Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal, and sadly Tracy Ellaway is out today.
Speaker 1: She is traveling, but I think I could sort of
Speaker 1: imagine the conversation that we would have prior to bring
Speaker 1: in our guests if she were here. We would probably
Speaker 1: talk about how for the first time in a while,
Speaker 1: we've been seeing market volatility lately, how a lot of
Speaker 1: the stories that we've been discussing since the financial crisis
Speaker 1: seemed to be mutating. And at the heart of these
Speaker 1: big changes that we're seeing is a very important debate
Speaker 1: about the economy, and that is whether we're really seeing
Speaker 1: a pickup and inflation for the first time in a
Speaker 1: long time. And so if you weren't aware, basically since
Speaker 1: the crisis, we've been seeing this incredibly mellow inflationary environment
Speaker 1: around the world, not much pricing power, not much acceleration
Speaker 1: in wages or anything else like that. And of course
Speaker 1: that's made central banks job very easy, because they're tasked
Speaker 1: with maintaining stable prices or in the US, stable prices
Speaker 1: and full employment. But if prices are just really stable,
Speaker 1: then that makes it easy. They don't really have to
Speaker 1: do anything for the most part. And so if we're
Speaker 1: starting to see a turn, if we're starting to see
Speaker 1: inflation really gained some teeth and accelerating prices and so forth,
Speaker 1: then that raises the question of whether central banks are
Speaker 1: going to really have to change their approach since the crisis.
Speaker 1: And if central banks changed their approach since the crisis,
Speaker 1: that could have potentially big ramifications for all sorts of markets,
Speaker 1: risky assets, bonds, and so forth. So this question of
Speaker 1: whether the uh, the Goldilocks era of inflation not too
Speaker 1: hot not too cold is going to persist is top
Speaker 1: of mind for a lot of people these is and
Speaker 1: so answering this question is crucial, and so that is
Speaker 1: what we're going to try to do on today's episode. So,
Speaker 1: without further ado, I would like to bring in our guest.
Speaker 1: His name is Michael Ashton of Enduring Investments, and he
Speaker 1: is on Twitter at the Inflation Guy, and he tweets
Speaker 1: very knowledgeably about inflation. Every time new data comes out,
Speaker 1: he breaks it down, and there's probably nobody there's probably
Speaker 1: nobody better to help us answer the question of what
Speaker 1: the heck is going on and what's about to happen.
Speaker 1: Michael thank you very much for joining us. Thank you
Speaker 1: very much, Joe. It's good to be here. And I'm
Speaker 1: I'm sure I speak for Tracy and saying that I'm
Speaker 1: really sorry that I'm missing this. I feel very sorry
Speaker 1: for Tracy that she's missing this huge She will be devastated,
Speaker 1: but I'm very excited. Let's talk first about your background. So,
Speaker 1: as I mentioned, you're the atflation guy. That's literally your
Speaker 1: Twitter handle. You right, every time there's a new economic
Speaker 1: data release that has the latest inflation data, you really
Speaker 1: dive in and break it down and look, what are
Speaker 1: the components, Why did it move higher, why did it
Speaker 1: move lower? What's your background? How did you get to be, uh,
Speaker 1: the inflation guy? Well, let's see. I I've I've been
Speaker 1: in financial markets since the early nine nineties, I guess
Speaker 1: since nine and I've spent a long time as a strategist,
Speaker 1: fixed income strategists for a lot of the big shops
Speaker 1: out there, bankers, trust, JP Morrigan, that sort of thing,
Speaker 1: and then got into trading around two thousand for Barkley's.
Speaker 1: And I was trading options for Barkley's when Barkley's, which
Speaker 1: at the time viewed themselves as actually they styled themselves
Speaker 1: as the inflation house. You know, at that time, inflation
Speaker 1: derivatives were just getting started in Europe and they're just
Speaker 1: case start in the US. And Barkley's said, you know,
Speaker 1: we really need to get the US inflation derivatives market
Speaker 1: going because that's good for Barkley's. And and I was,
Speaker 1: you know, I had a good strategist background, a good
Speaker 1: trading background. I spent a lot of time writing as
Speaker 1: I do now and explaining things, teaching, training and so on,
Speaker 1: and so I had a very good, uh well rounded
Speaker 1: background to go and be be made the inflation guy.
Speaker 1: So uh so you come to it from both a
Speaker 1: theoretical with a theoretical background, but also the trading world background.
