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Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.

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Speaker 1: My name is Mike Regan. I'm a senior editor at Bloomberg.

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Speaker 2: And I'm Aldona hired across asset reporter with Bloomberg.

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Speaker 1: And this week on the show, Well, the magic number

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Speaker 1: is one point one percent. That's how much the US

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Speaker 1: economy grew in the first quarter, according to the government's

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Speaker 1: first estimate. That's down from growth of two point six

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Speaker 1: percent at the end of last year, and quite a

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Speaker 1: bit lower than the one point nine percent that economists

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Speaker 1: had estimated in a Bloomberg survey. So is this it

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Speaker 1: is that looming recession we've been hearing about more or

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Speaker 1: less since the last recession. Is it finally upon us?

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Speaker 1: And if so, how bad could it get? We're going

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Speaker 1: to pick the brain of a senior economist at a

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Speaker 1: major US bank, but Bildana. First, I have a very

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Speaker 1: important question for you.

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Speaker 3: Always have an important question.

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Speaker 1: This is a divisive question this time of year. Okay,

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Speaker 1: it's playoff time, but the question is hockey.

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Speaker 2: Obviously, the sabers are out right, they're out. I don't

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Speaker 2: actually watch that much of it, what my husband tells me.

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Speaker 1: Okay, the wait, wait, wait, wait wait, you just do

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Speaker 1: what your husband tells you.

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Speaker 3: No, no, just when it comes. That's not.

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Speaker 2: I mean, the only knowledge I have of the NHL

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Speaker 2: is what he tells what what? What he relates back

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Speaker 2: to me? You have me flustered.

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Speaker 4: Now.

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Speaker 2: I know that the Sabers are out, which is sad

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Speaker 2: for our household. But the devils are are they still

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Speaker 2: in the play?

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Speaker 1: Devils indeed are still live.

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Speaker 3: Oh my gosh. Then that's who I'm rooting for.

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Speaker 1: Just beat the Ranges, the Ranges, but Florida Beat. You're

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Speaker 1: exhausting my hockey knowledge. I'm an NBA guy. I uh,

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Speaker 1: this is so you don't for me.

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Speaker 3: I see, okay, but.

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Speaker 1: I wish the hockey would just end earlier, like I

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Speaker 1: could get into it if they weren't competing at the

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Speaker 1: same time. Yeah, mba.

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Speaker 2: Anyway, I don't know if there's a hockey team where

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Speaker 2: our guests this week is based.

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Speaker 3: She's in Charlotte. Is sarah hockey team?

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Speaker 1: Oh yeah, yeah, I believe.

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Speaker 3: So I don't know. Well, let me bring her, let

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Speaker 3: me let me bring her in.

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Speaker 2: It's Sarah House, senior economists at Wells Fargo. Welcome to

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Speaker 2: the show.

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Speaker 4: Thank you. So I'm a journey from Charlotte. So our

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Speaker 4: closest NHL team is in Raleigh, and the Hurricanes, I'm

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Speaker 4: happy to say, are still in the playoffs.

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Speaker 3: Oh my gosh, she knows more than me and you.

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Speaker 1: It's amazing that they play hockey in Carolina during basketball

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Speaker 1: season at all.

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Speaker 2: It's amazing that they play hockey in Florida at all. True,

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Speaker 2: I'm always amazed by that.

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Speaker 1: Well, Sarah, hockey or basketball the important question?

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Speaker 4: First, hockey, for sure?

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Speaker 1: Really, there you go.

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Speaker 3: We beat we beat you out.

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Speaker 2: Okay, But Sarah, maybe you can just start by telling

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Speaker 2: us about your role at Wells Fargo.

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Speaker 4: Sure. So, I'm one of our teams senior economists. So

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Speaker 4: I focus on the US economy, specifically inflation and labor markets.

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Speaker 4: Look a lot at FED policy just given the importance

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Speaker 4: of those two sectors there, but really just that broader

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Speaker 4: focus on the overall US outlook.

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Speaker 1: So, Sarah, that print for the first quarter GDP surprising

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Speaker 1: to you, more or less what you expected. How walk

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Speaker 1: us through how you're thinking about what we know about

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Speaker 1: the economy after that report?

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Speaker 4: Yeah, so we're actually below consensus, in part because you

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Speaker 4: did get some pretty significant revisions to consumer spending in

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Speaker 4: the days before the release, so we had taken down

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Speaker 4: our consumer spending numbers, but I think in some ways

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Speaker 4: it was surprising and just the degree of the slowdown,

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Speaker 4: so sort of bigger drag from from inventories. But you know,

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Speaker 4: overall final demand from domestic purchasers was holding up, and

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Speaker 4: so that's really kind of the better bell weather for

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Speaker 4: underlying pace of economic activity. But we did see momentum

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Speaker 4: slow over the quarter, and so we're a little less

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Speaker 4: optimistic that we can maintain the pace that we saw

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Speaker 4: in Key one as we look out further into the year.

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Speaker 2: Okay, so let's look up into the year, because I

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Speaker 2: believe you and your team are anticipating a modest recession

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Speaker 2: for later this year, starting later this year, So can

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Speaker 2: you tell us what's behind that.

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Speaker 4: Yeah, so we are in the recession camp. We don't

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Speaker 4: think it's going to be quite the douzy of the

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Speaker 4: past few recessions. But when we look at just the

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Speaker 4: degree of tightening that we've seen coming from the FED

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Speaker 4: and really just the severity of inflation, we think that

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Speaker 4: if the Fed's going to be really set on getting

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Speaker 4: inflation anywhere close back to its two percent target, it's

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Speaker 4: likely that we're going to see demand need to pull back,

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Speaker 4: and so we are expecting a contraction later this year

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Speaker 4: and spending. We're already starting to see some weakness coming

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Speaker 4: out of the business investment side, and this is really

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Speaker 4: a FED engineered recession aimed at curtailing demand to send

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Speaker 4: that inflation pressure. Before the mess of March, we already

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Speaker 4: see credit conditions tightened just as the outlook was deteriorating,

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Speaker 4: So we think that's going to be important part of

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Speaker 4: this slowdown, and not just the availability of credit, but

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Speaker 4: just also the cost leading to businesses and households just

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Speaker 4: getting a little bit more conservative.

