1 00:00:00,120 --> 00:00:04,240 Speaker 1: Our guest is William Lee, chief economist at Milton Institute. Bill, 2 00:00:04,360 --> 00:00:06,920 Speaker 1: great to have you on the program. As usual, I 3 00:00:06,920 --> 00:00:09,719 Speaker 1: want to ask you a little bit about markets. Today 4 00:00:09,840 --> 00:00:12,719 Speaker 1: was an interesting day. It seemed quite rational, as Risch 5 00:00:13,119 --> 00:00:17,480 Speaker 1: suggested earlier, rather than any kind of panic selling. It's 6 00:00:17,520 --> 00:00:20,520 Speaker 1: the seventh time the market has seen this kind of 7 00:00:20,520 --> 00:00:23,400 Speaker 1: selloff in the three to four percent range, so maybe 8 00:00:23,400 --> 00:00:26,240 Speaker 1: we're getting a little bit used to it. Is that 9 00:00:26,320 --> 00:00:29,000 Speaker 1: the case. Are people looking at this with a rational 10 00:00:29,440 --> 00:00:32,559 Speaker 1: mindset or is it just equity investors can't let go 11 00:00:32,680 --> 00:00:37,960 Speaker 1: of the old the old dynamic. Well, Brian, it seems 12 00:00:38,000 --> 00:00:40,239 Speaker 1: like the message from the Fed is finally starting to 13 00:00:40,280 --> 00:00:43,000 Speaker 1: sync in UM, and so we had that huge drop 14 00:00:43,040 --> 00:00:46,160 Speaker 1: off on Friday, even though chu Haul has said nothing 15 00:00:46,159 --> 00:00:48,520 Speaker 1: more than to repeat his same messages over and over again, 16 00:00:48,560 --> 00:00:51,760 Speaker 1: but this time it with some force and some conviction 17 00:00:51,840 --> 00:00:55,120 Speaker 1: that he is going to bring the inflation right back 18 00:00:55,120 --> 00:00:58,080 Speaker 1: down to percent regardless of what's going on with the economy, 19 00:00:58,200 --> 00:01:00,440 Speaker 1: and finally the market started to get it. Now, today's 20 00:01:00,600 --> 00:01:02,880 Speaker 1: UM sell off is probably continuation of that. But as 21 00:01:02,920 --> 00:01:05,960 Speaker 1: you said around three o'clock, sounded like, well, people may 22 00:01:06,000 --> 00:01:09,360 Speaker 1: be reconsidering and and maybe reconcidering that maybe the market 23 00:01:09,400 --> 00:01:12,160 Speaker 1: is overreacted and perhaps the market equity markets have gone 24 00:01:12,160 --> 00:01:14,520 Speaker 1: down too much. Now, one of the things that I 25 00:01:14,520 --> 00:01:17,600 Speaker 1: think most marketicipants and strategists are talking about is this 26 00:01:17,880 --> 00:01:20,959 Speaker 1: trade off between how long will it take for the 27 00:01:21,040 --> 00:01:24,679 Speaker 1: FED to keep its strict policies and slow down the economy. 28 00:01:24,800 --> 00:01:27,240 Speaker 1: If they are able to do it successfully and bring 29 00:01:27,280 --> 00:01:29,640 Speaker 1: inflation down fairly quickly, then we're going to see a 30 00:01:29,680 --> 00:01:32,039 Speaker 1: recovery come on pretty quickly. And that's where the equity 31 00:01:32,080 --> 00:01:35,240 Speaker 1: markets should be rebounding. If the equity markets are searching 32 00:01:35,240 --> 00:01:37,640 Speaker 1: around for where the troth of the recession is going 33 00:01:37,680 --> 00:01:39,959 Speaker 1: to be, that's really the key to the timing of 34 00:01:40,000 --> 00:01:43,800 Speaker 1: when the equity markets will turn around. It's interesting what 35 00:01:44,280 --> 00:01:47,720 Speaker 1: you talk about not if there's a recession, but when 36 00:01:47,920 --> 00:01:51,760 Speaker 1: there's a recession. Well, ch it's without a doubt that 37 00:01:51,840 --> 00:01:55,240 Speaker 1: the FED is determined to bring down inflation. Uh As, 38 00:01:55,320 --> 00:01:58,240 Speaker 1: as a practical person on the street, you gotta ask 39 00:01:58,240 --> 00:02:01,840 Speaker 1: yourself what will stop people from spending and pushing prices up. 40 00:02:02,040 --> 00:02:04,280 Speaker 1: It's got to be that they don't have enough income beings, 41 00:02:04,320 --> 00:02:06,600 Speaker 1: meaning they have to be laid off. And so the 42 00:02:06,600 --> 00:02:09,480 Speaker 1: FED has said in so many words, there's going to 43 00:02:09,560 --> 00:02:11,880 Speaker 1: be some pain. That pain is going to come from 44 00:02:11,919 --> 00:02:14,720 Speaker 1: a lot of layoffs because it's just not possible to 45 00:02:14,800 --> 00:02:18,680 Speaker 1: reduce spending by getting rid of job vacancies or unfilled vacancies. 