Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy. I have to say
Speaker 1: that at this point maybe in my career, at this
Speaker 1: stage in the economy, I can't remember a time in
Speaker 1: which I feel like there are so many, like legitimate,
Speaker 1: divergent views on the direction of the economy. Like some
Speaker 1: people will say, like inflation is going to stay high
Speaker 1: through all of three and the economy isn't gonna slow down.
Speaker 1: Some people are saying, Okay, we're heading for a recession
Speaker 1: because the FEDS hight rates and housing is plunging and
Speaker 1: other things. Oh, where's this is getting stagflation? Because there's
Speaker 1: in trench, Like there are many very legitimate views in
Speaker 1: my perception about where things could head from here. It
Speaker 1: does feel very bifurcated at the moment, like two very
Speaker 1: extreme paths, like either you get a massive global recession
Speaker 1: and ensuing deflation, or you have this period of nineteen
Speaker 1: seventies style hyper inflation, or you have something even worse,
Speaker 1: which would be stagflation. And you know, people used to
Speaker 1: talk about the prospect of the soft landing that kind
Speaker 1: of went away for a while. This idea that the
Speaker 1: FED could raise rates and quash inflation without necessarily engineering
Speaker 1: a huge knock to economic growth. It kind of went
Speaker 1: away for a while, I think when the inflation readings
Speaker 1: kept coming in higher than expected. But we're recording this
Speaker 1: on January six, and we just had a really good
Speaker 1: payrolls report. From the perspective of the soft landing thesis,
Speaker 1: we had I think unemployment dropping but wages easing a
Speaker 1: little bit, so we don't have to worry about that
Speaker 1: wage price spiral that central banks were all scared about.
Speaker 1: And so now we have a lot of talk again
Speaker 1: about the possibility of the soft landing. Yeah. I mean
Speaker 1: the way I've been thinking about it is that until
Speaker 1: unemployment actually really starts jumping, and it hasn't jumped at all,
Speaker 1: because we're back down to three point five percent like
Speaker 1: the historic lows. I think I saw a tweet that actually,
Speaker 1: if you were like go out to the sixth decimal point,
Speaker 1: it really is like the lowest and like fifty years now.
Speaker 1: I don't know I did in fact check it, but
Speaker 1: you should do a post on it if that's true.
Speaker 1: This way, this is why we need like each other,
Speaker 1: like in the office, so that someone's like don't just like,
Speaker 1: don't just look at the tweet post. But in all
Speaker 1: seriess is, you know, like until my view is like
Speaker 1: until unemployment like really starts to rise, like until we
Speaker 1: really have that like the soft landing scenario like can't
Speaker 1: be disproven, right because there's always the chance that inflation
Speaker 1: comes down and employment doesn't go up, Like it's a
Speaker 1: hope like you know, knock on live we all wanted
Speaker 1: to happen. But you know, until like unemployment really starts
Speaker 1: falling apart, that can't be disproven. And then there's the
Speaker 1: additional layer, which is, let's say, inflation where to come
Speaker 1: down and get closer to the FEDS goal, but the
Speaker 1: unemployment rate refuses to budge. Does the FED believe it
Speaker 1: or does the FED say, know, like, we have to
Speaker 1: keep hammering. We have to keep hiking rates in order
Speaker 1: to get unemployment up the only so that we can
Speaker 1: be confident that this decline and inflation is sustained. I
Speaker 1: do have to say, like part of me still still
Speaker 1: feels a little weird when we're talking about the FED
Speaker 1: explicitly trying to push up unemployment and also like the
Speaker 1: idea that oh it's good that wages aren't going up
Speaker 1: in a period of high inflation. We're all kind of poorer.
Speaker 1: But on the other hand, we don't have un anchored
Speaker 1: inflation expectations. But setting that aside, the thing I'm getting
Speaker 1: from this conversation is that we have a lot to
Speaker 1: talk about. That's right, and we could keep talking because
Speaker 1: we have plenty of thoughts. But why don't we talk
Speaker 1: to two guests who we've both had on before that
Speaker 1: also plenty of thoughts, some of our favorite sort of
Speaker 1: like big picture, a coom thinkers. A great conversation, I'm
Speaker 1: hopefully a great conversation to start twenty twenty three destined
Speaker 1: to be a great conversation. I'm sure. Yes, we're gonna
Speaker 1: be speaking with connorson a columnist here in Bloomberg Opinion,
Speaker 1: as well as Neil Dutta, head of Economics Renaissance, macros So,
Speaker 1: Connor and Neil. Thank you so much for coming back
Speaker 1: on odd lot. Great to be here. Thank you. I'll
Speaker 1: start with you, Neil, because you know you're you're you know,
Speaker 1: I think at some point last summer you're starting to
Speaker 1: get a little bit more negative on the economy these days.
Speaker 1: I feel like you're a little bit more optimistic, can
Speaker 1: we get the soft landing like is this still in
Speaker 1: the cards? Well, first, thanks for having the the Harold
Speaker 1: and Kumara find into it on on on your on
Speaker 1: your podcast. We definitely appreciate it. But you start a competitor,
Speaker 1: start a competitor. I had to get that in there.
Speaker 1: But but at any rate, yeah, I mean the news
Speaker 1: today was good for the soft landing bulls. I don't
Speaker 1: really see how you can cut it any other way.
Speaker 1: One of the data points that we like to look
Speaker 1: at is UH, the index of aggrega weekly perils, right,
Speaker 1: which is the some product of job of jobs the
Speaker 1: work week and UH and hourly earnings. And you know,
Speaker 1: over the last three months that's up, you know, just
Speaker 1: under four percent at an annual rate. So that's basically
Speaker 1: your proxy phenomenal growth, right, I mean jobs and hours
Speaker 1: that's real GDP and wages you can consider is basically
Speaker 1: your inflation proxy. You put it all together, you're around
Speaker 1: four percent. That's the kind of number that will make
Speaker 1: the Fed very happy and I think lead them away
Speaker 1: from a more aggressive rate tightening campaign at least in
Speaker 1: the short run. But I think to something that you
Speaker 1: were getting at earlier, the unemployment rate is three and
Speaker 1: a half percent. I mean, there was a lot of
Speaker 1: discussion around this sort of yawning gap between the household
Speaker 1: measure of employment and the establishment Perill figure. That gap
Speaker 1: basically narrowed substantially in December, right, And the unemployment rate
Speaker 1: is three and a half percent, And you know, ultimately
Speaker 1: it's hard to for me at least to push the
Speaker 1: kind of immaculate disinflation thesis that much if the unemployment
Speaker 1: rate is three and a half percent. And you know,
Speaker 1: ultimately the FED views the labor markets as the conduit
Speaker 1: to achieve their inflation objectives, and you know, by that standard,
Speaker 1: they're not really succeeding. And so you know, and remember
Speaker 1: that the inflation numbers will look a lot better over
Speaker 1: the next several months, right, I mean, you have gas
Speaker 1: prices coming down, you hustle utility bills will probably come down,
Speaker 1: food prices will probably moderate, but aggregate incomes growth, you know,
Speaker 1: are still okay. And so it just means that you
Speaker 1: have this pick up and real disposable income. So that
Speaker 1: to me puts pressure on capacity, right, I mean, real
Speaker 1: growth takes away you know, resources, real resources and um
Speaker 1: and ultimately as you put pressure on on physical capacity,
Speaker 1: whether it's labor or product and resource markets, that will
Speaker 1: ultimately put pressure up on an inflation. So I hate
Speaker 1: to say it, but you know, it may well be
Speaker 1: that the improvement that we see, or or the sort
Speaker 1: of the soft landing bulls having their day in the sun,
Speaker 1: maybe that proves transitory. So that that that that's sort
Speaker 1: of how I'm thinking about it right now. But I
Speaker 1: definitely think the wind is behind the soft landing bulls
Speaker 1: is back at the moment. Connor, Yeah, I think right
Speaker 1: now it's easier to think about what's happening in the
Speaker 1: economy at the moment and over the next three to
Speaker 1: six months than to talk about sort of the more
Speaker 1: abstract does this level of labor market utilization mean this
Speaker 1: for inflation in that for a session. I think that's
Speaker 1: a conversation really for the second half of this year
Speaker 1: and right now, because people came into the year so negative.