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Speaker 2: And you see it starting later this year and then

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Speaker 2: continuing on into the first half of twenty twenty four.

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Speaker 2: Or how long can we expect it to actually be

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Speaker 2: playing out?

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Speaker 4: That's a good question. Yeah, So in our baseline forecast,

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Speaker 4: so we have the economy tipping into recession around the

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Speaker 4: third quarter and really things getting worse around Q four.

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Speaker 4: So Q four is kind of where we see the

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Speaker 4: worst of it, but still spilling over a little bit

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Speaker 4: into Q one. So we think it's likely to be

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Speaker 4: kind of more of a slow drag in terms of

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Speaker 4: economic activity, just given that, we also don't think the

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Speaker 4: Fed's going to be writing to the rescue as soon

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Speaker 4: as you do see that weakness, the nature of the

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Speaker 4: inflation that we're seeing right now, I think that the

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Speaker 4: FED is actually going to be pretty reluctant to ease

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Speaker 4: policy even as the economy is entering a recession. So

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Speaker 4: we do think it's likely to last a few.

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Speaker 1: Quarters, you know, sir, there seems to be this sort

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Speaker 1: of discrepancy right now between the manufacturing side of the

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Speaker 1: economy and the services side of the economy. Manufacturing is

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Speaker 1: very weak, you know, according to most of the purchasing

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Speaker 1: manager indexes, they're all coming in below fifty, you know,

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Speaker 1: that sort of dividing line between growth and contraction for manufacturing.

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Speaker 1: Services have been better, but they're still holding above that fifty,

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Speaker 1: signaling growth in the service industries. I mean, obviously the

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Speaker 1: service side of the economy is way way bigger than

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Speaker 1: the manufacturing side. But I'm wondering how you think about

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Speaker 1: that discrepancy? Is there, you know, the possibility that that

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Speaker 1: manufacturing side is sort of a canary in the coal

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Speaker 1: mine for the entire economy, or how do you think

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Speaker 1: about it? Sort of you know, one's growing, one's shrinking,

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Speaker 1: and what it means going forward.

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Speaker 4: Yeah, So I think one important aspect of that manufacturing

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Speaker 4: services divide in this cycle, in particular, is the nature

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Speaker 4: of the crisis that we just came out of, and

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Speaker 4: really what areas of the economy have done fairly well

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Speaker 4: over the past few years and which ones have struggled

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Speaker 4: a little bit more to get back on their feet. So,

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Speaker 4: you know, what's so interesting about the COVID recession is

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Speaker 4: that it was a boon for manufacturing. So typically when

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Speaker 4: you see a downturn, that tends to be some of

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Speaker 4: the more cyclical items, you know, big ticket costs, and

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Speaker 4: so consumers retrench more. But just given the nature of

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Speaker 4: the shock that we saw and the demand that resulted

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Speaker 4: in physical things over experiences, that was a huge benefit

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Speaker 4: to the manufacturing sector. So we think some of this

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Speaker 4: pullback is cyclical, so it's in response to the higher

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Speaker 4: rate environment that we're seeing businesses cutting back on capital

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Speaker 4: goods expenditures. But we also think it's a little bit

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Speaker 4: of payback from some of that demand being pulled forward

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Speaker 4: and just really unsustainable levels of activity and demand for

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Speaker 4: goods that again just benefited so much from the nature

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Speaker 4: of the crisis. So I think there's a little bit

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Speaker 4: of both in there that I think the downturn that

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Speaker 4: we've seen, and not just the isms, but some of

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Speaker 4: the hard data on manufacturing from the Industrial Production Report

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Speaker 4: is indicative of the conditions are getting harder. It's harder

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Speaker 4: for businesses to plan, they're cutting back on spending. But

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Speaker 4: we think some of this is also just payback from

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Speaker 4: what we saw in the pandemic years.

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Speaker 2: And you mentioned the turmoil that we saw in the

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Speaker 2: banking sector, and obviously that continues to play out. But

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Speaker 2: I'm wondering how you're thinking about it, is the worst

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Speaker 2: behind us? And then how can we start to see

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Speaker 2: credit tightening or a crunch, whichever way you refer to it.

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Speaker 2: How can we see it starting to manifest in the economy.

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Speaker 4: Yeah, so our baseline assumption is the worst is over.

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Speaker 4: You know, we saw obviously the Treasury, the FED, the

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Speaker 4: FDIC come out pretty strongly and swiftly to try and

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Speaker 4: stem the issues surrounding the banking sector. So, for example,

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Speaker 4: we have a new facility aimed at helping helping banks

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Speaker 4: with some of the securities that have lost value. And

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Speaker 4: so our working assumption is that we're not in for

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Speaker 4: an outright credit crisis, but we do think that on

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Speaker 4: net credit is going to be tighter ahead. So we

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Speaker 4: had already seen credit tight and pretty substantially leading into March.

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Speaker 4: So if you look at the Senior Loan Office or

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Speaker 4: survey for example that only went through the fourth quarter,

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Speaker 4: we were seeing recessionary degrees of tightening across business loans,

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Speaker 4: consumer loans, commercial real estate already. Now we don't have

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Speaker 4: the next out quite yet, so we don't know exactly

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Speaker 4: what the March events did to that. But you do

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Speaker 4: have some data, for example, from the Dallas FED that

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Speaker 4: does a by quarterly version of this, and it showed

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Speaker 4: marginally more more tightening, and so we think that it's

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Speaker 4: it's that additional restraint on credit flow. So we think

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Speaker 4: maybe there's not a significant degree of additional tightening. I

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Speaker 4: think that's consistent with what a number of Financial Conditions index,

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Speaker 4: including the Bloomberg one, is showing. But I think overall

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Speaker 4: we're looking at probably marginal more tightening. As banks are

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Speaker 4: just a little bit more conservative, there's probably more anks

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Speaker 4: around some of their funding costs and what's happening with

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Speaker 4: the deposits, and so we think that that's going to

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Speaker 4: lead to just slower credit growth across the economy, and

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Speaker 4: that's going to weigh on activity. It's going to weigh

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Speaker 4: on business's ability to expand, to hire, and so we

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Speaker 4: think it's it's going to be a slow kind of

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Speaker 4: a slow burn as we move through the rest of

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Speaker 4: this year.

