WEBVTT - The Real Pain From Rate Hikes May Still Be on the Way 0:00:10.039 --> 0:00:14.200 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.240 --> 0:00:15.880 I'm Joe Wisenthal. 0:00:15.440 --> 0:00:16.560 And I'm Tracy Alloway. 0:00:16.720 --> 0:00:18.280 Tracy, we've been on the road a lot late. 0:00:18.600 --> 0:00:21.520 I know it's been NonStop trips. 0:00:21.600 --> 0:00:23.840 Let's see, we did Jackson Hole and then we went 0:00:23.840 --> 0:00:27.680 to California at Huntington Beach and now we're in Austin, Texas, 0:00:27.720 --> 0:00:28.560 your hometown. 0:00:28.720 --> 0:00:30.160 Have you enjoyed Austin so far? 0:00:30.400 --> 0:00:30.880 I love it? 0:00:30.960 --> 0:00:33.839 Okay, I mean, I'm not gonna lie. Large parts of it. 0:00:33.920 --> 0:00:38.640 Do you remind me of Dallas? But controversial opinion, but 0:00:39.440 --> 0:00:43.800 it has its own thing, going to like amazing bars, restaurants, shops. 0:00:44.120 --> 0:00:47.760 We went Cowboy boot shopping at Alan Boots. We've had 0:00:47.760 --> 0:00:52.239 some amazing tex mex really excellent barbecue at Terry Black's. 0:00:52.280 --> 0:00:52.960 It's been good. 0:00:53.159 --> 0:00:54.840 Yeah, we were in Jackson Hole and we did a 0:00:54.840 --> 0:00:57.400 lot of episodes in Jackson Hall, but a lot of 0:00:57.440 --> 0:00:59.440 them were sort of like these sort of like longer 0:00:59.480 --> 0:01:03.640 running like academic questions that a lot of the episodes 0:01:03.680 --> 0:01:06.800 that we did, we didn't really do too much there 0:01:06.840 --> 0:01:09.080 on Like okay, but like what's happening right now in 0:01:09.120 --> 0:01:12.399 the economy with like monetary policy, the impact of the 0:01:12.400 --> 0:01:15.480 FED rate hikes things like that, even though that's sort 0:01:15.480 --> 0:01:16.479 of on a lot of people's much. 0:01:16.600 --> 0:01:16.800 Yeah. 0:01:16.840 --> 0:01:21.640 Funnily enough, at a macroeconomic conference, the real economy wasn't 0:01:21.720 --> 0:01:24.200 the first topic of conversation. Although that's a little bit 0:01:24.280 --> 0:01:26.720 unfair because they did talk about supply chains and things 0:01:26.840 --> 0:01:27.080 like that. 0:01:27.160 --> 0:01:27.720 But you're right. 0:01:27.760 --> 0:01:31.039 We haven't done a current state of the Economy episode 0:01:31.080 --> 0:01:34.040 for a while, although we've touched on it in various ways. 0:01:34.319 --> 0:01:36.440 One of the more recent ones was when we spoke 0:01:36.480 --> 0:01:39.560 to Wayne Dahl from oak Tree about the credit market, 0:01:40.000 --> 0:01:44.280 and a big topic of conversation in there was why 0:01:44.360 --> 0:01:47.520 haven't we seen more of an impact from this historic 0:01:47.600 --> 0:01:50.320 pace of rate hikes on the real economy. 0:01:50.720 --> 0:01:54.600 Yeah, it feels like this is still this looming question 0:01:54.840 --> 0:01:58.640 and until until we have a sort of better idea 0:01:58.680 --> 0:02:00.800 of what's going on here, I think there's like a 0:02:00.840 --> 0:02:04.200 sense of unease. And even add Jackson Hole at Powell's speech, 0:02:04.960 --> 0:02:09.160 even with the improvement in inflation from last year, there 0:02:09.200 --> 0:02:12.440 is this still underlying sense of unease, which is partly 0:02:12.520 --> 0:02:16.040 driven by the fact that we've seen improvement, but it's 0:02:16.040 --> 0:02:19.280 like we can't quite explain why because drawing that line 0:02:19.320 --> 0:02:23.000 between the rate hikes to the improvement and h inflation 0:02:23.520 --> 0:02:26.200 is hard to draw. You would expect that, okay, if 0:02:26.280 --> 0:02:29.360 unemployment had been rising significantly. It's like, okay, well we 0:02:29.400 --> 0:02:33.040 could tell the traditional monetary policy story Ship's curve is alive, 0:02:33.160 --> 0:02:36.040 and well, yes, we can't quite tell that story. And 0:02:36.040 --> 0:02:37.880 then maybe it has something to do with the terming 0:02:37.919 --> 0:02:39.919 out of the debt that we talked about, Wayne Dahl. 0:02:40.520 --> 0:02:42.480 And then if that's the case, well what does that 0:02:42.639 --> 0:02:45.519 mean then, like are we still going to feel the impact? 