Speaker 1: John Men. A few weeks ago, you and I had
Speaker 1: a really interesting conversation with an author, Peter Touchin, who
Speaker 1: took to us about elite overproduction and how that causes
Speaker 1: horrible instability in society. You've got too many over educated
Speaker 1: people the likes of you and me, and not enough
Speaker 1: high status jobs for us to have, and that causes
Speaker 1: no end of upset. And in the past we talked
Speaker 1: about this in the UK, we've managed to avoid the
Speaker 1: social unrests and some other countries we've seen when they've
Speaker 1: overproduced their elease by sending our elites abroad to the
Speaker 1: empire and got rid of them. Off they go and
Speaker 1: they can't stay here and cause trouble now here we
Speaker 1: are today and we have a similar problem, according to
Speaker 1: touch where we are over producing a lot of our
Speaker 1: elites and we have nowhere to export them to. But
Speaker 1: we got a really interesting email from one of our listeners.
Speaker 1: And listeners, by the way, we love getting emails from you.
Speaker 1: We want your input, we want your questions, We want
Speaker 1: to answer your questions and comment on your comments on
Speaker 1: our podcasts and in our writings, so keep sending them.
Speaker 1: In this one, this email is just that this time around.
Speaker 1: We haven't exported our elites abroad. We've just exported them
Speaker 1: into the third sector, all right, So one of them.
Speaker 1: So what this listener, thank you, Andy says. He says,
Speaker 1: this is not just about the wealth pumped the ultra wealthy.
Speaker 1: It's about the flow of funds to quangos, to NGOs,
Speaker 1: to bureaucrats, the civil service, retirees, godblated pensions, charity bosses,
Speaker 1: special interest groups and you know, I quote bloody lawyers.
Speaker 2: Agrease with Peter or in that Peter singleed it lawyers
Speaker 2: as well.
Speaker 1: Yeah, these are all part of the modern elite, and
Speaker 1: many are also the counter elites. Think about the current
Speaker 1: COVID inquiry and all these groups headed by QC's vying
Speaker 1: to get their special interest groups across. Who funds all
Speaker 1: these groups? Ultimately, very few of them have a productive
Speaker 1: role in society exiitn't increase wealth or increase its productive capital,
Speaker 1: but they have a disproportionate voice in society and their
Speaker 1: burden falls on the everyday work, the entrepreneur and the grafter.
Speaker 1: That's them, the modern elite. We've exported into the third sector,
Speaker 1: and they're acting as a drag on the rest of
Speaker 1: us on the entrepreneurs and the grafters. They have too
Speaker 1: much weight when it comes to policymaking and to voice
Speaker 1: got to get rid of them.
Speaker 2: I think almostly. I think that's really perceptive. I mean,
Speaker 2: you have consistently made the point about gift aid and
Speaker 2: the fact that you can essentially, as a wealthy person,
Speaker 2: hypothe kate, you know, a chunk of your tax revenue
Speaker 2: to the charity of your choice, as opposed to paying
Speaker 2: into the things that we've all democratically agreed are the
Speaker 2: priorities of the country. And I think obviously it's just
Speaker 2: an extension of this. It's a classic phenomenon that we've
Speaker 2: seen over the last kind of like ten to twenty years.
Speaker 2: I think, where if you hide behind the label charity,
Speaker 2: you can basically do what you want and you know,
Speaker 2: operate with a certain amount of a patness. And I
Speaker 2: do think that that whole sector kind of generally needs
Speaker 2: to be more accountable. And I think they're getting ready
Speaker 2: a lot of the tax breaks and making them much
Speaker 2: clearer of which kind of charities and endures, et cetera,
Speaker 2: get government funding, which is tax payer money, and making
Speaker 2: them more accountable for that is actually important and like
Speaker 2: a major thing that needs to be tackled.
Speaker 1: They all get tax payer money. There is no such
Speaker 1: thing as a charity that doesn't get tax payer money.
Speaker 1: Every single one is getting your money and my money.
Speaker 1: Toward that too much, you'll upset me. But that was
Speaker 1: in the newspaper this morning. A small charity being discussed,
Speaker 1: in fact, quite a big charity in the scheme of
Speaker 1: becuts so many a time, one hundred and thirty million
Speaker 1: pounds in it. I won't name it, you can go
Speaker 1: look it up. But the key point is this charity
Speaker 1: is one hundred and thirty million in It gives away
Speaker 1: thirteen million a year, which means it's going to mind
Speaker 1: itself down anyway unless it's getting a lot of new
Speaker 1: contributions in. I don't know how these people figure the
Speaker 1: numbers out. That they have no advice anyway, be that
Speaker 1: is it me. I looked at this and I thought, well,
Speaker 1: this was interesting. I'm going to look up and see
Speaker 1: what the guy who distributes the thirteen million could a year,
Speaker 1: because I wouldn't have any trouble doing that. By the way,
Speaker 1: what he gets paid, And the answer is that his
Speaker 1: total pay is one hundred and thirty grand and that
Speaker 1: includes and get this, John, get this, twenty thousand pounds
Speaker 1: a year in pension contributions.
Speaker 2: Oh, I know, this is what we're talking about here now.
Speaker 1: Anyway, moving on, moving on. We were talking about talking
Speaker 1: about these elites, and someone suggested to me that we
Speaker 1: have a look at the Hidalgos in Spain in the
Speaker 1: twelfth century, because there was a point when in someone
Speaker 1: who's better at twelfth century history can write in and
Speaker 1: tell us more detail on this, because I can't find
Speaker 1: any more detail on it. But the Dalgos were the
Speaker 1: lowest of the low when it came to the nobility.
Speaker 1: But the nobility of all types didn't have to pay
Speaker 1: any taxes, so and the Hidalgos were a fertile lot.
Speaker 1: So gradually we got to the point where practically nobody
Speaker 1: who had any money was paying any taxes, and that
Speaker 1: led to all sorts of difficulty and upset and India's
Speaker 1: social unrest, until eventually the head algoes were forced to
Speaker 1: start paying taxes. And that was a rather interesting example.
Speaker 1: I thought of the over production of elite, because these
Speaker 1: elites weren't necessarily over educated or anything like that. They're
Speaker 1: just looking for the status.