Speaker 1: I think the bigger story is just that real growth
Speaker 1: was very good and Q three looks like Q four
Speaker 1: and we're kind of entering with good momentum on that side,
Speaker 1: and then at the same time we see inflation really
Speaker 1: rapidly coming off between core goods, which we've seen for
Speaker 1: several months now, gas prices, which is just phenomenal thing
Speaker 1: but still matters to the consumers. And then also in
Speaker 1: the rental market, we're seeing market rents really start to
Speaker 1: decrease pretty rapidly over the past few months. So the
Speaker 1: the outlook at the moment is very very good, and
Speaker 1: we can sort of think about later later, but I
Speaker 1: think the story for now is just how good things
Speaker 1: are heading in. So, Neil, you sort of touched on
Speaker 1: this um, the idea of the FED at some point
Speaker 1: starting to slow down its rate increases, and we had
Speaker 1: something else this week again you know, we're recording it.
Speaker 1: The first week of three, we had the Fed Minutes
Speaker 1: where the Fed was talking about the difficulty of tightening
Speaker 1: financial conditions, and financial conditions, you know, relative to the
Speaker 1: pace and extent of rate increases, you could argue have
Speaker 1: been relatively loose. So I guess my question is, like,
Speaker 1: what would be the catalyst for the FEDS starting to
Speaker 1: take its foot off the pedal if we haven't really
Speaker 1: seen a big tightening of financial conditions. Well, part of
Speaker 1: that's implicit in their forecast, right, I mean, to me,
Speaker 1: I think a lot of this is just optics, right, Tracy.
Speaker 1: I mean, how there's no denying that financial conditions have
Speaker 1: actually eased over the last couple of months, even as
Speaker 1: the FETE has been, um, you know, trying to job
Speaker 1: bone markets and has been hiking you know, seventy basis
Speaker 1: points fifty basis points, signaling more to come. But to
Speaker 1: me it's optics. Yeah, I guess my question is more like,
Speaker 1: when do they feel comfortable stopping the jaw boning because
Speaker 1: it is clear that they're talking about, you know, higher
Speaker 1: rates for longer, and the market isn't necessarily believing them. Well,
Speaker 1: they're getting there. I mean they're getting there already, but
Speaker 1: I don't I mean, I don't know that that that
Speaker 1: it's formulaic. I mean it's sort of like a touch
Speaker 1: and field type of approach. I mean they go around.
Speaker 1: I mean Bullard is talking about how okay, we're getting
Speaker 1: close to the end. I mean, he he was a hockey,
Speaker 1: had some comments this week that would rent a little
Speaker 1: bit more devish Lee. But we don't know, you know,
Speaker 1: sort of x Anti, you know what the right and
Speaker 1: level for the for the fet funds, right should be
Speaker 1: to cool the economy. I mean it could be multi
Speaker 1: vers I mean, it could be you know, different rates
Speaker 1: at different points and time. I mean, this is not
Speaker 1: I mean to me, this is more like this is
Speaker 1: not an exact science, honestly, and I just think that
Speaker 1: you are going to get much softer inflation between now
Speaker 1: and the March off MC meeting. And for me, the
Speaker 1: tension is think about what the Fed did in December, right,
Speaker 1: I mean they raised their their inflation forecast and they
Speaker 1: marked down their growth forecast. So the bar for them
Speaker 1: has been changed in a way that you know, right,
Speaker 1: I mean, you're being very polite, but yeah, you could be.
Speaker 1: You could easily come back in March and they'll be
Speaker 1: revising down their inflation forecast potentially considerably, and they're gonna
Speaker 1: what say that they're going to accelerate the pace of
Speaker 1: rate hikes at that point. That to me is a
Speaker 1: little bit difficult to see. So so that that's sort
Speaker 1: of where I'm at. Go ahead, Connor to Niel's point
Speaker 1: right now, you've been pretty critical of this that like, Okay,
Speaker 1: the way the FED is talking is we're seeing an
Speaker 1: economy with accelerating and fflation and weakening growth, and yet
Speaker 1: the actual data seems to be the exact opposite. We
Speaker 1: seem to have pretty solid growth in the second half
Speaker 1: of first quarter and declining inflation, Like, what's your take here,
Speaker 1: what's going on? I think what's going on is that?
Speaker 1: And you know, you two had on Neil cash Carey
Speaker 1: if Minneapolis fed and maybe August, and he was saying
Speaker 1: how he was unhappy with the stock market rallying, and
Speaker 1: they sort of felt like their messaging wasn't being understood
Speaker 1: by the market, and so at that point they really
Speaker 1: changed their messaging to focus on a higher unemployment rate
Speaker 1: and kind of this whatever this, whatever it takes, determination
Speaker 1: to rate and inflation. Markets got the message, and by
Speaker 1: September October they were probably in the place where they
Speaker 1: wanted to be in terms of what the market was pricing,
Speaker 1: the level of financial conditions that they wanted to see.
Speaker 1: And to be fair, at that point, inflation was running
Speaker 1: really hot and growth was slowing, And the data has
Speaker 1: changed a lot over the past three months, where to
Speaker 1: your point, inflation now looks like it's coming off pretty rapidly.
Speaker 1: Growth has picked up, but they want financial conditions to
Speaker 1: stay in this place until to have more confidence on
Speaker 1: where things are going. So they're kind of sticking with
Speaker 1: this matches that is really out of sync with what's
Speaker 1: happened in the economy. But since markets are by and
Speaker 1: large not running away from them, they're kind of okay
Speaker 1: with it. But it's going to become increasingly out of data.
Speaker 1: Is you know, you look at the unemployment rate at
Speaker 1: three and a half percent at the start of three
Speaker 1: they forecasted at going to four point seven percent at
Speaker 1: the end of this year. That not only would certainly
Speaker 1: not be a soft landing, it's just wildly out of
Speaker 1: sync with what we're seeing in the data. So it's
Speaker 1: they're just really not in a place that's in sync
Speaker 1: with what's happening in the economy. Ground Neil, I want
Speaker 1: to go back to something you said in your first answer,
Speaker 1: because I've I've you know, I don't troll on Twitter,
Speaker 1: but I do sometimes joke very very convincing laugh there.
