1 00:00:10,600 --> 00:00:14,360 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:14,440 --> 00:00:18,799 Speaker 1: I'm Joe and I'm Tracy Alloy. Tracy, we know a 3 00:00:18,920 --> 00:00:20,960 Speaker 1: couple of things about the economy right now. We know 4 00:00:21,040 --> 00:00:25,680 Speaker 1: that inflation is high, it's way too hot for the 5 00:00:25,720 --> 00:00:29,200 Speaker 1: FED and the general public, and that the FED as 6 00:00:29,280 --> 00:00:32,320 Speaker 1: of the moment, plans to hike aggressively over the next 7 00:00:32,760 --> 00:00:36,720 Speaker 1: several meetings in order to bring down inflation. I don't 8 00:00:36,720 --> 00:00:39,879 Speaker 1: think we actually know much more than that. Yeah, I 9 00:00:39,880 --> 00:00:42,960 Speaker 1: think there are a lot of open questions on what exactly, 10 00:00:43,159 --> 00:00:47,120 Speaker 1: well a, what impact our hikes actually going to have 11 00:00:47,440 --> 00:00:50,520 Speaker 1: on the economy, how to interest rate hikes actually work 12 00:00:51,080 --> 00:00:54,520 Speaker 1: to slow down price levels, And of course there's this 13 00:00:54,560 --> 00:00:56,600 Speaker 1: big open question about whether or not we should be 14 00:00:56,640 --> 00:00:59,960 Speaker 1: targeting demand when supply seems to be more of an issue. 15 00:01:00,480 --> 00:01:03,160 Speaker 1: But the other thing we don't really know is how 16 00:01:03,200 --> 00:01:07,520 Speaker 1: does the FED react once the impact or the effects 17 00:01:07,520 --> 00:01:10,240 Speaker 1: of those hikes start working their way through the economy. 18 00:01:10,480 --> 00:01:13,600 Speaker 1: What level of inflation is acceptable? Does it have to 19 00:01:13,640 --> 00:01:17,399 Speaker 1: go back to two percent? Is the FED willing to 20 00:01:18,080 --> 00:01:22,040 Speaker 1: I don't know, accept slightly higher levels of inflation in 21 00:01:22,120 --> 00:01:26,000 Speaker 1: order to preserve I guess functioning financial markets and things 22 00:01:26,040 --> 00:01:32,160 Speaker 1: like yeah, like like the question of okay, if it 23 00:01:32,160 --> 00:01:34,479 Speaker 1: would the FED be happy with three and a half 24 00:01:34,480 --> 00:01:37,440 Speaker 1: inflation three and a half inflation if it means it 25 00:01:37,480 --> 00:01:39,640 Speaker 1: doesn't push us into a research Yeah, it strikes me 26 00:01:39,720 --> 00:01:42,160 Speaker 1: is like an interesting question. It feels like, and I 27 00:01:42,240 --> 00:01:44,039 Speaker 1: know we've been saying this for two years now, but 28 00:01:44,080 --> 00:01:47,120 Speaker 1: it feels like we are actually in a different type 29 00:01:47,200 --> 00:01:49,960 Speaker 1: of economic cycle, and so there are a lot of 30 00:01:50,000 --> 00:01:53,160 Speaker 1: open questions swirling around exactly what that looks like and 31 00:01:53,480 --> 00:01:56,400 Speaker 1: how potentially it ends. Yes, so I think there's this 32 00:01:56,520 --> 00:02:00,480 Speaker 1: view that Okay, maybe uh, the inflation is expected to 33 00:02:00,480 --> 00:02:03,600 Speaker 1: come down significantly, but it's unlikely to get back down 34 00:02:03,640 --> 00:02:05,600 Speaker 1: to target by the end of the year. And so 35 00:02:05,680 --> 00:02:07,640 Speaker 1: then the question is like, well, how hard does the 36 00:02:07,640 --> 00:02:10,280 Speaker 1: FED push for those last one or two percent or 37 00:02:10,320 --> 00:02:13,240 Speaker 1: does it ease off a little bit. But then also again, 38 00:02:13,520 --> 00:02:16,760 Speaker 1: and it's a question that never really comes up, which 39 00:02:16,800 --> 00:02:21,560 Speaker 1: is can the Fed articulate how rate hikes help, how 40 00:02:21,639 --> 00:02:24,560 Speaker 1: they how they tame inflation. We have this idea, you 41 00:02:24,639 --> 00:02:29,120 Speaker 1: hike rates inflation and theory goes down. But I think 42 00:02:29,120 --> 00:02:31,240 Speaker 1: the FED is getting a little bit more explicit about this. 43 00:02:31,320 --> 00:02:32,919 Speaker 1: It's like, yeah, well, maybe there's gonna be some pain. 44 00:02:32,960 --> 00:02:36,240 Speaker 1: Maybe unemployment is going to rise, but again, most parts 45 00:02:36,240 --> 00:02:39,240 Speaker 1: of the economy aren't really rate sensitive. It's like housing 46 00:02:39,320 --> 00:02:41,760 Speaker 1: is obviously the big one, maybe autos, and so the 47 00:02:41,800 --> 00:02:45,400 Speaker 1: connection between rate hikes and actually getting inflation of target, 48 00:02:45,960 --> 00:02:49,000 Speaker 1: at least to me, I think there's still some ambiguity. Yeah, 49 00:02:49,040 --> 00:02:50,880 Speaker 1: and I think, I mean, I think most of the 50 00:02:50,880 --> 00:02:53,359 Speaker 1: people at the FED would readily admit that, and they're 51 00:02:53,400 --> 00:02:55,400 Speaker 1: still talk talking about it and trying to work their 52 00:02:55,440 --> 00:02:57,760 Speaker 1: way through it as well. So it's a weird time. 53 00:02:58,360 --> 00:03:00,560 Speaker 1: And I think that, you know, right, there's all these 54 00:03:00,680 --> 00:03:03,280 Speaker 1: questions about what is the Fed's goal, how does it 55 00:03:03,320 --> 00:03:06,120 Speaker 1: accomplish them, what's it, what's it really trying to achieve? 56 00:03:06,160 --> 00:03:08,440 Speaker 1: What success look like. So we're going to talk about 57 00:03:08,440 --> 00:03:10,800 Speaker 1: that today. We're going to be speaking to one of 58 00:03:10,840 --> 00:03:14,040 Speaker 1: our colleagues at Bloomberg, one of the sharpest people here, 59 00:03:14,480 --> 00:03:17,160 Speaker 1: one of the great writer and someone that we've been 60 00:03:17,200 --> 00:03:20,560 Speaker 1: fans of for years before he even came to Bloomberg. 61 00:03:20,600 --> 00:03:22,639 Speaker 1: So it's real treat and he's a colleague. We're gonna 62 00:03:22,639 --> 00:03:25,280 Speaker 1: be speaking with Ed Harrison, he's a senior editor on 63 00:03:25,320 --> 00:03:28,079 Speaker 1: the Markets team, and he will answer, he will tell 64 00:03:28,160 --> 00:03:30,880 Speaker 1: us all the answers to these questions. He has the answers, 65 00:03:31,600 --> 00:03:33,680 Speaker 1: he's gonna give us a edit. Thank you so much 66 00:03:33,720 --> 00:03:35,880 Speaker 1: for coming on odd lots, well, thank you for having me, 67 00:03:35,840 --> 00:03:38,640 Speaker 1: and I hope I have some of the our colleague 68 00:03:38,640 --> 00:03:41,600 Speaker 1: now at Bloomberg coming up on the year. Actually next 69 00:03:41,640 --> 00:03:44,400 Speaker 1: month it will be one year. I don't want to say, 70 00:03:44,480 --> 00:03:46,840 Speaker 1: I don't want to like sidetrack because this is not 71 00:03:46,960 --> 00:03:49,960 Speaker 1: the topic of the conversation of them. Maybe we could 72 00:03:49,960 --> 00:03:53,000 Speaker 1: get into it, but you know, I've been reading your 73 00:03:53,080 --> 00:03:56,200 Speaker 1: blog and your newsletter. Credit right now is for year. 74 00:03:56,240 --> 00:03:58,400 Speaker 1: It's probably coming out a decade, and I was thinking, 75 00:03:58,480 --> 00:04:00,480 Speaker 1: I was actually talked to someone about it the other day, 76 00:04:00,480 --> 00:04:03,120 Speaker 1: and you know, you're there's sort of like indispensable source. 77 00:04:03,160 --> 00:04:06,400 Speaker 1: During the euro crisis, Italian spreads are widening again, Like 78 00:04:06,400 --> 00:04:09,119 Speaker 1: where's a little bit of tension in Europe again, isn't there? Yeah, 79 00:04:09,240 --> 00:04:13,360 Speaker 1: I mean there are all sorts of weird externalities that happened. 80 00:04:13,400 --> 00:04:15,560 Speaker 1: When I mean, because the way I remember the euro 81 00:04:15,640 --> 00:04:20,719 Speaker 1: crisis anyway was Dubai World. Yeah, I remember Dubai. That 82 00:04:21,040 --> 00:04:26,200 Speaker 1: was the event that kicked off people questioning UH sovereign 83 00:04:26,240 --> 00:04:30,960 Speaker 1: debt and bizarrely then it moves straight to Europe. So 84 00:04:31,200 --> 00:04:36,240 Speaker 1: Dubai degrees exactly. It's almost like a butterfly flat effect. Uh, 85 00:04:36,279 --> 00:04:39,320 Speaker 1: this is bringing back euro crisis flashbacks. So I'm going 86 00:04:39,360 --> 00:04:43,400 Speaker 1: to bring us back to firmly because we have a Yeah, yeah, 87 00:04:43,560 --> 00:04:45,919 Speaker 1: we'll just talk about the e CP for for thirty minutes, 88 00:04:45,960 --> 00:04:49,640 Speaker 1: and it speaks seven languages, so he's actually anyway, let's 89 00:04:49,640 --> 00:04:51,960 Speaker 1: go back, We'll talk about the ECB in court Uguese 90 00:04:52,279 --> 00:04:56,520 Speaker 1: and greet No, let's talk about inflation and the economy 91 00:04:56,760 --> 00:04:59,000 Speaker 1: in the US and try to focus it a little bit. 92 00:04:59,000 --> 00:05:02,440 Speaker 1: So maybe just to begin with the really broad question 93 00:05:02,760 --> 00:05:04,680 Speaker 1: that Joe was kind of hinting at in the intro, 94 00:05:05,240 --> 00:05:09,480 Speaker 1: but what exactly our interest rate hikes supposed to do 95 00:05:09,720 --> 00:05:13,720 Speaker 1: in the current situation. I think that they're basically supposed 96 00:05:13,760 --> 00:05:16,360 Speaker 1: to from what I understand, the FED saying is bring 97 00:05:16,440 --> 00:05:21,280 Speaker 1: supply demand into balance. And ultimately, when they say that, 98 00:05:21,320 --> 00:05:24,400 Speaker 1: what they're saying essentially is is that if the supply 99 00:05:24,800 --> 00:05:27,720 Speaker 1: is limited, then we're going to limit the demand. We're 100 00:05:27,760 --> 00:05:31,200 Speaker 1: going to bring demand down to the limited level that 101 00:05:31,279 --> 00:05:37,880 Speaker 1: supply is. So they're essentially