Speaker 1: That's right, inflation derivatives. So inflation is an economic measure,
Speaker 1: but derivatives are essentially instruments that people can use to
Speaker 1: bet or hedge on specific outcomes in the economy. So theoretically,
Speaker 1: you could construct a instrument that will pay off X
Speaker 1: if say the CPI rises to two point five percent
Speaker 1: next year or something like that. That's right, And actually
Speaker 1: inflation derivatives generally pay off on the price level. And
Speaker 1: we've tried a couple of times to create CPI futures. Actually,
Speaker 1: one of my big flubs was in two thousand and three,
Speaker 1: I persuaded the Chicago marke Until Exchange to launch CPI futures,
Speaker 1: and I suggested they should look like euro dollars, and
Speaker 1: it turns out that that's not at all the way
Speaker 1: they should look. And so I was the market maker
Speaker 1: for these these futures and they didn't really do anything
Speaker 1: and eventually got delisted. But we figured out that rather
Speaker 1: than trading on a rate in general, when you what
Speaker 1: you're really trading is you're trading the price level. And
Speaker 1: so you can obviously figure out the price level today
Speaker 1: versus the price level ten years from now. We can
Speaker 1: figure out what the rate is, and that's what goes
Speaker 1: into yields and things like that. Is that expectation, but
Speaker 1: it's really the future prices that you're trading. I don't
Speaker 1: want to go too far down the rabbit hole with
Speaker 1: inflation derivative, but anytime I hear about things like this,
Speaker 1: I one of the questions that I always ask in
Speaker 1: my mind is who are the natural sellers and buyers
Speaker 1: of this product? So I could imagine that a fixed
Speaker 1: income portfolio manager whose assets would stand to lose a
Speaker 1: lot of money would want to protect against higher inflation.
Speaker 1: Who is the natural seller of that protection. It's interesting.
Speaker 1: I think the way that inflation derivatives are structured, you
Speaker 1: really do tend to have an imbalance, and so the
Speaker 1: supplier tends to be the government through tips, right, so
Speaker 1: the government tends to be the payer of inflation. And
Speaker 1: that's actually been one of the big problems with the
Speaker 1: inflation markets over the years that lots of people and
Speaker 1: most consumers, you know, we're exposed to headline inflation or
Speaker 1: something which kind of looks like it, and that's what
Speaker 1: tips pay. But the issuer side, incorporates, they aren't exposed
Speaker 1: to headline inflation. They're exposed to uh, you know, if
Speaker 1: your caterpillary, you're exposed to farm implements inflation or you know,
Speaker 1: things like that. And so we haven't seen corporates issue
Speaker 1: that sort of bonds. That's interesting. I hadn't thought about it.
Speaker 1: So they are affected, but it's very a very narrow
Speaker 1: slice of inflation. Let's uh fast forward a little bit
Speaker 1: to the post crisis period, and why don't you describe
Speaker 1: what we've seen in inflation in general over these last
Speaker 1: several years, which I sort of set up the sort
Speaker 1: of goldilocks scenario. Yeah, you know it. It really turned
Speaker 1: out to be a wonderful thing for central banks, as
Speaker 1: you alluded to. You know, if you're fighting fires and
Speaker 1: you don't have to worry about any you know, nearby buildings, Uh,
Speaker 1: then it it turns out to be much easier than
Speaker 1: if you have to worry about everything else catching on fire.
Speaker 1: And central banks didn't have to worry over the last
Speaker 1: nine years about anything catching on fire. They could spray
Speaker 1: their hoses whatever they wanted and not really cause any
Speaker 1: inflationary problems. And so we've had this continued low inflation
Speaker 1: A lot of people have called it initially after the
Speaker 1: crisis that was caused by housing prices going down, But
Speaker 1: even since then, as housing prices have come back up
Speaker 1: and housing inflation has come back up, other prices in
Speaker 1: the economy and mostly important goods, have tended to restrain
Speaker 1: the overall level of inflation. How much of this restrained
Speaker 1: inflation is essentially a matter of under utilization of economic resources.
Speaker 1: So we've overbuilt a lot of houses prior to the crisis,
Speaker 1: during that boom, and so then if you owned houses
Speaker 1: for a long time, you didn't have much pricing power
Speaker 1: on rent and so forth, they're selling your house, And
Speaker 1: there was a lot of unemployment, and it's taken a
Speaker 1: long time for unemployment to come down. So if you're
Speaker 1: a worker, you don't have a lot of theoretical bargaining power.