Speaker 2: Anyway, associal Yeah, they kind oft bought them wrong with
Speaker 2: the Spanish elite. Yeah, we just producing too many of themselves.
Speaker 1: That's interesting being an elite by luck, Yeah, which is
Speaker 1: what happens if you, you know, maybe you have a
Speaker 1: family charity, for example, a family foundation and you can
Speaker 1: all work for it. Kind of similar thing, right.
Speaker 2: It is similar, I mean, but getting kind of dangerously
Speaker 2: close to the whole inheritance tax argiven as well.
Speaker 3: But.
Speaker 1: Make that a gift tax. I say, now that moves
Speaker 1: us on neatly, neatly, very neatly too. Today's elite, And
Speaker 1: we've talked about that today's e leader in terms of
Speaker 1: being the kind of people who have to find benefit pensions,
Speaker 1: who work in non productive industries, et cetera. But the
Speaker 1: other big signifier of being a member of the elite
Speaker 1: in the UK today is owning your home without a mortgage, right,
Speaker 1: and that's well over thirty percent of the population can
Speaker 1: kick back and not pay any attention to fast raising
Speaker 1: mortgage rates and fast raising interest rates. They don't have
Speaker 1: to worry about this, and they even don't have to
Speaker 1: worry about inflation if they have one of those nice
Speaker 1: indus link defined benefit pensions. That's what I call elite.
Speaker 2: Oh, I said, so I think andysixeen me you mentioned
Speaker 2: the gold plated coldplated pensions. But yes, I mean, I
Speaker 2: think the thing is the elite may have to they
Speaker 2: may have to worry attaining a little bit because it
Speaker 2: does look at it, if the ports of gold on
Speaker 2: which they are certain may not be as resilient, you
Speaker 2: may actually be able to go wrong with bricks and mortar. Yeah,
Speaker 2: you know.
Speaker 1: You can't go wrong with bricks and mortar. You know
Speaker 1: where you are with bricks and motor John, you know
Speaker 1: where you are.
Speaker 2: It's true, It's true. You do know where you are.
Speaker 2: It may not be where you want it to be,
Speaker 2: but you do know where you are. It's the latest
Speaker 2: the latest day of Rick's surveys, so the Royal Institution
Speaker 2: of Chartered Surveyors and the ages come out this morning
Speaker 2: as we're recording this, and with a kind of much
Speaker 2: much gloomier outlook and a major kind of sharp downturn
Speaker 2: compared to what has been going on in recent months.
Speaker 2: So basically this is basically asking a load of state
Speaker 2: agents what they think is going to happen to the
Speaker 2: housing market, and in recent months while they were gloomy.
Speaker 2: Following the whole strum ash in October, with interest rates spiking,
Speaker 2: the kind of market started to recover and kind of February,
Speaker 2: mortgage rates started going down a bit and everyone started
Speaker 2: feeling more relaxed about the housing market again. But of course,
Speaker 2: exactly because what's happened is mortgage rates have gone back
Speaker 2: up because it wasn't all liz Trust's fault. That was
Speaker 2: actually a fact that inflation was a problem. Interest rates
Speaker 2: did have to catch up. And so now that we're
Speaker 2: talking about mortgage rates averaged two year fire is now
Speaker 2: up to six point seven five percent, called the money facts,
Speaker 2: Suddenly it's not looking so good again. And so the
Speaker 2: one that caught my eye is where the kind of
Speaker 2: stagents expect house prices to be three months from now,
Speaker 2: And they'd almost got back up to the zero line,
Speaker 2: because basically it's how positive or negative you are, so
Speaker 2: a number between you know, plus fifty or plus one
Speaker 2: hundred and negative one hundred, and he'd always got back
Speaker 2: up to zero, and the latest one went all the
Speaker 2: way back down from like negative three to negative forty six,
Speaker 2: which is like a massive shift. And if you map
Speaker 2: that out, against what happens to nationwide house price growth.
Speaker 2: I want a chart and they'll be doing it in
Speaker 2: money distilled later on today. Then it's very clear that
Speaker 2: there's a very very strong correlation. So it basically says that,
Speaker 2: you know, if you thought the house price kind of
Speaker 2: correction was over, then you're wrong. It's we're going to
Speaker 2: see further house price falls this year. And that's just
Speaker 2: the nominal terms, let alone real terms.
Speaker 1: Okay, how close are we going to get? Do you
Speaker 1: think to Nail's prediction of a forty percent nomenal? Now
Speaker 1: hang on forty percent rail.
Speaker 2: For I think that's too perish. But the main thing
Speaker 2: that changes my mind on that one way or the
Speaker 2: other is whether the Bank of England basically over titans
Speaker 2: on interest rates. And I think that's perfectly possible because
Speaker 2: the other thing that I've noticed this last week, a
Speaker 2: lot of the recruitment agencies, like I think three of
Speaker 2: the listed recruitment agencies have reported this week, and they've
Speaker 2: all mentioned that the jobs markets getting harder the recruiting,
Speaker 2: the number of attempts that people want is going up,
Speaker 2: and the number of permanents they want is going down.
Speaker 2: In fact, I was reading yesterday, Anglish Page Group actually
Speaker 2: laid off some of its recruitment advisors in the UK
Speaker 2: because of, you know, a dipping activity, which is I mean,
Speaker 2: there's something, you know, there's a kind of ironic you know,
Speaker 2: I feel sorry for people were laid off, but you know, you'
Speaker 2: getting laid off because you're a head hunter and the
Speaker 2: job market is meant to be ragingly hot, and I mean,
Speaker 2: I think that kind of points to there's certainly a
Speaker 2: cooling off that just hasn't come through to the data yet.
Speaker 1: Yeah, and we have seen a fall in the number
Speaker 1: of vacancies, haven't We still above a million, but it's
Speaker 1: dance significantly.
Speaker 2: And people also point out that that's partly because in
Speaker 2: the Internet, you had a job's just hanging about for
Speaker 2: longer because you don't get deleted. You know, you don't
Speaker 2: have to pay the Guardian you advertise your job anymore.