46 00:02:18,840 --> 00:02:21,720 Speaker 1: So I don't know, we don't know how long that 47 00:02:21,800 --> 00:02:25,320 Speaker 1: pain will will exist. I mean, the FED could raise 48 00:02:25,400 --> 00:02:28,400 Speaker 1: rates three basis points and probably bring a recession on 49 00:02:28,440 --> 00:02:31,480 Speaker 1: and crush inflation, but doesn't want to do that. So 50 00:02:31,680 --> 00:02:34,800 Speaker 1: it's it's this kind of plan going out. I'm wondering, 51 00:02:34,960 --> 00:02:39,440 Speaker 1: can you see the Fed at some point adjusting the 52 00:02:39,480 --> 00:02:43,120 Speaker 1: target above two percent to say maybe three percent for 53 00:02:43,160 --> 00:02:45,880 Speaker 1: a while because of needing that time to get to 54 00:02:46,200 --> 00:02:50,560 Speaker 1: the ultimate target. Well, Brian, so many very prominent economists 55 00:02:50,560 --> 00:02:54,960 Speaker 1: have talked about raising the definition of inflation with price 56 00:02:54,960 --> 00:02:58,720 Speaker 1: stability to something above two I think that's giving up 57 00:02:58,720 --> 00:03:00,720 Speaker 1: the game, because once you do at you doubt, you 58 00:03:00,760 --> 00:03:03,280 Speaker 1: go down that slippery slope of how high is high? 59 00:03:03,520 --> 00:03:05,680 Speaker 1: And how long do you keep it there? If you 60 00:03:05,760 --> 00:03:07,359 Speaker 1: think that what people are going to believe that you 61 00:03:07,400 --> 00:03:09,480 Speaker 1: will come down to three percent, kind of hold it 62 00:03:09,520 --> 00:03:11,560 Speaker 1: there and keep it there and then and not let 63 00:03:11,560 --> 00:03:13,720 Speaker 1: it go back up again, and with the hope that 64 00:03:13,760 --> 00:03:15,600 Speaker 1: it will go back down to two percent. I think 65 00:03:15,600 --> 00:03:19,799 Speaker 1: you're nuts, because the market participants right now are are 66 00:03:20,000 --> 00:03:23,000 Speaker 1: saying that the FED really lacks credibility as an inflation fighter. 67 00:03:23,320 --> 00:03:26,440 Speaker 1: If they start messing around with the target and and 68 00:03:26,440 --> 00:03:29,080 Speaker 1: and essentially lowering the bar so that they can achieve 69 00:03:29,080 --> 00:03:32,000 Speaker 1: their global price stability, that will destroy the credibility that 70 00:03:32,080 --> 00:03:34,079 Speaker 1: has been built up for less several decades in Vocer. 71 00:03:34,920 --> 00:03:37,480 Speaker 1: It's interesting you note here that if we are to 72 00:03:37,480 --> 00:03:39,240 Speaker 1: have a recession, and I think you fairly of that 73 00:03:39,320 --> 00:03:41,880 Speaker 1: conviction that it's going to be a white colored one 74 00:03:41,880 --> 00:03:44,840 Speaker 1: and not a blue color one. What's your thinking then, Well, Richard, 75 00:03:44,840 --> 00:03:48,440 Speaker 1: I think this is the first time in quite a while, uh, 76 00:03:48,480 --> 00:03:50,400 Speaker 1: as far as I can remember in the US economy 77 00:03:50,480 --> 00:03:53,080 Speaker 1: history that I think the most vulnerable groups in the 78 00:03:53,320 --> 00:03:55,520 Speaker 1: h in the in the in the US right now 79 00:03:55,600 --> 00:03:58,200 Speaker 1: to an economy slowdown will likely be the less skilled 80 00:03:58,200 --> 00:04:01,880 Speaker 1: white collar workers