Speaker 1: Various versions of the same story of overbuilding, lots of
Speaker 1: resources that are still being under utilized, and when resources
Speaker 1: are under utilized, no one can really raise prices. How
Speaker 1: much does that explain in your view, the muted inflation. Well,
Speaker 1: I tend to push back a little bit on the whole,
Speaker 1: on that whole notion, it's certainly true at you know,
Speaker 1: in bubble periods, things like houses that got you know,
Speaker 1: too expensive and then got very cheap, and and that
Speaker 1: tends to cause ripples in in inflation. But over time,
Speaker 1: what you're really looking at with inflation is what's happening
Speaker 1: to the currency, you know, in general, what can you
Speaker 1: buy over time? And that's not really caused by the
Speaker 1: relative supply and demand dynamics, um, It's caused by how
Speaker 1: much money is out there chasing how many goods. The
Speaker 1: classic monitorist explanation of the thing you know all the
Speaker 1: other things that you describe, and you know, shortages of
Speaker 1: this or that or too much of this or that
Speaker 1: cause relative price changes relative to the overall rising tide,
Speaker 1: if you will. And so you know, we we have
Speaker 1: these general forces on housing that have caused housing prices
Speaker 1: to to escalate faster than incomes for a while. And
Speaker 1: you have the strong dollar, and you have globalization that
Speaker 1: that has tended to depress goods prices for a while.
Speaker 1: But overall, over time, if you if you keep adding
Speaker 1: money to the system, then the overall price level changes.
Speaker 1: And this is this view that you espouse, the sort
Speaker 1: of monitorist money driven view. It's not really the I
Speaker 1: mean a lot of people at the FED would sort
Speaker 1: of take my the way I said that, which is
Speaker 1: this sort of more Phillips curve style. You're not going
Speaker 1: to get inflation as long as you have capacity under utilization,
Speaker 1: and that inflation will really kick in now or soon
Speaker 1: once we finally are using everything and everyone is labor
Speaker 1: bargaining power. So talk a little bit about this debate
Speaker 1: and this sort of like because I think it's really
Speaker 1: uh a fundamental ideological question about what causes prices to rise. Yeah,
Speaker 1: I think it's really interesting. Obviously, when we go we
Speaker 1: learn economics, we tend to focus on supply and demand curps,
Speaker 1: and so we tend to think about the idea that
Speaker 1: if you increase supply, you d decrease prices, and if
Speaker 1: you increase demand, you increase prices. And I think that
Speaker 1: the problem comes when you try to aggregate that to
Speaker 1: the overall economy UM and I s l M curves
Speaker 1: and there's lots of fancy Keynsian you know, macroeconomics to
Speaker 1: go and describe what happens, but you sort of lose
Speaker 1: the forest for the trees again. You start talking. You
Speaker 1: take what are really micro effects and they don't really
Speaker 1: aggregate very well. So when you look at the central
Speaker 1: bankers around the world, ironically, I guess, since they're supposed
Speaker 1: to be managing the money supply as you, you don't
Speaker 1: have very many monitorous left. You have You had Daniel
Speaker 1: Thornton at the St. Louis FED who's retired, and then
Speaker 1: my friend Samuel Reynard at the Swiss National Bank who's
Speaker 1: still publishing. But other other than that, there aren't any
Speaker 1: publishing monitorus out there anymore. Does this differing framework explain
Speaker 1: in your view why the FED has been basically persistently
Speaker 1: wrong on inflation throughout this entire cycle. Incidentally, they've been, uh,
Speaker 1: they've been pessimistic relative to what happened unemployment, So they
Speaker 1: keep unemployment keeps falling faster than what they expect, but
Speaker 1: they keep missing on the inflation front too, So they
Speaker 1: expect inflation to come in higher than it does, and
Speaker 1: then every time it comes out it disappoints them. Is
Speaker 1: that error, in your view, attributed to what you see
Speaker 1: as an incorrect model? Oh? Absolutely, I think that that
Speaker 1: you can take an incorrect model and try to parameterize
Speaker 1: it better and you still have an incorrect model. And
Speaker 1: that's what's happened is every time they have a bad prediction,
Speaker 1: they look at the model and they say, oh, well,
Speaker 1: I guess you know the natural rate of unemployment must
Speaker 1: be lower. Well yeah, or maybe that doesn't have anything
Speaker 1: to do with it. I mean, it's possible. So what
Speaker 1: is happening right now? Because as I set up in
Speaker 1: the intro, after many years, it feels like the debate
Speaker 1: is back and maybe for the first time in a while,
Speaker 1: people think inflation could go meaningfully higher. Before we asked why, like,
Speaker 1: would you agree with that that it feels like we're
Speaker 1: at some sort of turning point at least into debate. Well,
Speaker 1: certainly the debate has has uh and we see it
Speaker 1: in our business every day with the amount of inquiry
Speaker 1: we've gotten over the last couple of months is just
