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I want to talk about inflation.
So this week, the government reported that inflation, hit, seven percent.
That’s the highest rate since 1982 core inflation, which excludes food and energy.
Since those prices are a little bit bouncy was five point five percent.
That’s the highest rate since 1991.
So depending on how you look at it.
We’re either dealing with the highest inflation rate in 40 years or the highest inflation rate in 30 years.
I’d say that’s a pretty big deal.
And this is a case where a lot of very, very smart people.
Got it, very, very wrong.
So, the government got it wrong last March, the Federal Reserve was projecting inflation and 2021 to hold around two or three percent.
Nope, investors got it wrong.
If you look at several measures of investor expectations of inflation, the last year, they mostly seem to be expecting inflation to come out around 2 to 3%.
The bank’s got it wrong.
Most of the big Banks publish these fancy analyst notes, where you get a bunch of big economic brains, to predict the future.
And one summary of Predictions that I found for inflation.
Had an average of just wait for it two or three percent wrong wrong wrong.
But even the government’s critics weren’t exactly right.
There are a lot of Republicans and even some non Republicans like famous economist Larry Summers, who spoke out against the Biden ministration.
Last summer said that you shouldn’t send these thousand dollar checks to all these people because it’s going to land us in a stagflation airing environment like the 1960s.
The stagflation being the portmanteau of stagnation and inflation, which is a phenomenon that we saw in the late 1960s, early 1970s.
And these other critics Administration they were right about inflation, but they weren’t right.
They were wrong about the Stag part.
They were wrong about the stagnation.
The US economy, isn’t stagnating at all.
Americans are spending money like crazy.
So those prognosticators didn’t give us an accurate snapshot of the future as they sought either.
Then finally, the bit.
Going bros, got it wrong.
A lot of people in the crypto Community have been predicting that the u.s.
Government was leading the world into this hyperinflationary environment and that the best investment you could make to ride out the wave was to buy Bitcoin.
So let’s roll back.
The tape say you had a thousand dollars to invest in March or April of 2021 and everyone is making all these predictions and you think okay.
Should I put my money in the stock market or should I bet on inflation?
Put my money where my mouth is and put it in?
Then use it like an inflation hedge like digital gold.
Well, if you put your thousand dollars on Bitcoin in March or April 20-21, you would be down 200 to 300 dollars today.
Meanwhile, if you put your money in the S&P 500, not just any, you know, particularly intelligent basket of stocks, just dumb blind.
Corporate America here.
Take my cash.
I’m putting a thousand bucks in the S&P. 500, my friend you would be up more than $200.
So, in the last nine months, the market has beaten Bitcoin by 40 percentage points.
This is not an argument that the Bitcoin Maxi is have one.
This is a strange World in, which everybody seems to be a little bit wrong and want to be clear.
Like this is not an argument against Bitcoin.
If you bought the coin and March 20, 20 or something, I think you’re up something like eight hundred percent, but the point is a matter of correctness about the path of inflation in the last 10 months.
There’s nothing About the price of Bitcoin that suggests that this group was especially right?
So in conclusion, basically everybody was wrong about inflation.
Here’s what I want to know.
Why are we wrong?
And what happens now?
I’m Derrick Thompson.
This is plain English.
We are back with our economic Roundtable.
That means Michael bat, Nick and Ben Carlson are here to break down.
Michael is the director of research for riffles wealth management.
Been is the director of institutional Asset Management.
They co-host the wonderful animal spirits podcast.
Okay guys, so here is the news US inflation, hit its fastest Pace in nearly four decades last year.
The Consumer Price Index.
That’s what the government uses to measure.
What consumers, typically by row seven percent in December fastest rate of any month since 1982.
And yet big picture important important to point out.
This is happening in a broader economy.
That is kind of booming in unemployment is very low spending is very high.
The stock market had a blockbuster year.
So first question for each of you.
What is the single most important thing about the latest info?
Ation report, Michael you go, first.
It is broad-based.
Unfortunately, there’s not just one thing that we could point to 90 percent of the total CPI.
Sub components are rising faster than the feds Target rate of 2%.
I know we’re going to get into meet later because I’ve got takes there but as an example Energy prices are up 30%, ghastly in the national average a year ago, which was quite low.
So to be fair was quite low with two dollars and 35 cents.
It’s $3.30 today commodity prices.
It’s Our copper is at an all-time high used car trucks and price used car trucks.
Used color trucks.