and less o the traditional blue collar guys, 81 00:04:02,080 --> 00:04:04,480 Speaker 1: because there's been a lot of changes in the supply 82 00:04:04,560 --> 00:04:07,960 Speaker 1: chains and business models where new technology has been employed, 83 00:04:08,040 --> 00:04:10,720 Speaker 1: so that the demand for blue collar workers such as 84 00:04:10,720 --> 00:04:13,840 Speaker 1: truck drivers and restaurant UH chefs that are doing ghost 85 00:04:13,920 --> 00:04:16,919 Speaker 1: kitchens are in high demand. These are skilled blue collar 86 00:04:16,960 --> 00:04:21,120 Speaker 1: workers who can operate in an Amazon warehouse, the very 87 00:04:21,120 --> 00:04:25,000 Speaker 1: complex computer keyboards for for getting all the the stuff 88 00:04:25,480 --> 00:04:29,600 Speaker 1: from the robotic the uh you know warehouses, and truck 89 00:04:29,680 --> 00:04:33,760 Speaker 1: drivers to deliver the stuff. But the traditionally has been 90 00:04:33,800 --> 00:04:37,960 Speaker 1: thought that the safe entry level white collar worker, the bookkeeper, 91 00:04:38,080 --> 00:04:41,120 Speaker 1: the data entry guy might be protected into slowdown. But 92 00:04:41,240 --> 00:04:44,000 Speaker 1: now we see a lot of businesses are investing in 93 00:04:44,240 --> 00:04:47,600 Speaker 1: new equipment and new software, so that data entry is 94 00:04:47,680 --> 00:04:51,039 Speaker 1: less valuable. The office skills are less valuable. They need 95 00:04:51,080 --> 00:04:55,880 Speaker 1: more technical skills. Uh. Accounting firms need more less bookkeepers 96 00:04:55,920 --> 00:05:02,159 Speaker 1: and they need more accounting strategies. So I think, yeah, yeah, 97 00:05:02,200 --> 00:05:06,080 Speaker 1: there we have a downturn. The the entry level bookkeeper 98 00:05:06,200 --> 00:05:08,479 Speaker 1: and data and enter entry guy will be laid off, 99 00:05:09,000 --> 00:05:11,280 Speaker 1: but the Amazon warehouse guys can hide demand and the 100 00:05:11,279 --> 00:05:13,839 Speaker 1: truck drivers and high demand. Yeah. Does that mean that 101 00:05:13,920 --> 00:05:17,400 Speaker 1: companies whould be able to cut costs faster than they 102 00:05:17,400 --> 00:05:19,400 Speaker 1: lose business? In other words, when we get to the 103 00:05:19,440 --> 00:05:22,240 Speaker 1: next earning season, will they beat again or do you 104 00:05:22,240 --> 00:05:25,520 Speaker 1: think they'll they'll suffer. That's the purpose of of this 105 00:05:25,680 --> 00:05:27,160 Speaker 1: of this ship that I think that in the pend 106 00:05:27,240 --> 00:05:30,640 Speaker 1: during the pandemic, companies have rethought their business models and 107 00:05:30,680 --> 00:05:32,960 Speaker 1: they said, how can I do stuff more efficiently? So 108 00:05:33,000 --> 00:05:35,080 Speaker 1: a restaurant is saying, I don't really need to have 109 00:05:35,200 --> 00:05:38,839 Speaker 1: expensive rental property in these very expensive central center business 110 00:05:39,160 --> 00:05:43,159 Speaker 1: central business districts that try customers. I can deliver good 111 00:05:43,200 --> 00:05:46,520 Speaker 1: food using ghost kitchens and and and and even when 112 00:05:46,520 --> 00:05:49,120 Speaker 1: I do have a restaurant, my point of sale terminal 113 00:05:49,200 --> 00:05:51,799 Speaker 1: means that I need fewer cashiers and I need fewer 114 00:05:51,800 --> 00:05:54,719 Speaker 1: waiters to serve the people. So I think you're right 115 00:05:55,040 --> 00:05:58,440 Speaker 1: to say that this means that as the economy turns 116 00:05:58,480 --> 00:06:00,520 Speaker 1: down and when it recovers again, we're going to be 117 00:06:00,560 --> 00:06:05,000 Speaker 1: see less of a hit the profits tell me something here, also, William, 118 00:06:05,240 --> 00:06:08,599 Speaker 1: we look at what happened February the twenty four, that's 