Speaker 1: an order of magnitude different from what we had the
Speaker 1: three months before that. So the Keynesians would say, we're
Speaker 1: finally tapped out that you know why, we've been underestimating
Speaker 1: how strong the labor market could get. But we were,
Speaker 1: We knew it was going to get somewhere, and we're
Speaker 1: finally hitting it and there really aren't any spare workers
Speaker 1: left or very few, and that means that the people
Speaker 1: that are in the labor market, there's a lot of
Speaker 1: demand coming. They're gonna ask for wage increases, that they're
Speaker 1: gonna go out and spend more on rent, and they're
Speaker 1: gonna buy stuff that we can't build in all this
Speaker 1: and we're finally seeing that. So what is wrong with
Speaker 1: that story? Pretty much everything? But you know, I really
Speaker 1: love the wage push inflation, you know, our hum It's
Speaker 1: always sort of fun to me because if you think
Speaker 1: about it, if wages caused inflation. Higher wages caused higher inflation,
Speaker 1: then we would all love inflation, right, because our wages
Speaker 1: would go up, and then prices would go up, and
Speaker 1: so we that leaves us in a good position, right,
Speaker 1: and businesses would hate it. And in fact we see
Speaker 1: exactly the opposite, that some inflation is good for businesses
Speaker 1: because they don't have to make wage adjustments right away,
Speaker 1: so wages tend to follow inflation. Actually, I got to
Speaker 1: give some credit to Bob Shiller. He wrote a paper
Speaker 1: about that, probably thirty years ago when he surveyed people,
Speaker 1: and in the name of the paper is something like,
Speaker 1: why do people hate inflation? And it turns out that
Speaker 1: we all know that if the prices go up, that
Speaker 1: our wages aren't going to go up first, they're going
Speaker 1: to go up afterwards. Do you think there's a inflation
Speaker 1: fetishism to some extent where we forget that nobody really
Speaker 1: likes to pay more for stuff, and we talk about
Speaker 1: things like, oh, the fet is uh missed on inflation,
Speaker 1: or inflation came in weak or whatever, as if people
Speaker 1: just sort of have got into their minds that higher
Speaker 1: prices are good. Yeah. It's it's strange too, because you know,
Speaker 1: if you talk to somebody from South Africa or from
Speaker 1: South America where inflation is higher, and they look at
Speaker 1: our obsession with one in three quarters versus two and
Speaker 1: a quarter, and they just laugh. I mean, it's just
Speaker 1: absurd to be that, you know, focused on these these
Speaker 1: little things. But I think that the general view in
Speaker 1: the economics community, I guess I don't disagree with this
Speaker 1: is that some small amount of inflation add some lubricant
Speaker 1: to the economic system, allows you to decrease your real
Speaker 1: costs without decreasing your decrease the real wages you're paying
Speaker 1: without decreased the nominal wages you're paying, and so on.
Speaker 1: I'm glad you brought in the international angle on this,
Speaker 1: because I wasn't thinking about that. But I always have
Speaker 1: found it to be pretty funny when you hear things like, oh, Japan,
Speaker 1: they can't seem to generate any lation. Is this big crisis. Meanwhile,
Speaker 1: unemployment is at thirty year loads said, they have a
Speaker 1: standard of living that's the envy of the world, and
Speaker 1: it's like that sounds like a pretty great problem to
Speaker 1: have if the only if everything, If unemployment is really
Speaker 1: low and they're one of the richest countries in the world,
Speaker 1: and your big problem is that prices aren't going up. Yeah,
Speaker 1: it doesn't really sound that bad. No, I've never I've
Speaker 1: never really understood that. And I've asked people it's not
Speaker 1: gonna I've asked guests on TV and other stuff, like
Speaker 1: what's the big problem? And I have to say, I've
Speaker 1: never totally heard as satisfactory answer to why it's so bad. No,
Speaker 1: I think that, Uh, it is funny that that for
Speaker 1: as good as that situation is, the Bank of Japan
Speaker 1: is is working very hard to completely ruin the entire
Speaker 1: future of Japan, right, I mean it's they really didn't
Speaker 1: necessarily have to do anything. Actually, you know, going back
Speaker 1: to the money supply, you know, the bank in Japan
Speaker 1: for many years struggle with money growth in Japan being
Speaker 1: around two percent or one percent, and that's the reason
Speaker 1: they had low inflation. Now it's getting up to four
Speaker 1: something more reasonable, and they're starting to see inflation. But
Speaker 1: in the in the process, they've managed to completely nationalize
Speaker 1: their financial may a very interesting experiment, right that. See
Speaker 1: how all in the service of getting inflation from zero
Speaker 1: to two. It does seem a little odd when you
Speaker 1: put it that way. All right, let's go back to
Speaker 1: the U. S and area. You you mentioned that the
Speaker 1: last three months you've seen so much more inbound interest
Speaker 1: in uh figuring out what inflation is going to do,
