marke Until Exchange to launch CPI futures, 0:05:23.000 --> 0:05:25.400 and I suggested they should look like euro dollars, and 0:05:25.440 --> 0:05:27.280 it turns out that that's not at all the way 0:05:27.320 --> 0:05:29.719 they should look. And so I was the market maker 0:05:29.760 --> 0:05:31.920 for these these futures and they didn't really do anything 0:05:32.000 --> 0:05:36.200 and eventually got delisted. But we figured out that rather 0:05:36.279 --> 0:05:39.000 than trading on a rate in general, when you what 0:05:39.040 --> 0:05:41.440 you're really trading is you're trading the price level. And 0:05:41.520 --> 0:05:43.719 so you can obviously figure out the price level today 0:05:43.800 --> 0:05:46.280 versus the price level ten years from now. We can 0:05:46.279 --> 0:05:49.200 figure out what the rate is, and that's what goes 0:05:49.240 --> 0:05:52.160 into yields and things like that. Is that expectation, but 0:05:52.160 --> 0:05:55.240 it's really the future prices that you're trading. I don't 0:05:55.279 --> 0:05:57.359 want to go too far down the rabbit hole with 0:05:57.440 --> 0:06:00.560 inflation derivative, but anytime I hear about things like this, 0:06:00.720 --> 0:06:03.200 I one of the questions that I always ask in 0:06:03.240 --> 0:06:06.760 my mind is who are the natural sellers and buyers 0:06:06.800 --> 0:06:11.040 of this product? So I could imagine that a fixed 0:06:11.040 --> 0:06:15.520 income portfolio manager whose assets would stand to lose a 0:06:15.520 --> 0:06:19.200 lot of money would want to protect against higher inflation. 0:06:19.839 --> 0:06:23.640 Who is the natural seller of that protection. It's interesting. 0:06:23.680 --> 0:06:27.200 I think the way that inflation derivatives are structured, you 0:06:27.240 --> 0:06:29.560 really do tend to have an imbalance, and so the 0:06:29.600 --> 0:06:34.039 supplier tends to be the government through tips, right, so 0:06:34.080 --> 0:06:36.680 the government tends to be the payer of inflation. And 0:06:36.720 --> 0:06:38.960 that's actually been one of the big problems with the 0:06:39.000 --> 0:06:41.760 inflation markets over the years that lots of people and 0:06:42.040 --> 0:06:46.279 most consumers, you know, we're exposed to headline inflation or 0:06:46.320 --> 0:06:48.000 something which kind of looks like it, and that's what 0:06:48.080 --> 0:06:53.440 tips pay. But the issuer side, incorporates, they aren't exposed 0:06:53.480 --> 0:06:57.000 to headline inflation. They're exposed to uh, you know, if 0:06:57.040 --> 0:07:01.080 your caterpillary, you're exposed to farm implements inflation or you know, 0:07:01.120 --> 0:07:04.680 things like that. And so we haven't seen corporates issue 0:07:04.720 --> 0:07:07.719 that sort of bonds. That's interesting. I hadn't thought about it. 0:07:07.720 --> 0:07:09.960 So they are affected, but it's very a very narrow 0:07:10.000 --> 0:07:15.600 slice of inflation. Let's uh fast forward a little bit 0:07:15.680 --> 0:07:20.240 to the post crisis period, and why don't you describe 0:07:20.640 --> 0:07:24.480 what we've seen in inflation in general over these last 0:07:24.520 --> 0:07:26.680 several years, which I sort of set up the sort 0:07:26.720 --> 0:07:30.160 of goldilocks scenario. Yeah, you know it. It really turned 0:07:30.160 --> 0:07:32.800 out to be a wonderful thing for central banks, as 0:07:32.800 --> 0:07:36.200 you alluded to. You know, if you're fighting fires and 0:07:36.240 --> 0:07:39.480 you don't have to worry about any you know, nearby buildings, Uh, 0:07:39.600 --> 0:07:41.760 then it it turns out to be much easier than 0:07:41.800 --> 0:07:44.080 if you have to worry about everything else catching on fire. 0:07:44.200 --> 0:07:46.679 And central banks didn't have to worry over the