Used cars and trucks is are still going up like crazy 37%.
My least just came off and instead of buying a new car, leasing a new car.
I bought my old one because economically, it just made sense to do that.
And here’s the thing that I think is most important to pay attention to all of these things that we were potentially talking about is being transitory like the used cars and trucks.
They’re going to come back down, but the Nikki thing that never reverses our wages.
So the Atlanta fed has a three-month average of the median wage growth and that was four and a half percent, which is the highest level since 2002, and that’s great, especially, because people on the bottom are finally getting to participate in the economic expansion, but when you compare that with seven percent inflation, it’s not so good.
And then the last thing on this topic is that over the last few years, inflation has been very moderate and it’s been primarily in service.
Is, but now it’s primarily or I should say, primarily we’re seeing Goods inflation, which is very rare.
And the Silver Lining there is it tells me that Goods inflation is hopefully one of the things that will moderate and eventually go away.
So basically your big takeaway is when you look at stuff inflation because experienced inflation Services is not particularly high, but in stuff inflation, it would be lovely if we could say.
Oh, this is just about used cars.
This is just about the price of bacon, but it’s the price of jewelry.
Yeah, and it’s the price of Commodities.
It’s so many different, suiting so much every stuff suit.
So much different stuff is seeing unusual food anymore and the Pentagon.
No, I said suits.
I think part of it.
Like you said, it’s the highest inflation rate in 40 years.
I think big round numbers really psychologically impact.
People like it’s seven percent.
That’s so big it.
Like if Wilt Chamberlain scored 99 instead of 100.
No one would remember it right?
But he is a sign with a hundred because I think there’s a huge psychological component to inflation.
I think seeing this number on the Is every single day, beating people’s heads, just beating people over the head with.
It is going to have a psychological pain and a, how people spend their money potentially.
And I think it’s hard to think in real terms for people.
So if we have eight percent economic growth, but seven percent inflation, people going to think that’s way worse than having three percent economic growth and 2% inflation, even less the same thing basically, right?
So I think we’ve we haven’t dealt with this in 40 years.
The majority of people especially the three of us sitting here have never had to deal with the situation.
The really only been to secular inflation spikes in our history, like the 1940s, the 1970s, some, there are some Boomers who still remember the 70s, but this is a totally different time frame.
So, I think the fact that we’ve just never experienced this, I think psychologically how people react to it is going to be fascinating because I really don’t know.
It was so broad base that they added an extra week to the NFL is, right.
Yeah, even the schedule is seeing hyperinflation in ways that screwing with all of us, it definitely screwed with my fantasy team.
That’s for sure.
So I I am glad you guys started there.
I want to have a bit of media, Reckoning and Economist Reckoning.
I want to know how so many people got 20 21 inflation wrong.
Because if you look at the teams that started a forum at the beginning of last year, almost every single team, missed this badly.
So first off there was guilty and and we’re all going to give our own confessions.
Our own Catholic confessions are coming soon, but there is team.
We I won’t have any inflation in 2021.
Okay, they were obviously wrong.
Then there was team transitory that meet Team.
This is going to happen for three or four months.
But by the end of 2020 one, we’re going to be back at 2 3, 2 3 & a half percent inflation.
Well, I think it’s time to say that they were clearly wrong.
They were critics of the administration critics of the FED.
Like maybe most prominently Economist, Larry Summers who predicted the imminence of possible, stagflation the combination of inflation with stagnant growth.
Well, he got inflation, right?
But he also Gut stagnant growth wrong because we’re kind of booming, in terms of spending in addition to inflation.
Then finally, you have like the Bitcoin, Maxis who said, you know, I’m all in on bitcoin because I think inflation is going to happen.
But if you look at the price of Bitcoin for years or the last over the last year, Bitcoin is not doing nearly as well as the S&P 500.
So financially speaking their bet on how inflation might cash out for them has also been disproven why Michael back to you?
Why was everybody or almost everybody?
So wrong about 20 21 inflation?
What did we miss?
First of all, we’re always wrong.
Everybody is always wrong about predicting the future course of where the economy is going to go, because it’s unpredictable just in his very nature, but I think inflation is especially unpredictable, but I think there’s two things to be very concrete of things that we underestimated one.
I don’t think it was interest rates because we’ve been in a low interest rate world to the last decade and we’ve had pretty much no inflation.
It was, we I think Underestimated, the impact of fiscal stimulus, people love to trash the FED, it was Treasury and the government that was sending money.