Speaker 2: So it's sitting on LinkedIn for like weeks and months,
Speaker 2: we you know, sort of like junk mail kind of responses,
Speaker 2: but nobody's actually taking these down. So I think that
Speaker 2: the vacancy's number is probably distorted by that sort of thing.
Speaker 1: Is there no non dodgy data.
Speaker 2: John, can you trust any of it?
Speaker 1: Can't trust anybody that'll be the elites that will.
Speaker 2: Right exactly between that and the mainstream media. Thank god
Speaker 2: we are not the mainstream media, I know.
Speaker 1: Welcome to Maren Talks Money, the podcast in which people
Speaker 1: who know the markets explain the markets. I'm Maren Sunset Web.
Speaker 1: This week our guest is Brian Pellegrini, founder of Intertemporal Economics.
Speaker 1: We discussed the Bank of England's monetary policy versus the FEDS,
Speaker 1: and Brian's going to tell us why he thinks the
Speaker 1: Bank of England is doing a better job. John and
Speaker 1: I will discuss afterwards whether he is right on that
Speaker 1: or not. Hi, Brian, thank you so much for joining
Speaker 1: us today.
Speaker 3: Thanks for having me Maren.
Speaker 1: Great Now listen, I know that your particular area of
Speaker 1: interest at the moment and ours as well, by the way,
Speaker 1: is inflation. What's going on with it in the US,
Speaker 1: in the UK globally? Are we going to see inflation
Speaker 1: for towards the end of this year? If it does,
Speaker 1: is it all over a back to two percent forever?
Speaker 1: Or are things never that simple? So how about we
Speaker 1: just start with you giving me an overview of where
Speaker 1: you think we are with inflation.
Speaker 3: We're likely to see inflation come down pretty rapidly in
Speaker 3: this second half of twenty twenty three, and I think
Speaker 3: it's going to be so rapid that it actually frightens
Speaker 3: the central bankers a little. And people had focused very
Speaker 3: heavily on the supposedly hawkish aspects of Powell's statements the
Speaker 3: recent press conference and then the minutes that came out
Speaker 3: yesterday July fifth, and they've looked at the disclaimers that
Speaker 3: he said that basically that if inflation is higher than
Speaker 3: we expect, then we will continue raising What he's really saying,
Speaker 3: which is that if inflation reacts in a way that's
Speaker 3: better than we expect, we're going to react to that
Speaker 3: as well. And I think if you look at the minutes,
Speaker 3: there was a lot of discussion about fear of how
Speaker 3: big and how powerful the lag and the effects of
Speaker 3: monetary policy are for the tightening that took place over
Speaker 3: the last year and a half. Right, So they're saying,
Speaker 3: is there another shoe that's waiting to drop or are
Speaker 3: we passed all that?
Speaker 1: There's a feeling, you think, on the committee that they've
Speaker 1: done enough in the actual talk. The last comments at
Speaker 1: Pearl Gavee. He talked about the skip which you mentioned
Speaker 1: in your latest piece of work, the idea that it's
Speaker 1: really just appoors and there'll be more later. There's more
Speaker 1: rises to come, but if inflation does come down in
Speaker 1: the way that you expect, then there'll be normal rises.
Speaker 1: We might actually see.
Speaker 3: Cuts, definitely. I mean he outright promised that. One of
Speaker 3: the reporters brought the subject up and it kind of
Speaker 3: was addressed but didn't get followed through on was that
Speaker 3: the projections all show lower monetary policy rates in twenty
Speaker 3: twenty four and twenty twenty five. Then at the end
Speaker 3: of twenty twenty three, and a reporter asked why that
Speaker 3: was if Powell didn't see a recession occurring and neither
Speaker 3: do I in twenty twenty three at least, and his
Speaker 3: statement was, as inflation comes down, in order to maintain
Speaker 3: real interest rates at a constant level, the Fed would
Speaker 3: have to cut right. So by saying that, he's pretty
Speaker 3: maturely easing because he's sending everyone's expectations right, So he
Speaker 3: sort of undercut himself. But he outright said if inflation
Speaker 3: comes down, they're going to do what they need to do.
Speaker 3: To keep real interest rates at a stable level, which
Speaker 3: they see as a magic number. And I think that
Speaker 3: as the FED is proven wrong and it's ex inflation
Speaker 3: expectations right, that they're going to be put in a
Speaker 3: very difficult position where they need to justify their past actions.
Speaker 3: And in twenty twenty five, in the aftermath of an
Speaker 3: inflation area twenty twenty four, it's going to look pretty
Speaker 3: clear that this was done in reaction to the twenty
Speaker 3: twenty four presidential election. Right. The Biden administration has three
Speaker 3: and about to have a fourth nominee on the board. Right,
Speaker 3: so Biden has a majority of the board that are
Speaker 3: beholden to him, and he's picked by and large of
Speaker 3: PhD economists that are people who are tend to be
Speaker 3: politically beholden to the person that chooses them, as opposed
Speaker 3: to a career bureaucrat who is less likely to be partisan.
Speaker 1: That's just loose money to next year. But can I
Speaker 1: just go back a little bit, because this is a
Speaker 1: complicated business. This you expect inflation to come down in
Speaker 1: the US and the second half of this year significantly
Speaker 1: faster than it looks like the FED believe inflation will
Speaker 1: come down. So before we go any further, I want
Speaker 1: to ask you what it is that you think will
Speaker 1: drive that, why your expectations different to that. That seems
Speaker 1: like the key point before we move on to next year.
Speaker 3: That's a great question. Well, I think that the aftermath
Speaker 3: of the supply chain unwined has been more dramatic than
Speaker 3: people expected. And if you look at the Institute for
Speaker 3: Supply Management's Manufacturing report and you look at customer inventories,
Speaker 3: what's really interesting is that the number of firms reporting
Speaker 3: their inventories being too low is still relatively high, but
Speaker 3: not at crisis levels, right. So there's still disturbance in
Speaker 3: the supply chain, right, But the number of firms that
Speaker 3: are reporting inventories being too high is at crisis levels, right.
