WEBVTT - Kyla Scanlon’s ‘Shrugflation’ Triangle

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<v Speaker 1>Bloomberg Audio Studios.

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<v Speaker 2>Podcasts. Radio. News.

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<v Speaker 1>There's all of these pain points across the economy. I

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<v Speaker 1>think a lot of people feel like they're just, you know,

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<v Speaker 1>a duck where they're looking okay on the surface but

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<v Speaker 1>paddling like crazy underneath.

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<v Speaker 2>I'm Sarah Holder and this is The Big Take from

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<v Speaker 2>Bloomberg News. Today on the show, the Fed voted to

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<v Speaker 2>hold rates steady this week, despite evidence that inflation isn't

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<v Speaker 2>slowing down. Ahead of the meeting, I sat down with

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<v Speaker 2>the author and economic commentator, Kyla Scanlon, to unpack what

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<v Speaker 2>she calls the shrugflation triangle and how it explains what's

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<v Speaker 2>happening in the U.S. economy. Well, Kyla, the reason I

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<v Speaker 2>wanted to have you on the show today is because

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<v Speaker 2>I wanted to talk about your latest piece. We've heard

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<v Speaker 2>about skimflation, stagflation, greedflation, shrinkflation.

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<v Speaker 1>Yeah.

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<v Speaker 2>And now you've coined this new portmanteau, shrugflation. Can you

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<v Speaker 2>define shrugflation for me?

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<v Speaker 1>Yeah, so I don't know if it's exactly the right word.

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<v Speaker 1>I mean, I wanted to capture this idea that both

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<v Speaker 1>the AI companies and the U.S. government are are sort

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<v Speaker 1>of shrugging at the financial conditions in the market. The

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<v Speaker 1>ad companies were just, I mean, they still are. They're

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<v Speaker 1>borrowing a ton of money.

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<v Speaker 2>The U.S.

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<v Speaker 1>Government is borrowing a ton of money, both of them

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<v Speaker 1>being relatively rate insensitive. The ad companies, because they have

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<v Speaker 1>so much money. And then the U.S. government obviously has

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<v Speaker 1>to borrow because if there's a deficit, they have to

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<v Speaker 1>close it. Right. And so that was sort of the

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<v Speaker 1>idea is that we have these two really rate insensitive

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<v Speaker 1>borrowers shrugging at the market. And that makes everyone else

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<v Speaker 1>like the people in the economy have to carry that

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<v Speaker 1>that burden because they're not able to shrug. Like a

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<v Speaker 1>person who's trying to get a mortgage isn't able to

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<v Speaker 1>shrug at higher mortgage rates. Person who's trying to borrow

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<v Speaker 1>for an auto loan can't shrug at higher auto loan rates.

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<v Speaker 2>And you also talked about this kind of triangle, right?

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<v Speaker 2>There's the AI companies, the treasury market, and oil. How

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<v Speaker 2>do you see these three factors interacting right now in

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<v Speaker 2>the economy?

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<v Speaker 1>Yeah, I mean, so part of the reason that the

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<v Speaker 1>Federal Reserve had to hike rates in order to battle

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<v Speaker 1>inflation was because energy has gotten so expensive due to

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<v Speaker 1>the war in Iran. And so the three are just

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<v Speaker 1>pretty interconnected with energy markets causing higher rates. AI and treasuries,

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<v Speaker 1>you know, pushing rates up even more. And then we

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<v Speaker 1>find our way back because AI companies are so reliant

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<v Speaker 1>on energy.

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<v Speaker 2>So energy prices are rising, interest rates are rising. And still,

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<v Speaker 2>as you've said, the U.S. government and AI companies keep borrowing.

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<v Speaker 2>They're shrugging it off. I want to dig into a

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<v Speaker 2>little bit more about why. AI companies, why are they

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<v Speaker 2>willing to keep borrowing?

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<v Speaker 1>Yeah, so the AI companies feel like they have to

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<v Speaker 1>borrow a ton of money in order to keep up,

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<v Speaker 1>in order to beat each other, in order to beat China.

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<v Speaker 1>So there's just this massive need to just keep building, building, building.

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<v Speaker 1>And the companies have gotten to the point where they have,

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<v Speaker 1>like for Google and Amazon and Meta, where they're having

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<v Speaker 1>to borrow more and more because they can't keep pulling

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<v Speaker 1>from their cash coffers. And so they're turning to the

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<v Speaker 1>debt market and saying, well, we're going to borrow a

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<v Speaker 1>There's this like massive race to kind of know where

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<v Speaker 1>it seems to win.