last 0:07:46.760 --> 0:07:50.200 nine years about anything catching on fire. They could spray 0:07:50.320 --> 0:07:53.600 their hoses whatever they wanted and not really cause any 0:07:53.800 --> 0:07:58.440 inflationary problems. And so we've had this continued low inflation 0:07:58.560 --> 0:08:01.200 A lot of people have called it initially after the 0:08:01.240 --> 0:08:07.080 crisis that was caused by housing prices going down, But 0:08:07.160 --> 0:08:09.600 even since then, as housing prices have come back up 0:08:09.600 --> 0:08:12.760 and housing inflation has come back up, other prices in 0:08:12.800 --> 0:08:17.280 the economy and mostly important goods, have tended to restrain 0:08:17.320 --> 0:08:21.640 the overall level of inflation. How much of this restrained 0:08:21.800 --> 0:08:29.480 inflation is essentially a matter of under utilization of economic resources. 0:08:29.480 --> 0:08:32.640 So we've overbuilt a lot of houses prior to the crisis, 0:08:32.760 --> 0:08:35.800 during that boom, and so then if you owned houses 0:08:35.840 --> 0:08:38.400 for a long time, you didn't have much pricing power 0:08:38.400 --> 0:08:40.440 on rent and so forth, they're selling your house, And 0:08:40.640 --> 0:08:43.360 there was a lot of unemployment, and it's taken a 0:08:43.360 --> 0:08:45.560 long time for unemployment to come down. So if you're 0:08:45.600 --> 0:08:49.280 a worker, you don't have a lot of theoretical bargaining power. 0:08:50.120 --> 0:08:54.720 Various versions of the same story of overbuilding, lots of 0:08:54.760 --> 0:08:58.240 resources that are still being under utilized, and when resources 0:08:58.280 --> 0:09:01.839 are under utilized, no one can really raise prices. How 0:09:01.920 --> 0:09:05.880 much does that explain in your view, the muted inflation. Well, 0:09:05.960 --> 0:09:09.160 I tend to push back a little bit on the whole, 0:09:09.559 --> 0:09:12.600 on that whole notion, it's certainly true at you know, 0:09:12.600 --> 0:09:15.560 in bubble periods, things like houses that got you know, 0:09:15.640 --> 0:09:18.400 too expensive and then got very cheap, and and that 0:09:18.480 --> 0:09:24.720 tends to cause ripples in in inflation. But over time, 0:09:24.960 --> 0:09:28.640 what you're really looking at with inflation is what's happening 0:09:28.679 --> 0:09:31.280 to the currency, you know, in general, what can you 0:09:31.320 --> 0:09:34.800 buy over time? And that's not really caused by the 0:09:34.840 --> 0:09:38.480 relative supply and demand dynamics, um, It's caused by how 0:09:38.559 --> 0:09:40.840 much money is out there chasing how many goods. The 0:09:40.840 --> 0:09:44.120 classic monitorist explanation of the thing you know all the 0:09:44.120 --> 0:09:46.680 other things that you describe, and you know, shortages of 0:09:46.720 --> 0:09:48.880 this or that or too much of this or that 0:09:49.320 --> 0:09:54.240 cause relative price changes relative to the overall rising tide, 0:09:54.280 --> 0:09:56.560 if you will. And so you know, we we have 0:09:57.200 --> 0:10:00.480 these general forces on housing that have caused housing prices 0:10:00.520 --> 0:10:04.080 to to escalate faster than incomes for a while. And 0:10:04.160 --> 0:10:07.840 you have the strong dollar, and you have globalization that 0:10:07.840 --> 0:10:11.040 that has tended to depress goods prices for a while. 0:10:11.600 --> 0:10:14.880 But overall, over time, if you if you keep adding 0:10:14.920 --> 0:10:19.320 money to the system, then the overall price level changes. 