0:02:45.600 --> 0:02:48.200 So it's like there's improvement, but it's like there's sense 0:02:48.200 --> 0:02:49.320 of unease underneath. 0:02:49.360 --> 0:02:53.440 Absolutely, But the most simple explanation for what's been going 0:02:53.480 --> 0:02:56.200 on is, yes, we had a massive terming out of 0:02:56.240 --> 0:02:59.880 debt on the corporate side and arguably on some individual 0:03:00.120 --> 0:03:04.440 as well, homeowners for instance, and that's provided a cushion, 0:03:04.840 --> 0:03:08.399 you know, between twenty twenty one, twenty twenty twenty two 0:03:08.480 --> 0:03:11.760 and where we are now. But it can only last 0:03:11.800 --> 0:03:14.040 for so long, and you're sort of getting back to 0:03:14.080 --> 0:03:18.240 the traditional long and variable lags argument, like, yeah, maybe 0:03:18.440 --> 0:03:22.440 this is just the longest lag that we've seen in many, 0:03:22.440 --> 0:03:23.040 many years. 0:03:23.240 --> 0:03:27.040 So we did actually have this conversation at Jackson Hole. 0:03:27.120 --> 0:03:28.320 We just didn't get it on the record. 0:03:28.360 --> 0:03:29.639 We just oh, yeah, you're right. 0:03:30.360 --> 0:03:32.200 We did actually talk about all this at Jacksonville. We 0:03:32.240 --> 0:03:35.840 just never recorded an episode. But the person who we 0:03:35.960 --> 0:03:40.360 spoke to in Jackson Hole in Wyoming last month happens 0:03:40.360 --> 0:03:42.800 to be based here in Austin, Texas. So we are like, 0:03:43.160 --> 0:03:44.720 in a way, we're going to like pick up the 0:03:44.840 --> 0:03:48.120 jackson Hole series with someone who happens to be here 0:03:48.160 --> 0:03:48.680 in Texas. 0:03:48.720 --> 0:03:51.120 I like how we've gone to Austin to record an 0:03:51.160 --> 0:03:53.880 episode with someone we talked to in Wyoming. 0:03:54.280 --> 0:03:57.680 So I'm very excited we're going to explore these topics 0:03:57.720 --> 0:03:59.640 and more for them. I'm very excited about our guests. 0:04:00.160 --> 0:04:03.160 Second time, I believe her appearance on Odd Lads, We're 0:04:03.160 --> 0:04:06.760 going to be speaking with Julia Coronado. She is the founder, CEO, 0:04:06.840 --> 0:04:10.520 and president of Macro Policy Perspectives. She is also a 0:04:10.640 --> 0:04:15.120 clinical assistant professor at the University of Texas on business 0:04:15.120 --> 0:04:18.400 and economics. So, Julia, thank you so much for joining us. 0:04:18.440 --> 0:04:20.800 It is my absolute pleasure to be here with you. 0:04:21.400 --> 0:04:23.800 Really simple question to actually to start. 0:04:23.720 --> 0:04:25.560 Wait, Can I just say Julia is the first All 0:04:25.600 --> 0:04:28.440 Thoughts guest who has ever brought us breakfast tacos. 0:04:28.560 --> 0:04:31.200 Hey, which, now, if you're listening and you want to 0:04:31.200 --> 0:04:33.320 come on odd lots, this is now the expectation. 0:04:33.440 --> 0:04:36.320 Yeah, bring food, bring breakfast tacos. 0:04:36.400 --> 0:04:39.320 But Julia, so great to show you actually did real quick. 0:04:39.360 --> 0:04:41.760 What do you do at Macro Policy Perspectives? 0:04:42.200 --> 0:04:46.920 So Macro Policy Perspectives is a macro forecasting firm. So 0:04:46.960 --> 0:04:50.960 we work mostly with money managers, people that are managing portfolios, 0:04:51.040 --> 0:04:54.880 and we provide them a perspective on the US economy. 0:04:54.880 --> 0:04:59.560 We're US focused, but globally oriented and very markets oriented, 0:04:59.680 --> 0:05:03.640 so we work with money managers to help them understand 0:05:03.680 --> 0:05:04.520 this crazy world. 