Speaker 3: And so if the number of firms that had inventory
Speaker 3: being too low wasn't elevated, then this would be all
Speaker 3: over the news that there's an inventory crisis. And so
Speaker 3: the inventory situation in the United States in the factory
Speaker 3: sector feeds just about a one month lag. So factory
Speaker 3: prices in the United States lead factory prices in China
Speaker 3: with about a one month lag. And it's a pretty
Speaker 3: close relationship with the factory prices in China being more volatile,
Speaker 3: and so right now, factory prices in China are in
Speaker 3: outright deflation and they are down at levels seen in
Speaker 3: prior recessions. So we should expect to see that feedback
Speaker 3: into US consumer prices with the appropriate lag, and that
Speaker 3: lag starts to show up in the latter half of
Speaker 3: this year, so we should in the next few months
Speaker 3: really start to see core inflation really start to come
Speaker 3: down appreciably.
Speaker 1: Okay, interesting, Now I keep an eye on the true
Speaker 1: inflation numbers, which will pretty seem pretty good on the
Speaker 1: way up, and that they've led their official inflation numbers
Speaker 1: on the way up and they're now only just over
Speaker 1: two percent, which kind of tells us that this is
Speaker 1: coming right, and that then gives the Fed and excuse
Speaker 1: to slash rates into next year to set biding up
Speaker 1: for the election. Is that what you're thinking?
Speaker 3: Definitely. The important factor to keep in mind is that
Speaker 3: Powell is not himself a partisan, right. He is a conciliatarian. Right.
Speaker 3: His job is to make a consensus on the committee
Speaker 3: so that it looks like the FED is doing things
Speaker 3: in a calm, collective and non partisan manner. Right. But
Speaker 3: if he has a majority of the board who are
Speaker 3: outright partisans. You know, I don't want to demean these people,
Speaker 3: but they have their agendas and it's pretty clear from
Speaker 3: the minutes that there's a substantial portion of the committee
Speaker 3: that wants to ease And based on Chairman Powell's statements
Speaker 3: and his proclivity for repeating things that people say to him,
Speaker 3: we can tell who is influencing him, and it's pretty
Speaker 3: clear that that is the Biden group who are influencing
Speaker 3: him and will drive the Chairman's vote, which is approximately
Speaker 3: fifty percent of the voting weight of the committee. In
Speaker 3: real terms, everybody has one vote, but in reality, the power,
Speaker 3: the consensus power of the Chairman is about fifty percent.
Speaker 3: So taking that as the direction for FED policy, it
Speaker 3: looks likely that we're going to get some easing and
Speaker 3: in the aftermath of all this, right, what's interesting is that,
Speaker 3: you know, the Bank of England and the FED have
Speaker 3: both taken a bit of a hit to their credibility
Speaker 3: a bed, so the Bank of England both having very
Speaker 3: similar events, right, so they tightened and a leveraged part
Speaker 3: of the financial structure that they really didn't understand blew up, right,
Speaker 3: in the UK it was liability driven investing. In the
Speaker 3: US it was treasury funding by regional banks that were
Speaker 3: acting like private equity funds. And they reacted to both
Speaker 3: of those of in roughly the same way, which was
Speaker 3: to paper it over and to act in an inflationary manner, right,
Speaker 3: and say, oh, well, this wasn't really our fault, you know,
Speaker 3: don't ask us to solve all your problems. But and
Speaker 3: they papered it over, right, and people realize that that's
Speaker 3: an inflationary mess, right, that that tightening was undone by
Speaker 3: the papering that took place to replace the money supply
Speaker 3: that had been shrunken. Right. But the major difference is
Speaker 3: that the FED has never been as open and honest
Speaker 3: as the Monetary Policy Committee is, right, So it's only
Speaker 3: happened once that the chairman has been out voted in
Speaker 3: the United States, whereas it's regular currents for the head
Speaker 3: of the Bank of England to be he's just another
Speaker 3: member of the committee. And so the Bank of England
Speaker 3: has I think a more intellectually honest and intellectually open
Speaker 3: committee driving it that is willing to say, and this
Speaker 3: is really important recently that they've been willing to say
Speaker 3: we're not sure what's going on, We're going to be
Speaker 3: really careful. And if you look at the FED, it's
Speaker 3: a completely cavalier attitude. We've got it, has covered no problem.
Speaker 3: Inflation's a problem, and we're on top of it. We
Speaker 3: got it, and you're welcome America. Is basically the Fed's message.
Speaker 3: That's going to have negative consequences for the FED and
Speaker 3: as a result, for investors. I think that if you're
Speaker 3: looking to bet on inflation expectations, the credibility that the
Speaker 3: Bank of England, the Monetary Policy Committee is able to
Speaker 3: nurture with its honesty and with its humility, it's going
Speaker 3: to be a lot more valuable than what's left over
Speaker 3: at the FED, which is going to look like a
Speaker 3: completely politicized institution. And in twenty twenty six, depending on
Speaker 3: who's president, you know, it's a very good possibility that
Speaker 3: you have a replay of what went on in the
Speaker 3: transition from Lyndon Johnson to Richard Nixon. And Lyndon Johnson
Speaker 3: had a FED chairman who he brought in as a
Speaker 3: team player. Right Chairman Martin would never just change the
Speaker 3: interest rate for the ben fit of the president, but
Speaker 3: for policies right that happened to benefit the president. He
Speaker 3: was willing to do it. When Richard Nixon came in,
Speaker 3: he fought constantly with Chairman Martin because he was a
Speaker 3: Democrat and wasn't going to do what Richard Nixon wanted
Speaker 3: him to do. Richard Nixon was a Republican. So Richard
Speaker 3: Nixon brought in a pH d. Economist, Arthur Burns, who was.
Speaker 1: Poor Arthur Burns, which has called him poor Arthur Burns.
Speaker 3: He did redeem himself to a certain extent in nineteen
Speaker 3: seventy four, but it's certainly in nineteen seventy two he
Speaker 3: was a political hit man for the president and acted accordingly,
Speaker 3: and then in nineteen seventy three justified his actions by saying, well,
Speaker 3: what would you have us done? You know, everybody wants
Speaker 3: to have low unemployment in good times. You know, the
Speaker 3: Fed's credibility was wrecked as a result.