creating the preconditions for a recession. Now, 102 00:05:37,880 --> 00:05:42,200 Speaker 1: if they bring the demand down to a level to 103 00:05:42,320 --> 00:05:45,680 Speaker 1: think of it in sort of like a Goldilocks or well, 104 00:05:45,720 --> 00:05:48,480 Speaker 1: actually I think it's the one with the too hot 105 00:05:48,480 --> 00:05:54,200 Speaker 1: too cold forwards. What was um that they're thinking, Okay, 106 00:05:54,240 --> 00:05:57,920 Speaker 1: we'll bring it down, demand down, but not so far 107 00:05:58,000 --> 00:06:00,599 Speaker 1: down that we have a recession. How All has started 108 00:06:00,600 --> 00:06:03,520 Speaker 1: to dance around that issue, and I think he is 109 00:06:03,720 --> 00:06:07,520 Speaker 1: mirroring something that I heard Loretta Master, who's the Cleveland 110 00:06:07,600 --> 00:06:11,680 Speaker 1: FED president say. She mentioned to Mike McKee, one of 111 00:06:11,680 --> 00:06:16,600 Speaker 1: our colleagues, that maybe we'll get another quarter or two 112 00:06:17,160 --> 00:06:20,040 Speaker 1: of negative growth to go along with the Q one 113 00:06:20,160 --> 00:06:23,480 Speaker 1: negative growth that we had. Mike McKee was like, that 114 00:06:23,520 --> 00:06:26,400 Speaker 1: sounds kind of like a recession, and she was like, no, no, 115 00:06:26,480 --> 00:06:30,640 Speaker 1: maybe not. And so now the new code word is softish, 116 00:06:32,080 --> 00:06:36,839 Speaker 1: soft soft landing soft ish. So what does that mean? 117 00:06:37,040 --> 00:06:39,800 Speaker 1: I think what it means to me is what the 118 00:06:39,839 --> 00:06:44,360 Speaker 1: FED is effectively doing is they're telling you that a 119 00:06:44,480 --> 00:06:49,320 Speaker 1: mild recession is not a problem. And to some extent, 120 00:06:49,600 --> 00:06:53,440 Speaker 1: I mean, look, I don't think the FED wants a recession. Clearly, 121 00:06:53,480 --> 00:06:56,080 Speaker 1: like all things being equal, it would clearly prefer growth 122 00:06:56,120 --> 00:07:00,360 Speaker 1: to recession. But there is something about that sick knowing 123 00:07:00,520 --> 00:07:04,320 Speaker 1: it seems like it's an expression of seriousness. When the 124 00:07:04,360 --> 00:07:07,880 Speaker 1: FED is telling us that it might be willing to 125 00:07:07,880 --> 00:07:11,560 Speaker 1: tolerate a recession if that's what it takes to bring 126 00:07:11,600 --> 00:07:15,000 Speaker 1: down demand such to a level such that we're back 127 00:07:15,040 --> 00:07:18,080 Speaker 1: and balanced and don't have this high inflation anymore. It's 128 00:07:18,120 --> 00:07:23,120 Speaker 1: sort of indicating a a seriousness about the degree to 129 00:07:23,160 --> 00:07:26,120 Speaker 1: which it will undertake its task definitely. And so I 130 00:07:26,160 --> 00:07:29,440 Speaker 1: think then the question for us is are what are 131 00:07:29,480 --> 00:07:32,640 Speaker 1: their hopes and dreams and what are their prognostications about 132 00:07:32,680 --> 00:07:35,840 Speaker 1: what's likely to occur? You know, is the is the FED, 133 00:07:36,320 --> 00:07:41,040 Speaker 1: unlike what Bill Dudley saying, actually pulling its punches. Is 134 00:07:41,080 --> 00:07:44,200 Speaker 1: the FED not giving us the full story? Maybe the 135 00:07:44,200 --> 00:07:49,160 Speaker 1: FED actually believes that soft dish is the base case. 136 00:07:50,120 --> 00:07:52,080 Speaker 1: Why don't you go out and say that. But they're 137 00:07:52,120 --> 00:07:54,720 Speaker 1: not saying that. What they're saying is is we're hoping 138 00:07:55,280 --> 00:07:58,160 Speaker 1: that we can get this down and the economy keeps growing. 139 00:07:58,600 --> 00:08:03,360 Speaker 1: But more and more of financial markets are pricing themselves 140 00:08:03,400 --> 00:08:06,160 Speaker 1: as if that is more likely to be the case. 141 00:08:07,240 --> 00:08:09,600 Speaker 1: So there's another thing that I think we take for 142 00:08:09,680 --> 00:08:12,080 Speaker 1: granted at this point in time, and I think it 143 00:08:12,120 --> 00:08:14,080 Speaker 1: should be discussed a lot more and that is the 144 00:08:14,480 --> 00:08:17,760 Speaker 1: pace of the hiking cycle. So we just saw fifty 145 00:08:17,920 --> 00:08:21,400 Speaker 1: basis points at the last decision, and I think the 146 00:08:21,400 --> 00:08:25,040 Speaker 1: Fed's talking about doing fifty basis points at the next decision. 147 00:08:25,680 --> 00:08:29,239 Speaker 1: And it seems like they are moving, and they've used 148 00:08:29,320 --> 00:08:33,880 Speaker 1: the specific word, but they're moving quickly and expeditiously, and 149 00:08:33,920 --> 00:08:37,320 Speaker 1: it feels like there's really a sense of urgency. But 150 00:08:37,440 --> 00:08:41,000 Speaker 1: on the other hand, they will also openly talk about 151 00:08:41,520 --> 00:08:45,160 Speaker 1: the economy is already slowing. We think that inflation is 152 00:08:45,400 --> 00:08:49,040 Speaker 1: currently peaking. So I guess my question is, like, why 153 00:08:49,080 --> 00:08:52,040 Speaker 1: that urgency? What exactly are they worried about here? Is 154 00:08:52,040 --> 00:08:55,840 Speaker 1: it inflation expectations becoming unmoored, is it some sort of 155 00:08:55,920 --> 00:08:59,360 Speaker 1: wage price spiral, or is it something really simple like 156 00:08:59,559 --> 00:09:02,120 Speaker 1: credit city they have to come in and convince people 157 00:09:02,160 --> 00:09:05,320 Speaker 1: that they are serious about prices. Yeah, I think it's 158 00:09:05,360 --> 00:09:07,440 Speaker 1: all of that. Um And you know, there are three 159 00:09:07,440 --> 00:09:10,640 Speaker 1: words that I've been listening to that I find very interesting, 160 00:09:10,679 --> 00:09:13,080 Speaker 1: and the way that they talk about it expeditiously as 161 00:09:13,120 --> 00:09:16,079 Speaker 1: one of the words. Cadence is another word, and then 162 00:09:16,120 --> 00:09:19,640 Speaker 1: there's that softish word. I think that when you combine 163 00:09:19,679 --> 00:09:22,520 Speaker 1: the three of them together, what it says is that 164 00:09:22,559 --> 00:09:25,120 Speaker 1: they want to front load, meaning that they want to 165 00:09:25,120 --> 00:09:28,079 Speaker 1: do it at a specific cadence fifty basis points, and 166 00:09:28,120 --> 00:09:31,079 Speaker 1: then have the optionality after that to be able to 167 00:09:31,160 --> 00:09:33,839 Speaker 1: do whatever they need. You know, Loretta Mester, who I 168 00:09:33,960 --> 00:09:38,760 Speaker 1: mentioned before, I find her talking points very beneficial. They're 169 00:09:38,880 --> 00:09:41,760 Speaker 1: very much on point in terms of, you know, what 170 00:09:41,840 --> 00:09:44,400 Speaker 1: the FED is looking to do. And she talked about 171 00:09:44,559 --> 00:09:48,120 Speaker 1: the optionality question, and so that's what frontloading is supposed 172 00:09:48,120 --> 00:09:50,840 Speaker 1: to do. It's supposed to say, if we at the 173 00:09:50,840 --> 00:09:54,800 Speaker 1: time that we start hiking hike more aggressively in the beginning, 174 00:09:55,240 --> 00:09:57,560 Speaker 1: then we have the option to go zero, we have 175 00:09:57,559 --> 00:09:59,360 Speaker 1: the option to go twenty five, we have the option 176 00:09:59,400 --> 00:10:02,800 Speaker 1: to go fifth. We have more optionality that way. And 177 00:10:02,840 --> 00:10:05,959 Speaker 1: given the fact that our policy acts with a lag, 178 00:10:06,840 --> 00:10:11,160 Speaker 1: then that's beneficial because the stuff that we did three 179 00:10:11,240 --> 00:10:13,480 Speaker 1: or four months ago, we'll start to see that filter 180 00:10:13,600 --> 00:10:16,640 Speaker 1: into the system, and then we might even be able 181 00:10:16,720 --> 00:10:20,240 Speaker 1: to completely miss a meeting. We might be able to 182 00:10:20,280 --> 00:10:23,040 Speaker 1: go that meeting, we might be able to speed it up. 183 00:10:23,400 --> 00:10:27,439 Speaker 1: But by front loading, by going at this specific cadence, 184 00:10:27,559 --> 00:10:32,160 Speaker 1: this fifty basis points cadence, we're giving ourselves more optionality 185 00:10:32,240 --> 00:10:52,120 Speaker 1: rather than less I want to actually go back to 186 00:10:52,160 --> 00:10:55,360 Speaker 1: the first question because there's another component of it. When 187 00:10:55,360 --> 00:10:57,040 Speaker 1: we talk about what is the FED trying to do? 188 00:10:57,120 --> 00:10:59,680 Speaker 1: It is you by raising rage and as you say that, 189 00:11:00,280 --> 00:11:02,840 Speaker 1: it's trying to bring supply and demand into balance and 190 00:11:02,840 --> 00:11:06,360 Speaker 1: a supply constrained environment, it means bring demand down. But 191 00:11:06,400 --> 00:11:10,960 Speaker 1: there's another step, which is what is the transmission mechanism 192 00:11:11,000 --> 00:11:14,800 Speaker 1: between higher rates and bringing demand down? How do you 193 00:11:14,840 --> 00:11:16,839 Speaker 1: think it works or how does the FED thing that 194 00:11:16,960 --> 00:11:20,480 Speaker 1: works mechanically? They had marks, they're like fifty and may 195 00:11:20,480 --> 00:11:23,720 Speaker 1: probably gonna get another. How does the higher rates translate 196 00:11:23,760 --> 00:11:25,960 Speaker 1: into lower demand? Yeah, I mean, and that is the 197 00:11:26,000 --> 00:11:29,880 Speaker 1: tricky question. I mean, that's the dollar question because there 198 00:11:29,880 --> 00:11:32,640 Speaker 1: are a lot of different thoughts about that. It's so 199 00:11:32,840 --> 00:11:36,520 Speaker 1: wild that like this is the primary tool that we 200 00:11:36,640 --> 00:11:41,040 Speaker 1: have in the developed world to manage inflation, which economists 