Speaker 1: versus the three months prior. We're certainly talking about it
Speaker 1: a lot more. Here. You've dismissed the Kynesian story, which
Speaker 1: is that, uh, the unemployment rate finally hit a point
Speaker 1: where there's not much more slack, and so you've dismissed
Speaker 1: the sort of wage wage push story. Okay, so that's
Speaker 1: not right. What is changing? Okay, So there's there's a
Speaker 1: couple of different things here. One is that the increasing
Speaker 1: interest in the last couple of months is mostly due
Speaker 1: to the optics of inflation. You know optics. It looks
Speaker 1: like inflation is suddenly accelerated. Well, it really hasn't. The
Speaker 1: underlying level of inflation. If you look at you know,
Speaker 1: median inflation, or you look at something that moves more slowly,
Speaker 1: you see that inflation itself hasn't moved very much. But
Speaker 1: what we're what's happening is that these we had all
Speaker 1: these one offs, you know, cell phones, We've been talked
Speaker 1: about a lot, but there's other one offs and they're
Speaker 1: all fading, and so we had this decline and core
Speaker 1: inflation that's just coming out of the data. You know,
Speaker 1: the next six months, we're gonna have core inflation going
Speaker 1: from where it is now to you know, up to
Speaker 1: two point three two point four, and people are going
Speaker 1: to think the sky is falling. But most of that's
Speaker 1: an illusion. Inflation is going slowly higher, but it's a
Speaker 1: lot of that's an illusion. That's why we're getting all
Speaker 1: the calls. But the underlying process has sort of two
Speaker 1: risks right now. One of them is is I guess policy,
Speaker 1: and one of them is for the inflation dynamics as
Speaker 1: a whole. The policy part we've been talking about a
Speaker 1: lot the last couple of days that you know, the
Speaker 1: risk when President Trump was was inaugurated was that it
Speaker 1: was not you know, the Trump flation, We're going to
Speaker 1: run the economy too hot. The risk was that we're
Speaker 1: going to reverse globalization or at least stop it. And
Speaker 1: globalization is a real it's the main reason we've had
Speaker 1: such a great trade off of growth and inflation over
Speaker 1: the last really since the fall of the Berlin Wall.
Speaker 1: In the early ahead, explain the mechanism there so I
Speaker 1: could think of a couple of different ways in which
Speaker 1: theoretically globalization could reduce inflation. And so one of the
Speaker 1: obvious ways is, Okay, well, you've just opened up all
Speaker 1: these new manufacturing markets, and so if you want to
Speaker 1: build a cell phone or you want to manufacture a
Speaker 1: bunch of T shirts, then there's a factory with really
Speaker 1: cheap labor in an emerging economy that could just do
Speaker 1: it cheaper than you could in the US. So that's
Speaker 1: one way I could see it reducing inflation. The other
Speaker 1: me chanism it seems to me that globalization could reduce
Speaker 1: inflation is that if there's no barriers on who could
Speaker 1: trade with whom, then everyone just sort of operates at
Speaker 1: the max efficiency, and capitalism is all about making the
Speaker 1: economy more and more efficient and competing on wages and
Speaker 1: that sort of cheap emerging market labor. Aside that any
Speaker 1: economy that sort of faces fewer artificial constraints would just
Speaker 1: sort of ring in efficiencies out of the system faster,
Speaker 1: and that will do So what is the sort of
Speaker 1: related you know, you mentioned since the fall of the
Speaker 1: Berlin Wall, this extraordinary period of globalization, how did that
Speaker 1: reduce inflation? Yeah? No, that you have it exactly right.
Speaker 1: I think that capitalism is about arbitraging out these inefficiencies.
Speaker 1: And and as you do that, uh, the the you know,
Speaker 1: that allows you know, again, you can think about it
Speaker 1: as a as a manufacturer. Let's think about someone who's
Speaker 1: manufacturing T shirts, you know, and prior to the nineteen nineties,
Speaker 1: we manufactured all our own apparel. Now we manufacture none
Speaker 1: of it. And the reason we manufacture none of it
Speaker 1: is that it turns out to be much cheaper for
Speaker 1: the manufacturer to go and and make these T shirts overseas,
Speaker 1: which allows one of two things to happen. Either as
Speaker 1: the manufacturer, either I can lower prices for my T
Speaker 1: shirts and get the same profit, or it can raise
Speaker 1: profits that's found money. As you globalize, you have more
Speaker 1: and more opportunities to do that, not just on the
Speaker 1: labor front, but also you know, getting cheap other goods,
Speaker 1: cheap inputs abroad as well. So, as you said, the
Speaker 1: sort of remember right after the Trump got elected in
Speaker 1: early November or sorry, in November, we saw a big
Speaker 1: initials sell off and treasuries and people started talking about
Speaker 1: Trump inflation and okay, is this going to change the tide,
Speaker 1: and in your view, the key variable that may have
Speaker 1: changed or that maybe changing under Trump is this is
Speaker 1: the renewed relationship and the renewed trajectory of globalization or globalization.