Speaker 1: But you know that that um, falling gas prices are
Speaker 1: bad for inflation because falling gas prices mean more money
Speaker 1: and consumer pockets. More money and consumer pockets mean more
Speaker 1: spending power. More spending power means higher prices. But you
Speaker 1: kind of said that in your first answer. You're like, look,
Speaker 1: real real wage growth with this decline in inflation is
Speaker 1: picking up. That makes it hard to get any is
Speaker 1: sort of like any kind of landing. So is there
Speaker 1: something where like falling gas prices and field their categories
Speaker 1: is not actually good news for inflation. Well, I think
Speaker 1: it moves things in place, right, I mean, you're talking
Speaker 1: about relative price shifting, right, So if if the labor
Speaker 1: markets are study and people see, I mean, it's like saying,
Speaker 1: I mean, do you think a tax cut is inflationary?
Speaker 1: I mean, I think most macro models will probably say yes. Right,
Speaker 1: So I think that the fact that the fact that
Speaker 1: gasoline prices are declining, all that does is is shift
Speaker 1: consumer purchasing power to other areas of their you know,
Speaker 1: goods and services basket, and that drives out the prices
Speaker 1: for those good and services. I don't think it has
Speaker 1: an overall impact on on inflation. But again, I mean
Speaker 1: the reason I think the FED looks at it through
Speaker 1: the conduit of the labor markets is this identity, right,
Speaker 1: I mean, as so much of economics is identity, whether
Speaker 1: you're talking about corporate profits or in this case, inflation,
Speaker 1: and for them, compensation equals inflation plus productivity. Powell has
Speaker 1: basically talked about that equation multiple times over the last year.
Speaker 1: And if the labor markets are tight and unemployment is
Speaker 1: three and a half percent, that's going to keep compensation
Speaker 1: growth steady. And we're not particularly in a strong productivity
Speaker 1: environment right now. I mean, productivity is notoriously hard to forecast,
Speaker 1: but it's not particularly strong. So that leaves a lot
Speaker 1: of pressure on inflation, and I think that's one of
Speaker 1: the reasons why the FED is looking at the labor
Speaker 1: markets so strongly. And by the way, a lot of
Speaker 1: the improvement and inflation that we're talking about right now
Speaker 1: has almost nothing to do with the FED, right I
Speaker 1: mean that that that that's that's part of the issue.
Speaker 1: I mean, use car prices, supply chain, and provement. You know,
Speaker 1: it's not like people put their rent on on the
Speaker 1: credit card, so so you know, the slowing and rental
Speaker 1: inflation has almost nothing to do with what's going on
Speaker 1: with the labor market or tightening credit or anything like that.
Speaker 1: I mean, it's just sort of it's happening kind of
Speaker 1: independently I think of what the FED is doing. So
Speaker 1: to me, the Feed's got some explaining to do. It
Speaker 1: wasn't Tracy. Wasn't there some term we were using, like
Speaker 1: one about inflation coming down for reasons other than monetary policy. Well, okay,
Speaker 1: this is my new This is my new conspiracy theory
Speaker 1: about financial conditions, which is, I believe the Fed thinks
Speaker 1: still thinks inflation is transitory and is actually comfortable with
Speaker 1: financial conditions not actually tightening that much because they think
Speaker 1: the things that are making prices go up are the
Speaker 1: transitory supply chain stuff, and so it's just, you know,
Speaker 1: talk your way out of the period of adjustment without
Speaker 1: actually tightening too much that would cause a recession. That's
Speaker 1: my new conspiracy theory. Okay, there's silence, so I guess
Speaker 1: no one else agrees with me. Okay, well, Connor, you know,
Speaker 1: we talked a little bit, I think, in private about productivity,
Speaker 1: and you have seen companies come out and talk about
Speaker 1: the difficulty of replacing the older workforce that left during
Speaker 1: the pandemic, and we are having basically this productivity adjustment.
Speaker 1: How are you viewing that component of it, because, as
Speaker 1: Neil just mentioned, you know, it is a tough thing
Speaker 1: to forecast, and so far all we seem to have
Speaker 1: is anecdotes about what companies are doing here well. We
Speaker 1: know that labor market turnover has declined over the past
Speaker 1: six months at least, and companies say they're better staff
Speaker 1: they say they're in a better place. I think supply
Speaker 1: chains getting better is maybe it's kind of squishy, but
Speaker 1: helps with the margin things like being able to turn
Speaker 1: your capital faster because you're getting shipments more quickly and
Speaker 1: can sell them more quickly, so you're not waiting a
Speaker 1: long time for orders. But I think the challenge with
Speaker 1: productivity is to Neil's point, there's this very standard model
Speaker 1: of real economic growth is ours work plus productivity. But
Speaker 1: a lot of what's happening with real eccuon onic growth
Speaker 1: that we saw, what we're seeing right now doesn't really
Speaker 1: fit into that framework very well. And for instance, you
Speaker 1: look take the rental market, where we added four plus
Speaker 1: million jobs in two but actually new leases on rentals
Speaker 1: was negative in two for the first time since two
Speaker 1: thousand nine because we unwound some of the excess household
Speaker 1: formation we got during the pandemic. As a result, rents
Speaker 1: are falling and shelter is a huge part that goes
Speaker 1: into inflation, so inflation could come off very very rapidly
Speaker 1: for sort of reasons unrelated to sort of standard business productivity,
Speaker 1: just due to sort of households deciding not to get
Speaker 1: new leases, maybe fund roommates again. And as I don't
Speaker 1: know if that's like if if people decide to get
Speaker 1: a roommate, is that productivity growth? Not really, but it
Speaker 1: also frees up capacity for other people. So I think
Speaker 1: this sort of standard way of thinking about productivity isn't
Speaker 1: very helpful at the moment. So basically Powell needs to
Speaker 1: go out and say, get a roommate, folks, if you
Speaker 1: you we we can do this the hard way you
Speaker 1: lose more people lose their jobs, or the less hard way,
Speaker 1: like get a room that does So I haven't thought
Speaker 1: about it before, but like if two people share a
Speaker 1: space versus one, that is a kind of productivity growth,
Speaker 1: isn't it. Yeah. And the scenario that's really weird for three,
Speaker 1: which I think is possible, is we know that sort
Speaker 1: of that core goods inflation is negative right now, So
Speaker 1: let's say that's zero in three, and then you tended
Speaker 1: to be pretty low heading into the pandemic, and then
Speaker 1: we know rent growth is negative. At the moment, it
Speaker 1: was about negative three percent annualized in Q four two,
Speaker 1: what if the shelter component of CPI is is flat
Speaker 1: in and this is not assuming any job losses, just
Speaker 1: sort of due to these weird effects going on right now,
Speaker 1: and then that sort of core services x shelter component
Speaker 1: even caught five percent because maybe wage growth is still hot.
Speaker 1: That gets you to a core CPI number below two percent.
Speaker 1: So you could have a soft landing with sub two
Speaker 1: percent core inflation in a in a good growth environment.
Speaker 1: I wouldn't say that's the new normal or anything, but
Speaker 1: just that's what the data could show based on all
Speaker 1: these weird dynamics happening at the moment. Neil, I think
Speaker 1: it's it's totally plausible. The question is what does that
Speaker 1: mean for right? You know, look like, let's say everyone
Speaker 1: decides to get a roommate, right, and you had this
Speaker 1: big burst of household formation that drove up shelter prices,
Speaker 1: and now people decide to get a roommate and that
Speaker 1: you know, we can shustle formation, and now shelter costs
Speaker 1: go down. You're still love with this idea around the
Speaker 1: labor market, right, I mean, for whatever reason, Okay, the
Speaker 1: FED views the labor market as the conduit for achieving
Speaker 1: their inflation objectives. That is the principal issue right now.