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Speaker 1: And you do point out in a recent note that

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Speaker 1: credit spreads haven't exactly blown out. They did widen quite

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Speaker 1: a bit after the March bank turmoil, they've closed up

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Speaker 1: a little bit, you know, and for listeners who are unaware,

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Speaker 1: that's basically the interest rate on corporate bonds, the spread

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Speaker 1: above the interest rate on treasuries is what we're talking about.

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Speaker 1: Should we expect some more widening if the economy is

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Speaker 1: headed for a recession? And how bad would you expect

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Speaker 1: that to get if so, And really, to complicate the

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Speaker 1: question even further, how do you explain why credit spreads

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Speaker 1: have remained fairly tame in this environment?

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Speaker 4: Yeah, so I think it's possible that we'll see those

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Speaker 4: credit spreads widen a little bit as you think you

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Speaker 4: do see market participants get a little bit more concerned

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Speaker 4: about the path for the economy. So, you know, we're

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Speaker 4: a little bit more downbeat in our assessments of what

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Speaker 4: we think is going to happen to the US economy.

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Speaker 4: There still is this the softly camp floating around, so

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Speaker 4: we think it's if we were to see that happen,

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Speaker 4: I think you would see those credit spreads widen. But

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Speaker 4: I think in some ways that the fact that they

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Speaker 4: haven't widened all already it speaks to, you know, this

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Speaker 4: is a pretty uncertain environment. So while we're in the

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Speaker 4: recession camp, you know, there's a lot of unique factors

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Speaker 4: about this cycle, which I think makes it very difficult

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Speaker 4: to kind of pin down the timing of when activity

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Speaker 4: is likely to just low more meaningfully and when you

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Speaker 4: actually might get some of that more pressure on corporations

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Speaker 4: and their profits and just pricing therefore being reflected in

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Speaker 4: that worsening outlook for the business sector.

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Speaker 2: And then how are you thinking about what's going on

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Speaker 2: with the jobs market, Because we do have some more

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Speaker 2: chatter of people saying the jobless claims have ticked up

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Speaker 2: a little bit in recent weeks. The jolts number was

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Speaker 2: a bit more surprising than people had thought. So how

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Speaker 2: are you starting to think about what's going on in

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Speaker 2: the jobs market.

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Speaker 4: Yeah, So our view of the jobs market is that

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Speaker 4: overall the market remains very strong, but the direction here

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Speaker 4: is very important. So if you look across a whole

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Speaker 4: host of labor market indicators, the direction is deteriorating. So

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Speaker 4: you can see that certainly from the demand side, with

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Speaker 4: those job openings down twenty percent from their peak. You

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Speaker 4: can see it in terms of the jobless claim so

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Speaker 4: still at exceptionally low levels, but we have seen them

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Speaker 4: trend higher over the past few months after being more

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Speaker 4: or less stable through twenty twenty two. Same thing with

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Speaker 4: hiring plans, so we've seen weakening across the pmis whether

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Speaker 4: you're looking at the ISM versions or some of the

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Speaker 4: regional FED employment components in their surveys, but also just

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Speaker 4: the small business hiring plans. So that's been an area

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Speaker 4: where small businesses have been the ones that have had

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Speaker 4: the hardest time getting labor in this economy over the

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Speaker 4: past few years. But we're seeing those hiring plans dial

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Speaker 4: back pretty markedly here, and in fact they're lower than

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Speaker 4: at any point of barring just the throes of the

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Speaker 4: pandemic since about twenty seventeens. You're seeing the demand indicators

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Speaker 4: come down supplies coming back a little bit, and that's

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Speaker 4: helping prop up the overall level of nonfarm employment in

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Speaker 4: the pace of hiring. But even then, we've seen it

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Speaker 4: decelerate over the past year, and we think we're going

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Speaker 4: to see a further downturn here in the coming months.

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Speaker 1: So I think when we hear the word recession, you know, dunk,

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Speaker 1: dund dun, people tend to think of, you know, double

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Speaker 1: digit unemployment, something really nasty. I don't get the impression

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Speaker 1: that's what you're bracing for, though, how bad do you

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Speaker 1: think that unemployment rate could get from here.

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Speaker 4: We're not bracing for a huge spike in the unemployment rate,

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Speaker 4: and part of that has to do with the fact

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Speaker 4: that we're not thinking this is going to be a

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Speaker 4: downturn like we saw in two thousand and eight, two

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Speaker 4: thousand and nine, or the acute downturn that we saw

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Speaker 4: in twenty twenty. So our GDP contraction we're looking for

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Speaker 4: basically a peak to traff decline of roughly one percent.

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Speaker 4: But even when we look at the increase in the

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Speaker 4: unemployment rate, so we're only expecting that to go up

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Speaker 4: to about five point one percent. So if realized, that

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Speaker 4: would actually be the smallest increase in the unemployment rate

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Speaker 4: over recession, and I think part of that reflects the

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Speaker 4: fact that it's not a super severe downturn. But also

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Speaker 4: there are still industries like leisure and hospitality that are

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Speaker 4: catching up on hiring, and so that's going to have

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Speaker 4: an impact in terms of perhaps the degree of output cuts.