0:05:05.120 --> 0:05:08.280 So speaking of crazy world, and we'll get to all 0:05:08.360 --> 0:05:10.640 the dead stuff. Tercy and I the other night were 0:05:10.880 --> 0:05:14.320 we actually spoke to a group of students here at 0:05:14.360 --> 0:05:17.480 the Business school at Macombs and weird chatting about various 0:05:17.480 --> 0:05:20.200 things and what of the students said something interesting. They're like, oh, 0:05:20.360 --> 0:05:23.400 you know, they're talking about CMBs and they're like, oh, 0:05:23.520 --> 0:05:25.279 you know, it's hard to know what's in some of 0:05:25.320 --> 0:05:27.520 the they're very smart case they said, hard to know 0:05:27.600 --> 0:05:30.080 what are in some of these assets that people are buying, 0:05:30.440 --> 0:05:34.279 and what if you're buying stuff that's like Austin, downtown 0:05:34.320 --> 0:05:37.600 Austin real estate and there's huge vacancies. Isn't that true? 0:05:38.000 --> 0:05:40.320 It seems like this town is booming, is actually underneath 0:05:40.360 --> 0:05:44.440 the facade here in Austin like some problems brewing. 0:05:44.640 --> 0:05:48.000 It depends. There's a debate. The commercial real estate crowd 0:05:48.320 --> 0:05:52.440 is inherently optimistic glass half hole type of people. I 0:05:52.480 --> 0:05:54.400 think you have to be to take that kind of risk. 0:05:54.760 --> 0:05:58.359 And they've been printing money for a decade, right Austin 0:05:58.440 --> 0:06:03.920 has been booming. All of the developments exceed expectations and 0:06:04.040 --> 0:06:06.600 so it's been a great run. But yes, there is 0:06:06.640 --> 0:06:09.280 an overhang. So you see the cranes all around you, 0:06:09.760 --> 0:06:11.880 but a lot of these buildings are empty. So we 0:06:11.960 --> 0:06:15.720 have very high vacancy rates, very high rates of sub leasing, 0:06:15.800 --> 0:06:19.119 which is another indication that you know, Google or Meta 0:06:19.240 --> 0:06:21.480 builds a building, but then they don't need it and 0:06:21.520 --> 0:06:25.160 so they sublease a lot of the space. And depending 0:06:25.200 --> 0:06:27.680 on how you look at it, that the estimates of 0:06:27.960 --> 0:06:31.760 the pipeline under construction as a percent of the existing 0:06:31.839 --> 0:06:34.840 inventory is by far the highest in the nation and 0:06:34.880 --> 0:06:37.960 at record highs by many measures. So we've got a 0:06:37.960 --> 0:06:42.560 lot of supply both in offices and in multifamily that 0:06:42.640 --> 0:06:45.640 are coming to market in the next twelve to eighteen 0:06:45.680 --> 0:06:51.320 months and rates are high, vacancies are high. Probably the 0:06:51.360 --> 0:06:55.200 assumptions that went into these projects at the beginning are 0:06:55.240 --> 0:06:58.520 not going to materialize. So the question is does that 0:06:58.600 --> 0:07:01.680 mean just reduced profits or does that mean outright defaults, 0:07:01.720 --> 0:07:04.920 delinquencies and some distress. 0:07:05.080 --> 0:07:07.160 Right, this was going to be my next question, which 0:07:07.200 --> 0:07:11.080 is how does distress in commercial real estate actually feed 0:07:11.120 --> 0:07:14.679 through into the wider economy because you see different types 0:07:14.720 --> 0:07:18.680 of arguments. You know, you see a more optimistic scenario, 0:07:18.880 --> 0:07:21.960 which is, well, yes there are pockets of stress, but 0:07:22.120 --> 0:07:26.120 not everything is dire at the moment. Yes, downtown offices 0:07:26.160 --> 0:07:28.680 are probably the most affected, but you know, maybe a 0:07:28.760 --> 0:07:33.360 multi use building in the suburbs with doctors' offices and 0:07:33.440 --> 0:07:37.360 little shops like probably not as huge a deal. And 0:07:37.400 --> 0:07:40.080 then the dire scenario that you see every once in 0:07:40.120 --> 0:07:42.360 a while is that we are going to get a 0:07:42.360 --> 0:07:46.080 bunch of defaults eventually and that will impact the banks 0:07:46.160 --> 0:07:48.440 presumably and they're going to have to cut back on lending. 0:07:48.880 --> 0:07:51.720 So how are you viewing like the actual impact of 0:07:51.840 --> 0:07:53.120 cre distress. 0:07:52.840 --> 0:07:57.520 That is extraordinarily difficult to get a clear idea of 0:07:57.680 --> 0:08:02.800 or put good parameters around because CRE is inherently idiosyncratic. 