Speaker 1: Powell keeps talking about pain and rebalancing the labor market.
Speaker 1: If that is what the FETE is trying to achieve,
Speaker 1: they're not doing it. Okay, they're not doing it. And
Speaker 1: that's why I think maybe where Connor and I disagree
Speaker 1: a little bit is what does that mean for the
Speaker 1: interest rate outlook in the back half of the year.
Speaker 1: And let's just keep in mind, right, I mean, and
Speaker 1: so there is a good reason. I mean, I think
Speaker 1: there's a pretty you can make a pretty compelling argument
Speaker 1: that growth is likely to accelerate over the next several months. Okay,
Speaker 1: because of the loosening of financial conditions that we've seen
Speaker 1: over the over the last few months. Right, so you
Speaker 1: get a positive impulse from from housing. Maybe government spending
Speaker 1: is a bit better. We talked about real incomes and
Speaker 1: what that could mean for consumption. So if you have
Speaker 1: real growth above trend again for the next quarter or two,
Speaker 1: what do you think that's gonna mean for the labor markets.
Speaker 1: It's gonna mean continue tightening, which in turn means what
Speaker 1: potentially higher wage inflation, which in turn will push prices
Speaker 1: up and I mean to me, that's that's really the issue.
Speaker 1: And this is all happening at a time when the
Speaker 1: FED is increasingly not just doves but hawks like Bullard
Speaker 1: that they're a little bit more comfortable with the way
Speaker 1: things stand and that they're going to back off to
Speaker 1: So if you know, and Connors talked about this as well,
Speaker 1: of the extent that twenty two was about them hiking
Speaker 1: aggressively into a slowdown, what does it mean that they
Speaker 1: may be pausing into an acceleration. And I think he's
Speaker 1: right that sort of I can that the data is
Speaker 1: sometimes I don't want to say it lies, but it's
Speaker 1: sort of not really telling the whole picture because of
Speaker 1: lags between various factors. And so again I can get
Speaker 1: to this the story where right now we have real
Speaker 1: deflation because of all these things freight prices, gasoline prices,
Speaker 1: core goods shelter, while employment growth continues to grow higher
Speaker 1: and income growth continues to grow higher. That's not a
Speaker 1: sustainable long term scenario. It's not like we've discovered the singularity,
Speaker 1: but it's just the way the data is shaking out.
Speaker 1: But yeah, on the other side of this, we might
Speaker 1: have a labor market with three and a half percent unemployment,
Speaker 1: good balance sheets, and a lot of consumers and businesses
Speaker 1: that have been hunkered down waiting for recession and then
Speaker 1: they're ready to hit the ghost which again and that
Speaker 1: could be a very boom inflationary on the other side
Speaker 1: of this if we don't figure out where policy should
Speaker 1: be and and sort things out on that side. So,
Speaker 1: speaking of reliable data, one of the big debates in
Speaker 1: two was the surveys versus the hard data, and the
Speaker 1: idea that if you looked at a lot of survey measures,
Speaker 1: survey based measures, people seem miserable, like on the verge
Speaker 1: of a massive recession, but if you looked at the
Speaker 1: hard data, it was very much still coming in strong.
Speaker 1: Can you talk a little bit more about how you're
Speaker 1: thinking of that discrepancy going into three, because you know,
Speaker 1: as Neil has pointed out, there does seem to be
Speaker 1: an improvement in terms of consumers ability to spend just
Speaker 1: by virtue of gas prices going down. And we know
Speaker 1: that gas prices, I mean, if you look at some
Speaker 1: of the survey data, like there is a lot that
Speaker 1: just tracks one for one with gas prices. So how
Speaker 1: are you thinking about the whole you know, I tried
Speaker 1: to ask this question without actually saying the word, but
Speaker 1: the whole vibe session idea. Yeah, I think and demand
Speaker 1: in terms of consumers spending money remains very resilient. But
Speaker 1: I think because of all these sort of bulup effects
Speaker 1: and fed procession fears, that's led to the soft data
Speaker 1: being being pretty weak or at least a lot weaker
Speaker 1: than the hard data. And I think a good way
Speaker 1: to think about it is Nike, where they have said
Speaker 1: that they had this big sort of boom and inventory.
Speaker 1: Part of it is because that inventory they ordered in
Speaker 1: the spring didn't show up until late past season because
Speaker 1: of supply chain lags. And then because supply chains have
Speaker 1: gotten so much better, they got their holiday season inventory
Speaker 1: earlier than they expected. So they kind of had inventory
Speaker 1: coming in at the wrong time on both sides and
Speaker 1: they have to work through that. And so while they're
Speaker 1: working through that, consumer spending is steady. But because supply
Speaker 1: chains are better now, maybe instead of having to order
Speaker 1: shoes three months in advance, they can order it six
Speaker 1: weeks in advance. That's a one or two month lag
Speaker 1: where they're not doing orders. So if you're a factory
Speaker 1: in China. You're saying, I'm not getting any orders, but
Speaker 1: it just because they have to sell through their inventory.
Speaker 1: The supply chains are now better. But then things are fine,
Speaker 1: say by March, and so that's sort of this sort
Speaker 1: of the real way in which the soft data is accurate.
Speaker 1: And then just if the fence telling you they need
Speaker 1: to raise unemployment and we're gonna have a recession or
Speaker 1: people believe that that's going to change the way that
Speaker 1: you think about the economy as well. So I trust
Speaker 1: the hard data more. But I understand why this off data.
Speaker 1: We can wait, all right, I want to you know,
Speaker 1: we actually haven't done an episode. I think we're doing
Speaker 1: an episode soon, specifically on rent prices. It's one of
Speaker 1: these topics that we've should have hit sooner. But I know, Connor,
Speaker 1: you've done a lot of like work and studying of this,
Speaker 1: and so we do have these measures from some of
Speaker 1: these private companies like Apartment List or Zillo or some
Speaker 1: of the others, and it looks like rents coming down.
Speaker 1: We had that episode last year with Omaris Reef talked
Speaker 1: about the gap between these measured rents versus what's in
Speaker 1: the government data. But I guess the simple question for
Speaker 1: me as a New Yorker who rents, is my rent
Speaker 1: going to come down? Yes? Really, rent is gonna be
Speaker 1: rent growth is going to be negative. Ine that to
Speaker 1: me is like the big undappreciated story. What's help come?
Speaker 1: What's going on? Like? Well, how come? So sort of
Speaker 1: a few things. First is that you had this excess
Speaker 1: household formation in which finally started unwinding over the past
Speaker 1: six months. You can sort of think about as a
Speaker 1: bulop effect and renting, but just because people sign year
Speaker 1: long leases, there's just a much bigger lag there than
Speaker 1: maybe buying shoes, which can sort of happen a lot sooner.