0:10:20.080 --> 0:10:22.640 And this is this view that you espouse, the sort 0:10:22.640 --> 0:10:27.360 of monitorist money driven view. It's not really the I 0:10:27.400 --> 0:10:29.200 mean a lot of people at the FED would sort 0:10:29.200 --> 0:10:32.760 of take my the way I said that, which is 0:10:32.800 --> 0:10:36.400 this sort of more Phillips curve style. You're not going 0:10:36.440 --> 0:10:41.199 to get inflation as long as you have capacity under utilization, 0:10:41.679 --> 0:10:44.319 and that inflation will really kick in now or soon 0:10:44.679 --> 0:10:48.040 once we finally are using everything and everyone is labor 0:10:48.040 --> 0:10:51.280 bargaining power. So talk a little bit about this debate 0:10:51.360 --> 0:10:53.760 and this sort of like because I think it's really 0:10:54.080 --> 0:10:59.040 uh a fundamental ideological question about what causes prices to rise. Yeah, 0:10:59.080 --> 0:11:01.160 I think it's really interesting. Obviously, when we go we 0:11:01.280 --> 0:11:04.600 learn economics, we tend to focus on supply and demand curps, 0:11:04.840 --> 0:11:06.640 and so we tend to think about the idea that 0:11:06.640 --> 0:11:09.719 if you increase supply, you d decrease prices, and if 0:11:09.720 --> 0:11:12.640 you increase demand, you increase prices. And I think that 0:11:12.760 --> 0:11:15.199 the problem comes when you try to aggregate that to 0:11:15.320 --> 0:11:18.760 the overall economy UM and I s l M curves 0:11:18.760 --> 0:11:22.080 and there's lots of fancy Keynsian you know, macroeconomics to 0:11:22.120 --> 0:11:25.079 go and describe what happens, but you sort of lose 0:11:25.160 --> 0:11:27.720 the forest for the trees again. You start talking. You 0:11:27.840 --> 0:11:30.960 take what are really micro effects and they don't really 0:11:31.000 --> 0:11:33.800 aggregate very well. So when you look at the central 0:11:33.800 --> 0:11:38.360 bankers around the world, ironically, I guess, since they're supposed 0:11:38.400 --> 0:11:41.480 to be managing the money supply as you, you don't 0:11:41.520 --> 0:11:45.760 have very many monitorous left. You have You had Daniel 0:11:45.800 --> 0:11:49.000 Thornton at the St. Louis FED who's retired, and then 0:11:49.000 --> 0:11:51.760 my friend Samuel Reynard at the Swiss National Bank who's 0:11:51.760 --> 0:11:53.959 still publishing. But other other than that, there aren't any 0:11:53.960 --> 0:11:59.960 publishing monitorus out there anymore. Does this differing framework explain 0:12:00.280 --> 0:12:04.120 in your view why the FED has been basically persistently 0:12:04.160 --> 0:12:10.200 wrong on inflation throughout this entire cycle. Incidentally, they've been, uh, 0:12:10.360 --> 0:12:13.199 they've been pessimistic relative to what happened unemployment, So they 0:12:13.280 --> 0:12:16.880 keep unemployment keeps falling faster than what they expect, but 0:12:17.000 --> 0:12:20.440 they keep missing on the inflation front too, So they 0:12:20.480 --> 0:12:24.000 expect inflation to come in higher than it does, and 0:12:24.000 --> 0:12:27.000 then every time it comes out it disappoints them. Is 0:12:27.040 --> 0:12:30.000 that error, in your view, attributed to what you see 0:12:30.040 --> 0:12:33.040 as an incorrect model? Oh? Absolutely, I think that that 0:12:33.200 --> 0:12:36.280 you can take an incorrect model and try to parameterize 0:12:36.280 --> 0:12:38.480 it better and you still have an incorrect model. And 0:12:38.520 --> 0:12:40.920 that's what's happened is every time they have a bad prediction, 0:12:41.480 --> 0:12:43.120 they look at the model and they say, oh, well, 0:12:43.200 --> 0:12:45.520 I guess you know the natural rate of unemployment must 0:12:45.520 --> 0:12:49.120 be lower. Well yeah, or maybe that doesn't have anything 0:12:49.120 --> 0:12:51.120 to do with it. I mean, it's possible. So what 0:12:51.320 --> 0:12:54.000 is happening right now? Because as I set up in 0:12:54.040 --> 0:12:58.240 the intro, after many years, it feels like the debate 0:12:58.320 --> 