0:08:02.880 --> 0:08:06.240 Every project is different. The financing of each of these 0:08:06.280 --> 0:08:10.240 projects come in layers and are you know, sourced differently, 0:08:10.360 --> 0:08:13.280 so it's really hard to get kind of a macro 0:08:13.640 --> 0:08:18.280 framing of how much potential distress. You know, I would 0:08:18.480 --> 0:08:22.720 categorize the banking channel is one that could go nonlinear 0:08:22.880 --> 0:08:24.480 in the sense that you know, it could we could 0:08:24.480 --> 0:08:27.440 see more bank failures, or it could be just a 0:08:27.560 --> 0:08:32.040 macroeconomic channel of a headwind. Right right now, the unemployment 0:08:32.120 --> 0:08:35.360 rate in Texas is underperforming. It's risen more than the 0:08:35.440 --> 0:08:39.400 national average. That's unusual for Texas. Some of that is 0:08:39.440 --> 0:08:41.960 the tech layoffs, which are part of what's behind some 0:08:42.080 --> 0:08:45.600 of the vacancies. So as these projects roll off, you're 0:08:45.600 --> 0:08:49.200 going to see less jobs. You know, people in the 0:08:49.240 --> 0:08:53.080 real estate industry and the construction industry are seeing layoffs here. 0:08:53.840 --> 0:08:57.920 Maybe not everywhere, but certainly here. So you'll just see 0:08:57.960 --> 0:09:02.760 some regular old garden variety economic headwinds. Even if it's not, 0:09:03.720 --> 0:09:06.960 you know, some sort of crisis, it's it's yet to 0:09:07.040 --> 0:09:10.440 be felt. And therein are the legs and monetary policy. 0:09:10.559 --> 0:09:14.000 So I want to get into obviously this whole legs debate. 0:09:14.200 --> 0:09:17.640 But before we do, you know, you mentioned the developers 0:09:17.679 --> 0:09:20.400 of various sorts in Austin have been printing money, and 0:09:20.440 --> 0:09:22.960 you mentioned all the cranes. We don't really see many 0:09:22.960 --> 0:09:24.920 cranes in New York because I guess it's a city 0:09:25.360 --> 0:09:27.760 you forgot how to build for various reasons. 0:09:27.840 --> 0:09:27.960 Well. 0:09:28.000 --> 0:09:31.120 Also, even if they're there, they're up pretty high high. 0:09:32.320 --> 0:09:34.079 Right because the one thing they do build out those 0:09:34.120 --> 0:09:36.280 like super tall buildings for. 0:09:36.640 --> 0:09:38.560 The tall skinny cigarette skin. 0:09:38.920 --> 0:09:41.520 Yeah, but Austin is not alone. I mean, like this 0:09:41.600 --> 0:09:44.559 is is this a broader sun Belt story? And can 0:09:44.600 --> 0:09:47.600 you talk about like how much of these developments have 0:09:47.800 --> 0:09:49.920 a sort of speci Okay, we're like we're building this 0:09:50.040 --> 0:09:54.200 for Google or we're building this for whatever versus we're 0:09:54.200 --> 0:09:56.720 building this and it's the sun Belt and someone is 0:09:56.720 --> 0:09:58.640 eventually going to rent, rent it, but we'll build it 0:09:58.679 --> 0:09:59.360 without even knowing how. 0:09:59.480 --> 0:10:01.959 Yeah, there is a lot more build it and they 0:10:02.000 --> 0:10:05.680 will come activity in the sun Belt that doesn't exist 0:10:05.679 --> 0:10:08.319 in New York. In New York, before you build a 0:10:08.400 --> 0:10:12.440 Hudson Yards, you've got several anchor tenants lined up. That 0:10:12.600 --> 0:10:14.680 is not the case here you can actually a lot 0:10:14.760 --> 0:10:17.280 of these developments. You know, the Google and the Meta 0:10:17.320 --> 0:10:20.120 buildings are an exception, but there are a lot of 0:10:20.600 --> 0:10:23.880 developments around town that are built on spec And is 0:10:23.920 --> 0:10:26.640 it broader than Austin. Yes, there's a number of cities. 