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Speaker 4: But those are less lower productivity jobs, and so that's

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Speaker 4: going to help there. But then there's also a supply

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Speaker 4: consideration here, So just the fact that one, employers are

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Speaker 4: already pretty desperate to hire, they might be a little

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Speaker 4: bit more conservative in terms of laying off workers, just

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Speaker 4: given how hard it's been to get workers in the

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Speaker 4: first place, not just over the past two years, but

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Speaker 4: in the years preceding the COVID recession. And then also

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Speaker 4: just the inflows into the labor force are much much

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Speaker 4: slower than what we've had in prior decade, just given

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Speaker 4: population trends. So I think just the normal inflows that

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Speaker 4: we'd be seen into the labor market in the coming

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Speaker 4: years that's going to limit how high you see that

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Speaker 4: unemployment rate rise.

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Speaker 1: So would that level of unemployment a little over five percent,

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Speaker 1: would that change the calculus for the Federal Reserve. Do

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Speaker 1: you think make them actually throw in the towel and

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Speaker 1: start cutting rates.

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Speaker 4: We're no, So we do think probably once the unemployment

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Speaker 4: rate rises a percentage point or so, we think at

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Speaker 4: that point, when it's very clear that the economy is

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Speaker 4: in a recession, we do think that the FED will

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Speaker 4: will start cutting. So this would still be a market

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Speaker 4: departure from the reaction function of prior cycle. So for example,

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Speaker 4: if you go look at the two thousand and seven

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Speaker 4: cutting cycle, so they began to cut rates when the

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Speaker 4: unemployment rate had only ticked up about a tenth or two.

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Speaker 4: So the fact that the FED is likely to wait

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Speaker 4: until unemployment has risen a full percentage point, which is

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Speaker 4: pretty well known that it usually only takes about half

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Speaker 4: a percentage point and you're definitely in a recession, I

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Speaker 4: think that's a big change in the Fed's reaction. So

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Speaker 4: we don't think that they'll, you know, completely look through

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Speaker 4: the rise in unemployment, but we think that they will

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Speaker 4: drag their feet because they want to make sure that

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Speaker 4: you are seeing slack in the labor market come back,

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Speaker 4: but also weakening demand. That's going to be enough to

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Speaker 4: put down put enough downward pressure on inflation where you're

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Speaker 4: going to get back somewhere at least close to two percent.

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Speaker 2: What about before we see any potential cuts, Like, what

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Speaker 2: are you expecting from the Fed for the remainder of

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Speaker 2: the year, Because I was speaking with a bunch of

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Speaker 2: money managers earlier this week, and a bunch of them

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Speaker 2: are expecting the FED to also raise rates at their

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Speaker 2: June meeting, even though it's not something that the market

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Speaker 2: is exactly pricing in right now. What is your team

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Speaker 2: projecting in terms of what we're getting from the Fed

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Speaker 2: before any potential cuts.

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Speaker 4: Yeah, So our or basicline expectation is that they hold

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Speaker 4: in June and they remain on hold for the following

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Speaker 4: few meetings, and that may is likely the end of

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Speaker 4: the hiking cycle. And with that, I think that comes

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Speaker 4: from the fact that you do see a number of

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Speaker 4: FED officials, I think, getting increasingly nervous about how much

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Speaker 4: they've done, lack of certainty over what the impact of

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Speaker 4: the increases are on the banking sector, what it means

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Speaker 4: for for credit growth and therefore the economy ahead. So

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Speaker 4: I think just given the rapid degree of tightening that

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Speaker 4: we've seen and the fact that FED officials they know

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Speaker 4: that policy acts with the lag they want to see

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Speaker 4: how that affects. So I think it's likely that we'll

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Speaker 4: see the FED on hold for an extended period and

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Speaker 4: then our baseline assumption is that then they cut. But

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Speaker 4: I think if we continue to see the spending continue

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Speaker 4: to grow, if we see the jobs market remain very strong, resilient,

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Speaker 4: you don't really see that meaningful increase in unemployment and

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Speaker 4: inflation remains sticky, you might hear a lot more conversations about, well,

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Speaker 4: maybe the next move is actually another hike rather than

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Speaker 4: the next move beating a cut.

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Speaker 2: So the one thing that we really haven't touched on

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Speaker 2: so far is your outlook on inflation. I think the

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Speaker 2: one thing everybody can agree on is it's just not

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Speaker 2: coming down fast enough. So what are you expecting in

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Speaker 2: terms of the inflation rate coming down and to what level?

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Speaker 4: Yeah, so our expectations are that we are going to

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Speaker 4: see some meaningful improvement here over the coming month. So

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Speaker 4: I think some of the increases we saw in the

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Speaker 4: first quarter might have to do with a little bit

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Speaker 4: of a residual seasonality, So you tend to see more

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Speaker 4: price increases at the start of the year, and maybe

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Speaker 4: just the seasonals not quite catching up with that. And

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Speaker 4: I think also some of the momentum we've seen in inflation,

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Speaker 4: you have to remember a lot of that came through

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Speaker 4: revisions to those seasonal factors, so showing that Q four

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Speaker 4: was actually a lot stronger than it was. So as

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Speaker 4: we think ahead, I think there's some technical reasons why

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Speaker 4: we might get a little bit more of a clear

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Speaker 4: improvement on the inflation side over the next few months.

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Speaker 4: Is those seasonals will actually lend a little bit more

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Speaker 4: of a depressing effect to some of the readings coming up.

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Speaker 4: But then I think also just where we are in

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Speaker 4: the economy and the growth cycle, so our expectations are

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Speaker 4: that you're starting to see the impact of the weaker

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Speaker 4: housing market start to show up in these official inflation measures.

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Speaker 4: I think we got a little bit of a taste

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Speaker 4: of that in March. Maybe it overstated the pace of decline,

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Speaker 4: but I think that's set to gather momentum. Thus far,

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Speaker 4: the improvement in inflation has been pretty narrow. It's been

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Speaker 4: largely energy and vehicles, but I think that there's certainly

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Speaker 4: more room for that vehicle this inflation to pick up,

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Speaker 4: but also broader goods as we have seen supply chains correct,

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Speaker 4: and also just consumers are getting more choosy and their

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Speaker 4: finances are squeezed, and so they just don't have that

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Speaker 4: same degree of purchasing power. Just they're not able to

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Speaker 4: just accept the same degree of higher prices that we've seen.