0:13:00.280 is back and maybe for the first time in a while, 0:13:00.360 --> 0:13:03.480 people think inflation could go meaningfully higher. Before we asked why, like, 0:13:03.520 --> 0:13:05.319 would you agree with that that it feels like we're 0:13:05.320 --> 0:13:08.040 at some sort of turning point at least into debate. Well, 0:13:08.200 --> 0:13:11.240 certainly the debate has has uh and we see it 0:13:11.679 --> 0:13:14.199 in our business every day with the amount of inquiry 0:13:14.240 --> 0:13:16.720 we've gotten over the last couple of months is just 0:13:16.760 --> 0:13:18.920 an order of magnitude different from what we had the 0:13:18.920 --> 0:13:23.960 three months before that. So the Keynesians would say, we're 0:13:24.000 --> 0:13:28.080 finally tapped out that you know why, we've been underestimating 0:13:28.120 --> 0:13:31.080 how strong the labor market could get. But we were, 0:13:31.200 --> 0:13:33.240 We knew it was going to get somewhere, and we're 0:13:33.240 --> 0:13:36.080 finally hitting it and there really aren't any spare workers 0:13:36.200 --> 0:13:39.640 left or very few, and that means that the people 0:13:39.679 --> 0:13:41.400 that are in the labor market, there's a lot of 0:13:41.440 --> 0:13:44.800 demand coming. They're gonna ask for wage increases, that they're 0:13:44.800 --> 0:13:47.000 gonna go out and spend more on rent, and they're 0:13:47.000 --> 0:13:48.920 gonna buy stuff that we can't build in all this 0:13:49.000 --> 0:13:52.080 and we're finally seeing that. So what is wrong with 0:13:52.120 --> 0:13:55.760 that story? Pretty much everything? But you know, I really 0:13:55.840 --> 0:14:00.360 love the wage push inflation, you know, our hum It's 0:14:00.360 --> 0:14:03.120 always sort of fun to me because if you think 0:14:03.160 --> 0:14:07.920 about it, if wages caused inflation. Higher wages caused higher inflation, 0:14:08.400 --> 0:14:11.880 then we would all love inflation, right, because our wages 0:14:11.920 --> 0:14:14.280 would go up, and then prices would go up, and 0:14:14.280 --> 0:14:16.439 so we that leaves us in a good position, right, 0:14:17.320 --> 0:14:20.160 and businesses would hate it. And in fact we see 0:14:20.200 --> 0:14:23.920 exactly the opposite, that some inflation is good for businesses 0:14:24.000 --> 0:14:26.400 because they don't have to make wage adjustments right away, 0:14:26.440 --> 0:14:30.080 so wages tend to follow inflation. Actually, I got to 0:14:30.120 --> 0:14:32.000 give some credit to Bob Shiller. He wrote a paper 0:14:32.000 --> 0:14:35.960 about that, probably thirty years ago when he surveyed people, 0:14:36.440 --> 0:14:38.000 and in the name of the paper is something like, 0:14:38.000 --> 0:14:41.320 why do people hate inflation? And it turns out that 0:14:41.440 --> 0:14:43.640 we all know that if the prices go up, that 0:14:43.680 --> 0:14:45.400 our wages aren't going to go up first, they're going 0:14:45.440 --> 0:14:48.480 to go up afterwards. Do you think there's a inflation 0:14:48.560 --> 0:14:54.000 fetishism to some extent where we forget that nobody really 0:14:54.080 --> 0:14:56.280 likes to pay more for stuff, and we talk about 0:14:56.320 --> 0:14:59.600 things like, oh, the fet is uh missed on inflation, 0:15:00.120 --> 0:15:03.920 or inflation came in weak or whatever, as if people 0:15:04.080 --> 0:15:06.120 just sort of have got into their minds that higher 0:15:06.160 --> 0:15:10.200 prices are good. Yeah. It's it's strange too, because you know, 0:15:10.240 --> 0:15:13.440 if you talk to somebody from South Africa or from 0:15:13.840 --> 0:15:16.680 South America where inflation is higher, and they look at 0:15:16.680 --> 0:15:21.040 our obsession with one in three quarters versus two and 0:15:21.080 --> 0:15:22.960 a quarter, and