119 00:06:08,640 --> 00:06:11,320 Speaker 1: in the Russians invaded the Ukraine and ever since then, 120 00:06:11,320 --> 00:06:12,960 Speaker 1: this is when inflation has really really gone up, and 121 00:06:13,000 --> 00:06:14,840 Speaker 1: it was already seen as a supply side of things 122 00:06:15,520 --> 00:06:18,440 Speaker 1: was just belying the truth, which was actually we were 123 00:06:18,520 --> 00:06:21,960 Speaker 1: going to get inflation anyway because of structural changes to 124 00:06:22,120 --> 00:06:26,039 Speaker 1: it to itself, because of deglobalization, demographics, and also as 125 00:06:26,040 --> 00:06:30,280 Speaker 1: we go to a greener society. Absolutely rich and and 126 00:06:30,279 --> 00:06:33,200 Speaker 1: and the change the composition of output and how how 127 00:06:33,240 --> 00:06:36,960 Speaker 1: output is being produced has really changed where the inflationary 128 00:06:36,960 --> 00:06:39,760 Speaker 1: forces are. When we have a cutback and ADDEU supply 129 00:06:39,880 --> 00:06:42,280 Speaker 1: that comes from the award in Ukraine, for example, the 130 00:06:42,760 --> 00:06:45,520 Speaker 1: key input that was cut off with the energy and 131 00:06:45,560 --> 00:06:48,440 Speaker 1: the raw materials for food. But on the demand side, 132 00:06:48,520 --> 00:06:51,960 Speaker 1: because the Biden administration had pumped out so much in 133 00:06:51,960 --> 00:06:55,600 Speaker 1: the way of extra extra checks to to help the 134 00:06:56,000 --> 00:06:59,440 Speaker 1: already recovering economy, there was so much built built up 135 00:06:59,440 --> 00:07:03,719 Speaker 1: demand that the demand overwhelmed the limited supply, and so 136 00:07:03,720 --> 00:07:06,320 Speaker 1: so that the huge kind of inflationary pressure we see 137 00:07:06,360 --> 00:07:11,200 Speaker 1: now is spreading beyond just the goods demand and into 138 00:07:11,240 --> 00:07:13,880 Speaker 1: service demand. And that's where we see a lot of bottlenecks. 139 00:07:14,400 --> 00:07:16,720 Speaker 1: I want to do a quick pivot to China US 140 00:07:16,800 --> 00:07:19,520 Speaker 1: business optimism. They're tumbling to an all time low. How 141 00:07:19,560 --> 00:07:22,440 Speaker 1: significant is that? Oh, I think China is really the 142 00:07:22,520 --> 00:07:25,680 Speaker 1: key to the entire global recovery. Uh right now. The 143 00:07:26,160 --> 00:07:29,840 Speaker 1: restructuring of logistics and supply chains means that China is 144 00:07:29,880 --> 00:07:33,640 Speaker 1: no longer the center of the manufacturing world. The the 145 00:07:33,800 --> 00:07:37,640 Speaker 1: decentralization away from China into other parts of Asia and 146 00:07:37,680 --> 00:07:40,320 Speaker 1: into Eastern Europe and into the United States. Means that 147 00:07:40,440 --> 00:07:42,680 Speaker 1: China is not going to have that export boom to 148 00:07:42,760 --> 00:07:46,240 Speaker 1: help its economy recover um. And I think that it's 149 00:07:46,240 --> 00:07:49,920 Speaker 1: gonna add to the political turmoil that's already we see 150 00:07:49,920 --> 00:07:53,040 Speaker 1: in China because of the zero COVID policy. So President 151 00:07:53,120 --> 00:07:55,560 Speaker 1: She's gonna have one hell of a time after he 152 00:07:55,600 --> 00:08:01,120 Speaker 1: gets his reappointment to have a a China that's anywhere 153 00:08:01,200 --> 00:08:04,280 Speaker 1: near where it was before. Yeah, be careful what you 154 00:08:04,320 --> 00:08:06,880 Speaker 1: wish for. Thank you so much for joining us. William 155 00:08:06,960 --> 00:08:09,480 Speaker 1: Lee there in chief Economies at Milk and Institute, getting 156 00:08:09,480 --> 00:08:13,400 Speaker 1: his take on inflation, the markets of Federal Reserve, and 157 00:08:13,440 --> 00:08:16,360 Speaker 1: indeed also they're latterly talking about China.