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Speaker 4: So we think that that's going to be an important

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Speaker 4: part in other goods, but also even some services, including

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Speaker 4: some of the more discretionary services like travel that can

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Speaker 4: also reprice pretty quickly as compared to other parts of

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Speaker 4: the service sector like medical care for example. So we

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Speaker 4: have core inflation coming down but still looking pretty high

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Speaker 4: when we get to the end of the year. So

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Speaker 4: core PC probably somewhere close to three three and a

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Speaker 4: half percent on a year over year basis, I think progress,

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Speaker 4: but still unacceptably high. And I think what we'll put

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Speaker 4: the FED in a pretty tough spot is they're seeing

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Speaker 4: that labor market deteriorate, but inflation is still running uncomfortably high.

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Speaker 3: So what does the FED do?

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Speaker 2: So you guys are projecting cuts obviously towards the end

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Speaker 2: of the year, but if inflation is still at three

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Speaker 2: and a half, you know it does put them in

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Speaker 2: a bund, as you say, So what do they do

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Speaker 2: in that instance, like maybe you can put yourself in

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Speaker 2: their mindset and think about how they might be thinking

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Speaker 2: about it.

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Speaker 4: Yeah. So I think given what we've seen in terms

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Speaker 4: of the discussions and how frequently you're seeing officials including

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Speaker 4: share Pal harken back to the nineteen seventies, I think

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Speaker 4: that they're going to lean towards giving inflation a little

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Speaker 4: bit more weight in this environment, that they're going to

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Speaker 4: accept somewhat weaker labor market conditions and an unemployment rate

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Speaker 4: in part because the labor market is contributing to this

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Speaker 4: inflation environment. It is just not all the supply chains

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Speaker 4: for physical goods, the lack of chips for auto's production,

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Speaker 4: but it comes down in large parts to the fact

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Speaker 4: that you're still seeing exceptionally strong labor cost growth. So

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Speaker 4: we had a very strong Key one employment costs index

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Speaker 4: showing labor costs still running it close to five percent annualize,

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Speaker 4: and that has the FED pretty nervous about what's happening

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Speaker 4: to some of the services components of the core. And

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Speaker 4: so I think that given that the labor market is

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Speaker 4: contributing to these inflation air pressures in the significant way,

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Speaker 4: I think that the FED looks through some of that

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Speaker 4: labor market weakness if it means getting inflation at least

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Speaker 4: back on track towards two percent. They don't need to

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Speaker 4: hit two percent on the nose, but I think they

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Speaker 4: want to see that conditions are in place for it

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Speaker 4: to slow further, you.

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Speaker 1: Know, Sarah. One of the biggest headlines that we saw

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Speaker 1: this week that I think caught a lot of people

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Speaker 1: off guard was Treasury Secretary Janet Yellen came out and

440
00:23:49,240 --> 00:23:53,800
Speaker 1: said the quote unquote x state for the debt ceiling

441
00:23:54,160 --> 00:23:57,280
Speaker 1: is in her estimation now June one. In other words,

442
00:23:58,040 --> 00:24:00,600
Speaker 1: the US government, if the debt ceiling is not by

443
00:24:00,600 --> 00:24:03,639
Speaker 1: then basically has the potential to run out of money

444
00:24:04,160 --> 00:24:07,560
Speaker 1: in early June. Then the Congressional Budget Office came out

445
00:24:07,600 --> 00:24:10,280
Speaker 1: and kind of confirmed the timing more or less. I

446
00:24:10,320 --> 00:24:12,280
Speaker 1: don't think to the day, but said early June was

447
00:24:12,359 --> 00:24:15,919
Speaker 1: kind of the target. So many people that we've talked

448
00:24:15,920 --> 00:24:20,080
Speaker 1: to have kind of, I think, ignored this issue and

449
00:24:20,119 --> 00:24:23,320
Speaker 1: hope it goes away to some degree, which makes sense

450
00:24:23,320 --> 00:24:27,439
Speaker 1: given how many times issues come up and the brinkmanship

451
00:24:27,640 --> 00:24:29,919
Speaker 1: goes down to the eleventh hour and then there's a

452
00:24:29,960 --> 00:24:34,080
Speaker 1: deal struck to avert the worst case scenario. I do

453
00:24:34,200 --> 00:24:36,560
Speaker 1: wonder though, if this time is different. I mean, politics

454
00:24:36,560 --> 00:24:39,720
Speaker 1: are so toxic and so combative in the US right now.

455
00:24:40,640 --> 00:24:44,520
Speaker 1: I'm assuming, you know, if you're forecasting a shallow recession,

456
00:24:44,640 --> 00:24:47,639
Speaker 1: that your base case is that this won't be an issue,

457
00:24:47,680 --> 00:24:52,359
Speaker 1: that this will get resolved before disaster strikes. But I'm

458
00:24:52,400 --> 00:24:54,600
Speaker 1: wondering how you're thinking about it. How big of a

459
00:24:54,680 --> 00:24:58,280
Speaker 1: risk is this the US doesn't get to a deal

460
00:24:58,280 --> 00:25:01,320
Speaker 1: to increase the debt ceiling before that date. How big

461
00:25:01,359 --> 00:25:02,919
Speaker 1: of a threat to the economy is that. I mean,

462
00:25:03,119 --> 00:25:05,160
Speaker 1: my guess is it's a massive threat to the economy.

463
00:25:05,160 --> 00:25:07,240
Speaker 1: But I'm just curious how you're thinking about it. All.