That really a, my opinion Juiced inflation.
The other thing that we severely underestimated, was how difficult it was to turn the economy back on, we shut it off for 16 months.
However, long it was and then the idea that we could just turn the supply chain back on, it didn’t quite work that way.
So I think that this is more.
I know this is Cop is that?
I do think it doesn’t supply chain issue.
Obviously demand is there, which is great.
But I still think supplies behind.
This is a good time to admit that.
I got it wrong as well.
I thought inflation might be three or four percent.
I didn’t make a specific prediction, but I did not think that we were going to see six or seven percent inflation in 2021 Michael to your point.
You go back to March of last year.
Biden signs, the American Rescue plan Americans.
Get their 1400 dollar stimulus checks, and they say, I want Furniture.
I want a new car.
Our I want Electronics, right home and the u.s.
Can’t import enough, Furniture cars and electronics, fast enough demand out races Supply and it gives us specific inflation in this category called durable goods, which I think of it’s just stuff.
I want to put on the table though, which was a legit surprise is the Delta wave, Delta swept through Asia and we saw lockdowns in southern China and other Factory hubs and that’s screwed with Supply chains as well.
In the u.s., It kept older.
Workers on the sidelines, they were afraid of getting sick by going back to work.
It kept working moms and dads at home.
All these early retirees, and working mom, and dad’s pulling themselves out of the labor force.
I think has contributed to the labor shortage that we see and the labor shortage that we see is also I think pushing up prices been.
How do you see this cash out?
Why do you think we got it wrong here, both to put some color on that demand.
So us retail sales or less 20 years pre-pandemic was Like 4% per year since the pandemic and this includes an 18 percent correction and retail sales in the first few months of the pandemic.
It’s up 13 percent per year.
So we are spending so much money right now, but I also think I’m willing to let people move the goalposts a little bit because this wasn’t an economic cycle.
You couldn’t look at a textbook and understand what’s happening here.
This is crazy.
This is more like a war, but it’s different because we didn’t like, you know, when a war is ending, right?
We don’t know.
When this is going to end, and I think the fact that covid-19 we send out the checks and And I think the fact that it kept going.
I think the people that were saying, transitory might have been right of covid-19.
Had the worst economic GDP contraction on a quarterly basis, ever even worse than the Great Depression, and we’ve made that back up and now we’re back to where we were face.
It just it just explain that a little bit.
What you mean by that?
When you say we’re back to where we were, you mean that nominal gross domestic product.
Like the size of the economy is backed at the trend line that we expected it to be in 2021 before.
There was any pandemic, is that correct?
So, following historical tragedy DP, doesn’t move all that much.
The stock market is all over the place.
GDP rarely moves, even in 2008.
The, the economy was down, like, I don’t know, three or four percent when the stock market fell 50, right?
So GDP doesn’t move all that much.
So if you follow a long-term trend line of where it was going.
We’re basically back to yeah, where it was going before.
We had the dip and then they come back.
So real and real GDP is at an all-time high after inflation.
Yes, even accounting for inflation.
So the whole thing that people missing how high inflation was going to be and how long it would last.
I think that is all pandemic related and I’m willing to give most people pass.
I also think everyone these days is a Mac or tourist.
So One has an idea.
If the crypto people who made all the money in Tech.
They think I’m smart.
I made a ton of money.
I know what’s going to happen to the economy now and everyone does and I think inflation is just really, really difficult to predict.
No, there’s no model in any textbook.
The can tell you this is going to cause inflation if we just pulled these one or two levers.
We really don’t know most of the time.
So for example, is somebody who is on Whole 30.
I’m going to come on a no-carb diet.
I’m a meat and veggies guy.
I’m feeling it.
I am feeling the meat Felician.
You’re feeling of inflation.
You look at me prices right now.
I mean it, It it it sucks for you beef and veal up 17.6% uncooked, be fun, cooked ground beef.
That’s 11% uncooked beef roast.
I don’t know.
If you’re Bistro.
If beef roast guy, that’s 21% Time bacon, 17%, interestingly butter cheese and tea are the only food products.
I can find that are seeing falling inflation.
My wife, huge into T.
Big and a cheese, big into butter.
She is keeping this.
If it was just for me, we’d be bankrupt because I’m out there, buying all the steaks in the and the bacon.
I’m bankrupt in this family, but she’s buying all this stuff where prices are falling, but in all seriousness, you’re exactly right.