201 00:11:41,040 --> 00:11:43,920 Speaker 1: considered basically to be the top test, and that actually 202 00:11:43,920 --> 00:11:46,840 Speaker 1: we don't really know or have like a clear sustinct 203 00:11:46,840 --> 00:11:49,120 Speaker 1: answer from anyone, but how that works? But any what, 204 00:11:49,280 --> 00:11:51,640 Speaker 1: what's what's the thinking generally on how this works? Well, 205 00:11:51,720 --> 00:11:54,559 Speaker 1: let me throw a curveball into the conversation, because you know, 206 00:11:54,600 --> 00:11:55,960 Speaker 1: every once in a while get a chance to talk 207 00:11:56,000 --> 00:11:59,240 Speaker 1: to Warren Moser, the godfather of mm T. Yeah, and 208 00:11:59,840 --> 00:12:02,080 Speaker 1: as controversial is some of the things he says are. 209 00:12:02,520 --> 00:12:05,360 Speaker 1: The thing that I find the most interesting in the 210 00:12:05,400 --> 00:12:10,680 Speaker 1: controversy is his concept that when the Fed hikes rates, 211 00:12:10,960 --> 00:12:17,000 Speaker 1: they're actually adding interest income to the private sector. So literally, 212 00:12:17,480 --> 00:12:20,200 Speaker 1: yesterday I was walking down the street and I got 213 00:12:20,200 --> 00:12:23,640 Speaker 1: an email. It was from my savings account. The savings 214 00:12:23,640 --> 00:12:26,480 Speaker 1: account said, your interest rate is going up. It's going 215 00:12:26,520 --> 00:12:29,880 Speaker 1: up from like almost nail to a little bit more 216 00:12:29,880 --> 00:12:35,280 Speaker 1: than nil. But that amount that it went up by 217 00:12:35,679 --> 00:12:40,720 Speaker 1: a new team is uh. You know, that potentially could 218 00:12:40,720 --> 00:12:43,600 Speaker 1: add to aggregate demand. So when we talk about interest 219 00:12:43,679 --> 00:12:48,679 Speaker 1: rates going up only working against uh, the economy, it's 220 00:12:48,720 --> 00:12:53,160 Speaker 1: not entirely true. When you look at the mechanisms offen 221 00:12:53,440 --> 00:12:57,040 Speaker 1: what's sort of like the mainstream view of the transmission. Yeah, 222 00:12:57,040 --> 00:12:59,439 Speaker 1: so I think the mainstream view of the transmission mechanism 223 00:12:59,640 --> 00:13:02,800 Speaker 1: is mostly about financial conditions tightening. And you know, there 224 00:13:02,800 --> 00:13:05,200 Speaker 1: are two things in particular that I would think of, 225 00:13:05,320 --> 00:13:09,120 Speaker 1: one as mortgages and interest rates for businesses, and then 226 00:13:09,160 --> 00:13:13,200 Speaker 1: the other is discount rates. So you think about stocks 227 00:13:13,200 --> 00:13:16,760 Speaker 1: and bonds going down because interest rates are going up, 228 00:13:17,080 --> 00:13:19,840 Speaker 1: that's financial conditions tightening. But also when you think about 229 00:13:19,840 --> 00:13:23,600 Speaker 1: mortgage rates going up, when you think about bond yields 230 00:13:23,640 --> 00:13:27,880 Speaker 1: going up, that's also financial conditions tightening. And the biggest 231 00:13:27,880 --> 00:13:31,240 Speaker 1: tricky point for the FED is that the United States 232 00:13:31,520 --> 00:13:35,600 Speaker 1: is an economy, especially in the household sector, that is 233 00:13:35,800 --> 00:13:40,680 Speaker 1: leveraged to fixed rate mortgages. You know, in the UK, 234 00:13:41,440 --> 00:13:46,400 Speaker 1: when you raise interest rates immediately, everyone's mortgages goes up 235 00:13:46,520 --> 00:13:50,080 Speaker 1: relatively quickly. In the United States, there's been a massive 236 00:13:50,160 --> 00:13:53,480 Speaker 1: refive boom that has been stopped out now and so 237 00:13:53,520 --> 00:13:56,160 Speaker 1: there are a lot of people who are at very 238 00:13:56,280 --> 00:13:59,880 Speaker 1: very low thirty year of mortgage rates and so increase 239 00:14:00,000 --> 00:14:03,760 Speaker 1: seen interest rates just a little bit, you know, fifty 240 00:14:03,800 --> 00:14:07,600 Speaker 1: basis points, a hundred basis points may not be enough 241 00:14:08,000 --> 00:14:11,400 Speaker 1: to have a tightening of conditions in that market. That 242 00:14:11,600 --> 00:14:13,720 Speaker 1: is interesting. Does that mean that they have to pull 243 00:14:14,440 --> 00:14:16,880 Speaker 1: other levers or they have to wait for other components 244 00:14:16,880 --> 00:14:19,680 Speaker 1: of financial conditions to start tightening, And you know, things 245 00:14:19,720 --> 00:14:22,760 Speaker 1: like asset prices will feed into that, right right, So 246 00:14:22,800 --> 00:14:24,880 Speaker 1: I mean they're looking at an aggregate picture, and so 247 00:14:24,920 --> 00:14:29,280 Speaker 1: they have to if they want the feed through mechanism 248 00:14:29,320 --> 00:14:32,080 Speaker 1: to work, then they might have to do more or 249 00:14:32,160 --> 00:14:35,760 Speaker 1: get more from one of those other areas, and obviously 250 00:14:35,800 --> 00:14:38,640 Speaker 1: the more that you get, the greater the chance for 251 00:14:38,800 --> 00:14:42,800 Speaker 1: discontinuity where you get sort of liquidity problems, where you 252 00:14:42,840 --> 00:14:46,120 Speaker 1: get crises and things of that nature. Yeah, So this 253 00:14:46,160 --> 00:14:48,080 Speaker 1: is what I was sort of alluding to in the 254 00:14:48,080 --> 00:14:53,200 Speaker 1: intro about market functioning. But it does feel like we 255 00:14:53,240 --> 00:14:56,480 Speaker 1: are in this environment. You know, things are unclear at 256 00:14:56,600 --> 00:14:58,480 Speaker 1: the best of times, and no one seems to know 257 00:14:58,520 --> 00:15:01,960 Speaker 1: how inflation actually works or how interest rates actually worked 258 00:15:01,960 --> 00:15:06,240 Speaker 1: to tame inflation. And then add in this unusual situation, uh, 259 00:15:06,480 --> 00:15:10,800 Speaker 1: post COVID, where we have supply issues. Uh, we have 260 00:15:10,920 --> 00:15:13,600 Speaker 1: things just being very different to how they were before. 261 00:15:14,280 --> 00:15:16,840 Speaker 1: And it feels like that there's a potential here for 262 00:15:16,920 --> 00:15:19,480 Speaker 1: something to go wrong, or for something to break, or 263 00:15:19,520 --> 00:15:22,520 Speaker 1: for the FED to overdo it in some way. So 264 00:15:22,560 --> 00:15:25,400 Speaker 1: how do you think they're thinking about and trying to 265 00:15:25,520 --> 00:15:29,440 Speaker 1: manage that particular risk? You know, that is a very 266 00:15:29,440 --> 00:15:33,960 Speaker 1: good question, because it's not clear that they have a 267 00:15:34,080 --> 00:15:37,320 Speaker 1: specific strategy on that. Uh. The thing that I found 268 00:15:37,360 --> 00:15:42,080 Speaker 1: most interesting from the FED recently is that some of 269 00:15:42,080 --> 00:15:44,080 Speaker 1: the speakers, and I think actually most of the speakers 270 00:15:44,120 --> 00:15:48,640 Speaker 1: that I've heard including the most hawkish speaker, mentioned the 271 00:15:48,840 --> 00:15:51,760 Speaker 1: tightening of financial conditions. And I think that the terminology 272 00:15:51,800 --> 00:15:54,680 Speaker 1: that Jim Bullard, who is the St. Louis FED President 273 00:15:54,920 --> 00:15:58,760 Speaker 1: and who is uh one of the more openly hawkish members, 274 00:15:59,120 --> 00:16:02,600 Speaker 1: the terminology use was quite a bit or you know, 275 00:16:02,680 --> 00:16:06,560 Speaker 1: a lot, So to me, that's sort of a messaging 276 00:16:06,720 --> 00:16:09,680 Speaker 1: that it sort of undercuts this whole thing that we're 277 00:16:09,720 --> 00:16:12,800 Speaker 1: moving expeditious lee and will you know, we want to 278 00:16:12,840 --> 00:16:18,280 Speaker 1: soft this potentially mild recession landing. But at the same time, 279 00:16:18,360 --> 00:16:22,520 Speaker 1: it tells you that they're looking at financial conditions so 280 00:16:22,520 --> 00:16:25,440 Speaker 1: they won't let things unravel. Uh, is I think what 281 00:16:25,480 --> 00:16:27,120 Speaker 1: the messaging is that. I mean, that's the best they 282 00:16:27,120 --> 00:16:29,440 Speaker 1: can do. So this is something Tracy and I were 283 00:16:29,480 --> 00:16:33,080 Speaker 1: actually just talking about this at lunch, and you know, 284 00:16:33,480 --> 00:16:36,280 Speaker 1: stock trading is really hard and I could never do 285 00:16:36,360 --> 00:16:38,840 Speaker 1: it professionally, and I'm glad that's not my job. But 286 00:16:39,560 --> 00:16:42,320 Speaker 1: you know, stocks are financial conditions or the you know, 287 00:16:42,360 --> 00:16:44,880 Speaker 1: when stocks go up, that represents a loosening of financial 288 00:16:44,920 --> 00:16:49,080 Speaker 1: conditions when they go down. In some sense, the FED 289 00:16:49,160 --> 00:16:54,920 Speaker 1: basically said by saying that a we wanna defeat inflation 290 00:16:55,080 --> 00:16:58,640 Speaker 1: by tightening policy and be our policy works through tightening 291 00:16:58,680 --> 00:17:02,800 Speaker 1: financial conditions. In some sense, the FED sort of told 292 00:17:02,800 --> 00:17:04,959 Speaker 1: you that they were going to make stocks go down, right, 293 00:17:05,280 --> 00:17:08,520 Speaker 1: And you know, I think it's interesting because the number 294 00:17:08,560 --> 00:17:12,280 Speaker 1: of former FED officials and people in the know who 295 00:17:12,280 --> 00:17:15,879 Speaker 1: have been telling the FED, and Build Dudley in particular, 296 00:17:16,119 --> 00:17:19,880 Speaker 1: that by the way, if stocks aren't going down, you're 297 00:17:19,920 --> 00:17:22,680 Speaker 1: really not tightening plants of conditions. I think it's interesting 298 00:17:22,920 --> 00:17:28,520 Speaker 1: because clearly they're listening to what Bill Dudley