464
00:25:07,920 --> 00:25:10,479
Speaker 4: Yeah, so I think this is a significant threat. And

465
00:25:10,920 --> 00:25:13,600
Speaker 4: we think, despite you know, it seems we go through

466
00:25:13,600 --> 00:25:16,760
Speaker 4: this exercise, you know, at least every couple of years,

467
00:25:16,800 --> 00:25:19,879
Speaker 4: and it eventually gets worked out and we've all become

468
00:25:20,240 --> 00:25:23,080
Speaker 4: a bit numb to the debate. We think that this

469
00:25:23,200 --> 00:25:27,680
Speaker 4: particular instance has the potential to be quite contentious, and

470
00:25:28,200 --> 00:25:31,320
Speaker 4: it's reaching that X state and surpassing it with It's

471
00:25:31,359 --> 00:25:33,879
Speaker 4: a tail risk in our view, but it's a significant one,

472
00:25:33,920 --> 00:25:37,920
Speaker 4: just given the catastrophic implications that it would that it

473
00:25:37,960 --> 00:25:41,280
Speaker 4: would likely have. So we think about just the split

474
00:25:41,359 --> 00:25:44,680
Speaker 4: in Congress and even just the some of the divisions

475
00:25:44,680 --> 00:25:48,719
Speaker 4: within the GOP and how thin their margins are. You know,

476
00:25:48,840 --> 00:25:51,679
Speaker 4: this could very likely come down to the wire. And

477
00:25:51,880 --> 00:25:54,040
Speaker 4: I'd also point out that it doesn't even we don't

478
00:25:54,080 --> 00:25:57,280
Speaker 4: even have to actually reach that X date without a deal,

479
00:25:57,320 --> 00:26:00,280
Speaker 4: But if it looks like it's coming down very close

480
00:26:00,800 --> 00:26:02,600
Speaker 4: to the end of that period, you could still see

481
00:26:02,640 --> 00:26:05,400
Speaker 4: a lot of collateral damage in the economy, I think,

482
00:26:05,520 --> 00:26:09,919
Speaker 4: particularly given the toxic political environment and perhaps you know,

483
00:26:10,080 --> 00:26:13,439
Speaker 4: some not a lot of optimism that it might actually

484
00:26:13,440 --> 00:26:15,439
Speaker 4: get done. So if you go back to twenty eleven,

485
00:26:15,480 --> 00:26:18,760
Speaker 4: for example, consumer confidence over the summer, when we were

486
00:26:18,760 --> 00:26:21,760
Speaker 4: having a very similar split in terms of Congress and

487
00:26:21,840 --> 00:26:25,639
Speaker 4: the White House, you saw confidence plunge that summer. You

488
00:26:25,640 --> 00:26:28,720
Speaker 4: saw the stock market decline essentially seventeen percent in just

489
00:26:28,760 --> 00:26:30,720
Speaker 4: a matter of weeks. So you don't even need to

490
00:26:30,760 --> 00:26:33,119
Speaker 4: actually default on the debt for I think there to

491
00:26:33,160 --> 00:26:37,720
Speaker 4: be real damage in the economy, and particularly given that

492
00:26:37,720 --> 00:26:41,080
Speaker 4: that the overall picture is already getting increasingly fragile, So

493
00:26:41,119 --> 00:26:43,560
Speaker 4: it wouldn't take a lot to kind of accelerate that

494
00:26:43,600 --> 00:26:48,280
Speaker 4: downward momentum if you did see another contentious debt ceiling.

495
00:26:47,920 --> 00:26:50,480
Speaker 1: Debate, but then even in actual default and it just

496
00:26:50,520 --> 00:26:52,800
Speaker 1: seems like, well, the wheels really come off the bus

497
00:26:52,800 --> 00:26:53,399
Speaker 1: at that point.

498
00:26:53,760 --> 00:26:54,280
Speaker 4: Game over.

499
00:26:54,800 --> 00:27:00,639
Speaker 1: Yeah, it's not funny, that's not I laugh because a

500
00:27:00,680 --> 00:27:03,200
Speaker 1: nervous laughter of course at the apocalypse.

501
00:27:03,720 --> 00:27:08,840
Speaker 2: Yeah, the apocalyp We can cry after the podcast is over.

502
00:27:10,160 --> 00:27:14,240
Speaker 1: Well, Sarah House, senior economist at Wells Fargo. Really great

503
00:27:14,280 --> 00:27:16,960
Speaker 1: to be able to pick your brain on all things

504
00:27:16,960 --> 00:27:20,680
Speaker 1: about the economy this week. Can't let you go just yet.

505
00:27:20,840 --> 00:27:23,320
Speaker 1: We have to talk about the craziest things we saw

506
00:27:23,359 --> 00:27:25,240
Speaker 1: in markets this week, which is our tradition.

507
00:27:25,720 --> 00:27:28,040
Speaker 3: We have a lame one and a good one. Should

508
00:27:28,040 --> 00:27:28,880
Speaker 3: I go with the lame one?

509
00:27:28,920 --> 00:27:32,680
Speaker 2: Okay, it's actually from my sister, who's our new craziest things.

510
00:27:33,280 --> 00:27:35,200
Speaker 1: We don't have to put her on the payroll here.

511
00:27:35,200 --> 00:27:37,439
Speaker 2: Yeah we will, because she keeps texting me all the

512
00:27:37,440 --> 00:27:40,399
Speaker 2: time like crazy stuff she saw. But it's a little

513
00:27:40,400 --> 00:27:43,600
Speaker 2: bit lame anyway. She said, this was the craziest thing

514
00:27:43,680 --> 00:27:47,640
Speaker 2: she saw. Wendy's is putting their chili with beans into

515
00:27:47,680 --> 00:27:49,640
Speaker 2: grocery stores at four ninety nine.

516
00:27:49,440 --> 00:27:54,760
Speaker 1: A canoe for a can of chili from Wendy's with beans.

517
00:27:54,560 --> 00:27:57,960
Speaker 2: With beans and beef, And apparently they started making the

518
00:27:58,040 --> 00:28:02,240
Speaker 2: chili because they had a lot of leftover hamburger meat

519
00:28:02,440 --> 00:28:03,640
Speaker 2: and they didn't want to waste it.

520
00:28:03,760 --> 00:28:04,080
Speaker 1: Really.

521
00:28:04,200 --> 00:28:08,040
Speaker 2: Yeah, anyway, it's a little lame. I'll admit I like it.