I think this is, this is definitely a bizarre.
A bizarre moment.
I can take I can hear like two different arguments on on Delta 1, is that Delta created more inflation, but the other is that maybe Delta is actually holding back inflation.
Maybe there’s Americans that really want to spend a lot of money on services.
On restaurants on vacations, but they’re keeping that money in their pockets and so in a weird way, the rising variants might be holding inflation down.
More than they’re pushing it up.
Been a Michael.
How would you tease apart that argument?
Do you like, do you come down strong than once out of the other?
I just booked a flight yesterday to Miami for February.
Guess how much a one-way ticket is I’ll tell you, 92 bucks, Jesus.
So that shock the heck, out of me.
I guess people aren’t flying right now.
Now, but here’s where I think one impact of the the virus that we haven’t spoken about again, getting back to the wages, is that people rethought how they were going to go back to work?
And in order to get them to go back to their jobs that some people weren’t happy with.
They said I’m not doing that for 11 bucks an hour.
There’s no chance in heck.
So I think that had a huge impact on the wage story, which is ultimately going to be what drives potential sustained inflation.
In my opinion.
I do think Derek to your point if Supply could meet And right now, I think things could be a lot worse.
I think growth could probably be hired to so that that relationship might be similar on a relative basis.
But if we were allowing Supply to go, I think we could have that like Roaring Twenties.
We’ve been hoping for, in talking about if we could have those to meet and obviously it’s going to be hard to have them meet perfectly and find this equilibrium, but I do think that’s a possibility.
Like, if we could just figure out how to get this in, like, be a little patient with this and let this applies of come back online and see what happens as opposed to.
No, we got to shut it down.
I also demand and let’s cut it off right now.
I don’t see how that’s helpful to anyone.
I’m going to talk specifically about meet inflation, prices are up.
As I said, 17 percent for bacon, 22% reveal.
This is a case where a lot of democratic politicians have stepped into The Fray and said we’re blaming companies for inflation.
Not the macroeconomic conditions.
Not these big picture things like pandemic Supply demand note.
We are blaming companies and Senator Elizabeth Warren caused a stir when she came.
Out against the meat processing companies and I want your reaction to What She Said.
So, I’m quoting from her tweet.
Quote, families are rightly upset that the price of meat has gone through the roof, who’s to blame Meatpacking monopolies, that are using inflation as a cover to raise prices, and make record profits.
The four largest meat processing companies are jacking up, beef prices to fatten their profit margins.
While consumers are left with higher prices and quote, and the White House has picked up on this.
The press secretary tweeted this quote for big companies control 50% of meat processing.
These middlemen use their position to overcharge grocery stores and ultimately companies and quote been do they have a case are the meat processing companies aren’t the meat processing monopolies to blame for Michaels impoverished State as he’s on the Whole 30 diet.
I honestly think Think they’re on the right track, but the fact that they’re, they’re narrowing their search to meet processor, seems bizarre to me, because you could argue that Corporate America has taken advantage of higher prices cuz people in Corporate America are complaining, we have this labor shortage.
We have to pay people more and we have higher input prices in the supply.
Chain is all messed up but profit margins for S&P 500 companies.
That’s the all the biggest companies in the stock market have never been higher.
There’s high as they’ve ever been.
They’ve been rising over the past year.
So companies are making In profit, and keeping more now than they ever had, even with these higher costs are having to deal with.
So you could say, yes, Corporate America and I understand taking Corporate America to task.
I’m not sure going at the meat processes.
We’re dealing with these problems of, I’m sure they’ve had tons of covid outbreaks, at their plants, right?
They’re doing with higher fuel costs.
Commodity prices are higher way higher over the past year.
So I understand wanting to go off the big bad corporations, but going after this meat Packer specifically, I’m not sure this one.
Really hits to me.
What do you think?
So Tyson and Hormel, which are two of the biggest Meat Company, publicly traded companies.
There are margins are close to all-time Highs but there’s the but their net.
Margins are like in the single digits.
So they’re not like absolutely killing people what and I think people were like, sort of rolling their eyes at the Meat Processing Company.
But once you went after grocery stores, Elizabeth Warren.
What she did.
That’s what people like, okay.
Wait a minute.
Wait a minute.
Wait a minute.
Grocery stores are the lowest margin business possible at Kroger’s?
Net margins. 0.75%, they’re not grouchy, the customers.