Speaker 1: Arthur Burns was one of those chairmen who was thought
Speaker 1: to be more interested in the state of the economy
Speaker 1: in general, in people's living standards and lifestyles, than he
Speaker 1: was in actually bringing inflation down. It's not that he
Speaker 1: couldn't have brought inflation down. It's just that he had
Speaker 1: too many priorities, right.
Speaker 3: Yes, And but who's setting those priorities. It's his political boss,
Speaker 3: is really the answer. Among the Watergate documentation, right that
Speaker 3: came out was a confidential letter from Richard Nixon to
Speaker 3: Arthur Burns in November of nineteen seventy one, and he
Speaker 3: says that people don't care about they don't like inflation,
Speaker 3: but they don't vote based on it. They vote based
Speaker 3: on unemployment. Richard Nixon blamed his loss in the nineteen
Speaker 3: sixty presidential election to tight monetary policy by the prior
Speaker 3: FED chair, and he said, don't let that happen again
Speaker 3: in nineteen seventy two, make sure I get elected. Burns
Speaker 3: did that, and so I think that certainly in nineteen
Speaker 3: seventy two, Burns was acting explicitly politically in holding off
Speaker 3: on raising interest rates until he felt that the lag
Speaker 3: effects would be past the election. So I think that
Speaker 3: is definitely the case. I think after that, right in
Speaker 3: nineteen seventy three, then the issue of too many priorities
Speaker 3: really starts to come out, right, and then it becomes, well,
Speaker 3: what do you want us to do? Like, you know,
Speaker 3: we want unemployment to be low, and we don't want
Speaker 3: the housing industry to be too hurt and these things. So,
Speaker 3: you know, just to a certain extent, then it becomes
Speaker 3: too many pots on the stove to mind. But a
Speaker 3: lot of that was justification and an attempt to hold
Speaker 3: off the political criticism that was taking place as the
Speaker 3: Nixon regime was collapsing. And at this time Arthur Burns
Speaker 3: was having, you know, a realization that this man who
Speaker 3: he admired and that he had helped was a dastardly
Speaker 3: person and not a good guy, right, And so you know,
Speaker 3: in his personal diary, Burns talks about finding out the
Speaker 3: dirty tricks that Richard Nixon had played on him to
Speaker 3: teach him lessons about being you know, so called about
Speaker 3: being loyal and never questioning the president. And so I
Speaker 3: do think that he was a bit naive in nineteen
Speaker 3: seventy two, and in the course of nineteen seventy three,
Speaker 3: that realization happened. All those lessons that he learned, right,
Speaker 3: and any potential for reformation of the FED was then
Speaker 3: lost in nineteen seventy seven when Jimmy Carter came in
Speaker 3: and got sick of him and said, well, I want
Speaker 3: easy money, and just like the last guy had what
Speaker 3: the heck?
Speaker 1: Yeah, And then we had William Miller exactly, and he
Speaker 1: didn't ask very long, but he had that idea that
Speaker 1: raising interest rates raised inflation. Yes, yes, didn't we have
Speaker 1: that resily in Turkey never goes away.
Speaker 3: And the results were shockingly similar. Right, And the thing
Speaker 3: to remember is William Miller had an only eighteen month term.
Speaker 3: It wasn't because Jimmy Carter didn't like the job he did.
Speaker 3: He got promoted.
Speaker 1: Right.
Speaker 3: The Treasury Secretary was critical of the Fed of saying
Speaker 3: that they were not tight enough in nineteen seventy eight
Speaker 3: and that they needed to tighten. Meanwhile, Jimmy Carter and
Speaker 3: William Miller wanted to stimulate fiscally, and Jimmy Carter wanted
Speaker 3: to send everybody fifty bucks in the mail.
Speaker 1: Yeah, he would have had such a good time if
Speaker 1: he'd been president during COVID.
Speaker 3: Well, this similarity between the events of the oil shock
Speaker 3: events of nineteen seventy three, nineteen seventy nine and COVID
Speaker 3: and the Fed' reaction to it, right and the Bank
Speaker 3: of England are mirror images. Right, And the result has
Speaker 3: been the same inflationary mess, and we'll see if they
Speaker 3: learn that lesson, But that idea that something has caused
Speaker 3: a temporary but severe degradation of the supply capacity of
Speaker 3: the economy but did not touch the demand side of things,
Speaker 3: and the FED is completely in. The central banks in
Speaker 3: general are flummixed by how to deal with that, because
Speaker 3: they say, well, should we tighten and crush demand to
Speaker 3: fit supply and then cause some sort of a long recession,
Speaker 3: or do we try and bridge that gap and let
Speaker 3: it cheat and hope that well, this diminution of supply
Speaker 3: will be covered by inventories. Right, And the result is
Speaker 3: that all three times right, teen seventy three, nineteen seventy nine,
Speaker 3: and in twenty twenty, the central banks and the governments
Speaker 3: completely overestimated the hit to demand that was going to
Speaker 3: take place, and as a result, they not only validated
Speaker 3: but doubled down on the price increases that were in
Speaker 3: the system by you know, supporting demand at a time
Speaker 3: when it really didn't need to be supported. So they
Speaker 3: really haven't learned any lesson on that aspect that if
Speaker 3: you have something bad happens, it's totally out of the blue,
Speaker 3: you're kind of got to just take your medicine right,
Speaker 3: you need to allow demand to fall. And instead of
Speaker 3: trying to say, well, maybe we can be the candy
Speaker 3: man and help everyone avoid this unfortunate incident, Ben Broadman
Speaker 3: gave a speech back in May where he describes that
Speaker 3: and basically saying, you know, it was up to us
Speaker 3: to come in during COVID and replace the shrunken money
Speaker 3: supply with newly created money. And they did not expect
Speaker 3: it to sit in bank accounts like it did, and
Speaker 3: they did not expect then demand to then come roaring
Speaker 3: back shortly after. And the situation is remarkably similar to
Speaker 3: the events of nineteen seventy nine.
Speaker 1: Difference now, of course, is that we're not going to
Speaker 1: get a pull Volka coming in to shove and trust
Speaker 1: rates up as up to the levels they were then
Speaker 1: and make it all go away. But we're going to
Speaker 1: get this bout of disinflation coming through that makes everyone
Speaker 1: feel just fine. So I suppose the two questions, then
Speaker 1: what is that that will drive a resurgence of inflation.