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<v Speaker 2>So, I mean, this dynamic that you're describing seems to

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<v Speaker 2>pose a big structural challenge, right? If big economic actors

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<v Speaker 2>aren't like reacting rationally to economic constraints, if they're not

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<v Speaker 2>stopping borrowing even when rates are rising, does that mean

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<v Speaker 2>rate hikes matter less? I guess I'm wondering, can raising

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<v Speaker 2>interest rates still cool inflation if it doesn't stop borrowing anymore?

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<v Speaker 1>So I had the chance to interview Chicago Fed President

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<v Speaker 1>Austin Goolsbee, and he talked about this sort of rate

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<v Speaker 1>hike dilemma in And the point that he made is

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<v Speaker 1>that the Fed will have a toolkit to use if

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<v Speaker 1>they do need to slow down AI-driven demand rate. Like

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<v Speaker 1>they can raise rates even further and maybe that'll cool

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<v Speaker 1>off certain parts of the economy. But I think the

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<v Speaker 1>challenging part about the current inflationary environment is that the

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<v Speaker 1>Fed can hike rates, but they can't really go and

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<v Speaker 1>reopen the Strait of Hormuz. Many people have made this point.

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<v Speaker 1>And so that makes it very challenging as you can

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<v Speaker 1>slow down certain parts of the economy. But if the

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<v Speaker 1>inflationary problem is energy prices, that's really a supply story

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<v Speaker 1>needing more energy.

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<v Speaker 2>I am curious about what small businesses and consumers are

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<v Speaker 2>doing right now because you mentioned they're not able to

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<v Speaker 2>shrug in the same way. What are you seeing?

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<v Speaker 1>Yeah, I mean, I think that consumers are having a

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<v Speaker 1>pretty hard time. You know, it's funny, like a lot

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<v Speaker 1>of people will point to consumer spending and compare that

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<v Speaker 1>to sentiment and be like, well, you know, people are

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<v Speaker 1>still spending, so clearly they're not that sad. And I

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<v Speaker 1>find that to be a pretty... Pretty unfair statement.

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<v Speaker 2>Yeah, say more about that.

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<v Speaker 1>Well, I mean, just because people are spending money doesn't

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<v Speaker 1>mean they're happy, right?

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<v Speaker 2>Or doesn't mean they're confident about the future.

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<v Speaker 1>Yeah. And so I find that to be really short-sighted. And,

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<v Speaker 1>you know, I think we need to be like, well, OK,

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<v Speaker 1>so what are their expectations? Like the Nobel Prize winners

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<v Speaker 1>in economics showed us how important... expectations are. We want

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<v Speaker 1>people to feel like they have a solid economic future.

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<v Speaker 1>And it feels like, you know, Natasha Sarin, I believe

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<v Speaker 1>her last name is pronounced, she wrote a really good

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<v Speaker 1>New York Times opinion piece on the affordability crisis. And

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<v Speaker 1>she pointed out that this is really like an economic

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<v Speaker 1>security crisis. Like a lot of people are you know,

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<v Speaker 1>struggling with housing and child care and elder care and

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<v Speaker 1>grocery prices. But like, they're also really worried about none

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<v Speaker 1>of that ever getting better.

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<v Speaker 2>Well, it seems to present a tricky problem for the Fed, right?

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<v Speaker 2>Because raising interest rates is squeezing the kinds of borrowers

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<v Speaker 2>who are actually less responsible for the kind of inflationary

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<v Speaker 2>pressures that the Fed is trying to cool. Is there

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<v Speaker 2>a risk that the Fed makes the economy more unequal

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<v Speaker 2>by trying to control... I mean, I.

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<v Speaker 1>Think that a lot of the spending done in the

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<v Speaker 1>economy is done by older folks. So over the age

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<v Speaker 1>of 65, they've accumulated a ton of wealth in the economy.

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<v Speaker 1>The Fed's conservative consumer finances came out. People over the

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<v Speaker 1>age of 75, their wealth has gone up by like

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<v Speaker 1>40 percent, almost 40 percent. Under 35, it's gone down

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<v Speaker 1>by 23 percent. And I think older folks tend to

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<v Speaker 1>be a little more insulated from rate hikes. They usually

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<v Speaker 1>own their home. They're usually benefiting from higher yields, right,

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<v Speaker 1>because they're able to invest and take advantage of that.