So I think maybe they’re right about Corporate America to Ben’s point, but they’re pointing the fingers of the wrong place.
So, one of the things that’s responsible for this is underlying inflation cattle.
For example, are as high as they have been since 2016.
If you want to blame anybody blame the cows.
So I I think she’s right.
Like you guys said that there is obviously a lot of consolidation in meat processing.
There’s a lot of consolidation across the economy.
I have, I have Two specific objections to her case and you guys have partly covered.
Both of them.
One meet inflation is a little bit unusual but it’s not that unusual meet inflation is the same as used cars energy.
Furniture oranges, peanut butter.
Like we’re just seeing a lot of different price categories at 40 or highs.
Number two animals.
Need food to eat before we eat them.
That’s how it works circle of life.
Like, food prices are going up.
So animals cost more to raise which means they cost more.
More to eat.
And I was wondering, you know, what are we animals to eat?
They eat a lot of grains, you would need grain inflation to be around the highest.
It’s been in maybe 50 years to partly explain the price of meat.
So I looked it up and it turns out that the producer price index for grains.
That is what farmers are paying for grains to feed.
Their animals is, in fact, the highest it’s been in 50 years.
So, again, I don’t want to suggest here that like corporate consolidation is a fantasy.
It’s very, very real, but if we’re trying to The rising price of Meet the rising price of grains in order to feed the animals that become our meat is a pretty important clue.
And to your point.
I when she starts going, after the grocery stores that have profit margins between like 0.5% 21.5 percent, right?
I start to wonder whether the good argument for antitrust regulation is being marshaled in the least, possibly useful way.
Yeah, I’m sympathetic to her case, but when she says things like this, it’s I make makes me want to hop off and so again, Then to point the wrong, the fingers in the wrong faces.
I’m, we might have spoken about this last time but housing prices stock.
Horton, for example, it’s the biggest home builder in America.
They their margins are at all-time highs even though lumber prices have gone up so much.
But when lumber prices crashed, they were asked by an analyst on the calls.
Lumber prices came down, you raised home prices as a result of lumber going up.
Now, it came back down.
Are you going to lower prices?
And they said, no, we’re going to take it to margin, which they have.
So they are taking advantage of the situation.
I guess what, that sort of that sort of But it, but so it does stink.
I’ve worked as a macro question for you guys because you understand the space better than I do, but I’m thinking, you know, bacon is top of mind.
Let’s just say, I run a bacon store and I’ve got a couple employees that I pay in my bacon store and I obviously have to buy the pig meat to start, if I’m in a high inflation environment, inflation is going up for wages for the people that I employ and inflation is going up for the pigs.
Wouldn’t I start to raise prices, even a little bit more than I have to, to keep up with yesterday’s profit margin in anticipation of the fact that I’m in a high inflationary environment in which all of the prices surrounding my business are rising at the same time.
Like I guess to make it one sentence.
Is it rational?
Does it seem rational for some companies to purposefully, try to Kris their profit margins in high inflationary environments as a protective measure, not as a matter of greed.
But as a matter of worrying that next quarter’s prices, just might be at a point where today’s prices that you’re charging consumers like won’t pay for it.
Does that makes any sense?
Well, this is the psychological component of inflation.
The same with consumers, right?
So consumers might want to buy and this is why I think if that eventually trickles down to Consumers and inflation stays here for long.
This is where you throw the models out the window and go.
Oh no, this this is having an impact on consumer.
The problem is right now, consumers are still spending so much that we’re giving the corporation’s a break here and letting them raise prices as much as they want, because we have so much money.
The consumer balance sheet has never looked as good as it has today and take away that.
It’s never looked as good as it has coming out of a recession as it does today because interest rates are so low and people got money and people pay down credit card debt and Shore up their finances.
So the fact that the consumer is still spending.
Gives them leeway to do this, but I understand your point that it’s psychological in your planning ahead.
And what if it gets worse, I want it.
And that’s the point where if that trickles down to the consumer and it changes their spending habits, then maybe inflation stays here for a little longer than we even anticipate, because maybe people start buying sooner, because they think well, prices are going to be higher in the future.
I should by now, we haven’t seen that happen yet, but it’s possible people really hit inflation because even though their wages have gone up, those are usually one time boosts.
Whereas you see prices going up every week and I think that this is largely responsible for For President Biden’s disapproval rating ratings, right?
All are at all-time lows for him.
But I think a lot of this is consumer prices.