Speaker 1: I think we can agree that we expect inflation to
Speaker 1: be very volatile going forward, But I wonder what you
Speaker 1: think it is that will drive the next bout of volatility,
Speaker 1: and let you ask us answer that bit before I
Speaker 1: bring up the secondary question.
Speaker 3: Really, what it comes down to is the is the
Speaker 3: tightness of the labor market. Right. So, the labor market
Speaker 3: is extremely tight. So that means that if any sort
Speaker 3: of increase in orders occurs, right, a business needs to
Speaker 3: then not only find new workers, but steal them away
Speaker 3: from others. Right. So until you get an appreciable loosening
Speaker 3: of the labor market such that excess capacity can build up,
Speaker 3: so that there are second and third lines of production
Speaker 3: available to businesses that they can bring online. They can
Speaker 3: operate profitably as they are, but if a big order
Speaker 3: comes in, they can fill that order without having to
Speaker 3: raise prices appreciably. Is the big difference, right, And so
Speaker 3: the labor market remains tighter than tight in the United
Speaker 3: States in the UK, right, And that was something that
Speaker 3: was extremely tight in twenty nineteen, and the dislocation to
Speaker 3: the labor force that took place in twenty twenty and
Speaker 3: twenty twenty one made that much worse. Right, So we
Speaker 3: were already in a bad place, and COVID sort of
Speaker 3: jumped us into the middle of a bad equilibrium. The
Speaker 3: problem is is that you have, and we had talked
Speaker 3: about this. You know why America is not going back
Speaker 3: to work even now as the words participation rate is
Speaker 3: returning to its pre COVID rate. The people are different, right,
Speaker 3: So the older age ranges the participation rate has fallen,
Speaker 3: but lower ages young workers are participating at sky high
Speaker 3: rates because wages are growing so fast. So the capital
Speaker 3: structure in terms of the people, the number of people,
Speaker 3: who those people are and what they do, has changed
Speaker 3: relatively significantly in the past three years. So you need
Speaker 3: to change the physical capital structure, the actual machines on
Speaker 3: the ground to get an efficient operating economy. But how
Speaker 3: do you do that if you don't have the workers
Speaker 3: to install the machines, right, So that's the problem is
Speaker 3: that you're stuck in to catch twenty two, where you
Speaker 3: can operate relatively smoothly as long as things aren't going
Speaker 3: too fast. But as soon as you try to step
Speaker 3: things up, the system starts to barate down because there
Speaker 3: is not that excess capacity available, and there is no
Speaker 3: way to restructure the system because they will never allow
Speaker 3: that excess capacity to build up. Anytime unemployment starts to rise,
Speaker 3: they ease, They say, who whoa we don't want to
Speaker 3: be responsible for a recession, right, And you know that's
Speaker 3: that's really the key is that to get from an
Speaker 3: inflationary equilibrium to a low inflation equilibrium, you need a
Speaker 3: bad recession that kind of comes out of nowhere as
Speaker 3: far as people are concerned. And the FED doesn't want
Speaker 3: to be the one responsible for causing a recession just
Speaker 3: to cause a recession, right, because well, you're all making
Speaker 3: too much money, right, who wants to be the one
Speaker 3: that does that. So what they do is, and this
Speaker 3: happened in the nineteen seventies and it's happening again today,
Speaker 3: is they say, we're gonna run things a little slow,
Speaker 3: slower than potential growth, right for a few years, and
Speaker 3: if you're just patient, it's gonna take two or three years,
Speaker 3: but we'll get there and we won't have to have
Speaker 3: a recession. The problem is is that you never get there,
Speaker 3: right because a they don't really know what the rate
Speaker 3: of potential growth growth is because it's not a thing
Speaker 3: you can measure, right. And the second thing is is
Speaker 3: that even if the growth in raw dollar terms, right
Speaker 3: of the potential growth rate of the economy keeps moving up, right,
Speaker 3: the efficiency the flexibility of that does not grow or
Speaker 3: does not change unless you've got a real, a significant
Speaker 3: amount of capacity that people can work with. Right, so
Speaker 3: that restructuring of the capital structure needs space. And so
Speaker 3: as long as they keep one of the and this
Speaker 3: is the one of the indicators that I watch very closely.
Speaker 3: In the minutes of the FED meetings, the staff report
Speaker 3: section lists how long until they think the output will
Speaker 3: be below potential output? Right, So, right now we're in
Speaker 3: an excess demand situation, excess output. And that has been
Speaker 3: so output has been above potential since COVID start, or
Speaker 3: since since shortly after you know, the worst days of COVID,
Speaker 3: right Q three, twenty twenty. And what's basically happened is
Speaker 3: they've kept pushing back and forth this magical date that
Speaker 3: we will exit the inflationary equilibrium. So they say we
Speaker 3: expect it to be output to be above potential until
Speaker 3: twenty twenty four, and then in this last meeting they
Speaker 3: said until twenty twenty five, and during the worst of
Speaker 3: the inflation they were saying twenty twenty six. So they
Speaker 3: move it back and forth, and we'll never actually get there. Right.
Speaker 3: Is the issue is that they'll say, oh, we just
Speaker 3: need to be patient. We just need to be patient.
Speaker 3: But the solution never comes. And that's exactly what happened
Speaker 3: in the nineteen seventies and it's developing again today.
Speaker 1: And that's exactly how you create a high and volatile
Speaker 1: inflation environment. Okay, so here we are, we've established all
Speaker 1: the bad news. How on earth does an ordinary investor
Speaker 1: deal with this kind of environment? Where does their money go?
Speaker 3: There's two aspects, right. One is that standing still, there
Speaker 3: are going to be time when you can make what
Speaker 3: look like high nominal returns, right, But you've got to
Speaker 3: be cognizant of what is your real return? Right? So
Speaker 3: you have to be thinking in terms of where is
Speaker 3: the red hot locus of inflation going to be? Right? So,
Speaker 3: where is it that prices are not only being validated,
Speaker 3: but money is flowing to and expanding those prices? Right?