has to say. Well, 299 00:17:28,520 --> 00:17:33,320 Speaker 1: and then the other follow on that striking is I 300 00:17:33,359 --> 00:17:36,000 Speaker 1: think if you look at like corporate behavior, you can 301 00:17:36,040 --> 00:17:40,359 Speaker 1: see a pretty clear link between a following stock market 302 00:17:40,600 --> 00:17:44,040 Speaker 1: and hiring and decisions to hold back on hiring. And 303 00:17:44,119 --> 00:17:47,359 Speaker 1: so we know that the most intense um selling in 304 00:17:47,400 --> 00:17:49,359 Speaker 1: the stock market is a lot of these high flying 305 00:17:49,840 --> 00:17:53,840 Speaker 1: tech stocks, and one after another, you're reading these memos 306 00:17:53,880 --> 00:17:56,800 Speaker 1: like we're putting on a hiring freeze because investors want 307 00:17:56,800 --> 00:17:58,560 Speaker 1: to see free cash flow. They don't want us to 308 00:17:58,960 --> 00:18:02,119 Speaker 1: spend a lot. So to the extent that the goal 309 00:18:02,160 --> 00:18:04,520 Speaker 1: of for the FED is to have the softish landing 310 00:18:04,600 --> 00:18:07,560 Speaker 1: and to sap demand. And one way you sap demand 311 00:18:08,000 --> 00:18:12,560 Speaker 1: is by weakening the labor market. Maybe increasing unemployment. You 312 00:18:12,600 --> 00:18:16,440 Speaker 1: can draw a pretty straight line between they've tightened, they've 313 00:18:16,520 --> 00:18:20,720 Speaker 1: hit stocks, and stocks the companies who stocks have fallen 314 00:18:20,720 --> 00:18:24,520 Speaker 1: are slowing hiring, right, and so unemployment. I think Bill 315 00:18:24,600 --> 00:18:28,600 Speaker 1: Dudley at one point during the last business cycle, when 316 00:18:28,640 --> 00:18:31,320 Speaker 1: he was a FED official, you know, New York Fed president, 317 00:18:31,480 --> 00:18:35,200 Speaker 1: he mentioned something about to load two low unemployment, low 318 00:18:35,280 --> 00:18:37,880 Speaker 1: low unemployment, and I think he said too low unemployment. 319 00:18:38,440 --> 00:18:43,440 Speaker 1: So you know, mentally, this whole Phillips curve thinking, which 320 00:18:43,480 --> 00:18:46,720 Speaker 1: is what that's representative of. It says that you need 321 00:18:46,800 --> 00:18:49,480 Speaker 1: to throw people out of work and uh, and that's 322 00:18:49,520 --> 00:18:52,159 Speaker 1: going and that's ultimately how demand gets slowed down. So 323 00:18:52,160 --> 00:18:56,240 Speaker 1: when we think about the transmission mechanism, ultimately it's about 324 00:18:56,280 --> 00:19:01,320 Speaker 1: people losing their jobs, which is difficult just on a 325 00:19:01,400 --> 00:19:05,240 Speaker 1: human level to think about. That's that's our transmission mechanism. 326 00:19:05,400 --> 00:19:07,520 Speaker 1: So one thing I was reading just before I came 327 00:19:07,560 --> 00:19:10,280 Speaker 1: in here, there's a big paper published by the Bank 328 00:19:10,320 --> 00:19:12,960 Speaker 1: for International Settlements. Actually I think they called it a book, 329 00:19:13,240 --> 00:19:15,959 Speaker 1: and it is very long, and it's all about inequality 330 00:19:16,240 --> 00:19:18,640 Speaker 1: in recent years, the fact that inequality has been going 331 00:19:18,760 --> 00:19:21,240 Speaker 1: up and what it means for central banks and the 332 00:19:21,280 --> 00:19:26,160 Speaker 1: contention there is that inequality actually makes monetary policy less 333 00:19:26,160 --> 00:19:29,920 Speaker 1: effective because you know a lot of people are sort 334 00:19:29,960 --> 00:19:33,879 Speaker 1: of the wealthiest percentile or the wealthiest chunk of the 335 00:19:33,920 --> 00:19:38,639 Speaker 1: population are insulated from things like mortgage rates going up 336 00:19:38,680 --> 00:19:42,040 Speaker 1: to your point earlier. So I guess my question is, is 337 00:19:41,160 --> 00:19:45,879 Speaker 1: is there a better way to try to bring supply 338 00:19:45,920 --> 00:19:51,280 Speaker 1: and demand into balance than a pure blunt interest rate hike. Yeah, 339 00:19:51,480 --> 00:19:55,879 Speaker 1: And it's to me that question automatically makes you think 340 00:19:55,920 --> 00:19:58,600 Speaker 1: about fiscal and monetary policy and some of the debates 341 00:19:58,640 --> 00:20:01,719 Speaker 1: that you might have about what you should do and 342 00:20:01,760 --> 00:20:05,879 Speaker 1: where there is a quasi fiscal monetary policy where the 343 00:20:05,880 --> 00:20:08,720 Speaker 1: line gets drawn, etcetera. And I think what we've seen 344 00:20:09,520 --> 00:20:13,960 Speaker 1: is that the FED believes, and it's probably true that 345 00:20:14,720 --> 00:20:21,280 Speaker 1: these other substitute policies like quantitative easy are squishy, They're 346 00:20:21,320 --> 00:20:25,120 Speaker 1: not as easy to deal with, and there are externalities 347 00:20:25,320 --> 00:20:27,520 Speaker 1: like we saw with the repot crisis in two thousand 348 00:20:27,600 --> 00:20:31,320 Speaker 1: and nineteen, that they wish to avoid. So quantitative tightening 349 00:20:32,359 --> 00:20:34,960 Speaker 1: is seen as an adjunct to the primary tools. I 350 00:20:34,960 --> 00:20:37,359 Speaker 1: think there between a rock and a hard place in 351 00:20:37,440 --> 00:20:42,119 Speaker 1: terms of coming up with other mechanisms regulatory certainly, but 352 00:20:42,280 --> 00:20:45,680 Speaker 1: you know this hard blunt instrument really is what they have, 353 00:20:46,200 --> 00:20:48,280 Speaker 1: and then you ask yourself what else can be done 354 00:20:48,280 --> 00:20:53,240 Speaker 1: from a policy perspective, and that obviously begs the fiscal question. UH. 355 00:20:53,280 --> 00:20:56,440 Speaker 1: I think what we're seeing, especially with the degree of 356 00:20:56,720 --> 00:21:01,040 Speaker 1: in the United States at least wrangling discord ward that 357 00:21:01,520 --> 00:21:04,680 Speaker 1: if you want things to get done because you're behind 358 00:21:04,680 --> 00:21:09,320 Speaker 1: the curve or because inflation is moving quickly, it's very 359 00:21:09,320 --> 00:21:13,840 Speaker 1: difficult to think that fiscal is a replacement for monetary policy. 360 00:21:13,840 --> 00:21:16,800 Speaker 1: And I think that one of the reasons that we've 361 00:21:16,840 --> 00:21:21,240 Speaker 1: been leaning on monetary policy, and these are unelected officials obviously, 362 00:21:21,800 --> 00:21:25,639 Speaker 1: is because they can get it done very quickly. Well, 363 00:21:25,680 --> 00:21:28,920 Speaker 1: and if if we sort of accept and I don't 364 00:21:28,920 --> 00:21:31,080 Speaker 1: know that we necessarily should, but if we sort of 365 00:21:31,119 --> 00:21:35,800 Speaker 1: accept this premise that people need to be thrown out 366 00:21:35,800 --> 00:21:39,480 Speaker 1: of work in order to bring supply and demand into balance, 367 00:21:39,960 --> 00:21:43,960 Speaker 1: I guess at some level politicians maybe like getting doubt 368 00:21:44,000 --> 00:21:48,080 Speaker 1: source that to UH, unelected officials at the at the 369 00:21:48,119 --> 00:21:51,760 Speaker 1: Federal Reserve, rather than having to make a policy decision 370 00:21:51,800 --> 00:21:54,560 Speaker 1: that would have that effect. Yeah, I think that you know, 371 00:21:55,480 --> 00:22:00,000 Speaker 1: we we would need a complete rework of our police, 372 00:22:00,000 --> 00:22:03,480 Speaker 1: little cool policy making institutions, and not just in the 373 00:22:03,560 --> 00:22:07,520 Speaker 1: United States, but I would say generally speaking in western 374 00:22:07,720 --> 00:22:11,959 Speaker 1: or in industrialized economies. So where do you stand and 375 00:22:12,040 --> 00:22:16,320 Speaker 1: what is history tell us about this prospect of either 376 00:22:16,400 --> 00:22:19,840 Speaker 1: the soft or the soft dish landing, because there are 377 00:22:19,880 --> 00:22:21,879 Speaker 1: some few of its like this is a fantasy. It 378 00:22:21,920 --> 00:22:23,840 Speaker 1: never happens every time they go into one of these 379 00:22:23,920 --> 00:22:26,600 Speaker 1: hiking cycles, especially with inflation as high as it is 380 00:22:26,880 --> 00:22:28,679 Speaker 1: eight percent, so they have a lot of work to 381 00:22:28,720 --> 00:22:31,040 Speaker 1: do to bring into the target. And so the argument is, 382 00:22:31,400 --> 00:22:35,280 Speaker 1: there is no historical precedent for this much of an 383 00:22:35,280 --> 00:22:39,200 Speaker 1: inflation collapse, without a recession, without a meaningful increase in 384 00:22:39,240 --> 00:22:43,160 Speaker 1: the unemployment rate. To my mind, the only counter argument is, yeah, 385 00:22:43,160 --> 00:22:45,399 Speaker 1: maybe there's no historical precedent for that. There's also no 386 00:22:45,520 --> 00:22:48,800 Speaker 1: historical precedent really for a pandemic and this sort of 387 00:22:48,920 --> 00:22:52,880 Speaker 1: extremely strange business cycle or this cycle that we've seen 388 00:22:52,880 --> 00:22:56,320 Speaker 1: over the last two years. But in your reading of history, 389 00:22:56,640 --> 00:23:00,960 Speaker 1: is the soft dish landing possible? I would say that's 390 00:23:00,960 --> 00:23:04,680 Speaker 1: not my base case. I'll give you two things that 391 00:23:04,680 --> 00:23:09,520 Speaker 1: I'm looking at, which some of the Fed officials point to, 392 00:23:09,680 --> 00:23:13,199 Speaker 1: and the seventies. So with regard to ninety four, one 393 00:23:13,240 --> 00:23:14,680 Speaker 1: of the reasons that we look at that is because 394 00:23:14,720 --> 00:23:17,720 Speaker 1: that was a soft ish landing. Not just softish, it 395 00:23:17,800 --> 00:23:20,399 Speaker 1: was soft in the sense that, you know, you had 396 00:23:20,400 --> 00:23:24,160 