Speaker 1: The second is that there's a lot of supply growth
Speaker 1: in the pipeline. We currently have twice as many apartments
Speaker 1: under construction as we did at the peak in two
Speaker 1: thousand and six on the onset of the housing bust,
Speaker 1: and that's because I think there's some extent we've been
Speaker 1: building apartments for a decade now to kept sort of
Speaker 1: meet millennial demand, and there's just been the secular belief
Speaker 1: in the rental story. And then you have that huge
Speaker 1: surge in household formation in which, just like e commerce companies,
Speaker 1: they leaned into this. This is a new normal for
Speaker 1: rental demand, and so builders built a meet that and
Speaker 1: they just they haven't been scarred by a bus the
Speaker 1: way that single on the builders were in two thousand eight,
Speaker 1: people got foreclosed upon, they had to go into renting,
Speaker 1: millennials unting the labor force. We're renting instead of owning.
Speaker 1: So the apartment market that never really skipped a beat.
Speaker 1: But this is sort of a big reckoning, I think
Speaker 1: for the rental market because millennials now are looking to
Speaker 1: buy rather than rents, so you don't really have that
Speaker 1: secular growth in renting versus buying, and then you have
Speaker 1: this rapidly rising vacancy right and a lot of supply
Speaker 1: on the pipeline. I would just point out that if
Speaker 1: we're talking about a secular increase in home ownership, homeowners
Speaker 1: tend to spend multiples of what renters do, not on
Speaker 1: not on things just inside the home, but dining out, travels,
Speaker 1: you know, leisure, that sort of thing. What does that
Speaker 1: mean for inflation at the end of the day, all
Speaker 1: all all we're doing here is just pointing out, Okay,
Speaker 1: look at this area, look at that area. This price
Speaker 1: is going down, but you're talking about still a growing pie,
Speaker 1: right ultimately, and I think that's the principal issue, right.
Speaker 1: I Mean, everything we're talking about in terms of the
Speaker 1: improvement and inflation is primarily looking at it through the
Speaker 1: rens of relative shifts and prices. Okay, so shelter prices
Speaker 1: will come down. I mean, Connor is probably going to
Speaker 1: be right about that based on what we're seeing with
Speaker 1: new lease growth. Connor is probably going to be right
Speaker 1: about used car prices and and the things related to
Speaker 1: the improvement in the supply chain. But ultimately that's just
Speaker 1: the relative shift in prices. A good way to think
Speaker 1: about this is what happened with gasoline prices in the
Speaker 1: mid twenty tents, where because we finally had that sort
Speaker 1: of access from production relative to demand, gasol prices and
Speaker 1: oil prices plunge globally and for a while that led to,
Speaker 1: you know, we're sening sentiment for manufacturing. There was a
Speaker 1: bust in investment on that side. But if you're a
Speaker 1: U S consumer that was a big boon boon to
Speaker 1: you because you've got cheaper gas and we're seeing that
Speaker 1: in like almost everything on the good side, and maybe
Speaker 1: the rent slide as well, so that can lead you
Speaker 1: to think that inflation is getting better. You have some
Speaker 1: downturns and surveys if you actually produce some of these things.
Speaker 1: But if you're consumer, you're just getting a huge burst
Speaker 1: in your purchasing power because everything's getting cheaper. Of course,
Speaker 1: CPI during that period actually rose, it accelerated in terms
Speaker 1: of rates of growth rates. And so if you look
Speaker 1: at the long history of just food and energy cp
Speaker 1: I versus course cp I, the contemporarious correlation between those
Speaker 1: two series is basically close to zero because it goes
Speaker 1: to the point that Connor was making, which is, you
Speaker 1: know you're all you're doing is talking about relative price shifting.
Speaker 1: That that's again, I mean, I don't make a judgment, Joe,
Speaker 1: as you know, like you always talk about how you're
Speaker 1: a journalist, you never I'm no one here has any
Speaker 1: opinions and judgments or forecast and I'm the and I'm
Speaker 1: the I'm the same way Joe. As a business economist,
Speaker 1: I don't know whether it's right or wrong to look
Speaker 1: through look at it, look at look at inflation through
Speaker 1: the prism of the labor markets. All I can tell
Speaker 1: you is that's what the fettest thinking, and that's and
Speaker 1: that's that that's what drives our calls on the economy
Speaker 1: and markets and stuff. You can Actually, I just want
Speaker 1: to press on this point because I think you're absolutely right,
Speaker 1: and it's something that we heard from Tim Dewey as
Speaker 1: well on a recent episode. But like, why do you
Speaker 1: think that is You don't have to appine on whether
Speaker 1: it's right or wrong, but why do you think they've
Speaker 1: taken that, you know, tact Because sort of a ironclad
Speaker 1: rule in macroeconomics is that compensation equals inflation plus productivity,
Speaker 1: So compensation growth is what drives the inflation outlook. So,
Speaker 1: I mean, remember one of the reasons why we had
Speaker 1: the soft landing in the nineties was because green Span
Speaker 1: nailed the productivity call right. When when was that? I
Speaker 1: mean remember at the time, actually, if you go back
Speaker 1: to the transcripts during that era, you know, Yelling was
Speaker 1: basically saying that Greenspan may have been making a mistake,
Speaker 1: right and and and Greenspan got that call right, Maybe
Speaker 1: Joe one benefit of not having the PhD. But but
Speaker 1: but but I think I think that that's that's something
Speaker 1: we need to keep in the back of their mind right.
Speaker 1: I mean, so we didn't have a formalized inflation should
Speaker 1: target of two back then, and we had a rapid
Speaker 1: increase in productivity, and so that helps you achieve the
Speaker 1: soft landing. Are we going to see that again? I mean,
Speaker 1: we obviously have their form they've they've they've said that
Speaker 1: they have an inflation target of two percent. I mean,
Speaker 1: pal sort of hinted at maybe a longer term project
Speaker 1: to look at that. I mean maybe that was you know, um,
Speaker 1: a slip of the tongue, but but it really it
Speaker 1: comes to, I mean productivity. I mean, why why should
Speaker 1: productivity be a lot stronger now? I'm I'm I mean
Speaker 1: with younger people in the workforce, there's more churn in
Speaker 1: the labor markets. You know, you have a lot of
Speaker 1: the experienced workers leaving. So what's the case for stronger productivity?
Speaker 1: Has capital spending been booming relative to hours worked? Have
Speaker 1: we seen a lot of capital deepening? We haven't, really,
Speaker 1: you know, I think I think so that that that
Speaker 1: productivity call is a lot harder to make. I think.
Speaker 1: So we've talked about okay, headline inflation, gasoline prices coming down,
Speaker 1: we talked about rent and all that, but you know,
Speaker 1: in the last FED press comp and Powell made a
Speaker 1: point and it's interesting too because, like you know, it
Speaker 1: feels like the area within inflation that the FED pays
Speaker 1: attention to is always shifting. Earlier in two, they're really
Speaker 1: big on headline inflation because headline inflation informed expectations, and
Speaker 1: no one really talks about that anymore. But now the
Speaker 1: big thing is the non shelter component of core PC
Speaker 1: is like still hot, so okay, even if rent comes down,
Speaker 1: even if gasoline prices come down, etcetera. Well, the real
Speaker 1: signal is from this non shelter component of CORPC. Neil,
Speaker 1: what is that that? What else? What are the big
Speaker 1: things in that basket? And why? You know, how do
Speaker 1: wagers really like drive those numbers? Like can you talk
Speaker 1: a little bit about how we should understand this part
Speaker 1: of PC that seems to have become so central. Well,
Speaker 1: you're talking about personal care services as an example, so
Speaker 1: going to the laundry, Matt, the barber. I think, recreational
Speaker 1: recreation services, right, sporting events, things of that nature, And
Speaker 1: the reason they're focused on it is because that's an
Speaker 1: important challeel channel for how the labor markets affect inflation. Right.