Speaker 3: And you know, these are the situations where you have
Speaker 3: things that eventually make it into the news. Right. So
Speaker 3: container shipping was in twenty twenty one and twenty twenty
Speaker 3: two an example of that. Right. I think that in
Speaker 3: the food and fuel complex now with renewable diesel, the
Speaker 3: connection between vegetable oils and particularly soybean oil and diesel prices,
Speaker 3: which is globally used for transportation, right. I mean in
Speaker 3: the United States, we love our gasoline, so that market
Speaker 3: have been connected for some time. But now the majority
Speaker 3: of the diesel sold on the West Coast is actually
Speaker 3: renewable diesel made from vegetable oil. And this is different
Speaker 3: from biodiesel, which is recycled and has to be mixed. Right.
Speaker 3: Renewable diesel can directly be used in the engine and
Speaker 3: is exactly the same thing as petroleum diesel. So you
Speaker 3: have now a point where there's any if there's a
Speaker 3: shock to agriculture markets or to energy markets, those two
Speaker 3: things are connected and will feed on each other because
Speaker 3: if diesel prices go up, farmers will plant more soybeans,
Speaker 3: and to plant more soybeans, they're going to need more diesel.
Speaker 1: Okay, So it makes sense for investors to have exposure
Speaker 1: to agriculture one way or another and have exposure to
Speaker 1: the energy market.
Speaker 3: I think, well, yes, and I think to look for
Speaker 3: places where supply chains are distended. Right. Low elastice items
Speaker 3: places where supply chains are distended, and those are the
Speaker 3: places where you're likely to get these explosions in prices.
Speaker 3: The other aspect is to think about the election cycles
Speaker 3: and the credibility of the banks. Right So the simple
Speaker 3: fact is that the FED is on a political calendar
Speaker 3: that right now that's a lot shorter than the Bank
Speaker 3: of England. And so even if you didn't think that
Speaker 3: there was more intellectual credibility and quality on the Monetary
Speaker 3: Policy Committee, which I do think there is, But even
Speaker 3: if you didn't have that opinion, simply the pressure, the
Speaker 3: political pressure that the FEED is in is likely to
Speaker 3: get them to ease prematurely. And so you know, you
Speaker 3: have like this horse race between the Bank of England
Speaker 3: and the FED going on where they're both saying we're
Speaker 3: going to stay tight as long as we need to,
Speaker 3: and you know, we're going to hold stick to our guns.
Speaker 3: I would bet on the Bank of England and against
Speaker 3: the FED in this, and I think that that the
Speaker 3: gap and credibility between those two banks is going to grow,
Speaker 3: and that's going to have an effect on the currency.
Speaker 3: It's going to have an effect on interest rates and
Speaker 3: asset prices in general.
Speaker 1: So what's it going to do to act prices in
Speaker 1: the US going into the end of this year.
Speaker 3: Well and to the end of this year, there's probably
Speaker 3: going to be a really nice boom. Everybody's going to go,
Speaker 3: oh wow, inflation is going down and the Fed's cutting
Speaker 3: interest rates and everything's great, and it's just like, you know,
Speaker 3: we all wanted it to be okay.
Speaker 1: So this is going to turn out with being a
Speaker 1: fantastic year for equity markets.
Speaker 3: For example, probably at the end of the year. Yeah,
Speaker 3: but the first half of twenty twenty four and inflation
Speaker 3: starts to come back and people start to get worried,
Speaker 3: and then it comes apart pretty quick. But yeah, to
Speaker 3: twenty twenty three at the end of the year will
Speaker 3: probably look like a pretty great year for equity markets.
Speaker 1: And what about gold? Is that a good hedge against inflation,
Speaker 1: against this kind of inflation.
Speaker 3: Yes, it is. I mean, the concern is that the
Speaker 3: central banks start to interfere with the gold market because
Speaker 3: they don't want it to become an alternative to currencies.
Speaker 3: It's a very good hedge against low real interest rates.
Speaker 3: That's sort of it's a hedge against not inflation, against
Speaker 3: low real interest rates. So the problem is is that
Speaker 3: in the next inflationary cycle, the problem is that they're
Speaker 3: going to not be able to raise interest rates without
Speaker 3: inverting the yield curve almost immediately. So the central banks
Speaker 3: are going to be stuck in a little bit of
Speaker 3: a position, and the way that they're going to deal
Speaker 3: with that is yield curve control. Right, They're going to
Speaker 3: fall up the Bank of Japan and prop up the
Speaker 3: long end of the of the yield curves. So you
Speaker 3: could have a situation where real interest rates very suddenly increase.
Speaker 3: So I would not be buying gold right now. I
Speaker 3: would wait until the gold market gets slaughtered in a
Speaker 3: suddenly increase in real interest rates, and then I would
Speaker 3: buy because then there will be a lot of shakeout.
Speaker 3: But in the meantime it's going to look very tempting,
Speaker 3: but I would be careful.
Speaker 1: All right, Brian, let me ask you then that you've
Speaker 1: given us a view on gold, but let's see what
Speaker 1: your view on gold is compared to another sset class.
Speaker 1: I'm afraid I always ask this question at the end
Speaker 1: of a podcast, and I think I know how you're
Speaker 1: going to answer it. If you had to hold four
Speaker 1: ten years, four ten years gold or bitcoin, which would
Speaker 1: it be gold?
Speaker 3: Definitely?
Speaker 1: Definitely we're never going to get the wrong answer. Are
Speaker 1: We were always going to get the right answer.
Speaker 3: All the all the questions about bitcoin aside or whatever. Like,
Speaker 3: I'm pretty sure that people will st value gold in
Speaker 3: ten years. I'm not so sure about bitcoin. Yeah, and
Speaker 3: that's that's the bet.
Speaker 1: That's a very fair way to put it. Brian, thank
Speaker 1: you so much for joining us today. He hugely appreciated
Speaker 1: my pleasure.
Speaker 3: Thank you for having me.
Speaker 1: So that was pretty interesting, John, I hope you agree.