522
00:28:08,119 --> 00:28:10,680
Speaker 1: I like it. H Okay, I tell you commend to

523
00:28:10,720 --> 00:28:13,160
Speaker 1: your sister for me. She's doing good work.

524
00:28:13,280 --> 00:28:15,520
Speaker 3: Yeah, she is. She usually says to be some really

525
00:28:15,560 --> 00:28:16,080
Speaker 3: good ones.

526
00:28:16,760 --> 00:28:17,960
Speaker 1: Five bucks for canna chilli.

527
00:28:18,000 --> 00:28:20,880
Speaker 2: I don't know, I know, maybe it's a super large camp.

528
00:28:20,960 --> 00:28:23,119
Speaker 1: I feel like it's probably cheaper than that at Wendy's. Well,

529
00:28:23,119 --> 00:28:24,399
Speaker 1: have to do some research on that.

530
00:28:24,520 --> 00:28:27,080
Speaker 2: We can go to Wendy's. Oh my gosh. Yeah, good,

531
00:28:27,119 --> 00:28:29,200
Speaker 2: Frosty's all.

532
00:28:29,160 --> 00:28:31,320
Speaker 1: Right, Sorry, how about you. You see anything crazy this week?

533
00:28:31,720 --> 00:28:34,879
Speaker 4: Well, one thing that stuck out to me was a

534
00:28:34,880 --> 00:28:39,360
Speaker 4: comment from the Ism Manufacturing Index we got earlier this week,

535
00:28:39,440 --> 00:28:41,720
Speaker 4: and I think it just did a really good job

536
00:28:42,160 --> 00:28:45,440
Speaker 4: summing up just how much uncertainty that we are seeing

537
00:28:45,440 --> 00:28:47,680
Speaker 4: in this economy and how in some ways we're seeing

538
00:28:47,720 --> 00:28:50,719
Speaker 4: things weakend but in other ways hold up better. And

539
00:28:50,840 --> 00:28:53,480
Speaker 4: she just speaks to I think the degree of uncertainty

540
00:28:53,520 --> 00:28:57,080
Speaker 4: about where exactly. The economy even is right now, let

541
00:28:57,080 --> 00:29:01,000
Speaker 4: alone where it's it's going. So the comment was, we

542
00:29:01,040 --> 00:29:04,120
Speaker 4: seem to be in a season of contradictions. Business is slowing,

543
00:29:04,160 --> 00:29:07,160
Speaker 4: but in some ways it isn't. Prices for some commodities

544
00:29:07,160 --> 00:29:10,960
Speaker 4: are stabilizing, but not for others. Some product shortages are over,

545
00:29:11,200 --> 00:29:14,680
Speaker 4: others aren't. Trucking is more plentiful, except when it isn't.

546
00:29:15,000 --> 00:29:17,960
Speaker 4: There's uncertainty one day but not the next. The next

547
00:29:17,960 --> 00:29:21,120
Speaker 4: couple of months should provide answers or not. It's hard

548
00:29:21,160 --> 00:29:23,040
Speaker 4: to make projections at.

549
00:29:22,240 --> 00:29:25,240
Speaker 3: The That's almost like a poem.

550
00:29:27,800 --> 00:29:30,000
Speaker 1: All It's like the shruggy man emoji at the end.

551
00:29:29,960 --> 00:29:32,840
Speaker 2: Of the day, Yes, the one, Yeah, they should have

552
00:29:33,440 --> 00:29:34,920
Speaker 2: the little shruggy.

553
00:29:35,480 --> 00:29:38,959
Speaker 1: The pandemic I feel like broke everything. It broke every chart.

554
00:29:39,400 --> 00:29:42,680
Speaker 1: It really just created this environment where no one can

555
00:29:42,680 --> 00:29:47,000
Speaker 1: predict anything. Is that your sort of vibe these days, Sarah,

556
00:29:47,080 --> 00:29:50,560
Speaker 1: That it's just forecasting is infinitely harder than it used

557
00:29:50,600 --> 00:29:51,600
Speaker 1: to be before the pandemic.

558
00:29:51,760 --> 00:29:54,560
Speaker 4: It's certainly gotten a lot harder, and I think there's

559
00:29:55,200 --> 00:29:58,000
Speaker 4: tremendous more uncertainty. And I think you see that, you know,

560
00:29:58,120 --> 00:30:01,920
Speaker 4: even in our own forecast discussion. But amongst other economists.

561
00:30:01,960 --> 00:30:04,400
Speaker 4: If you look at just the dispersion of estimates, if

562
00:30:04,400 --> 00:30:06,840
Speaker 4: you look at the FED and how they rank a

563
00:30:06,880 --> 00:30:10,480
Speaker 4: certainty around their own forecast, it's at record highs. So

564
00:30:11,240 --> 00:30:13,880
Speaker 4: I thought that summed up. I think where the overall

565
00:30:13,920 --> 00:30:16,920
Speaker 4: state of the economy and economists are right now?

566
00:30:17,640 --> 00:30:20,360
Speaker 1: All right, well, my crazy thing is back in the

567
00:30:20,400 --> 00:30:22,760
Speaker 1: crypto markets. I'm just going to read the lead of

568
00:30:22,760 --> 00:30:26,680
Speaker 1: the Bloomberg story because it sums it up so well. Well,

569
00:30:26,720 --> 00:30:30,840
Speaker 1: this is an Ohio man photographed lounging in a bathtub

570
00:30:30,920 --> 00:30:33,640
Speaker 1: full of dollar bills must serve four years in prison

571
00:30:34,320 --> 00:30:37,360
Speaker 1: for stealing seven hundred and thirteen bitcoin from a computer

572
00:30:37,440 --> 00:30:40,760
Speaker 1: device seesed by the government in a case against his brothers.