Speaker 1: I mean, inflation is multivariate, right. There are lots of
Speaker 1: things that drive inflation, and labor markets are one part
Speaker 1: of that. And labor markets show principally in that you
Speaker 1: know that X shelter services area. So that's why PAL
Speaker 1: is focusing on it. But I do sympathize with you
Speaker 1: that they have They look at different things at different
Speaker 1: points in time, right, and remember nothing stops them from
Speaker 1: doing that this time. Right. I mean, if if global
Speaker 1: growth picks up and oil prices start to pick up,
Speaker 1: and I know you've had a lot of people on
Speaker 1: your show talking about the lack of investment in the
Speaker 1: mining capital cap X, what does that mean for oil prices?
Speaker 1: The FED can be right back where they were in
Speaker 1: June and July talking about well, gas prices are back up.
Speaker 1: Short run inflation expectations are high, and that could mean
Speaker 1: something for wage to inflation. Yeah. Where I would sort
Speaker 1: of split the difference here is I think that to
Speaker 1: the extent that I'm right about the inflation data in
Speaker 1: three and four very technical reasons, it comes in very
Speaker 1: very low. If the unemployment rates still three and a percent,
Speaker 1: that might not make them hawkish, but it certainly won't
Speaker 1: lead them to cut. So I think to get rate cuts,
Speaker 1: you're probably gonna need to see at least for normalization
Speaker 1: in the labor market data, because just be they're not
Speaker 1: going to trust that at three and a percent unemployment
Speaker 1: rate is consistent with two percent inflation. So, speaking of services,
Speaker 1: we just had another headline again we're recording this on
Speaker 1: January six. We just had the I s M Services
Speaker 1: p M I coming in a lot lower than expected,
Speaker 1: kind of weird at forty nine point six versus an
Speaker 1: estimate for fifty five. And then earlier in the week
Speaker 1: we also had a slightly lower I s M manufacturing headline.
Speaker 1: Can can we talk a little bit more about the
Speaker 1: manufacturing outlook, because there are a lot of questions about
Speaker 1: like how much you can read into the p M
Speaker 1: I S. But Connor also made the point about inventories
Speaker 1: and how much of a role they have potentially played
Speaker 1: in two. So can we just talk more about what
Speaker 1: you're seeing there. Maybe let's start with Connor. Yeah, my
Speaker 1: view on the manufacturing side is that the weakness we're
Speaker 1: seeing it's more about inventory corrections and improvement in supply chains,
Speaker 1: meaning that there's less pressure on producer or I guess
Speaker 1: the consumers have manufactured goods to order things in time,
Speaker 1: rather than a big investment downturn. And so I think
Speaker 1: that a big investment downturn is when you see job losses,
Speaker 1: and that's sort of more your classic procession scenario, whereas
Speaker 1: to me, this is really more of a bull whip
Speaker 1: supply chain inventory story that will be cleared out by
Speaker 1: the end of the first quarter. Neil, Yeah, so Neil
Speaker 1: is a huge fan of taking the manufacturing report right.
Speaker 1: I mean, those are those that follow my work know
Speaker 1: that I think that the I S M is um
Speaker 1: you know, a useful rough and ready indicator, but not
Speaker 1: a good substitute for hard data. I mean, as an example,
Speaker 1: what's what's a better sign of confidence the fact that
Speaker 1: three hundred purchasing managers you know, are feeling a little
Speaker 1: bit more grumpy about their their industry or the fact
Speaker 1: that or the fact that hundreds of thou of establishments
Speaker 1: that were just surveyed by the Bereau of Labor Statistics
Speaker 1: are adding manufacturing jobs. I'll let you be the judge.
Speaker 1: Obviously it's the latter, which is why in the long
Speaker 1: history of the I S M it tends to give
Speaker 1: out a very large number of false signals, and it
Speaker 1: tends to be as early and signaling a bottom as
Speaker 1: it is latent signaling a peak. Right. I mean it's
Speaker 1: not a particularly good timing tool either for the economy. Right.
Speaker 1: So if you go to the nineties, I mean you
Speaker 1: had multiple, multiple times that it fell below fifty and
Speaker 1: if you look at the data, I mean, manufacturing production
Speaker 1: during that time was steady. After the financial crisis, same story, right,
Speaker 1: And that's what's going on now, right, I mean what
Speaker 1: matters for manufacturing the I s M or the fact
Speaker 1: that Boeing is going to build a bunch of planes
Speaker 1: for a while. They have a huge pipeline of orders
Speaker 1: that they need to work through. The same holds for
Speaker 1: motor vehicle assemblies. You're talking about autos an aircraft that's
Speaker 1: about fifteen ten to fifteen of US manufacturing production on
Speaker 1: its own. Forget the downstream effects. I mean, obviously, when
Speaker 1: those two industries are clicking, it's going to create a
Speaker 1: windfall for other areas in the in the manufacturing sort
Speaker 1: of value chain. Right. I think that matters a lot
Speaker 1: more than I s M. It's an it's an oscillator,
Speaker 1: you know, and for and for market participants. How has
Speaker 1: using the I s M been useful for you in
Speaker 1: making a market call? Just pull up a chart of
Speaker 1: industrial stocks over the last few months. They've been beating them.
Speaker 1: They've been outperforming the market. So you know, there's this
Speaker 1: cottage industry in Wall Street, you know, looking at the
Speaker 1: I s M as a timing tool, and and so
Speaker 1: on and so forth, and really it's just I think
Speaker 1: it's it's it's a waste, and I think it's better
Speaker 1: to focus on the actual data. And you mentioned the
Speaker 1: services number, Tracy. I mean again, there's there's there's a
Speaker 1: great example. I mean, look at look at dining reservations,
Speaker 1: look at look at flights, look at people's appetite to
Speaker 1: go out and do things. Look at Avatar, you know,
Speaker 1: be be out top gun Maverick, Right, I mean, don't
Speaker 1: don't don't talk to me about the is M S
Speaker 1: you know. So, so this is exactly why I wanted
Speaker 1: to talk to you about I s M. But I
Speaker 1: do think I do think you sort of raise a
Speaker 1: good point. They're about, like it overshooting and undershooting, like
Speaker 1: key turning points, because I think maybe that's what we're
Speaker 1: seeing in a lot of the survey data, which is
Speaker 1: like surveys just are not that good when when you
Speaker 1: have cycles that are like twisting and turning and extremely
Speaker 1: fast as this one has been, like maybe they're extra
Speaker 1: unreliable in these periods of time. Well, right, it's a diffusion.
Speaker 1: I mean, so let's let's put it this way. Let's
Speaker 1: say in January GDP growth is seven percent and in
Speaker 1: February GDP growth is seven percent. What does the I
Speaker 1: s M do? It goes to fifty? Is that bad?
Speaker 1: I mean by the people that by by the I
Speaker 1: s M Celtics that are all over the market, Um,
Speaker 1: maybe it is, But I think for a thinking person, no,
Speaker 1: it's fine. So so I I think, I mean, you
Speaker 1: have to understand like how these indicators are constructed. All
Speaker 1: they're asking you is are things going up? Down or sideways?