Speaker 1: a fourteen percent correction in the NASDAC at that particular juncture, 397 00:23:24,520 --> 00:23:27,359 Speaker 1: interest rates went up, people were thrown out of work. 398 00:23:28,800 --> 00:23:31,880 Speaker 1: You know what we've the financial condition adjustment that we've 399 00:23:31,920 --> 00:23:35,280 Speaker 1: seen thus far is commensurate with that particular period. It 400 00:23:35,280 --> 00:23:39,679 Speaker 1: would be nice if that were the analog. There there 401 00:23:39,680 --> 00:23:42,520 Speaker 1: are multiple problems with that analog. However, one of the 402 00:23:42,560 --> 00:23:45,800 Speaker 1: problems that you mentioned is that inflation is much higher now. 403 00:23:46,280 --> 00:23:49,240 Speaker 1: Second problem is because inflation is much higher, we have 404 00:23:49,400 --> 00:23:51,840 Speaker 1: to be more aggressive, or at least the FED believes 405 00:23:51,840 --> 00:23:55,919 Speaker 1: that it has to be more aggressive. In there was 406 00:23:56,040 --> 00:23:59,359 Speaker 1: never any back to back rate hikes of more than 407 00:24:00,000 --> 00:24:03,320 Speaker 1: issues points. Uh. The last time that there were back 408 00:24:03,359 --> 00:24:07,600 Speaker 1: to back rate hikes greater than basis points and those 409 00:24:07,640 --> 00:24:11,119 Speaker 1: are the last two before recession. And now the Feds 410 00:24:11,160 --> 00:24:13,880 Speaker 1: talking about back to back to back fifty basis point 411 00:24:14,000 --> 00:24:17,720 Speaker 1: rate hikes plus the potential for more after that. So 412 00:24:17,800 --> 00:24:22,000 Speaker 1: that's a differential in terms of the adjustment process, which 413 00:24:22,040 --> 00:24:25,280 Speaker 1: is much greater than and then the last thing, going 414 00:24:25,320 --> 00:24:29,239 Speaker 1: back to the inflation question, when you look at the 415 00:24:29,240 --> 00:24:33,240 Speaker 1: FED funds rate and the real rate of inflation that 416 00:24:33,359 --> 00:24:36,400 Speaker 1: people experience. So when you think about real rates rather 417 00:24:36,440 --> 00:24:41,320 Speaker 1: than you know, Treasury inflation protected securities, tips look at 418 00:24:41,760 --> 00:24:45,560 Speaker 1: FED funds minus CPR and what you find is is 419 00:24:45,640 --> 00:24:49,680 Speaker 1: is that in order to break the back of inflation, 420 00:24:50,400 --> 00:24:55,520 Speaker 1: you had FED funds above cp I materially for a 421 00:24:55,560 --> 00:24:59,600 Speaker 1: continuous period of time in the early eighties, and and 422 00:25:00,000 --> 00:25:01,879 Speaker 1: we're nowhere close to that. So that would be like, right, 423 00:25:04,080 --> 00:25:07,119 Speaker 1: I can't even imagine exactly, And you know, I'm actually 424 00:25:07,160 --> 00:25:10,280 Speaker 1: I was writing a piece right before this about the 425 00:25:10,320 --> 00:25:13,359 Speaker 1: seventies in that regard. You know, if you look at 426 00:25:13,359 --> 00:25:16,800 Speaker 1: the seventies early seventies, before the oil shock, we had 427 00:25:17,119 --> 00:25:20,880 Speaker 1: FED funds above cp I as inflation was going up. 428 00:25:21,040 --> 00:25:23,840 Speaker 1: But then the oil shock hit and the Fed relented. 429 00:25:24,720 --> 00:25:27,560 Speaker 1: They allowed the Fed funds to fall below the cp 430 00:25:27,680 --> 00:25:32,680 Speaker 1: I and then inflation kept on going down, but it 431 00:25:33,200 --> 00:25:35,919 Speaker 1: dipped only to five point nine percent before it started 432 00:25:35,920 --> 00:25:40,120 Speaker 1: going up again. And then that's when Boker came in 433 00:25:40,280 --> 00:25:44,679 Speaker 1: and really went to town. Can I say something weird? 434 00:25:45,160 --> 00:25:48,159 Speaker 1: You know, people talk about low interest rates and easy money, 435 00:25:48,200 --> 00:25:51,000 Speaker 1: but when I hear like ten percent Fed funds, right, 436 00:25:51,119 --> 00:25:52,840 Speaker 1: and I think, like I just put money in a 437 00:25:52,880 --> 00:25:55,399 Speaker 1: bank account and get ten percent back, Like that seems 438 00:25:55,400 --> 00:25:57,359 Speaker 1: like the really easy money to me. But I guess 439 00:25:57,359 --> 00:26:00,640 Speaker 1: obviously you'd be losing a lot on inflation, and that's 440 00:26:00,640 --> 00:26:03,199 Speaker 1: the whole point of having higher interest rates, and you 441 00:26:03,280 --> 00:26:09,080 Speaker 1: might not have an income in an environment. Setting that aside, 442 00:26:09,440 --> 00:26:13,800 Speaker 1: temperacent sounds great, okay um. On a serious note, so 443 00:26:14,160 --> 00:26:17,240 Speaker 1: I feel like to the recession point, one of the 444 00:26:17,280 --> 00:26:21,000 Speaker 1: things that has happened most recently is we've also seen 445 00:26:21,080 --> 00:26:24,800 Speaker 1: some questions swirling around the health of the U. S. Consumer. 446 00:26:25,359 --> 00:26:27,240 Speaker 1: And this was supposed to be the thing that was 447 00:26:27,320 --> 00:26:32,920 Speaker 1: really underpinning the expansion. Consumers were resilient. Now we've seen 448 00:26:33,280 --> 00:26:36,159 Speaker 1: consumer sentiment readings for the past few months that have 449 00:26:36,280 --> 00:26:39,680 Speaker 1: come in quite poorly, and then more recently we've seen 450 00:26:40,400 --> 00:26:44,560 Speaker 1: some major major retailers start to warn on the profit forecast. 451 00:26:44,600 --> 00:26:48,160 Speaker 1: So Target and Walmart were the big names most recently. 452 00:26:48,200 --> 00:26:52,080 Speaker 1: We're recording this on May nineteen. I should add, what 453 00:26:52,280 --> 00:26:54,679 Speaker 1: is going on there and does is that an early 454 00:26:54,760 --> 00:26:57,520 Speaker 1: sign of the economy slowing or an early sign that 455 00:26:57,600 --> 00:27:03,640 Speaker 1: perhaps we've misinterpreted and inventory build as underlying economic strength 456 00:27:03,800 --> 00:27:08,359 Speaker 1: and maybe we're hiking too fast. Yeah. My view on 457 00:27:08,440 --> 00:27:14,400 Speaker 1: that is that the markets are looking forward, and they're 458 00:27:14,400 --> 00:27:18,520 Speaker 1: looking forward to concerns about the consumer, and those concerns 459 00:27:18,640 --> 00:27:21,720 Speaker 1: are in the future, and that the data that we've 460 00:27:21,760 --> 00:27:25,800 Speaker 1: seen thus far do not show the consumer melting at 461 00:27:25,800 --> 00:27:29,800 Speaker 1: this point in time. So, first, on consumer sentiment, I 462 00:27:29,840 --> 00:27:32,240 Speaker 1: think that in the last two recessions, what we saw 463 00:27:32,440 --> 00:27:37,000 Speaker 1: is there's no correlation between consumer sentiment and actual consumer spending. 464 00:27:37,440 --> 00:27:40,760 Speaker 1: That the concept that because sentiment has been low for 465 00:27:40,760 --> 00:27:44,919 Speaker 1: a while, but spending we just got April data is fantasic, 466 00:27:45,000 --> 00:27:50,320 Speaker 1: is great. I don't know what economists use consumer sentiment 467 00:27:50,400 --> 00:27:54,480 Speaker 1: for in order from a predictive tool, but I'm very 468 00:27:54,520 --> 00:27:59,560 Speaker 1: skeptical about that tool as a you know, foreshadowing of 469 00:28:00,000 --> 00:28:03,560 Speaker 1: ekening consumer demand. Then the second thing when you look 470 00:28:03,600 --> 00:28:06,800 Speaker 1: at Target and Walmart in particular, I was looking at 471 00:28:06,800 --> 00:28:10,760 Speaker 1: Target just the other day when it came out comparable 472 00:28:10,800 --> 00:28:15,600 Speaker 1: store sales were up three percent versus expectations for like 473 00:28:15,720 --> 00:28:18,239 Speaker 1: zero points something percent, zero point three or zero point five. 474 00:28:18,280 --> 00:28:20,600 Speaker 1: I think it was so they beat on the top 475 00:28:20,680 --> 00:28:24,480 Speaker 1: line basis. Their problem was that the margins were cut 476 00:28:24,480 --> 00:28:28,880 Speaker 1: in half. And obviously, since your stock is based upon 477 00:28:29,080 --> 00:28:32,080 Speaker 1: your net income, you know, the free cash flow. That's 478 00:28:32,080 --> 00:28:33,919 Speaker 1: a problem for the stock, but it's not a problem 479 00:28:33,920 --> 00:28:37,760 Speaker 1: for consumer spending. It was really interesting reading the Target 480 00:28:37,800 --> 00:28:40,680 Speaker 1: earning this call because it was strange. I mean, so 481 00:28:40,760 --> 00:28:43,520 Speaker 1: Target came out of their quarterlier part and they then 482 00:28:43,520 --> 00:28:45,720 Speaker 1: the stock proceeded to plunge, had a worst day since. 483 00:28:47,520 --> 00:28:50,280 Speaker 1: But as you say, the top line was okay, and 484 00:28:50,320 --> 00:28:52,720 Speaker 1: they actually said, like, demand is fine and people keep 485 00:28:52,720 --> 00:28:55,880 Speaker 1: coming to the storage and Travis, it was basically their 486 00:28:55,960 --> 00:28:59,720 Speaker 1: costs are going up, and they really misread apparently the 487 00:28:59,720 --> 00:29:01,880 Speaker 1: ship aft in consumption, which we all knew was coming, 488 00:29:01,920 --> 00:29:03,760 Speaker 1: and so everyone's been talking for like probably at least 489 00:29:03,760 --> 00:29:05,160 Speaker 1: a year and a half it's like at some point 490 00:29:05,200 --> 00:29:09,040 Speaker 1: we're gonna switch back from household durable goods to services, 491 00:29:09,360 --> 00:29:11,960 Speaker 1: and they really misread the timing and now they have 492 00:29:12,040 --> 00:29:15,640 Speaker 1: this huge inventory pile. But it was interesting how they 493 00:29:15,680 --> 00:29:19,240 Speaker 1: kind of said, like, but actually help the consumers, okay, right, 494 00:29:19,480 --> 00:29:24,360 Speaker 1: And so in the context of correction and the worst 495 00:29:24,440 --> 00:29:28,400 Speaker 1: day since n it tells you that, you know, it 496 00:29:28,440 --> 00:29:30,200 Speaker 1: tells you something about the sentiment of the markets and 497 00:29:30,200 --> 00:29:35,040 Speaker 1: the jitteriness. It doesn't tell you anything about actual consumer demand. 