0:10:26.679 --> 0:10:30.120 Austin is by far got the biggest overhang, but Dallas 0:10:30.160 --> 0:10:35.520 has a pretty big overhang. Denver, Boise. There are a 0:10:35.600 --> 0:10:38.720 number of the sun Belt boom towns, the COVID boom 0:10:38.760 --> 0:10:42.120 towns in the West where you can build where it's 0:10:42.160 --> 0:10:48.680 relatively more straightforward to get from concept to groundbreaking. And 0:10:49.000 --> 0:10:52.960 I would say it is a sun Belt slash COVID 0:10:53.000 --> 0:10:57.120 boomtown phenomenon, mostly in the West and the South and 0:10:57.240 --> 0:10:58.000 the southeast. 0:11:13.800 --> 0:11:17.920 Can we get Jackson Holish for a moment, But you know, 0:11:17.960 --> 0:11:21.720 going back to the way monetary policy is supposed to work. 0:11:22.200 --> 0:11:25.520 When you hike interest rates, you are supposed to be 0:11:25.600 --> 0:11:31.960 deterring some speculative frothy activity. So in a sense, how 0:11:32.080 --> 0:11:36.080 expected is this development for policy makers? I mean, you 0:11:36.080 --> 0:11:38.440 were in Wyoming, you were talking to loads of people. 0:11:39.400 --> 0:11:41.400 When you talk to them about what's going on in 0:11:41.440 --> 0:11:46.440 the Sunbelt, construction maybe slowing in places like Austin, what 0:11:46.480 --> 0:11:47.680 do they say and what do they think? 0:11:47.920 --> 0:11:50.800 That's a great framing. There's a range of views obviously, 0:11:50.880 --> 0:11:53.360 and yes, this is an intended channel to the extent 0:11:53.440 --> 0:11:56.080 that people took risks that turn out not to be 0:11:56.640 --> 0:11:59.160 you know, viable, or have a lower rate of return 0:11:59.200 --> 0:12:02.040 than they anticipate. That's just, you know, that's life in 0:12:02.080 --> 0:12:05.360 the big city, right. It's just part of taking risk 0:12:05.520 --> 0:12:09.319 is you realize sometimes some losses as well as some gains. 0:12:09.800 --> 0:12:13.720 So this is an intended channel of policy. The debate 0:12:13.880 --> 0:12:17.480 is more around have we seen all that we've seen 0:12:17.840 --> 0:12:20.680 and therefore we need to do more to slow the economy? 0:12:21.000 --> 0:12:26.439 Or are a lot of the effects of this still 0:12:26.559 --> 0:12:28.760 do they still lie ahead of us? And I think 0:12:28.800 --> 0:12:31.640 that's where there's a range of views. I really respect 0:12:31.720 --> 0:12:35.880 and like to hear the views of Chris Waller, Governor Waller, 0:12:36.240 --> 0:12:38.880 but he tends to be of the view that, you know, 0:12:38.920 --> 0:12:42.000 the lags are shorter because of forward guidance, because the 0:12:42.000 --> 0:12:47.360 FED is very transparent, that markets react almost instantaneously well 0:12:47.400 --> 0:12:50.880 before they actually raise rates, and therefore it's all priced in. 0:12:51.240 --> 0:12:53.520 I think if we think about a credit channel, and 0:12:53.559 --> 0:12:56.880 it's something we didn't really have last time, right, the 0:12:56.920 --> 0:13:01.360 credit channel was crisis. We didn't have this elongated kind 0:13:01.440 --> 0:13:05.280 of tighter credit. How does it feed through into the economy. 0:13:06.400 --> 0:13:08.480 And because of the refunding that you touched on with 0:13:08.520 --> 0:13:12.719 your other episode, the lags are probably longer. And this 0:13:12.760 --> 0:13:15.880 is something that if you talk to European central bankers, 0:13:16.120 --> 0:13:18.320 they think of the legs as being longer because of 0:13:18.320 --> 0:13:20.960 fixed rate financing and more of that, and that it's 0:13:21.040 --> 0:13:23.880 going to take some time for financing to roll over 0:13:23.920 --> 0:13:27.439 and to feel the effects and employment and activity, and 0:13:27.880 --> 0:13:30.080 so you have to know that what you've done already 0:13:30.840 --> 0:13:34.680 is going to keep being a restraining force going forward. 0:13:35.120 --> 0:13:37.800 So I'm more in the lags are longer camp because 0:13:37.840 --> 0:13:40.920 of this than the lags are all behind us Camp, Joe. 0:13:40.960 --> 0:13:43.400 This kind of reminds me of some of the discussion 0:13:43.400 --> 0:13:47.640 around inflation, just the idea that it's been decades since 0:13:47.679 --> 0:13:50.400 anyone has really had to deal with higher inflation and 0:13:50.400 --> 0:13:51.640 we're not sure how. 0:13:51.440 --> 0:13:52.360 To deal with it. 0:13:52.400 --> 0:13:55.480 This idea that like, well, maybe it's been decades since 0:13:55.520 --> 0:13:59.719 we've had a sharp change in monetary policy propagated out 0:13:59.760 --> 0:14:02.840 into the economy, and we don't really get how it works. 