I am glad that you walk this back into politics because that’s where I want to move on.
To is the Federal Reserve where look, I think a lot of the debate over inflation cashes out as what should the Federal Reserve do about it.
So I want you guys to help me with out with the kind of, you know, econ 101 here.
Then what is the Federal Reserve?
What is its job and what are It’s tools right?
That the FED is essentially the lender of Last Resort before the FED existed in 1913.
We are on the gold standard and there was really no backstop to the US economy.
And so, I did some some data for one of my books.
I wrote from the 1850s to the 1930s.
Essentially, through the Great Depression, the US economy experienced a recession or depression once every four years and the average contraction GDP was a 23%.
So this is before the, you know, the before the FED really sunk his teeth and a new one was doing.
Since then we have won roughly every Seven years and we had the two longest economic expansion in history since 1990 alone.
And so you get the fat I think is a huge reason for this is they effectively acted as lender of Last Resort for the banking system.
So we don’t have like runs on the bank.
So in 2008 that could have turned into I think that was closer to going into depression and even the corona crisis because the financial system was was teetering on the brink and the FED stepped in and said, we’re going to back all these credits.
All these people who can’t pay the debts that they took out, we’re going to back them up.
We’re going to make sure the credit system continues to flow so people can borrow money.
And the economy can continue to chug along and the FED really has this dual mandate and is two things.
One is they want employment to be strong and to isn’t price stability.
So you can say in this last 18 months or so.
They’ve done a really good job in one of those dual mandates unemployment, rate has gone from 14.7% 23.9 percent in 21 months and then not so great on the price stability because prices are all over the place and they’re going higher.
The problem is their instruments.
For this stuff are pretty blunt.
Like they control short-term interest rates and they can buy bonds.
Owns, which is what being do.
It kind of mess with the credit markets and change the rate that people to borrow it and they can do this by by basically the push of a button.
The problem is it’s not like the FED can send out money to people or take it back from them.
The FED is effectively we’re borrowing money from ourselves when the FED creates a bond right there.
There are borrowing from the treasurer of the treasures borrow from the FED.
It’s just money coming out of thin air that really effectively just changes in interest rates.
It’s the government as Michael mentioned through fiscal policy is the way to get money to household.
So it’s not the feta with people.
The FED is printing money.
They’re not really printing money by giving it to households.
That’s why we didn’t see any inflation coming out of 08, because the Fed was doing things in the banking system.
Not the real economy by giving people money.
So, the FED controls interest rates.
So by raising interest rates affect can impact consumers because maybe mortgage rates go up, maybe credit card rates, go up, and they go up.
So they can have an impact there, but they’re not effectively changing like the the money supply that people see in their bank account in their checking account.
They’re just, they’re just playing with interest rates.
And so, unfortunately, yeah, raising interest rates could help things now, but the FED is not going to be able to help the supply chain.
Unless they just completely slow, demand.
They can’t make the supply chain stuff.
Any better just by raising or lowering interest rates.
Fantastic summary, fantastic history.
So Federal Reserve basically the king of monetary policy.
They’ve got a handful of tools.
They can change interest rates.
Number two, they can buy bonds.
You can buy assets and through that process sort of create money in the system by Buying the asset and then giving a bank money that is essentially coated up printed up.
So to speak the number three, you suggested this but I just want to put a point on it.
The Federal Reserve has a tool called talking.
The Federal Reserve can say we are never going to raise interest rates ever again, like Jerome Powell has the ability the chief the FED has he lived to say this and that is going to have an effect.
It’s going to make people think that inflation is going to be.
Sorry that interest rates are going to be low.
Forever and they’re going to change the way they, you know, go about getting loans or buying houses.
On the other hand.
Jerome Powell can say I am going to raise inch or I am interested in raising interest rates 57 times in 2022, and that’s going to have a very big psychological effect on people who are interested in.
Let’s say, buying a house if you want to buy a house next year, if you’re looking for a house right now, she’s we’re in 2022.
If you’re interested in buying a house this year, and the Federal Reserve is like Going to raise interest rates several dozen times in the next 12 months.
You’re like, holy crap.
I need to buy this house now, lock in my interest rate because it’s going to go from like three to ten percent in the next 12 months.
So I just want to be clear that just by talking, just by talking the Federal Reserve can wield power.
Michael speaking of the power that the Federal Reserve wields.
What is the Fed saying it’s going to do in the next 12 months right now?