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<v Speaker 1>And they're not borrowing as much. Like, they probably own

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<v Speaker 1>their car. Right.

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<v Speaker 2>Maybe they've paid off their house.

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<v Speaker 1>Yeah, exactly. Yeah. So I think in terms of the

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<v Speaker 1>Fed raising rates, like, what we see truly driving the

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<v Speaker 1>economy forward— our older folks and this energy crisis, raising

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<v Speaker 1>rates isn't going to maybe slow down older folks at

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<v Speaker 1>the rate that we might expect, as well as it's

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<v Speaker 1>not going to fix some of these energy problems that

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<v Speaker 1>we have.

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<v Speaker 2>More from my conversation with Kyla Scanlon after the break. Well,

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<v Speaker 2>I want to stick with higher rates and talk about

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<v Speaker 2>how those rates are interacting with other corners of our economy,

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<v Speaker 2>like the housing market. So the average 30-year fixed rate

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<v Speaker 2>mortgage is about 7.3% right now. We're hearing the words

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<v Speaker 2>deep freeze being thrown around in relation to home sales,

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<v Speaker 2>which is never good. And higher borrowing costs can also

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<v Speaker 2>discourage new construction, which we're seeing in the most recent

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<v Speaker 2>housing starts numbers, which are down. So higher rates mean

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<v Speaker 2>demand is taking a hit. New supply could be constrained.

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<v Speaker 2>I'm sensing another sort of vicious cycle. How worried are

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<v Speaker 2>you about the housing market?

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<v Speaker 1>I mean, I think part of the problem is home

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<v Speaker 1>sellers are sort of stuck in 2022. So a lot

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<v Speaker 1>of them don't want to lower prices. I think that

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<v Speaker 1>can be a bit challenging. And then, yeah, we have

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<v Speaker 1>sort of this double crunch in the higher mortgage rates

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<v Speaker 1>and then higher home costs. And so if you're trying

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<v Speaker 1>to buy a house right now, it's very, very complicated.

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<v Speaker 1>And 85% of consumers say it's a bad time to

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<v Speaker 1>buy a house. Over 60% of them blame interest rates,

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<v Speaker 1>according to Umesh. And so I think there's a lot

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<v Speaker 1>of negative sentiment about housing. And it just seems like

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<v Speaker 1>Until we expand supply or figure out this inflationary situation

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<v Speaker 1>so the Fed can start cutting rates, it just seems

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<v Speaker 1>like we're going to be in a situation where the

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<v Speaker 1>sellers are going to have to lower their prices. But

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<v Speaker 1>that's very unpopular because housing in the U.S. is both

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<v Speaker 1>a speculative asset and a place to live, as Derek

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<v Speaker 1>Thompson has described it. So people want their homes to

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<v Speaker 1>be worth a ton of money.

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<v Speaker 2>I also want to talk about the labor market because

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<v Speaker 2>Fed officials can look to the relatively stable unemployment rate

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<v Speaker 2>as an indication that there's still room to raise interest

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<v Speaker 2>rates without causing too much pain in the labor market.

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<v Speaker 2>But even though companies aren't necessarily firing that many people.

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<v Speaker 2>They're also not hiring that many. Yeah.

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<v Speaker 1>I mean, I think that this is a low-fire, low-hire environment.

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<v Speaker 1>And so that makes it very difficult for younger folks

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<v Speaker 1>that are just trying to get their foot on the

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<v Speaker 1>first rung of the economic ladder. And I think it

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<v Speaker 1>makes it really difficult for people who want to switch

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<v Speaker 1>their job.

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<v Speaker 2>It's another deep freeze happening, but in the labor market.

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<v Speaker 1>Yeah. Yeah.

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<v Speaker 2>Right.

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<v Speaker 1>It just feels like the whole economy is kind of

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<v Speaker 1>on hold except for the AI build-out, which is just

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<v Speaker 1>coming at us seemingly no matter what we do. And

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<v Speaker 1>so I think it's, yeah, just another sign of everybody,

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<v Speaker 1>whether it be because of higher health insurance costs, because

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<v Speaker 1>of the tariffs, because of general uncertainty, it just feels

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<v Speaker 1>like everybody's just waiting for something to change.