498 00:29:35,400 --> 00:29:37,720 Speaker 1: The thing that they said that worried me the most 499 00:29:37,800 --> 00:29:41,160 Speaker 1: was the point that you said they used to be 500 00:29:41,680 --> 00:29:46,239 Speaker 1: very good at reading consumer demand, but the pandemic and 501 00:29:46,320 --> 00:29:52,480 Speaker 1: supply chain shortages has wrought havoc on their ability to forecast. 502 00:29:52,640 --> 00:29:55,360 Speaker 1: And I think that this is the hidden problem from 503 00:29:55,400 --> 00:29:59,200 Speaker 1: an inflationary perspective, because when you have one of the 504 00:29:59,200 --> 00:30:01,480 Speaker 1: best companies in terms of being able to do that 505 00:30:01,760 --> 00:30:05,680 Speaker 1: having those problems, then the question becomes a how long 506 00:30:05,720 --> 00:30:08,560 Speaker 1: does that last? And be why are they having those problems. 507 00:30:08,760 --> 00:30:10,160 Speaker 1: I think one of the reasons that they're having the 508 00:30:10,240 --> 00:30:13,240 Speaker 1: problems is because we're in a new era. That era 509 00:30:13,520 --> 00:30:16,120 Speaker 1: is not the previous era, which was a just in 510 00:30:16,200 --> 00:30:20,440 Speaker 1: time inventory era. We're in an era where supply chains 511 00:30:20,720 --> 00:30:24,280 Speaker 1: are less just in time inventory builds, and then by 512 00:30:24,280 --> 00:30:27,760 Speaker 1: the time you realize that you've not gotten it right, 513 00:30:28,320 --> 00:30:32,360 Speaker 1: then suddenly you have to purge those inventors and demand 514 00:30:32,440 --> 00:30:35,000 Speaker 1: is moved to somewhere else. That's much more akin to 515 00:30:35,080 --> 00:30:38,600 Speaker 1: the period that we had pre China integration into the 516 00:30:38,640 --> 00:30:42,480 Speaker 1: global this system. That's more like, you know, the nineteen 517 00:30:42,520 --> 00:30:46,360 Speaker 1: seventies and nineteen eighties and nine nineties, and now we're 518 00:30:46,400 --> 00:31:04,480 Speaker 1: going back to that. So if we go back to 519 00:31:04,520 --> 00:31:07,840 Speaker 1: the soft landing question. You pointed out like history is 520 00:31:07,880 --> 00:31:11,000 Speaker 1: not very encouraging on this front, but I guess they 521 00:31:11,360 --> 00:31:12,640 Speaker 1: you know, to me, I can think of like a 522 00:31:12,640 --> 00:31:16,120 Speaker 1: few counter reasons, and one is, look, we've we're in 523 00:31:16,360 --> 00:31:19,320 Speaker 1: We're not in a business cycle classically. The recession that 524 00:31:19,400 --> 00:31:22,959 Speaker 1: we saw in spring of is not like a true 525 00:31:24,160 --> 00:31:27,520 Speaker 1: It was an exogenous shock. It we bounced back very quickly. 526 00:31:27,800 --> 00:31:32,440 Speaker 1: The recovery was not a normal expansion. It was um so. 527 00:31:32,880 --> 00:31:35,640 Speaker 1: And I think if you listen to feed officials, even Powell, 528 00:31:36,200 --> 00:31:39,440 Speaker 1: there's if the you know, eight plus eight point five 529 00:31:39,480 --> 00:31:43,000 Speaker 1: percent inflation that we see today, there's some chunk of 530 00:31:43,040 --> 00:31:46,560 Speaker 1: it that would still be characterized as transitory factors, right, 531 00:31:46,760 --> 00:31:49,840 Speaker 1: things related supply chain pressure is like the sort of 532 00:31:49,840 --> 00:31:51,680 Speaker 1: things we used to talk about on this podcast a 533 00:31:51,760 --> 00:31:54,920 Speaker 1: year ago, you know, cars and chips and all that. 534 00:31:55,160 --> 00:31:56,800 Speaker 1: And then there's something I was like, some sort of 535 00:31:56,840 --> 00:31:59,680 Speaker 1: like underlying pressure. And I guess the sort of like 536 00:32:00,040 --> 00:32:03,200 Speaker 1: the optimistic arguments is that a big chunk of that 537 00:32:03,360 --> 00:32:06,920 Speaker 1: eight and a half percent is still things that we 538 00:32:06,960 --> 00:32:09,960 Speaker 1: would call it transitory event will normalize when all the 539 00:32:09,960 --> 00:32:12,440 Speaker 1: effects of the pandemic are gone. How do you think 540 00:32:12,480 --> 00:32:14,960 Speaker 1: about that? Coursure, like, how do you wait, why do 541 00:32:15,000 --> 00:32:17,640 Speaker 1: you think we have eight and a half percent inflation 542 00:32:17,760 --> 00:32:19,320 Speaker 1: right now? Like, how do you sort of like wait 543 00:32:19,400 --> 00:32:22,560 Speaker 1: the different drivers of it? Yeah, and I think it's 544 00:32:22,600 --> 00:32:24,800 Speaker 1: a great question, but I don't know any more than 545 00:32:24,840 --> 00:32:29,920 Speaker 1: anyone else obviously. But that's the that's another you know, 546 00:32:30,400 --> 00:32:32,959 Speaker 1: sixt or four thousand other question in terms of should 547 00:32:32,960 --> 00:32:35,800 Speaker 1: we wait? Where where's our terminal rate? In terms of 548 00:32:36,160 --> 00:32:40,040 Speaker 1: how we think about this, because let's say let's disaggregate 549 00:32:40,080 --> 00:32:43,240 Speaker 1: the eight point three percent and say that four percent 550 00:32:43,280 --> 00:32:46,800 Speaker 1: of that is temporary, four point three percent of that 551 00:32:47,120 --> 00:32:52,080 Speaker 1: is remaining. We're going to bring demand down to the 552 00:32:52,160 --> 00:32:55,040 Speaker 1: supply level, and so that four point three percent will 553 00:32:55,280 --> 00:32:57,920 Speaker 1: fall to two percent over time. That's one way to 554 00:32:58,000 --> 00:32:59,880 Speaker 1: look at it. What does that mean in terms of 555 00:32:59,880 --> 00:33:02,600 Speaker 1: the terminal rate? It means three rate hikes up to 556 00:33:02,920 --> 00:33:07,400 Speaker 1: two percent and then say, uh, basis point hikes until 557 00:33:07,440 --> 00:33:09,520 Speaker 1: you get to say three point five percent. By the 558 00:33:09,520 --> 00:33:12,520 Speaker 1: time you get to three point five percent, actually the 559 00:33:12,560 --> 00:33:16,000 Speaker 1: Fed Funds rate is above or about the same as 560 00:33:16,120 --> 00:33:19,600 Speaker 1: the c p I. So that's a scenario, and that's 561 00:33:19,640 --> 00:33:23,680 Speaker 1: a very benign scenario. A less benign scenario is one 562 00:33:23,800 --> 00:33:29,280 Speaker 1: in which only say two percent of that is actually 563 00:33:29,720 --> 00:33:34,800 Speaker 1: supply chain related, and that you bring demand down. You 564 00:33:35,160 --> 00:33:37,640 Speaker 1: bring it down to say where the CPI is at 565 00:33:37,720 --> 00:33:40,800 Speaker 1: five and a half percent, and then you said that 566 00:33:40,840 --> 00:33:44,480 Speaker 1: your terminal rate is three and a half percent, You 567 00:33:44,600 --> 00:33:49,280 Speaker 1: cause a recession with inflation still at five and it 568 00:33:49,320 --> 00:33:53,240 Speaker 1: takes down to say three and a half percent, but 569 00:33:53,400 --> 00:33:56,680 Speaker 1: then it starts to go up again because at that 570 00:33:56,760 --> 00:34:01,280 Speaker 1: point the economy is re accelerating. So you've miscalculated. I 571 00:34:01,320 --> 00:34:05,560 Speaker 1: would say that that's what happened in the seventies, is that, uh, 572 00:34:05,600 --> 00:34:11,240 Speaker 1: they miscalculated how much in seventy seventy five they needed 573 00:34:11,280 --> 00:34:17,120 Speaker 1: to deal with the inflation problem. So what's your estimate 574 00:34:17,360 --> 00:34:20,319 Speaker 1: for how long it could take to get to a 575 00:34:20,360 --> 00:34:23,759 Speaker 1: point where the Fed would have to reassess what it's doing, 576 00:34:23,840 --> 00:34:26,280 Speaker 1: Like what is the sort of make or break time frame? 577 00:34:26,840 --> 00:34:29,960 Speaker 1: I think you're looking at the beginning of two thousand 578 00:34:30,000 --> 00:34:34,000 Speaker 1: twenty three, when they will be able to see what 579 00:34:34,120 --> 00:34:38,160 Speaker 1: the discrepancy sort of in the March time frame. By 580 00:34:38,200 --> 00:34:41,720 Speaker 1: that time you can get to they're the FED funds 581 00:34:41,760 --> 00:34:45,800 Speaker 1: forward terminal rate of three fifty, So Fed funds forwards 582 00:34:46,160 --> 00:34:48,960 Speaker 1: say the FED will get to three fifty by March 583 00:34:49,000 --> 00:34:52,799 Speaker 1: of two three. If you're at that level and the 584 00:34:52,880 --> 00:34:57,200 Speaker 1: c p I is five, then you have a question 585 00:34:57,560 --> 00:35:01,120 Speaker 1: as to do you want to stop there, do you 586 00:35:01,160 --> 00:35:04,520 Speaker 1: want to continue to go higher? What are financial conditions 587 00:35:04,960 --> 00:35:08,160 Speaker 1: and what's the state of the economy at that particular juncture, 588 00:35:08,200 --> 00:35:10,680 Speaker 1: Because those are the three variables that you're playing with, 589 00:35:11,160 --> 00:35:15,319 Speaker 1: and you know that leaves the FED less room obviously 590 00:35:15,480 --> 00:35:19,000 Speaker 1: to to operate if two of those things are problematic 591 00:35:19,040 --> 00:35:23,480 Speaker 1: as opposed to one. So the other thing that I 592 00:35:23,520 --> 00:35:27,200 Speaker 1: think is worth thinking about as we discuss the timing 593 00:35:27,480 --> 00:35:29,319 Speaker 1: of all of this and the pace or of the 594 00:35:29,400 --> 00:35:34,160 Speaker 1: cadence um as the FED has put it, is political considerations. 