573
00:30:40,800 --> 00:30:47,400
Speaker 1: So the brother got arrested for laundering money in the

574
00:30:47,520 --> 00:30:53,840
Speaker 1: darknet in of various crypto transactions. The irs actually seized

575
00:30:54,200 --> 00:30:58,480
Speaker 1: the brother's hard drive, which had what he thought were

576
00:30:58,520 --> 00:31:02,000
Speaker 1: his bitcoin wallet. But I guess the way this works

577
00:31:02,120 --> 00:31:05,360
Speaker 1: is you really just store your private keys on the wallet.

578
00:31:06,240 --> 00:31:11,000
Speaker 1: So the brother was able to using the actual private keys,

579
00:31:11,040 --> 00:31:15,560
Speaker 1: basically replicate the wallet on the hard drive and steal

580
00:31:15,920 --> 00:31:19,960
Speaker 1: seven hundred and thirteen bitcoins right off of a hard drive.

581
00:31:20,200 --> 00:31:25,120
Speaker 1: When was it possession by the irs? Twenty twenty? So

582
00:31:25,200 --> 00:31:26,560
Speaker 1: April twenty twenty.

583
00:31:27,560 --> 00:31:30,520
Speaker 2: Bitcoin was like eight or nine thousand dollars back then.

584
00:31:30,400 --> 00:31:33,160
Speaker 1: He was twenty twenty. Wasn't that low, wasn't it?

585
00:31:33,240 --> 00:31:35,680
Speaker 2: Because we were coming out of March twenty twenty when

586
00:31:35,720 --> 00:31:36,120
Speaker 2: it hit.

587
00:31:36,040 --> 00:31:40,320
Speaker 1: Up seven hundred and thirteen bitcoin value then at about

588
00:31:40,320 --> 00:31:43,480
Speaker 1: four point nine million. So I'll let you do the

589
00:31:43,520 --> 00:31:46,640
Speaker 1: math there. But there were a bunch of other four

590
00:31:46,720 --> 00:31:49,560
Speaker 1: hundred and eighty seven Okay, what is it again? Four

591
00:31:50,120 --> 00:31:53,440
Speaker 1: hundred and seventy seven digital token valued what four point

592
00:31:53,520 --> 00:31:59,160
Speaker 1: nine million million? Divided by Shoot, we're doing math live

593
00:31:59,360 --> 00:32:00,760
Speaker 1: on the cast here.

594
00:32:00,640 --> 00:32:03,040
Speaker 2: Because divided by seven hundred.

595
00:32:03,040 --> 00:32:06,720
Speaker 1: Thirteen thirteen, what was the price of VICLINI hundred? You

596
00:32:06,840 --> 00:32:07,800
Speaker 1: got that love on twenty four?

597
00:32:08,160 --> 00:32:09,920
Speaker 3: Yes, it was March twenty twenty, She's.

598
00:32:09,720 --> 00:32:11,920
Speaker 1: What and I buy? The best part is they seize

599
00:32:11,920 --> 00:32:13,680
Speaker 1: the guy's phone and they find this picture of him

600
00:32:14,200 --> 00:32:16,640
Speaker 1: lounging in a bathtub full of dollar bills. I thought

601
00:32:16,640 --> 00:32:19,920
Speaker 1: that was pretty good. And uh, one of the things

602
00:32:20,120 --> 00:32:23,640
Speaker 1: they said he did he used sixty eight bitcoin as

603
00:32:23,680 --> 00:32:27,239
Speaker 1: collateral for a one point two million dollar loan and

604
00:32:27,360 --> 00:32:33,920
Speaker 1: spent that loan to buy a luxury condo in Miami. Cleveland.

605
00:32:34,160 --> 00:32:37,360
Speaker 2: Wow, yeah, I guess.

606
00:32:37,880 --> 00:32:40,800
Speaker 1: Cleveland, which you know, I didn't even know they had

607
00:32:40,880 --> 00:32:42,880
Speaker 1: luxury condos in Cleveland. I mean, I Lebron had to

608
00:32:42,880 --> 00:32:44,960
Speaker 1: live somewhere, so I guess maybe it's that building. But

609
00:32:46,000 --> 00:32:47,480
Speaker 1: had they released the picture of the guy in the

610
00:32:47,520 --> 00:32:50,400
Speaker 1: bathtub full of dollar bills, he looks very happy, I

611
00:32:50,440 --> 00:32:52,240
Speaker 1: would be two. But you know, if you're a real

612
00:32:52,280 --> 00:32:55,360
Speaker 1: player dollar like at least tens or twenties, what he.

613
00:32:55,320 --> 00:32:59,400
Speaker 2: Did, he did just one dollar bill. That's good.

614
00:32:59,640 --> 00:33:03,320
Speaker 1: So anyway, that's a good story. Sara House, so great

615
00:33:03,320 --> 00:33:06,280
Speaker 1: to hear your perspective on everything. We really appreciate your time.

616
00:33:06,440 --> 00:33:16,120
Speaker 2: Thank you, Thank you, Sarah.

617
00:33:16,640 --> 00:33:17,320
Speaker 3: What Goes Up.

618
00:33:17,400 --> 00:33:20,200
Speaker 2: We'll be back next week. Until then, you can find

619
00:33:20,280 --> 00:33:23,760
Speaker 2: us on the Bloomberg Terminal, website and app or wherever

620
00:33:23,840 --> 00:33:26,560
Speaker 2: you get your podcasts. We'd love it if you took

621
00:33:26,600 --> 00:33:28,760
Speaker 2: the time to rate and review the show so more

622
00:33:28,800 --> 00:33:31,840
Speaker 2: listeners can find us. You can find us on Twitter,

623
00:33:32,600 --> 00:33:37,120
Speaker 2: follow me at Bildana Hirich. Mike Reagan is at Reaganonymous.

624
00:33:37,600 --> 00:33:42,120
Speaker 2: You can also follow Bloomberg Podcasts at podcasts. What Goes

625
00:33:42,200 --> 00:33:44,720
Speaker 2: Up is produced by Stacey Wong and our head of

626
00:33:44,760 --> 00:33:48,120
Speaker 2: Podcasts is Sage Bauman. Thanks for listening. We'll see you

627
00:33:48,120 --> 00:33:51,640
Speaker 2: next week.