So for the four, The audience listening that doesn’t know, Jerome Powell.
He is the head of the Federal Reserve.
He sort of think of him like like David Stern, or for the MBA, or Adam Silver for the MBA in terms of, in terms of the power that he holds.
So what is the Fed saying?
They’re going to do?
What is the market think they’re going to do and what are they doing today?
Today, they are still in crisis mode.
If you knew nothing and you just saw what the Fed was doing.
We have interest rates at zero, right?
So money is free.
We are still pumping money or liquidity into the system.
They are All, even after reducing their purchases, they are still buying 40 billion dollars a month of treasuries.
And again, defense point.
This is a banking thing.
It’s left pocket, right pocket, but it’s liquidity and it certainly has a big impact on asset prices and they’re still buying 20 billion dollars of month of mortgage-backed securities.
Does the housing market really need accommodative policies when real rates are - so all these sort of things.
I think a lot of people take issue with they think that the FED is increasing and Um, inequality, or wealth inequality, because all the rich people, hold all the assets, which are certainly part of it.
So I think current monetary policy and it’s easy to be an armchair quarterback.
I think that I don’t think they have bad intentions here.
I think that, that, that current policy is inappropriate given where we are in the recovery.
If so, that’s where we are, where we are, and where we were.
So, what do you tip the next?
Yeah, if current policy is inappropriate, Michael.
What is appropriate?
I mean, tell me you, you, drum calls, you this afternoon.
What should I do?
Walk me through it?
Like in as clear as possible language?
Like, I don’t do.
Don’t go all the way into nerdery but like you can go tiptoes little bit into nerdery.
What should the Federal Reserve do right now?
I think we should slow down and you could say even stop injecting liquidity into the system.
Stop buying 40 billion dollars worth of treasuries a month.
That’s number one.
Let’s begin to normalize interest rates.
Let’s stop acting as if we are in an economic crisis today.
And what I say normalize.
Stop with the free money.
I don’t think we need to jack up rates to kill demand.
I don’t think that Amanda is so hot that we need to stop it.
I think demand is a good thing.
We’ve had pretty subpar nominal GDP growth for the last decade.
There’s nothing wrong with wanting a little bit hot.
And having four, five, six, seven percent GDP growth, but I think that we just need to get off of the crisis levels that were at and just start to get back to normal and just just before I get to Ben connect the dots.
A little bit.
If the FED stops buying treasuries, If the Fed raises interest rates a little bit.
What’s the next thing that will happen?
What’s the next Domino?
That falls based on that decision?
And how does it trickle out into the broader economy?
Because I think one thing that is confusing, about the Federal Reserve for a lot of people is that like average people have no direct relationship to the Federal Reserve, right?
The Federal Reserve is not printing money and then dropping it out of the helicopter and the dollar bill floating.
Into my pocket, the Federal Reserve is changing interest rates.
In orchestrating monetary policy.
In a way that through the falling of interconnected dominoes cashes out in economic conditions, labor conditions, wage growth.
So from a domino falling standpoint, what happens after Jerome, Powell does what you’re asking him to do.
Everything is based on interest rates.
It’s the lifeblood of the economy.
It’s the cost of money.
It is integral to our lives.
If nobody directly interacts with the FED on a daily basis, so, for example, everything is based off of what is the overnight rate that the FED is conducted between itself and the banks that it’s that it’s lending to in borrowing from.
So if there’s a spread between mortgage rates and overnight rates, if that’s at 0, that’s going to keep mortgage rates, pretty low.
If those rates start to creep up, the cost of money is going to start to increase.
So that is going to impact the real economy.
Now it also So has a big impact on the stock market potentially, then fetch Airdrome.
Powell had a really interesting statement.
I think this was earlier today on Thursday or might have been late Wednesday.
He said, quote to get the very strong labor market, we want with high participation.
It is going to take a long expansion and to get along expansion.
We are going to need price stability.
Ben, you seem to speak a bit of fed.
He’s, you are fluent in.
How early is, what is Jerome Powell saying here?
What is he saying?
Do you think about to get along expansion?
We’re going to need price stability.
He’s basically saying we have the teeter-totter, I said already, they had their dual mandate.
Well, in the employment front, the inflation is much higher.
So they need to figure out how to, like, have that teeter-totter come back into balance a little bit more.
And so, I think he’s saying, we’re going to have to do something to try to rein in inflation, and if that means, raising interest rates to 1 or 2%, we’re going to have to do that.