595 00:35:34,239 --> 00:35:36,719 Speaker 1: And of course the Federal Reserve is supposed to be 596 00:35:36,800 --> 00:35:40,919 Speaker 1: an independent body. They're not supposed to care about politics, 597 00:35:40,920 --> 00:35:45,600 Speaker 1: but in practice I suspect that it may play some 598 00:35:45,680 --> 00:35:47,960 Speaker 1: sort of role, or it would at least be at 599 00:35:48,000 --> 00:35:50,399 Speaker 1: the back of their minds that later this year we're 600 00:35:50,400 --> 00:35:52,920 Speaker 1: going to have an election. Yeah, and you know you 601 00:35:53,000 --> 00:35:56,400 Speaker 1: asked at the top of the show about considerations that 602 00:35:56,400 --> 00:35:59,000 Speaker 1: you didn't mention the politics and the time, but I didn't. 603 00:35:59,520 --> 00:36:02,640 Speaker 1: I suspect that that could play a role. I mean, 604 00:36:02,880 --> 00:36:06,520 Speaker 1: is it. Here's a question, is it preferable to hike 605 00:36:06,640 --> 00:36:11,720 Speaker 1: fifty and then ease into other rate hikes well before 606 00:36:12,000 --> 00:36:16,959 Speaker 1: a midterm a contentious, contentious mid term election, or would 607 00:36:16,960 --> 00:36:20,399 Speaker 1: you rather be going, you know, fifty basis points at 608 00:36:20,400 --> 00:36:23,080 Speaker 1: a time in a November and December f o m C. 609 00:36:23,800 --> 00:36:26,319 Speaker 1: And I think that, you know, it's preferable to do 610 00:36:26,440 --> 00:36:29,399 Speaker 1: the first as opposed to the ladder. I look at 611 00:36:29,480 --> 00:36:32,440 Speaker 1: the speech that Jerome Powell gave at the beginning of 612 00:36:32,480 --> 00:36:36,760 Speaker 1: the last fom C meeting as highly unusual and a 613 00:36:36,760 --> 00:36:41,719 Speaker 1: representation of the level of political pressure that he must 614 00:36:41,719 --> 00:36:44,680 Speaker 1: be under. Because when you speak to the American people, 615 00:36:44,760 --> 00:36:46,759 Speaker 1: I want to speak directly to the American people. He 616 00:36:46,840 --> 00:36:50,640 Speaker 1: said to me. That's a sign that he feels political 617 00:36:50,719 --> 00:36:53,799 Speaker 1: pressure to speak to the American people. And so, as 618 00:36:53,840 --> 00:36:57,480 Speaker 1: a political is AFT would like to be. The reality 619 00:36:57,680 --> 00:37:00,080 Speaker 1: is is that they are a creature of Washington, and 620 00:37:00,120 --> 00:37:04,600 Speaker 1: they're in Washington, and they work at the behest of Congress. 621 00:37:05,400 --> 00:37:09,800 Speaker 1: You know. My my senses is that by the time 622 00:37:10,000 --> 00:37:13,080 Speaker 1: September comes around, Yeah, and that's when people are gonna 623 00:37:13,120 --> 00:37:16,360 Speaker 1: be on the campaign course, the economy will have decelerated, 624 00:37:16,680 --> 00:37:20,040 Speaker 1: meaning that right now we're not seeing full on deceleration. 625 00:37:20,120 --> 00:37:22,839 Speaker 1: The consumers still holding up, but by September we will 626 00:37:22,880 --> 00:37:26,400 Speaker 1: see some deceleration. And then the calculus from a political 627 00:37:26,400 --> 00:37:28,960 Speaker 1: perspective is do we want you to go on inflation 628 00:37:28,960 --> 00:37:31,600 Speaker 1: and do we want you to go on growth? Yeah, 629 00:37:32,120 --> 00:37:35,040 Speaker 1: we're sort of and then we're back to UH to 630 00:37:35,160 --> 00:37:39,920 Speaker 1: having these discussions again about unemployment versus UH price stability. 631 00:37:40,040 --> 00:37:44,040 Speaker 1: Because you know, when the jobless claims that came out today, 632 00:37:44,719 --> 00:37:47,960 Speaker 1: I'm up, Yes, I thought that. I mean, that number 633 00:37:48,000 --> 00:37:51,160 Speaker 1: is historically no low number, but so it seems like 634 00:37:51,200 --> 00:37:56,640 Speaker 1: the bull case just on like on labor is So 635 00:37:56,719 --> 00:38:00,000 Speaker 1: since the middle of March weekly initial job was claimed, 636 00:38:00,000 --> 00:38:03,200 Speaker 1: it's clearly been ticking up. There's clearly um, there's clearly 637 00:38:03,239 --> 00:38:07,359 Speaker 1: an uptrend, but the absolute levels are low. So I 638 00:38:07,400 --> 00:38:10,080 Speaker 1: feel like there is this hope and maybe it sort 639 00:38:10,120 --> 00:38:14,000 Speaker 1: of relates to the soft dish landing again. You know, 640 00:38:13,560 --> 00:38:17,160 Speaker 1: I remember, like the early two thousands of people used 641 00:38:17,160 --> 00:38:19,359 Speaker 1: to talk about the jobless recovery. Right, So we had 642 00:38:19,360 --> 00:38:23,080 Speaker 1: the recession after the dot com crash and after nine eleven, 643 00:38:23,560 --> 00:38:26,319 Speaker 1: and then the economy started growing again, but it was 644 00:38:26,440 --> 00:38:29,920 Speaker 1: not producing a ton of jobs. And I feel like 645 00:38:30,000 --> 00:38:34,560 Speaker 1: the hope is that we have sort of like the 646 00:38:34,560 --> 00:38:38,840 Speaker 1: the unemployment list recession whatever, the opposite of a jobless 647 00:38:38,880 --> 00:38:42,040 Speaker 1: recovery is that basically there is some way to slow 648 00:38:42,080 --> 00:38:44,960 Speaker 1: down the economy, but that we're starting in such a 649 00:38:44,960 --> 00:38:48,080 Speaker 1: good position and that there's so much labor demand and 650 00:38:48,120 --> 00:38:51,000 Speaker 1: that there's so much like room to slow that we 651 00:38:51,000 --> 00:38:54,000 Speaker 1: can actually have a slow down without a meaningful rise 652 00:38:54,040 --> 00:38:57,480 Speaker 1: in the unemployment rate. Because like that feels like like 653 00:38:57,520 --> 00:39:00,080 Speaker 1: that's the bull scenario, and you hear people talking about that. 654 00:39:00,160 --> 00:39:03,040 Speaker 1: I don't know if it's possible that it does sound 655 00:39:03,040 --> 00:39:04,839 Speaker 1: like people are talking about that, and I think that 656 00:39:04,920 --> 00:39:10,040 Speaker 1: the missing pieces um the participation rate that they're saying 657 00:39:10,280 --> 00:39:14,120 Speaker 1: essentially that the pandemic is still having a residual effect 658 00:39:14,600 --> 00:39:19,799 Speaker 1: on the participation rate. And uh, even if we get 659 00:39:19,840 --> 00:39:22,720 Speaker 1: an uptick in jobless claims and things of that nature, 660 00:39:22,920 --> 00:39:25,040 Speaker 1: there's still lots of people who are on the sidelines. 661 00:39:25,480 --> 00:39:28,879 Speaker 1: And as long as we get the softest landing, as 662 00:39:28,880 --> 00:39:31,640 Speaker 1: soon as we start to re accelerate, those people will 663 00:39:31,640 --> 00:39:33,719 Speaker 1: come back into the workforce and all will be well. 664 00:39:34,080 --> 00:39:37,520 Speaker 1: I'm not gonna comment on that, but I will say 665 00:39:37,680 --> 00:39:41,960 Speaker 1: that the political situation is going to be quite different. 666 00:39:42,000 --> 00:39:45,440 Speaker 1: If that doesn't come to pass. If between now you know, 667 00:39:45,560 --> 00:39:48,640 Speaker 1: May and say September, when the FED is going to 668 00:39:48,719 --> 00:39:50,400 Speaker 1: have to decide are they going to go for the 669 00:39:50,440 --> 00:39:55,040 Speaker 1: fourth fifty, you have a considerable uptick in either unemployment 670 00:39:55,280 --> 00:39:59,800 Speaker 1: or slow down in the economy, then the political calculus 671 00:39:59,840 --> 00:40:02,880 Speaker 1: chan is tremendously before we go. There's one other question 672 00:40:02,920 --> 00:40:06,560 Speaker 1: that I want to ask about, which is this year 673 00:40:06,640 --> 00:40:09,360 Speaker 1: of course, and you know everyone talks about it is 674 00:40:09,440 --> 00:40:14,840 Speaker 1: the two sort of unexpected again fresh exogenous shocks. There's 675 00:40:14,920 --> 00:40:18,840 Speaker 1: the core. There's of course Russia's invasion of Ukraine, which 676 00:40:18,920 --> 00:40:22,080 Speaker 1: has various destabilizing effects. It has effects on energy and 677 00:40:22,160 --> 00:40:26,360 Speaker 1: so forth. And then the extremely hard lockdowns in China, 678 00:40:26,440 --> 00:40:30,319 Speaker 1: which are creating new supply chain stress. How does the 679 00:40:30,400 --> 00:40:35,480 Speaker 1: FED incorporate you know, they're gonna be tempted the effects 680 00:40:35,480 --> 00:40:38,600 Speaker 1: of them. They're not you know, they don't reflect underlying conditions, 681 00:40:38,600 --> 00:40:41,880 Speaker 1: but they're real. And uh, they've pushed gasoline prices up 682 00:40:41,920 --> 00:40:45,160 Speaker 1: and again we heard Cisco earnings, they said that they're 683 00:40:45,160 --> 00:40:48,080 Speaker 1: having real supply chain issues out of China. Again, how 684 00:40:48,080 --> 00:40:50,560 Speaker 1: do these sort of outside shocks that are outside of 685 00:40:50,600 --> 00:40:53,280 Speaker 1: like the cycle effect the Fed's thinking at this point, 686 00:40:54,000 --> 00:40:56,319 Speaker 1: I would think that it gives them more impetus to 687 00:40:56,520 --> 00:40:59,640 Speaker 1: front load in order to have greater optionality on the 688 00:40:59,680 --> 00:41:01,799 Speaker 1: back side, you know, the quicker they can get these 689 00:41:01,880 --> 00:41:04,919 Speaker 1: hikes in there. The quicker they can come to say 690 00:41:05,000 --> 00:41:07,120 Speaker 1: that we're at the neutral rate, We've gotten to a 691 00:41:07,239 --> 00:41:10,560 Speaker 1: level that we feel is justifiable over the long term, 692 00:41:10,960 --> 00:41:15,200 Speaker 1: and then whatever shock hits the economy, they can then 693 00:41:15,400 --> 00:41:17,920 Speaker 1: deal with that shock at that time without having to 694 00:41:17,960 --> 00:41:21,000 Speaker 1: worry about, you know, being at a level that's lower 695 00:41:21,000 --> 00:41:23,239 Speaker 1: than the neutral rate. I mean, the worst thing for 696 00:41:23,320 --> 00:41:27,399 Speaker 1: them would be that the shock happens when interest rates 697 00:41:27,400 --> 00:41:30,839 Speaker 1: are at one percent. Then their hands are tied. Then 698 00:41:30,920 --> 00:41:34,560 Speaker 1: you have to start thinking about reversing, quantitative tightening, all 699 00:41:34,600 --> 00:41:38,399 Speaker 1: these kinds of things. That's gonna be a very difficult situation. Uh, 700 00:41:38,520 --> 00:41:41,880 Speaker 1: Ed Harrison, so great to have you on finally, and 701 00:41:42,120 --> 00:41:45,759 Speaker 1: uh there's a great chat, and I genuinely feel I 702 00:41:45,800 --> 00:41:47,799 Speaker 1: have a better understanding of like how the FED and 703 00:41:48,040 --> 00:41:50,040 Speaker 1: how we should be thinking about the FEDS challenge for 704 00:41:50,160 --> 00:41:51,680 Speaker 1: the rest of the year after that. So thanks for 705 00:41:51,719 --> 00:41:56,360 Speaker 1: coming on. And you're writing a new newsletter at Bloomberg. 