they just laugh. I mean, it's just 0:15:23.040 --> 0:15:26.160 absurd to be that, you know, focused on these these 0:15:26.200 --> 0:15:29.640 little things. But I think that the general view in 0:15:29.720 --> 0:15:32.200 the economics community, I guess I don't disagree with this 0:15:32.280 --> 0:15:35.760 is that some small amount of inflation add some lubricant 0:15:35.800 --> 0:15:40.760 to the economic system, allows you to decrease your real 0:15:41.000 --> 0:15:44.920 costs without decreasing your decrease the real wages you're paying 0:15:44.960 --> 0:15:47.240 without decreased the nominal wages you're paying, and so on. 0:15:47.520 --> 0:15:50.040 I'm glad you brought in the international angle on this, 0:15:50.160 --> 0:15:52.920 because I wasn't thinking about that. But I always have 0:15:53.000 --> 0:15:57.400 found it to be pretty funny when you hear things like, oh, Japan, 0:15:58.240 --> 0:16:01.800 they can't seem to generate any lation. Is this big crisis. Meanwhile, 0:16:01.880 --> 0:16:05.440 unemployment is at thirty year loads said, they have a 0:16:05.480 --> 0:16:08.120 standard of living that's the envy of the world, and 0:16:08.160 --> 0:16:10.760 it's like that sounds like a pretty great problem to 0:16:10.880 --> 0:16:13.520 have if the only if everything, If unemployment is really 0:16:13.520 --> 0:16:15.680 low and they're one of the richest countries in the world, 0:16:15.880 --> 0:16:18.440 and your big problem is that prices aren't going up. Yeah, 0:16:18.480 --> 0:16:20.640 it doesn't really sound that bad. No, I've never I've 0:16:20.640 --> 0:16:22.600 never really understood that. And I've asked people it's not 0:16:22.720 --> 0:16:25.600 gonna I've asked guests on TV and other stuff, like 0:16:25.600 --> 0:16:27.560 what's the big problem? And I have to say, I've 0:16:27.600 --> 0:16:31.040 never totally heard as satisfactory answer to why it's so bad. No, 0:16:31.240 --> 0:16:35.360 I think that, Uh, it is funny that that for 0:16:35.440 --> 0:16:38.760 as good as that situation is, the Bank of Japan 0:16:38.920 --> 0:16:42.000 is is working very hard to completely ruin the entire 0:16:42.040 --> 0:16:45.280 future of Japan, right, I mean it's they really didn't 0:16:45.360 --> 0:16:48.240 necessarily have to do anything. Actually, you know, going back 0:16:48.240 --> 0:16:49.800 to the money supply, you know, the bank in Japan 0:16:49.840 --> 0:16:52.880 for many years struggle with money growth in Japan being 0:16:52.920 --> 0:16:55.560 around two percent or one percent, and that's the reason 0:16:55.600 --> 0:16:59.640 they had low inflation. Now it's getting up to four 0:17:00.480 --> 0:17:03.880 something more reasonable, and they're starting to see inflation. But 0:17:03.960 --> 0:17:07.720 in the in the process, they've managed to completely nationalize 0:17:08.359 --> 0:17:12.760 their financial may a very interesting experiment, right that. See 0:17:12.800 --> 0:17:15.359 how all in the service of getting inflation from zero 0:17:15.480 --> 0:17:17.679 to two. It does seem a little odd when you 0:17:17.680 --> 0:17:20.840 put it that way. All right, let's go back to 0:17:20.880 --> 0:17:22.879 the U. S and area. You you mentioned that the 0:17:22.960 --> 0:17:26.200 last three months you've seen so much more inbound interest 0:17:26.280 --> 0:17:29.919 in uh figuring out what inflation is going to do, 0:17:30.320 --> 0:17:33.800 versus the three months prior. We're certainly talking about it 0:17:33.840 --> 0:17:38.439 a lot more. Here. You've dismissed the Kynesian story, which 0:17:38.520 --> 0:17:43.360 is that, uh, the unemployment rate finally hit a point 0:17:43.440 --> 0:17:46.760 where there's not much more slack, and so you've dismissed 0:17:46.760 --> 0:17:49.360 the sort of wage wage push