Even if that means the stock.
It goes down and maybe housing prices slow a little bit and mortgage rates come up.
He’s saying we’re gonna have to take some of that medicine now so we can continue to have this and I don’t have I don’t want to have to go and create a recession, but I want to maybe things just take a breather for a little bit.
Things have been so hot and heavy for 18 months or whatever that things have been going.
Well, housing prices are up. 20% in the stock market, is up a hundred percent off the bottom, like maybe we can slow down a little bit of that stuff.
And if I raise rates, we stop, our bond purchases and we have to take a pause.
I think that’s what he’s saying.
If we can try to rein in inflation a little bit then, Maybe we can balance it out a little more and not cause a recession that people get out of their jobs again and have it on a plumber.
It go back up.
But I think he’s trying to thread the needle here between having people go back to work and having wages rise with, also like bringing price control back into place, which we haven’t had for a while.
Last question guys, inflation 2022.
I’m not going to ask you to make any predictions because I think as we’ve established the any effort to make a strong and clear predictions about inflation is an exercise in futility.
But give me a framework that you have something to look out for in the next month or two about the direction of inflation for 2022.
Because honestly, you know, obviously this matter should people’s lives.
It matters for businesses that matters for families.
It matters a lot for politics.
If inflation is seven percent in October of 2022.
Democrats are going to get smashed like Republicans are going to run up the largest midterm election win, maybe in modern history.
I guess that’s just wrong prediction.
So give me some give me a framework for how to navigate the data of the next few months.
What are you looking for?
And Michael will start with you.
I think the most outrageous outlier that we’re seeing is used cars and trucks and I’m going to use that as my barometer for some semblance of returning to normalcy.
So if we continue to see the rates that were increasing and I really think that’s unlikely.
I’m going to, I’m going to start to get Very nervous.
I don’t know if that’s the right gauge, but that’s what I’m going to be looking at.
And what you looking at.
I do think you want to try not to use too much econ, speak here.
But like the second derivative is basically.
Yes, inflation is still accelerating, but is it accelerating at a lower level?
So I think we actually finally saw that this month where it month-over-month inflation was point six percent in November, but in December was point five percent, so it’s still going up but it’s doing so at a lower rate.
So I think if we can see that acceleration probably still happen at least for the first five or six months a year.
Didn’t like inflation is probably going to remain high because we’re pulling off these low base rates, but I think if we can see that rate of change, start to slow and not go up as much as it has in the past.
I think that is a potential light at the end of the tunnel.
Where were finally seeing it.
He’s a little bit.
Can I just make one more comment?
I think is very important.
Actually, we’re talking about, were talking about what happened as a result of a Confluence of events of government, intervention fiscal, monetary covid, the whole deal.
I think it’s a mirror.
Urkel that we’re talking about an overheating economy given where we were just two years ago.
And this is so much better than the alternative.
And I’m not saying that everybody did everything perfectly obviously, but this is so much better than the alternative of literally a global depression if we did nothing and that’s what would have happened.
So I’d much rather face these issues of inflation and Rising prices and Rising wages than the alternative and that he said that because that’s right when I land, you know, I don’t want to carry water for the administration here.
I don’t want to pretend that inflation is no big deal.
It’s a big deal that inflation is rising faster than wages.
That is a big deal.
It means that in real terms.
A lot of households are getting or feeling poorer depending on how they spend their money.
Like households that got a one-off raise got that annual raise six, seven months ago and our live in the Michael bat, make dietary on buying a lot of bacon and pork and veal, are absolutely feeling poorer than they did the month before they got their wage.
That is a reason to be frustrated with the federal government.
Its Easily frustrated with Biden.
And it’s raised me frustrated, just period at the same time.
We have to think about the parallel universe in which we did not pass these stimulus bills in which we did not send checks to Americans in which the Federal Reserve and Jerome.
Powell were not accommodative in their monetary policy and basically let the economy bottomed out.
Having unemployment under 4% given, where we were 18 months ago, or 20 months ago is is a It’s a minor miracle.
And so we are seeing historic scary inflation in the context of that minor miracle.
And we don’t have to say that it’s all good or all bad.
We can just say there’s good stuff and bad stuff and there’s a parallel universe that we could be living in in which it’s all bad.
Thank you so, so much for talking to me again.
Walk me through this complex stuff.
I really appreciate it and I’ll have you back on very, very soon.
I said thanks Doc just a lot of fun.
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