Speaker 1: And and the one thing I'll point out to people
Speaker 1: is if you take a look at the global manufacturing
Speaker 1: p M I S formerly known as market, you know,
Speaker 1: I look at about thirty five of them, and if
Speaker 1: you look at new orders only, you know maybe a
Speaker 1: fifth of them are in expansion territory. And that's happened.
Speaker 1: Maybe you know, maybe a handful of times in the
Speaker 1: last twenty or thirty years, like LTCM, the tech wreck, obviously,
Speaker 1: the financial crisis, and then the European debt crisis. So
Speaker 1: you can count the number of times on one hand
Speaker 1: where you've seen that happen, and in each time, what's
Speaker 1: gone on, what's happened next? It turns up. So it
Speaker 1: goes back to this idea that it's a momentum barometer, right,
Speaker 1: I mean, so the moment it's not like the thing
Speaker 1: goes to a hundred or and doesn't go to a zero.
Speaker 1: So you know, the lower goes, the more bullish you
Speaker 1: should give. In the spirit of explaining the data, we
Speaker 1: had an e comedy where nominal growth slowed from about
Speaker 1: twelve percent the end of one to more like six
Speaker 1: percent at the end of two, and then you had
Speaker 1: multiple cyclical sectors that went into contraction for sort of
Speaker 1: bullip related reasons, and then housing due to the FED.
Speaker 1: So I think that the nominal level of growth has
Speaker 1: arguably stabilized at this point, and then some of those
Speaker 1: industries that were in contraction for much of two could
Speaker 1: actually inflect higher in three, and again that could get
Speaker 1: lead to acceleration and growth when the FED is expecting
Speaker 1: a deceleration. Well, Connor, speaking of manufacturing and where there's
Speaker 1: potential growth, we recently got the awards auto sales. I
Speaker 1: think in December, GM had a good month, Toyota had
Speaker 1: a good month. We had thirteen point three million annualized
Speaker 1: rate of new car sales. But they're still well below
Speaker 1: like where we were regularly printing pre pandemic, which was
Speaker 1: like more in the seventeen million annualized rate. So is
Speaker 1: there still like a big like what's going on with
Speaker 1: cards and chips and all that. Is there still an
Speaker 1: opportunity for the big automakers to kick up production into
Speaker 1: a higher gear here? Yeah, I think everyone expects that
Speaker 1: number to go up in just because again it was
Speaker 1: our sort of lower than we would expect to supply
Speaker 1: chain reasons. We probably missed out on six to seven
Speaker 1: million vehicle sales over the past few years due to
Speaker 1: supply issues. Productions going to pick up, and automakers will
Speaker 1: cut prices that they have to, but if they produce cars,
Speaker 1: they're gonna sell cars. And then there also could just
Speaker 1: be sort of a weird dynamic where electric vehicle demand
Speaker 1: and production is picking up, sort of demand for conventional
Speaker 1: gasoline powered vehicles is going down, and maybe you're thinking, well,
Speaker 1: the e v I one isn't available yet, so I'm
Speaker 1: just gonna wait for a little while longer. But I'm
Speaker 1: not going to buy a gasoline vehicle in the meantime.
Speaker 1: So it just they're sort of pent up demand for
Speaker 1: e v s, which would explain overall level of sluggish
Speaker 1: sales well until that picks up. So I know we've
Speaker 1: been quite us focused in this conversation so far. But
Speaker 1: the other big thing for the global economy in three
Speaker 1: it would seem to be, is what's going on in
Speaker 1: China with the reopening and also more recently a lot
Speaker 1: of policymakers seemingly rolling back some of the restriction and
Speaker 1: crackdowns that they had on certain sectors like technology and
Speaker 1: real estate. And also, you know, you have some early
Speaker 1: signs of them potentially opening the floodgates of credit again
Speaker 1: and trying to boost economic growth at a time when
Speaker 1: a lot of the population is quite frustrated. How are
Speaker 1: you viewing that, Because on the one hand, it would
Speaker 1: seem that China explicitly trying to boost consumption might be
Speaker 1: another inflationary impulse for the year. On the other hand,
Speaker 1: you know, maybe it's a good thing for the world economy.
Speaker 1: If China is really focused on growth, maybe we get
Speaker 1: something like a repeat of what happened post two thousand
Speaker 1: eight with the financial crisis, when China really kind of
Speaker 1: came to the global economies rescue. But what are you
Speaker 1: thinking about China at the moment? Well, Tracy, I mean,
Speaker 1: as you know, I do focus more on the U s.
Speaker 1: But what what I what I will tell you is
Speaker 1: that you talked about the vibe session before. Well, in
Speaker 1: some respects, I think the FX markets are very viby,
Speaker 1: you know they they it's it's how how people. It's
Speaker 1: like basically a beta play. And if China is reflating,
Speaker 1: which I think it is, I mean that if you
Speaker 1: look at you know, the Hang Sang the Chinese equity markets,
Speaker 1: you know I was reading that. You know, obviously transit
Speaker 1: uses up, so things are getting back to normal. I mean,
Speaker 1: it's gonna look bumpy. Reopenings always do, as we know,
Speaker 1: but demand is likely to pick up. That's introducing an
Speaker 1: incremental source of demand to the global economy that I
Speaker 1: think will put downward pressure on the dollar. And I
Speaker 1: think that that's important. Obviously, because the dollar has a
Speaker 1: very mechanical impact in inflation dynamics, right, I mean, the
Speaker 1: FEDS workhorse model of the economy assumes that every ten
Speaker 1: percent drop in the dollar pushes up core inflation by
Speaker 1: about two to three tenths of a percentage point a
Speaker 1: year later. So that's the first point. The second point
Speaker 1: is I think that the improvement in China is going
Speaker 1: to mean a lot for Europe. And that's because Europe
Speaker 1: is a very large, open economy that trades a lot,
Speaker 1: and if China is improving, it's almost certain that Europe
Speaker 1: is going to look better next year too, right, So
Speaker 1: it's sort of I mean, you're talking about the same coin,
Speaker 1: two sides of the same coin. Europe and China are
Speaker 1: are are in some respects tied at the hip through trade.
Speaker 1: And if you have those two economies looking a little
Speaker 1: better next year, I think that's going to put downward
Speaker 1: pressure on the broad broad dollar exchange rate. At the
Speaker 1: same time, China has been you know, a mess in
Speaker 1: two as we all know. But during two, what do
Speaker 1: we also see the rest of the Asia E M
Speaker 1: complex looked okay, right, it looked okay. I mean look
Speaker 1: at India. I mean India activity was was doing reasonably well.
Speaker 1: Parts of em Asia looked better. I mean a lot
Speaker 1: of a lot of the final assembly frankly has already
Speaker 1: leaked out of China, but you know a lot of
Speaker 1: the other Asian economies that are around China did okay.