Speaker 1: I think Brian's fascinating. And he was also, of course
Speaker 1: right that I recorded that interview with him before we
Speaker 1: had the USCPI numbers out earlier this week, and obviously
Speaker 1: they're now back to well, not not quite to target,
Speaker 1: but what you might consider to be reasonable levels. And
Speaker 1: he's looking at that and saying that he thinks that
Speaker 1: the Bank of England has done a better job than
Speaker 1: the FED. But the FED has got inflation. Well I
Speaker 1: don't know if they've got inflation, but inflation is back
Speaker 1: to reasonable levels. And in the UK our last number
Speaker 1: came an a eight point seven percent.
Speaker 2: Yeah, it's very it's very kind of Brian's atypicalty here
Speaker 2: anyone saying a good thing about the UK, plus too
Speaker 2: the Fed in the US. I mean the one thing,
Speaker 2: and that really was an interesting conversation. But the one
Speaker 2: thing that I would say, because I saw someone else
Speaker 2: kind of tweeting about this the other day about how, oh,
Speaker 2: you know, the Fed's preserved its credibility and that's helped
Speaker 2: a weait inflation. I hate set it, but I think
Speaker 2: the strongking Great stockpilely natural gas and shal oil kind
Speaker 2: of you know, buried beneath American soil that they've kind
Speaker 2: of been digging out for you know, the last kind
Speaker 2: of ten years or so, actually really helped with inflation.
Speaker 2: I mean, energy has been the fundamental thing making the
Speaker 2: numbers look bad in Europe and the UK in general,
Speaker 2: and the thing that's made Britain stand out as an
Speaker 2: outliers the energy price cap and the way that basically
Speaker 2: the difference between the way we subsidized electricity bills and
Speaker 2: the way that for example, the Spanish did it and
Speaker 2: the Germans did it and the French did it. I mean,
Speaker 2: I think that we're going to find it by the
Speaker 2: end of this year the euro European area, including the UK,
Speaker 2: inflation has largely kind of converged and the Britain's not
Speaker 2: going to look as much of as much of an
Speaker 2: outlier as it was before. But other than that, I mean,
Speaker 2: it's interesting that you're saying that, you know, the Bank
Speaker 2: England structure is more intellectually honest.
Speaker 1: It's interesting, isn't it from because from my point of view,
Speaker 1: we look at the Bank Vieland and we think, well,
Speaker 1: maybe it's intellectually honest, but that doesn't mean that it
Speaker 1: can see past its own group.
Speaker 2: Think yeah, And I mean there is an element of
Speaker 2: you know, it's fine to be intellectually honest. But if
Speaker 2: all you're doing whenever you sit in front of the
Speaker 2: Treasury Committee is saying computer said no.
Speaker 1: No, it isn't it the models are, then I'm saying
Speaker 1: what we thought they would say.
Speaker 2: Yeah, there's a defence between kind of like humility and
Speaker 2: kind of baffled it's not my fault indifference, which I
Speaker 2: feel is slightly more the way to the bank in England.
Speaker 1: John, We've got a special file now for hate mail
Speaker 1: from the bank villain.
Speaker 2: Stop talking about my gold plated pension.
Speaker 1: Giving a rest on the now. You know, the interesting
Speaker 1: thing about what Brand says is that's he's clearly going
Speaker 1: to be right that inflation in the US is going
Speaker 1: to be very low or getting significantly lower going into
Speaker 1: the end of this year. He said even solo that
Speaker 1: it's going to begin to frighten the FED and make
Speaker 1: them feel that they're wrong again on their expectations, and
Speaker 1: then they need to put in this difficult position where
Speaker 1: they need to look at what they've done in the
Speaker 1: pastan and justify it when they've maybe gone up possibly
Speaker 1: too fast by the end. But you know, Brand really
Speaker 1: doesn't think this is over, you know, and he looked
Speaker 1: at the numbers that came out this week on CPI.
Speaker 1: He said, yes, absolutely, that's what I expected. But look
Speaker 1: underneath and there's a lot of things going under there
Speaker 1: that makes economy really vulnerable to inflationary shots shocks going forward.
Speaker 1: You know, the labor market is still very tight. While
Speaker 1: the most acute period of labor market shortages passed, it's
Speaker 1: still a mega mismatch between skills needed and skills provided,
Speaker 1: and you can see the titness at every level. So
Speaker 1: he doesn't see this as being over at all. He
Speaker 1: is still talking about nineteen seventies. We're ducks over the
Speaker 1: next step for five years.
Speaker 2: Yeah, And I mean that's sort of that I think
Speaker 2: would be certainly our base case as well the idea
Speaker 2: of inflation volatility again and obviously no effect wants to
Speaker 2: keep real interest rates at a certain level, as Brian
Speaker 2: sort of mentions, but that suggests that unless they are
Speaker 2: willing to look through all this and and sort of
Speaker 2: Brian implies, but he doesn't apply, basically states that the
Speaker 2: kind of politically compromised, then we're likely to see a
Speaker 2: more kind of like pro inflation kind of tone from
Speaker 2: whoever the next kind of the government is. So yeah,
Speaker 2: I mean I think that's I think we'll get a
Speaker 2: lull and everyone will be a little down fo sense
Speaker 2: of confidence.
Speaker 1: Yeah yeah. Well then let me end with one quote
Speaker 1: from what Brian wrote just after when we did that
Speaker 1: interview with him on the CPI. This does not represent
Speaker 1: a potential soft landing for the FAD, but rather an
Speaker 1: inflationary pressure bomb waiting for them to take their foot
Speaker 1: off the break.
Speaker 2: That's good.
Speaker 1: Thanks for listening to this week's Maren Talk's Money. We'll
Speaker 1: be back next week in the meantime. If you like
Speaker 1: our show, rate review and subscribe wherever you listen to
Speaker 1: your podcasts. This episode was hosted by me Maren Sumset Web.
Speaker 1: It was produced by Summers Sadi and Obria Ruffin, with
Speaker 1: help from Stacy Wong, Additional editing by Blake Maple's Special
Speaker 1: thanks to Brian Pellegrini and of course to John Steppek. Finally,
Speaker 1: my weekly reminder sign up to Johns daily news letter
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Speaker 1: How many times do I have to tell you? Get
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