0:14:02.840 --> 0:14:05.120 And the last example was so extreme in two thousand 0:14:05.120 --> 0:14:05.400 and eight. 0:14:05.520 --> 0:14:07.360 I love the way you put that, which is that 0:14:07.640 --> 0:14:11.160 we think of two thousand and eight as a credit crisis. Yes, 0:14:11.440 --> 0:14:14.800 but the actual mechanism by which the economy slowed down 0:14:14.920 --> 0:14:18.040 was not per se the contraction of credit. But oh 0:14:18.080 --> 0:14:20.240 my god, the world is falling apart, and everyone just 0:14:20.240 --> 0:14:22.440 slams the breakout once. They slam the breakout hiring, they 0:14:22.440 --> 0:14:24.880 slam the break on new development, etc. Which is not 0:14:25.560 --> 0:14:29.120 really what people have in mind, this idea that we're 0:14:29.160 --> 0:14:32.160 just going to pull back on credit and slow things down. Right, 0:14:32.240 --> 0:14:34.280 this is the key dynamic we want to talk about. 0:14:34.280 --> 0:14:38.200 But you know, the realized disinflation that we've seen so far. 0:14:38.280 --> 0:14:40.600 So at one point, I think we're looking around nine percent. 0:14:40.640 --> 0:14:44.040 Maybe we're closer like three something percent now, But as 0:14:44.040 --> 0:14:46.560 I said in the intro, no one really knows why exactly, 0:14:46.640 --> 0:14:49.640 and unemployment didn't rise like the way many economists would expect. 0:14:49.760 --> 0:14:54.200 What's your story basically for the last twelve months of 0:14:54.760 --> 0:14:56.160 fairly nice disinflation. 0:14:56.480 --> 0:15:04.160 So we are big believers in sector analysis micro to macro. Right, 0:15:04.280 --> 0:15:07.400 so what's going on looks sector bi sector, what's going 0:15:07.440 --> 0:15:10.480 on in the dynamics of you know, how concentrated is 0:15:10.520 --> 0:15:14.280 a sector, how are the profits panning out, how is 0:15:14.320 --> 0:15:19.000 consumer price sensitivity in that sector? And then building you know, 0:15:19.360 --> 0:15:22.200 running the top down macro models, but also building that 0:15:22.440 --> 0:15:25.480 outlook from the bottom up and the bottom up is 0:15:25.720 --> 0:15:27.960 you know, on the one hand, it led us to 0:15:28.040 --> 0:15:32.360 be falsely in the transitory camp early, but then we 0:15:32.480 --> 0:15:35.480 pivoted because the reason it failed was we had more 0:15:35.520 --> 0:15:38.800 supply chain frictions, We had more waves of COVID, we 0:15:38.880 --> 0:15:43.000 had Malaysian chip factory shutdowns, we had all kinds. 0:15:42.680 --> 0:15:45.119 Of Russia, Ukraine, Russia, Ukraine. 0:15:45.240 --> 0:15:51.080 These frictions and challenges sand in the gears that kept inflation. Meanwhile, 0:15:51.160 --> 0:15:55.440 also like very strong demand support, very in price and 0:15:55.560 --> 0:15:59.200 sensitive demand. When we look out at the dynamics so far, 0:15:59.600 --> 0:16:03.360 me of it. Yes, when you look at cars, for example, 0:16:03.360 --> 0:16:05.680 which has been such a key part of the inflation 0:16:06.320 --> 0:16:08.600 and now it's been a key part of the disinflation, 0:16:09.000 --> 0:16:14.560 it's both a macro story higher rates, lower demand for cars, 0:16:14.640 --> 0:16:19.040 more price sensitive demand for cars, but also improving supply chains, 0:16:19.320 --> 0:16:24.000 improving inventories, available chips. So it's both, you know, a 0:16:24.040 --> 0:16:29.160 supply and a policy story tangled up together, hard to disentangle, 0:16:29.320 --> 0:16:33.480 but you know, it's definitely a key part of the disinflation. 