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<v Speaker 2>And on the AI spending front, we got a handful

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<v Speaker 2>of big tech earnings last week, which we talked about

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<v Speaker 2>at length on The Big Take. We got Meta, we

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<v Speaker 2>got SpaceX, we got Tesla, Texas Instruments. I am wondering,

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<v Speaker 2>as someone who's been thinking a lot about the investment

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<v Speaker 2>these tech companies are making in AI relative to the

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<v Speaker 2>actual results that we're seeing in the revenue, what are

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<v Speaker 2>you looking out for in company earnings and what has

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<v Speaker 2>stood out to you?

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<v Speaker 1>Yeah, I mean, it's been interesting. I feel like the

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<v Speaker 1>market is really pressure testing the companies. It's not letting

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<v Speaker 1>them get away with as much. It just feels like

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<v Speaker 1>investors are really taking stuff seriously and not letting the

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<v Speaker 1>companies kind of skirt the corners as much.

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<v Speaker 2>It's like kind of a moment where people are not

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<v Speaker 2>able to shrug as much anymore. Like you saw the

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<v Speaker 2>market actually react pretty intensely to the news that Meta

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<v Speaker 2>was going to be spending a lot more on AI

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<v Speaker 2>in the coming years. Like that wasn't a shrug and

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<v Speaker 2>move on.

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<v Speaker 1>Yeah, totally. Investors are like, well, okay, so you're spending

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<v Speaker 1>all this money, you're borrowing all this money, you know,

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<v Speaker 1>Are you making as much as you thought you would?

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<v Speaker 1>There's been really awesome writing on the AI build-out. Greg

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<v Speaker 1>Epp has written about this over at the Wall Street Journal,

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<v Speaker 1>where in order for all of this to be paid back,

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<v Speaker 1>consumers are going to have to spend more on AI

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<v Speaker 1>than they do on food. There was a wonderful paper

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<v Speaker 1>called Financing the AI Build-out out of Brookings, where the

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<v Speaker 1>author pointed out that this would have to be like

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<v Speaker 1>$ 10 trillion worth. And revenue in order to pay back everybody.

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<v Speaker 1>And so I think investors are kind of looking at this.

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<v Speaker 1>And we saw this, I think, in some of the

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<v Speaker 1>responses to the earnings where they're like, OK, well, you know,

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<v Speaker 1>you've taken all this money. So show us the results.

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<v Speaker 1>And I think that's the big question with AIs. Like,

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<v Speaker 1>what will the results look like?

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<v Speaker 2>Kyla, I want to turn back to another term you coined,

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<v Speaker 2>vibe session. You were talking about, of course, how people's

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<v Speaker 2>experience of the economy didn't match the data. Are we

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<v Speaker 2>in an even deeper vibe session than we were in 2022?

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<v Speaker 2>Did we ever leave the vibe session? How do you

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<v Speaker 2>think about that?

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<v Speaker 1>Yeah, so the vibe session is this gap between consumer

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<v Speaker 1>sentiment and economic data. So economic data is telling us

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<v Speaker 1>one story, how people feel about the economy is telling

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<v Speaker 1>us another story. I first heard about it in 2022,

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<v Speaker 1>and it's been very persistent since then. And I think

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<v Speaker 1>there's a lot of reasons for that gap. You know,

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<v Speaker 1>structural affordability is a big reason. Elder care costs, child

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<v Speaker 1>care costs, the standard generation, housing costs, you know, price

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<v Speaker 1>level variation, I think, is also kind of complicated. You're

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<v Speaker 1>not really sure how much milk is going to cost

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<v Speaker 1>when you go to the store. And in terms of

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<v Speaker 1>like where we're at with the Bob session, you know,

0:12:36.059 --> 0:12:39.729
<v Speaker 1>sentiment is just cratering. But when you look at the

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<v Speaker 1>economic data, inflation is reaccelerating. The labor market does have

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<v Speaker 1>these soft spots. Mortgage rates are above 7%. And so

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<v Speaker 1>I don't know if it's necessarily that the vibes aren't

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<v Speaker 1>matching the data anymore. I feel like the data is

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<v Speaker 1>starting to match the vibes. And the concern is that,

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<v Speaker 1>you know, this will be somewhat of a self-fulfilling prophecy.

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<v Speaker 1>But I think it's a very different economy than 2022.

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<v Speaker 2>This is The Big Take from Bloomberg News. I'm Sarah Holder.

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<v Speaker 2>Thanks for listening. We'll be back tomorrow.