story. Okay, so that's 0:17:49.400 --> 0:17:52.760 not right. What is changing? Okay, So there's there's a 0:17:52.800 --> 0:17:55.480 couple of different things here. One is that the increasing 0:17:55.520 --> 0:17:58.880 interest in the last couple of months is mostly due 0:17:58.920 --> 0:18:02.120 to the optics of inflation. You know optics. It looks 0:18:02.160 --> 0:18:06.159 like inflation is suddenly accelerated. Well, it really hasn't. The 0:18:06.200 --> 0:18:09.040 underlying level of inflation. If you look at you know, 0:18:09.440 --> 0:18:12.560 median inflation, or you look at something that moves more slowly, 0:18:13.080 --> 0:18:15.280 you see that inflation itself hasn't moved very much. But 0:18:15.320 --> 0:18:19.000 what we're what's happening is that these we had all 0:18:19.119 --> 0:18:22.080 these one offs, you know, cell phones, We've been talked 0:18:22.080 --> 0:18:24.440 about a lot, but there's other one offs and they're 0:18:24.440 --> 0:18:27.520 all fading, and so we had this decline and core 0:18:27.560 --> 0:18:30.240 inflation that's just coming out of the data. You know, 0:18:30.320 --> 0:18:32.440 the next six months, we're gonna have core inflation going 0:18:32.440 --> 0:18:34.359 from where it is now to you know, up to 0:18:34.840 --> 0:18:37.679 two point three two point four, and people are going 0:18:37.720 --> 0:18:39.760 to think the sky is falling. But most of that's 0:18:39.960 --> 0:18:43.600 an illusion. Inflation is going slowly higher, but it's a 0:18:43.680 --> 0:18:45.360 lot of that's an illusion. That's why we're getting all 0:18:45.359 --> 0:18:48.119 the calls. But the underlying process has sort of two 0:18:48.240 --> 0:18:51.200 risks right now. One of them is is I guess policy, 0:18:51.240 --> 0:18:53.840 and one of them is for the inflation dynamics as 0:18:53.880 --> 0:18:56.800 a whole. The policy part we've been talking about a 0:18:56.800 --> 0:18:59.159 lot the last couple of days that you know, the 0:18:59.560 --> 0:19:05.359 risk when President Trump was was inaugurated was that it 0:19:05.520 --> 0:19:07.600 was not you know, the Trump flation, We're going to 0:19:07.720 --> 0:19:10.520 run the economy too hot. The risk was that we're 0:19:10.560 --> 0:19:14.480 going to reverse globalization or at least stop it. And 0:19:14.520 --> 0:19:18.440 globalization is a real it's the main reason we've had 0:19:18.440 --> 0:19:20.840 such a great trade off of growth and inflation over 0:19:20.880 --> 0:19:23.040 the last really since the fall of the Berlin Wall. 0:19:23.080 --> 0:19:28.760 In the early ahead, explain the mechanism there so I 0:19:29.280 --> 0:19:31.680 could think of a couple of different ways in which 0:19:31.760 --> 0:19:36.399 theoretically globalization could reduce inflation. And so one of the 0:19:36.520 --> 0:19:39.239 obvious ways is, Okay, well, you've just opened up all 0:19:39.240 --> 0:19:43.680 these new manufacturing markets, and so if you want to 0:19:43.960 --> 0:19:47.359 build a cell phone or you want to manufacture a 0:19:47.359 --> 0:19:50.480 bunch of T shirts, then there's a factory with really 0:19:50.520 --> 0:19:53.320 cheap labor in an emerging economy that could just do 0:19:53.359 --> 0:19:55.920 it cheaper than you could in the US. So that's 0:19:55.960 --> 0:19:59.680 one way I could see it reducing inflation. The other 0:19:59.760 --> 0:20:03.719 me chanism it seems to me that globalization could reduce 0:20:03.880 --> 0:20:07.800 inflation is that if there's no barriers on who could 0:20:07.840 --> 0:20:12.239 trade with whom, then everyone just sort of operates at 0:20:12.240 --> 0:20:17.040 the max efficiency, and capitalism is all about making the 0:20:17.040 --> 0:20:20.240 economy more and more efficient and competing on wages and 