0:16:34.040 --> 0:16:37.040 And if you don't think in those terms, if you're 0:16:37.240 --> 0:16:42.920 just thinking, okay, economic growth equals inflation, which is kind 0:16:42.920 --> 0:16:46.720 of what Powell did at the press conference, then you're 0:16:46.760 --> 0:16:49.960 going to be untrusting. You're going to be skeptical, part 0:16:49.960 --> 0:16:53.640 of which is perfectly healthy, but also maybe too skeptical. 0:16:53.680 --> 0:16:58.040 They're extreme. They have very pessimistic inflation assumptions for the 0:16:58.080 --> 0:17:01.400 remainder of the year in their forecast. They you know, 0:17:01.520 --> 0:17:03.760 definitely seem to be leaning on we maybe need to 0:17:03.800 --> 0:17:08.040 do more, and we see a lot of good things 0:17:08.080 --> 0:17:11.520 happening in inflation dynamics. One of the things we look at, 0:17:11.600 --> 0:17:14.920 for example, is the diffusion how many prices are increasing 0:17:15.040 --> 0:17:18.520 versus decreasing. That tells you if you look at the seventies, 0:17:19.840 --> 0:17:22.080 that was one hundred percent, every single price was going 0:17:22.160 --> 0:17:27.080 up every single month, quarter year, All wages were going up. 0:17:27.160 --> 0:17:31.200 That's not what's happening now. Some prices are falling, airfares 0:17:31.240 --> 0:17:34.760 go up and down depending on consumer demand. Capacity There 0:17:34.760 --> 0:17:39.240 has totally normalized auto sales similarly up and down. So 0:17:39.920 --> 0:17:43.800 I think we're seeing a much more dynamic healthy pricing dynamic, 0:17:43.840 --> 0:17:48.639 which gives us more optimism that these lower this lower 0:17:48.680 --> 0:17:51.760 regime can have some staying power and you don't need 0:17:51.800 --> 0:17:55.679 to hammer the economy. I mean, we had several cycles 0:17:55.840 --> 0:17:58.240 over the last thirty years where we had growth and 0:17:58.320 --> 0:18:02.720 no inflation, but because because of the PTSD from the pandemic, 0:18:02.760 --> 0:18:08.600 there's this equating of growth with inflation almost amongst and 0:18:08.640 --> 0:18:13.200 what's what was surprising about the meeting, the September FOMC 0:18:13.400 --> 0:18:16.520 meeting to me was how unanimous it seems to be. 0:18:16.680 --> 0:18:21.000 Everybody's forecasts kind of showed a higher funds rate, and 0:18:21.640 --> 0:18:26.960 everybody raised their twenty twenty four inflation forecast, or a 0:18:26.960 --> 0:18:30.160 lot of people did. There isn't a lot of sectoral 0:18:30.240 --> 0:18:36.600 inflationists on the FOMC, and I think that gives them 0:18:36.640 --> 0:18:39.720 a very rigid view of how things are playing out. 0:18:40.040 --> 0:18:42.479 This was going to be exactly my next question. Actually, 0:18:42.520 --> 0:18:45.920 you mentioned Powell's speech, which was very macro and sort 0:18:45.960 --> 0:18:50.399 of traditional FOMC speech ish, but Christine Legard of the 0:18:50.480 --> 0:18:54.000 UCB gave basically the opposite speech, talking about like we 0:18:54.040 --> 0:18:57.159 are in this weird period where it feels like the 0:18:57.200 --> 0:19:02.480 real economy of supply chain can straints U fiscal is 0:19:02.520 --> 0:19:05.800 more in control than monetary policy, and it poses new 0:19:05.920 --> 0:19:10.280 challenges to economists. How well equipped do you think economists 0:19:10.280 --> 0:19:13.480 are to start looking at, you know, individual industries or 0:19:13.560 --> 0:19:17.280 looking at specific sectors as you just pointed out, versus 0:19:17.359 --> 0:19:20.520 the sort of macroeconomic theory that many of them have 0:19:20.600 --> 0:19:21.199 been trained on. 0:19:21.440 --> 0:19:25.000 There's a lot of good economists, ourselves included, I would say, 0:19:25.640 --> 0:19:28.720 that are doing this kind of work. So Alan Dettmeister 0:19:28.800 --> 0:19:33.200 at UBS, Gonda Armana at Employee America, Oh, Mayr Sharif, 0:19:33.480 --> 0:19:35.400 Mike Knskall at Rose. 0:19:35.720 --> 0:19:37.240 I love that most of these are thoughts. 