Speaker 1: That's exactly right. I wrote that actually right after he
Speaker 1: was elected in our quarterly piece, that if you go
Speaker 1: through all the things that he'd said on the campaign trail,
Speaker 1: most of them would have no meaningful long term impact
Speaker 1: on inflation. We don't really know about the appeal of
Speaker 1: Obamacare what that would do exactly, but um, you know,
Speaker 1: in the long run, probably not huge. But the one
Speaker 1: thing you can really do is put the Berlin Wall
Speaker 1: back up. Now he can't do that obviously, but but
Speaker 1: you know, we're sort of seeing that not just we're
Speaker 1: talking about our own wall. Of course, Well yeah, exactly right,
Speaker 1: we're putting a wall back up. And but it isn't
Speaker 1: just us either. It's you know, Europe is having you know,
Speaker 1: many more cross border conflicts, and the general trend to
Speaker 1: globalization looks like it's at least coming to a slowdown. Anyway.
Speaker 1: The interesting thing to me about this pivotal role that
Speaker 1: Trump plays in the inflation story is that central banks
Speaker 1: or the Fed seems totally out of the picture on
Speaker 1: this question. And so it's the central bank's job to
Speaker 1: lift inflation or maintain stable prices. And central banks, to
Speaker 1: some extent, really pride themselves on having defeated inflation over
Speaker 1: the eighties and nineties and two thousands, and they congratulate
Speaker 1: themselves on sort of maintaining very low inflation expectations, which
Speaker 1: they say then feeds back into low inflation. But according
Speaker 1: to your story, there are other really big factors that
Speaker 1: are completely unrelated to the central bank, and maybe it's
Speaker 1: someone on the political side that could actually get the
Speaker 1: inflation right back up to where they want. Yeah, look,
Speaker 1: I think the central bank power is uh is exaggerated
Speaker 1: in their own minds, and in reality, you know that
Speaker 1: if the only thing you have is a hammer, everything
Speaker 1: looks like a nail. And the only thing that the
Speaker 1: central banks can really do, other than you know, police
Speaker 1: the financial system make sure it doesn't collapse, is maintain
Speaker 1: money in reserves, and it turns out that doesn't do everything.
Speaker 1: You know, The one thing they can do over time
Speaker 1: is raised or lower the price level, and that's kind
Speaker 1: of all they can really do. And that's you know,
Speaker 1: Greenspan used to say that that, you know, by maintaining
Speaker 1: low and stable inflation, that's the best thing the Fed
Speaker 1: can do to to create better long term growth. Let's,
Speaker 1: you know, the other policy lever that Trump could pull
Speaker 1: besides the globalization could be something on the fiscal front.
Speaker 1: And we've seen an unexpected or we're in we're going
Speaker 1: to see an unexpected positive fiscal impulse that I think
Speaker 1: a lot of economists weren't expecting. Part of it is
Speaker 1: the tax cuts. Part of it is also the elimination
Speaker 1: of the budget caps from the dead sailing in. That's
Speaker 1: a lot of money going into the economy theoretically, a
Speaker 1: lot of new funding for domestic programs. Again, I guess
Speaker 1: this gets back though to the sort of Candian equation,
Speaker 1: because the way we'll talk about that is this is
Speaker 1: a lot of new money at a time when we
Speaker 1: don't have we don't have a lot of spare resources.