0:20:20.320 --> 0:20:25.120 that sort of cheap emerging market labor. Aside that any 0:20:25.119 --> 0:20:29.600 economy that sort of faces fewer artificial constraints would just 0:20:29.640 --> 0:20:32.280 sort of ring in efficiencies out of the system faster, 0:20:32.320 --> 0:20:35.320 and that will do So what is the sort of 0:20:35.359 --> 0:20:37.320 related you know, you mentioned since the fall of the 0:20:37.359 --> 0:20:41.680 Berlin Wall, this extraordinary period of globalization, how did that 0:20:42.280 --> 0:20:45.199 reduce inflation? Yeah? No, that you have it exactly right. 0:20:45.200 --> 0:20:49.320 I think that capitalism is about arbitraging out these inefficiencies. 0:20:49.400 --> 0:20:53.639 And and as you do that, uh, the the you know, 0:20:53.680 --> 0:20:56.040 that allows you know, again, you can think about it 0:20:56.080 --> 0:20:58.760 as a as a manufacturer. Let's think about someone who's 0:20:58.760 --> 0:21:02.080 manufacturing T shirts, you know, and prior to the nineteen nineties, 0:21:02.119 --> 0:21:05.400 we manufactured all our own apparel. Now we manufacture none 0:21:05.400 --> 0:21:07.600 of it. And the reason we manufacture none of it 0:21:07.640 --> 0:21:09.960 is that it turns out to be much cheaper for 0:21:10.000 --> 0:21:14.600 the manufacturer to go and and make these T shirts overseas, 0:21:15.000 --> 0:21:19.520 which allows one of two things to happen. Either as 0:21:19.560 --> 0:21:22.639 the manufacturer, either I can lower prices for my T 0:21:22.760 --> 0:21:24.920 shirts and get the same profit, or it can raise 0:21:24.960 --> 0:21:29.359 profits that's found money. As you globalize, you have more 0:21:29.440 --> 0:21:31.440 and more opportunities to do that, not just on the 0:21:31.520 --> 0:21:34.359 labor front, but also you know, getting cheap other goods, 0:21:34.440 --> 0:21:39.199 cheap inputs abroad as well. So, as you said, the 0:21:39.400 --> 0:21:43.760 sort of remember right after the Trump got elected in 0:21:43.880 --> 0:21:48.919 early November or sorry, in November, we saw a big 0:21:49.480 --> 0:21:52.680 initials sell off and treasuries and people started talking about 0:21:52.920 --> 0:21:56.639 Trump inflation and okay, is this going to change the tide, 0:21:56.960 --> 0:22:01.800 and in your view, the key variable that may have 0:22:01.960 --> 0:22:05.600 changed or that maybe changing under Trump is this is 0:22:05.600 --> 0:22:10.160 the renewed relationship and the renewed trajectory of globalization or globalization. 0:22:10.320 --> 0:22:13.399 That's exactly right. I wrote that actually right after he 0:22:13.480 --> 0:22:16.119 was elected in our quarterly piece, that if you go 0:22:16.200 --> 0:22:18.480 through all the things that he'd said on the campaign trail, 0:22:18.600 --> 0:22:21.399 most of them would have no meaningful long term impact 0:22:21.480 --> 0:22:23.879 on inflation. We don't really know about the appeal of 0:22:23.920 --> 0:22:27.159 Obamacare what that would do exactly, but um, you know, 0:22:27.160 --> 0:22:29.360 in the long run, probably not huge. But the one 0:22:29.400 --> 0:22:32.160 thing you can really do is put the Berlin Wall 0:22:32.200 --> 0:22:34.960 back up. Now he can't do that obviously, but but 0:22:35.000 --> 0:22:36.960 you know, we're sort of seeing that not just we're 0:22:36.960 --> 0:22:39.439 talking about our own wall. Of course, Well yeah, exactly right, 0:22:39.480 --> 0:22:42.120 we're putting a wall back up. And but it isn't 0:22:42.160 --> 0:22:44.600 just us either. It's you know, Europe is having you know, 0:22:44.960 --> 0:22:48.440 many more cross border conflicts, and the general trend to 0:22:48.600 --> 0:22:54.000 globalization looks like it's at least coming to a slowdown. Anyway. 0:22:54.119 --> 0:22:56.679