0:19:37.920 --> 0:19:43.560 Yeah, we've we should have definitely should yeah, yeah, the 0:19:43.560 --> 0:19:46.720 who's who have? But there's and you know, we we 0:19:46.800 --> 0:19:49.600 engage in this conversation, in this debate, you know, in 0:19:49.680 --> 0:19:53.840 social media, and there's lots of great exchanges and analysis. 0:19:53.880 --> 0:19:58.040 The sellers inflation, your your point about the ECB is 0:19:58.040 --> 0:20:02.360 a great one. Seller's inflation. Let's set aside the loaded 0:20:02.480 --> 0:20:04.960 term greedflation, but the idea of profits. 0:20:05.080 --> 0:20:08.800 We have purposely avoided saying greedflation. We tried to coin 0:20:08.840 --> 0:20:11.760 the term excuse flation, which did some people have been 0:20:11.880 --> 0:20:15.000 using it. But yeah, I think sellers sellers inflation and. 0:20:15.000 --> 0:20:18.120 Yeah, let inflation. And if you look at say Lagarde's 0:20:18.160 --> 0:20:21.760 press conference, she breaks down what's been happening in inflation 0:20:21.840 --> 0:20:23.879 in terms of what's driven by the labor market and 0:20:23.920 --> 0:20:27.480 what's driven by profits, Like as a matter of accounting, 0:20:27.640 --> 0:20:31.320 you know, there's plenty of ECB officials that are sort 0:20:31.359 --> 0:20:33.760 of well versed in Yes, there's the labor market, and 0:20:33.800 --> 0:20:36.840 then there's the product side, there's the profit side, the 0:20:36.920 --> 0:20:40.960 industry side. It has to do with concentration and common shocks, 0:20:41.000 --> 0:20:45.639 et cetera. So it's not like it's a radical theory. 0:20:45.680 --> 0:20:48.320 It's not like there's no workout there. It's just like 0:20:48.480 --> 0:20:51.480 there's nobody on the FMC that embraces this, you know, 0:20:51.680 --> 0:20:54.120 very you know, overtly. 0:20:54.760 --> 0:20:54.879 Uh. 0:20:55.040 --> 0:20:59.439 And so again, I just think there's a common framework 0:20:59.480 --> 0:21:03.840 at the FETE that is, you know, it's an important framework. 0:21:03.880 --> 0:21:07.080 It's a useful framework, but it's not the only framework, 0:21:07.080 --> 0:21:09.399 and you need to have I would say it's better 0:21:09.440 --> 0:21:13.160 to have as many possible perspectives and points of view 0:21:13.160 --> 0:21:17.640 to understand these dynamics. You know, inflation went up more 0:21:17.680 --> 0:21:21.000 than even the macro models suggested, and at a timing 0:21:21.040 --> 0:21:24.120 that does not align with the macro models. So when 0:21:24.119 --> 0:21:27.600 you have an error on your model as a forecaster, 0:21:27.880 --> 0:21:31.280 you look forward and think, hmm, that error might reverse 0:21:31.320 --> 0:21:35.719 at some point, I might get downside surprises standard forecasting. 0:21:35.760 --> 0:21:38.639 I'm not saying anything radical now. Of course, it's not 0:21:38.760 --> 0:21:41.199 the Central Bank's job to err on the side of 0:21:41.280 --> 0:21:45.240 optimism when they're above their target. But you know, you 0:21:45.400 --> 0:21:50.280 can talk. I don't understand, like Powell had several opportunities 0:21:50.320 --> 0:21:53.919 at the press conference. There was three or four questions. 0:21:54.000 --> 0:21:54.400 Actually. 0:21:55.200 --> 0:22:00.520 Craig Torres of Bloomberg asked an excellent question about the 0:22:00.720 --> 0:22:05.800 nuances of higher rates and supply side lead inflation in 0:22:05.880 --> 0:22:11.320 real estate, and Powell just won't go there. He just 0:22:11.520 --> 0:22:14.200 doesn't want to go to the supply side and talk 0:22:14.240 --> 0:22:16.439 about those. I mean he did, to be fair, he 0:22:16.480 --> 0:22:20.440 did say we understood that fading pandemic frictions are part 0:22:20.480 --> 0:22:22.960 of the story. But again, I think they just are 0:22:23.080 --> 0:22:25.840 very shell shocked by what they've been through in the 0:22:25.880 --> 0:22:28.560 last couple of years and are still airing on the 0:22:28.600 --> 0:22:29.720 pessimistic side. 0:22:29.800 --> 0:22:32.280 You know, one other thing in that regards speech, specifically 0:22:32.280 --> 0:22:34.320