Speaker 1: The same goes for Japan. So you know the fact
Speaker 1: that China is now participating, I think it just elevates
Speaker 1: all these sort of economies around it, right, sort of
Speaker 1: a gravity model of activity. So I think it's I
Speaker 1: think what you're talking about, really, I mean, just bring
Speaker 1: can get back to the US. I think it's a
Speaker 1: dollar negative and you know, just I know we wanted
Speaker 1: to put a pin on the manufacturing discussion, but obviously
Speaker 1: if the dollar's weakening, that's gonna push up you know,
Speaker 1: the the exports of of manufactured goods close to wrapping
Speaker 1: up here. But connor any other thoughts either from the
Speaker 1: international thing or just sort of other dynamics looking into
Speaker 1: three that that are on your mind. I think just
Speaker 1: the real question is that everyone is wondering about is
Speaker 1: are we and have a recession? And so I think
Speaker 1: for me, it's sort of you try to think about
Speaker 1: all the components that could lead to recession. So it's
Speaker 1: global manufacturing, housing, consumption, financial conditions, and it's just hard
Speaker 1: to point to any one thing that's out of balance
Speaker 1: and likely to be a lot worse three than it
Speaker 1: was in two. And if you can't identify anything at
Speaker 1: that level, then maybe you should be a little more
Speaker 1: uncertain about how bad things are going to get. And
Speaker 1: you know, as we've talked about on this podcast, it's
Speaker 1: much easier to identify areas where things could pick up,
Speaker 1: at least for the next six months. Connor and Neil,
Speaker 1: thank you so much for joining us in my mind
Speaker 1: that lived up to the hype. I learned a lot
Speaker 1: and plenty of things to think about going out through
Speaker 1: the year. So thank you both for coming back on
Speaker 1: odd lots. Thank you, Harold and Kumar. Thanks Joe and Tracy.
Speaker 1: Thank you. We need a nickname. I was just gonna
Speaker 1: say the same thing. We need like our own like
Speaker 1: we need our own parents by those take care of Okay,
Speaker 1: So my big takeaway is that if Avatar is out
Speaker 1: grossing um top Gun Maverick, then I'm not going to
Speaker 1: pay attention to the I s M. Then rents are
Speaker 1: going down as well. I don't care about rents. I
Speaker 1: don't care about gas, I don't care about the I
Speaker 1: M I don't care about the dollar. It's like, how
Speaker 1: well is Avatar doing That's going to inform my view
Speaker 1: of the economy? Well, I think, I mean, I know
Speaker 1: you mentioned that you tweeted ironically, possibly trolling Lee about
Speaker 1: gas prices and the consumer, But this is a point
Speaker 1: I made somewhat more seriously, not in gas prices, but
Speaker 1: in one of our newsletters, which is just like, I
Speaker 1: actually think like, over the past year, forecasting inflation has
Speaker 1: been difficult, but I actually think like we're kind of
Speaker 1: entering the hard part now because all the parts are
Speaker 1: like so in motion in potentially different directions, it's going
Speaker 1: to get like pretty difficult. And then the other thing
Speaker 1: I would say, there's there are so many takeaways from
Speaker 1: that conversation. One thing that struck me was Connor talking
Speaker 1: about the inventory build up in two and the idea
Speaker 1: of that feeding into some of the surveys, because quite frankly,
Speaker 1: that was something that we heard in a recent conversation
Speaker 1: with Ryan Peterson at Flex Sports as well, this idea
Speaker 1: that well everyone was over ordering because transport times were
Speaker 1: so crazy. See and then once transport time started normalizing,
Speaker 1: they realized they had all this stuff and they had
Speaker 1: to start working through those stockpiles. And now as some
Speaker 1: of that starts to revert, as some of the shipping
Speaker 1: times start to normalize, maybe we see some improvement there.
Speaker 1: You knew, what I thought was a really interesting point
Speaker 1: in the conversation that I want to that we we
Speaker 1: really need to talk about like rents and multi family
Speaker 1: because I know and I know we have I think
Speaker 1: we have an episode coming up soon. But I had
Speaker 1: not thought about this point that Connor made, which is
Speaker 1: that for the for the multi family builders, the builders
Speaker 1: of you know, apartment complexes, etcetera, they never had that
Speaker 1: scarring the same way the single family homes did. It
Speaker 1: was just like there's been this huge secular bowl market
Speaker 1: in demand for multi family. They didn't have that big
Speaker 1: bust the same way, quite the same way. After like
Speaker 1: two thousand, two thousand nine, everything always seems to line up.
Speaker 1: Everyone's moving to the cities, young people don't want homes, etcetera.
Speaker 1: And it's this idea, it's like, oh, could we have
Speaker 1: like you know, like a Minsky moment basically floor multi
Speaker 1: family where just when everyone thinks you cannot lose building
Speaker 1: more apartments. Could this lead to like a real like reversal.
Speaker 1: It's like a really interesting sort of both short short
Speaker 1: term question because it affects what rents are going to do,
Speaker 1: but also like pretty long term question because like, what
Speaker 1: if there were a bust in this sector, Well, maybe
Speaker 1: I don't know, maybe we would get No, we wouldn't. Um.
Speaker 1: I was just thinking, like, I guess we'd get a
Speaker 1: big decline in productivity as well, because everyone would be
Speaker 1: able to afford moving out from their roommates and getting
Speaker 1: their own apartments. Right, it would be bad. It'd be bad.
Speaker 1: I hadn't even thought about that, right, So it's like, okay,
Speaker 1: thank you, we're all we all roommates again, saving money. Oh,
Speaker 1: rent prices come down, move back out. It's but this also,
Speaker 1: you know, this sort of general equilibrium style thinking which
Speaker 1: Neil talked about a lot, which is that a lot
Speaker 1: of what we've discussed, these sort of relative changes and
Speaker 1: more money and people's pockets because one thing going down
Speaker 1: means more spending elsewhere, and if that is sort of
Speaker 1: a useful framework. But this is the moving parts thing, right,
Speaker 1: Like it's so difficult to predict at the moment, I
Speaker 1: feel like because like one thing happens, and because so
Speaker 1: many of these moves have been extreme, which we talked
Speaker 1: about in relation to a lot of the survey data,
Speaker 1: their diffusion indexes, so they tend to overshoot and undershoot
Speaker 1: because everything has been so extreme and in such a
Speaker 1: compressed time frame, it just feels like a lot of
Speaker 1: our traditional forecasting models are terrible at dealing with totally.
Speaker 1: And you know, and again the theme all of last
Speaker 1: year is like you know, and you you've written about
Speaker 1: this recently that like, well, you know, people talk about
Speaker 1: the seventies or whatever, what if it's the Spanish flu
Speaker 1: and something, and all these like cycles that look like
Speaker 1: business cycles but aren't really cycles because it's just part
Speaker 1: of normalization. I think it's gonna it'll be an interesting year.
Speaker 1: We'll have plenty to talk about. I think we've come
Speaker 1: full circle to the beginning of this conversation, which is like,
Speaker 1: there are some extreme possibilities and opinions out there, and
Speaker 1: it's very difficult to choose directions and paths at the moment.
Speaker 1: So on that note, shall we leave it there, Let's
Speaker 1: leave it there. Okay, this has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Isn't All.
Speaker 1: You can follow me on Twitter at the Stalwart. Follow
Speaker 1: our guests on Twitter. Connorson He's at Connorson. Neil Dudda,
Speaker 1: I think he doesn't. He doesn't actually have an account,
Speaker 1: but at RELLC well at Ren mack llc is his firm,
Speaker 1: and I have a sneaking suspicion he's doing all the tweets.
Speaker 1: I'm like, you can read them. It's like, yeah, that's
Speaker 1: a Neil tweet, even though it's his firm. So check
Speaker 1: out rend can actually imagine it in Neil's totally, they're
Speaker 1: all in Neil's voice. You can tell Ren mac llc.
Speaker 1: Follow our producer Carmen Rodriguez at Carmen Arman and Dash
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