Speaker 1: But on the fiscal side, is there Does that do
Speaker 1: much in your view to lift inflation? No, not really,
Speaker 1: because um, you know, and it can it can change
Speaker 1: the texture, the near term texture of inflation, but can't
Speaker 1: really change it that much. You know, to go spend money,
Speaker 1: the government has to borrow it. And so they have
Speaker 1: to take dollars from somebody. And you know, whether it's
Speaker 1: they're taxing it from you to spend it somewhere else,
Speaker 1: or they're borrowing it from you to spend it somewhere else,
Speaker 1: the dollars are are neutral. You know, the amount of
Speaker 1: liquidity in the system doesn't change. Uh. And so yeah,
Speaker 1: we can favor one industry over another industry. Um. And
Speaker 1: we can change with tax policy. We can change you know,
Speaker 1: the near term contours, but we can't really change the
Speaker 1: level of inflation very much with fiscal policy. It's difficult
Speaker 1: to do other than other than by well, I guess
Speaker 1: this is really fiscal policy, but putting up trade barriers
Speaker 1: will do it. This is a really contentious point, this
Speaker 1: question of the fiscal dominance and whether it can change
Speaker 1: their trajectory. And I have my own personal audio syncretic views,
Speaker 1: but I don't want to, like, I don't want to
Speaker 1: get into that here. But I'll let's go back to
Speaker 1: what's happening right now in inflation. When you look at
Speaker 1: let's say we get the next CPI report, what are
Speaker 1: you going to be looking at. I mean, one of
Speaker 1: the things that you do on Twitter. Which is really
Speaker 1: great is you really dive into the data and you
Speaker 1: look at rent and healthcare and various trimmed mean measures
Speaker 1: of breaking down the CPI report. What are you doing
Speaker 1: when you look into all this stuff? How come? Okay? Sure,
Speaker 1: so I'm an inflation nerd. There's you know, someone's got
Speaker 1: it's been said and it's yeah, exactly, somebody's got to
Speaker 1: do that. Um, you know, the BLS produces two hundred
Speaker 1: and eighties some different subcategories of inflation. Um, you know,
Speaker 1: so you know eggs, uh, you know fresh you know,
Speaker 1: which they aggregate up into fresh food, which aggregates up
Speaker 1: into food which you know. So so you can really
Speaker 1: break down when you get the headline number, it really
Speaker 1: doesn't tell you a whole lot, because it can be
Speaker 1: a big thing moving a little or a little thing
Speaker 1: moving a lot, and so it's important to kind of
Speaker 1: look down at those little pieces, um you know. Recently,
Speaker 1: what I think the story is going forward over the
Speaker 1: next few months is what happens to um used autos,
Speaker 1: but also what's what's happening to medical care, So medical
Speaker 1: cares in services ex housing. It's kind of roughly a
Speaker 1: quarter of the of the CPI pie is services ex
Speaker 1: housing less rents of shelter, and medical care is an
Speaker 1: important part of that volatility wise. So you know, if
Speaker 1: medical medical care had been going down for the last year,
Speaker 1: so we think that's one of those temporary things, and
Speaker 1: so in the last month or two it looks like
Speaker 1: it might might be hooking back positive, and so we're
Speaker 1: gonna watch for that see that hook continues. And then
Speaker 1: the other about another quarter of overall inflation is core goods,
Speaker 1: and once the dollar has gone down for a while,
Speaker 1: you expect core goods to go positive. Core goods have
Speaker 1: been in deflation forever, uh and so we would expect
Speaker 1: that to start going a little positive. And so those
Speaker 1: are sort of the big, well, the big little pieces
Speaker 1: that we look at. How do you protect against because
Speaker 1: as you say, there's so much data, there's so many
Speaker 1: ways to look at some time series and lop off
Speaker 1: something like we're gonna look at uh CPI services X energy,
Speaker 1: which was a something we were focused a lot on
Speaker 1: during the oil crash and and all that stuff, because okay,
Speaker 1: that's that's an idio styne credic one time factor. How
Speaker 1: do you guard against essentially finding the series that fits
Speaker 1: a narrative. Sure, if you take everything out that went down,
Speaker 1: it goes up right. Well, you know, you have to
Speaker 1: have a general you have to have a longer term view.
Speaker 1: I think of what's you know, what's driving a particular series,
Speaker 1: And I think that economists tend to have a longer
Speaker 1: term view of what's driving inflation, but they don't really
Speaker 1: have a view of what's driving a pair. And so
Speaker 1: this last month we had this big jump in apparel
Speaker 1: prices month on month, and and lots of economists said, oh,
Speaker 1: you know, that's that's gonna be reversed next month. But
Speaker 1: if you have a longer term view, you'll notice that
Speaker 1: the prior few months that had been really really low,
Speaker 1: and so we're actually just back on trend. And so
Speaker 1: we don't think that's going to do anything, But you
Speaker 1: have to have This is the reason that I delve
Speaker 1: into the numbers as much as I do, is you've
Speaker 1: got to have some idea of over a longer time
Speaker 1: frame than last month, what happened to the numbers? Yeah,
Speaker 1: you mentioned eggs, and they feed out how do they
Speaker 1: tell the price of eggs? They just go to a
Speaker 1: grocery store and look, what is the process. Yeah, I
Speaker 1: mean it's it's it's pretty close to that. You know.
Speaker 1: They obviously different sorts of prices are gathered in different ways,
Speaker 1: but to some extent, all the grocery store stuff is
Speaker 1: really still done by people walking around a grocery store
Speaker 1: with you know, the electronic equivalent of clipboards and looking
Speaker 1: for the same thing they bought last month and saying, okay,
Speaker 1: now here's the price. And you have lots and lots
Speaker 1: of people doing that over many, many different goods, and
Speaker 1: then they all send it back to the BLS, who
Speaker 1: goes and does their little mathy thing on and gets
Speaker 1: the right answer. But what's interesting is it seems like
Speaker 1: it the measurement of inflation is not particularly sensitive to
Speaker 1: exactly how you gather these things. The billion in the well,
Speaker 1: you know, so the billion prices project a m I T.