706 00:41:56,840 --> 00:41:59,759 Speaker 1: Oh yeah, that's right, good Tracy. You are very good. 707 00:42:00,000 --> 00:42:03,640 Speaker 1: I have to everything risk and if I could give 708 00:42:03,640 --> 00:42:05,919 Speaker 1: it a plus, what I would say is is that 709 00:42:06,280 --> 00:42:10,279 Speaker 1: it's about the concept that we are now post a 710 00:42:10,280 --> 00:42:13,680 Speaker 1: great financial crisis, living in a world in which there 711 00:42:13,719 --> 00:42:16,560 Speaker 1: are risks that are embedded in the system in ways 712 00:42:16,600 --> 00:42:19,680 Speaker 1: that we can't understand. And I think that we're seeing 713 00:42:19,719 --> 00:42:23,360 Speaker 1: that this whole discussion was a manifestation of a risk 714 00:42:23,520 --> 00:42:27,840 Speaker 1: that I, as a you know, hardcore deflationists, would have 715 00:42:27,880 --> 00:42:30,919 Speaker 1: told you what didn't exist two years ago, and yet 716 00:42:31,160 --> 00:42:33,759 Speaker 1: here it is. Yeah, no, absolutely, And I think, like, 717 00:42:33,840 --> 00:42:35,719 Speaker 1: you know, we're all sort of like figuring out is 718 00:42:35,760 --> 00:42:39,160 Speaker 1: this is this a true? What I'll say is this 719 00:42:40,239 --> 00:42:43,319 Speaker 1: the twenty tens are starting to feel like a long 720 00:42:43,360 --> 00:42:45,680 Speaker 1: time ago. You know, It's one point it was like oh, 721 00:42:45,800 --> 00:42:48,799 Speaker 1: I kind of it's like, oh, we just normalize. It's 722 00:42:48,840 --> 00:42:51,120 Speaker 1: also back to like that, but that is starting to 723 00:42:51,120 --> 00:42:53,399 Speaker 1: feel like a lot that that economy that we had 724 00:42:53,440 --> 00:42:57,520 Speaker 1: in feels like a long time ago. But it's also 725 00:42:57,640 --> 00:42:59,840 Speaker 1: just kind of crazy that we spent like a decade 726 00:43:00,160 --> 00:43:04,800 Speaker 1: worried about why inflation was under target and and doing 727 00:43:04,840 --> 00:43:06,400 Speaker 1: a lot of stuff to try to get it up, 728 00:43:06,440 --> 00:43:09,840 Speaker 1: and then suddenly it's like, oh, inflations up, Oops, a 729 00:43:09,880 --> 00:43:14,480 Speaker 1: little bit too much? Yeah. Who whatever thought that we 730 00:43:14,560 --> 00:43:17,440 Speaker 1: wanted to go back to the days of secular stechniques. Yeah, exactly, 731 00:43:17,800 --> 00:43:23,200 Speaker 1: this makes secular stagnation look good nineteen. And the big 732 00:43:23,239 --> 00:43:27,120 Speaker 1: issues where are we going to teach coal miners to code? 733 00:43:27,719 --> 00:43:29,920 Speaker 1: And what are we going to do about truck drivers 734 00:43:30,000 --> 00:43:34,920 Speaker 1: when AI robots put you know, the big those were 735 00:43:34,960 --> 00:43:37,880 Speaker 1: like the big products back then. This is like, anyway, 736 00:43:38,040 --> 00:43:54,919 Speaker 1: thank you so much for coming out. I have to say, 737 00:43:55,000 --> 00:44:00,160 Speaker 1: Tracy hearing Ed talk about this sort of history is 738 00:44:00,840 --> 00:44:04,439 Speaker 1: the poor prospects of a soft landing, at least based 739 00:44:04,480 --> 00:44:06,239 Speaker 1: on history, we're not encouraging. Like I sort of got 740 00:44:06,239 --> 00:44:09,359 Speaker 1: a little bit more pessimistic of that part. Yeah, I mean, 741 00:44:09,440 --> 00:44:12,480 Speaker 1: I think the overarching thing that comes through on that 742 00:44:12,560 --> 00:44:16,480 Speaker 1: conversation is just how difficult it is to balance everything 743 00:44:16,520 --> 00:44:19,000 Speaker 1: that's going on. And as we discussed, you know, it's 744 00:44:19,520 --> 00:44:24,279 Speaker 1: interest rate hikes aren't necessarily the best tool for an 745 00:44:24,360 --> 00:44:27,600 Speaker 1: environment where supply is more of the issue than demand. 746 00:44:28,280 --> 00:44:31,480 Speaker 1: And then the other thing that I was thinking, and 747 00:44:31,560 --> 00:44:33,600 Speaker 1: I'm going to repeat it again, but it seems like 748 00:44:33,680 --> 00:44:37,279 Speaker 1: so many of our problems at the moment stem from 749 00:44:37,360 --> 00:44:40,360 Speaker 1: the unusual nous of the situation and the fact that 750 00:44:40,400 --> 00:44:43,480 Speaker 1: we don't really have I know, we reach for historical 751 00:44:43,560 --> 00:44:47,200 Speaker 1: analogies and parallels like the seventies, but actually there isn't 752 00:44:47,239 --> 00:44:50,800 Speaker 1: a really good example of this happening. Maybe like post 753 00:44:50,880 --> 00:44:55,040 Speaker 1: nineteen eighteen Spanish flu kind of thing, but the and 754 00:44:55,040 --> 00:44:58,319 Speaker 1: and honestly, that actually to me is like the optimistic thing, 755 00:44:58,360 --> 00:45:00,239 Speaker 1: which is like, Okay, in the past, we had to 756 00:45:00,239 --> 00:45:03,640 Speaker 1: get FED funds up above inflation in order to bring 757 00:45:03,680 --> 00:45:06,640 Speaker 1: it down, which means that you know, we're no work 758 00:45:06,719 --> 00:45:10,960 Speaker 1: close to enough the optimistic cases, yes, but this is 759 00:45:11,000 --> 00:45:13,879 Speaker 1: not like any of those scenarios. There is still a 760 00:45:13,960 --> 00:45:18,360 Speaker 1: large residual transitory effect. I'm still sort of I'm pretty 761 00:45:18,440 --> 00:45:21,280 Speaker 1: sympathetic to that view and that for natural reasons things 762 00:45:21,600 --> 00:45:24,319 Speaker 1: will roll over. But we have no idea. And you 763 00:45:24,320 --> 00:45:25,759 Speaker 1: know what else, we have no idea. You know, I'm 764 00:45:25,760 --> 00:45:28,160 Speaker 1: thinking back to some of the episodes we did in 765 00:45:28,280 --> 00:45:32,040 Speaker 1: summer of even before inflation started picking out right in 766 00:45:32,080 --> 00:45:34,400 Speaker 1: the middle of It's like we would like ask people, 767 00:45:35,080 --> 00:45:38,680 Speaker 1: ask central banks, central bankers, like what causes inflation? And 768 00:45:38,719 --> 00:45:41,200 Speaker 1: we get like no idea, Like no one had any 769 00:45:41,200 --> 00:45:43,120 Speaker 1: good answers back then, Like we don't really know what 770 00:45:43,160 --> 00:45:46,160 Speaker 1: caused inflation. For being honest, and now we have inflation, 771 00:45:46,400 --> 00:45:48,560 Speaker 1: but it's still not obvious to me that even now 772 00:45:48,600 --> 00:45:51,239 Speaker 1: with that, that we actually know why. I would like 773 00:45:51,320 --> 00:45:53,439 Speaker 1: to see this is slightly off topic, but I would 774 00:45:53,480 --> 00:45:58,279 Speaker 1: like to see anthropological look at inflation, or like a 775 00:45:58,360 --> 00:46:03,200 Speaker 1: social sociology social theology look at inflation, Like look at 776 00:46:03,239 --> 00:46:05,160 Speaker 1: it from the perspective of the people who are making 777 00:46:05,440 --> 00:46:08,279 Speaker 1: the decisions to raise prices and why they're doing. Yeah, 778 00:46:08,360 --> 00:46:11,759 Speaker 1: let's get let's get a manager from like Procter and 779 00:46:11,800 --> 00:46:14,319 Speaker 1: gamble on and talk to how they and then the 780 00:46:14,360 --> 00:46:17,439 Speaker 1: people just forget, forget the central bankers. They'll just blame 781 00:46:17,520 --> 00:46:19,360 Speaker 1: the person they're buying the commodities from. Some then we 782 00:46:19,360 --> 00:46:21,279 Speaker 1: got to talk to the commodity person and so on. 783 00:46:21,360 --> 00:46:23,799 Speaker 1: But okay, well, let's do a series on that, all right. Yeah, 784 00:46:23,840 --> 00:46:26,000 Speaker 1: we just got an idea for you know, an in 785 00:46:26,480 --> 00:46:29,080 Speaker 1: number of episodes. Okay, shall we leave it there. Let's 786 00:46:29,160 --> 00:46:31,759 Speaker 1: leave it there. This has been another episode of the 787 00:46:31,800 --> 00:46:34,480 Speaker 1: All Thoughts podcast. I'm Tracy Alloway. You can follow me 788 00:46:34,600 --> 00:46:37,480 Speaker 1: on Twitter at Tracy Alloway and I'm Joe Why Isn't All? 789 00:46:37,560 --> 00:46:40,520 Speaker 1: You can follow me on Twitter at The Stalwart. Follow 790 00:46:40,520 --> 00:46:44,400 Speaker 1: our guest Ed Harrison, He's at Edward and h. Follow 791 00:46:44,440 --> 00:46:48,440 Speaker 1: our producer Carmen Rodriguez at Carmen Rman. Follow the Bloomberg 792 00:46:48,440 --> 00:46:52,239 Speaker 1: ahead of podcast Francesca leaving at Francisco Today, and check 793 00:46:52,239 --> 00:46:56,400 Speaker 1: out all of our podcasts under the handle at podcasts. 794 00:46:56,560 --> 00:47:08,880 Speaker 1: Thanks for listening to