Speaker 1: You know, you might have heard about they've gather all
Speaker 1: their prices online and and you know, you can't gather
Speaker 1: some things online very well. But nevertheless, when they do that,
Speaker 1: they get almost exactly the same figure that the BLS
Speaker 1: comes up with doing it the old fashioned way. And
Speaker 1: so it turns out that there's a lot of complaint
Speaker 1: about you know, uh, you know what you do with
Speaker 1: substitution if if something is not available this month that
Speaker 1: was available last month, and how you hadonically adjust things.
Speaker 1: A lot of complaint about that, but at the end
Speaker 1: of the day, it turns out not to make that
Speaker 1: much difference. Interesting to wrap up, I mean, as you said,
Speaker 1: the big question or the reason your phone is ringing
Speaker 1: off the hooks. People want to know what's coming next.
Speaker 1: Are we about to see a turning point or has
Speaker 1: there been a lot of noise that's a result of
Speaker 1: some screwing numbers a year ago that's making the year
Speaker 1: over year figures look weird, or in the case of
Speaker 1: the recent CPI report, is it's something about apparel price
Speaker 1: is just compensating for the months earlier. Why don't you
Speaker 1: give us a forecast or sort of tell us what
Speaker 1: you think is happening now? Sure, well, look, I think
Speaker 1: that you know, I sort of gave you the short
Speaker 1: term contour. I think that the longer term. You know,
Speaker 1: we have these two risks, and one of them was
Speaker 1: the policy risk we talked about, but the real risk,
Speaker 1: the big risk. And by the way, I think that
Speaker 1: investors should look at risks and they should manage risks.
Speaker 1: They shouldn't listen to me and what I think is
Speaker 1: going to happen. They should be you know, everyone should
Speaker 1: recognize you have inflation risks, and you haven't seen it
Speaker 1: for twenty years, but you still have that risk, and
Speaker 1: particularly when it's cheap too heads, you should do so.
Speaker 1: But the bigger, longer term risk is that, you know,
Speaker 1: we know that inflation has these long tails. We know
Speaker 1: that over the last time of years, you know, a
Speaker 1: third of the time that inflation was over four, it
Speaker 1: was also over ten. And and there are inflation dynamics
Speaker 1: which which caused that to happen, you know, And and
Speaker 1: the risk right now is that we've had this period
Speaker 1: since the early nine of a virtuous cycle of lower
Speaker 1: interest rates causing lower money velocity, which causes lower inflation,
Speaker 1: which causes lower interest rates and so on. And we've
Speaker 1: seemed to have come to the end of that cycle.
Speaker 1: And if and and and the risk now is that
Speaker 1: normalizing interest rates kicks in the vicious cycle of all
Speaker 1: those things going in reverse. And if that happens, then yeah,
Speaker 1: it's not necessarily this cycle's concern. It's one or two
Speaker 1: or three cycles down the road. You go to three percent,
Speaker 1: then you go to five percent, and you know, and
Speaker 1: and we don't have central bankers who believe that, and
Speaker 1: they aren't doing the right things to counteractive. Michael Ashton
Speaker 1: of Enduring Investments the Inflation Guy on Twitter, thank you
Speaker 1: very much for joining us. Great to be here. Thank
Speaker 1: you very much. Well there you haven't folks. Tracey is
Speaker 1: not here, so I have nobody to banter with. But
Speaker 1: I really enjoyed that conversation, obviously, and I think this
Speaker 1: is a topic about which all of us are going
Speaker 1: to be very focused on, at least for the next
Speaker 1: several months, as we see whether this is some sort
Speaker 1: of temporary uptick we've seen an inflation due to some distortions,
Speaker 1: or whether we really are on the verge of some
Speaker 1: sort of inflation tail risk or a new paradigm or
Speaker 1: a new uh meaningfully new trend. And so hopefully we'll
Speaker 1: revisit this on the podcast at some point and we'll
Speaker 1: actually have an answer. Just kidding. None of these questions
Speaker 1: ever truly get answered. We just try and get a
Speaker 1: little smarter over time. Anyway, This has been another episode
Speaker 1: of the Odd Lots podcast. As I'm Joe Wisenthal. You
Speaker 1: can follow me on Twitter at The Stalwart. You can
Speaker 1: follow my co host, Tracy Alloway on Twitter at Tracy Alloway.
Speaker 1: You can follow Michael on Twitter at The Inflation Guy,
Speaker 1: and please follow our producer on Twitter tofur Foreheads at Foreheast,
Speaker 1: as well as the Bloomberg head of podcast, Francesco Levy
Speaker 1: at Francesco Today. Thanks for listening.