The AI Doomsday Machine

We're all doomed. AI is gonna take everybody's job. Thank goodness we have this podcast. Because you don't want to listen to AI versions of us, discussing the business cycle, base cases, and debating whether velocity matters. Maybe we'll do some of that today. We would have to put out three episodes a week every week to make a living from it though, which of course is what everyone wants. More podcasts. Our research isn't going anywhere.

But there have been fears fermenting within markets about AI taking even more white collar jobs, and business models of entire industries collapsing. We've also had a slightly different type of taco after the Supreme Court ruled against the president this week. So, to frame today's chat, we're asking Does every AI scenario now lead to disaster? Number two, can we stop worrying about tariffs after the Supreme Court ruling?

And number three, is the global monetary cycle now turning? AI is the gift that keeps on giving, not just in terms of productivity enhancing updates, but also market chatter around implications. Which often seem to be cataclysmic, and then suddenly kinda fine. Dario, is it all gonna be okay? Or are we set for disaster, regardless of what AI scenario we get? So every scenario leads to disaster, huh? Sorry. We're dealing up. We are deemed.

I think like I mean there's been so there's been one sort of risk that people have been in been obsessed with since last summer. Which was basically why on earth are these companies spending so much? And the latest Capex plans were what, six hundred billion for this year, which seems a lot.

And I think there's been this worry that, you know, can they actually generate any kind of return on this? Is this just is this Capex just being wasted? And if you look at the fund manager surveys, you know, for the first time in decades, you've got investors worrying about overinvestment. So that was the the one risk was of sort of well maybe AI is not going to work and all this capex will be wasted.

And that's still there. You know, I think you still hear investors worrying about this. The stocks of these companies are still not really going anywhere. And if they are going anywhere, it's down. Yeah. So there is still this worry about the the sort of disappearing free cash flow that these companies are engaged in. But now you've also got this other layer of worry, which is, well, we're starting to price in the disruption.

And so you're seeing this sort of rolling panics through a whole series of industries. You know, it started in software, got into logistics, it's been moving through various sectors of the stock market on the basis that, you know, suddenly These revenues are going to go to zero, all of these moats will disappear, and we're going to get massive unemployment and job losses in these sectors. And I think

You know, clearly we're in a very uncertain moment. I think, you know, there's there's a huge amount of uncertainty about all of this stuff. I get the sense that there has been a sort of breakthrough in AI late last year in this sort of agenda. um AI. That's what's driving all of this.

It's really difficult to figure out how much of an advancement this has really been because there's just huge amounts of sort of AI boosterism. So if you look at any of this stuff on Twitter. I mean you basically have a an algorithm that seems to be sort of pushing all of this AI hype, you know, to extreme levels. In a in a you don't see this on other sort of social media sites. I think clearly these tech companies have a vested interest in actually pushing these narratives.

Um, in terms of actual data, you know, I think You know, we are seeing, you know, people adopt these technologies in their work and we know that they can generate sort of talks, task efficiency gains. We've known that for a while. I'm not sure about this sudden, it's alive. thesis that is out there. You know, oh my God, suddenly it's come alive. It's the sort of Frankenstein. I I think that stuff is being overhyped.

I'm still not sure how reliable these models are. So the latest data I've seen was for December, which people are telling me was such a long time ago it's not relevant anymore. But December, I mean, we're now in sort of February. Um, and the reliability of these models was still at like eighty-five percent, which isn't great if you think you spent a trillion in extra compute compute.

um over the last, you know, year and it's only really gone up, you know, ten percentage points. I mean, that's not a massive return on the investment. So I I'm not sure. I'm I'm, you know, I'm still a little bit skeptical about some of this stuff. What do we know? I mean I got, you know, really told off on Twitter yesterday for actually looking through the facts of what we know about what impact AI has had so far on the economy, which is negligible. Like despite all of the hype.

Well, I'm sorry, but you know, I think it's good as at least as a starting point, let's look at what impact this technology has had so far. And at the moment, it's really not that great. Um, there is no evidence that AI is causing widespread job losses. You know, we've been through all of the sort of micro data on this. We've looked at what's happening with graduates.

Um, that's the sort of, you know, perception that graduate unemployment is going through the roof. It's just not true. You know, that there's no discernible impact of AI on employment. There's no discernible impact of AI on productivity in the US. I know, you know, the recent years' productivity numbers have been really good, but this was a trend that started before the pandemic, you know, in the late 2010s.

you could see that trend productivity growth in the US was starting to pick up. That was something that we were talking about at the time. It was one of the reasons that we were quite bullish medium term. And if anything, we're just back on that trend. You know, that the disruptions of the pandemic have sort of faded away. I think companies have been reluctant to hire because of all the uncertainties associated with this administration.

And they've pushed these efficiency gains, but basically they're back on trend. So all you're really left with in the actual data is the capet. And as I keep saying, you know, for a a year now the the the the the impact that the capex is having on the US economy is being overstated. You know, it's not true that all of US growth is coming from AI CapEx or that the US economy would be in recession without this. Okay, so that's a starting point, right? So there's lots of myths.

In terms of actual facts, we're not seeing a big impact from this technology so far. It could come, right? And the sort of doomsday scenario, the Citrini thing, which is now everywhere, you know, I don't know how many billions of hits that's had, but it's huge. Um and you've even got Fed officials talking about it as well, which is new. I've never heard Fed officials talk about something they saw on X. Yeah, yeah, exactly. Um

It's new. So they have this sort of doomsday scenario where what happens is these companies start automating jobs. unemployment starts to go up, um, that hits corporate revenues because there's less spending in the economy and it needs to leads to more rounds of redundancies and more automation and you get this sort of spiraling effect.

And then that has knock-on effects to areas like, you know, private equity. And there's there's obviously a sort of degree of post-traumatic stress disorder from the GFC, because it's that sort of thinking is deeply embedded in this sort of systemic risk stuff. I'll just say that that's not like the history of technological change.

Like typically when you get these sorts of technologies, what happens is unemployment goes down and wages go up, which is the opposite of what this this paper is saying. You know, we've got We've had like 150 years of technological progress and the unemployment rate is completely untrended. So technological unemployment is a sort of myth. And the reason for that is that output and demand is not fixed in the way that this sort of Citrini paper is assuming.

What happens is, you know, people will become more productive in their jobs, output will go up and demand will go up. It's it's not this sort of zero sum, you know, we sort of spiral into despair. And I think ultimately what it comes down to is whether you think this technology is Labour augmenting or labour replacing. And I think it's going to be labour augmenting. I think you're going to find that you can use this stuff and all of the tasks that you're doing you become more efficient at.

Your output will go up, your company will make more money out of that, and your wages will go up. That's the historical template for how this stuff. um works. I just don't think there's any reason to think this is going to be completely different. And even if you get into the sort of Artificial general intelligence, which we're not at and we may not get to quickly, despite all of the hype that's out there.

Even if the computer is better at everything, it is still going to be true that a computer plus the human is going to be more productive than just the computer on its own. You know, we're still going to need the sort of human overlay. And so as long as you've got that complementar complementarity, I don't think we're gonna see all of these sort of doomy, doomsday scenarios play out.

So just just unpack that little bit more in terms of output going up and demand going. Uh in in what sen so if you're assuming that there's like a fixed amount of demand in the economy, which is what this Litrini thing is doing, yeah. Um, then you know you you You start to destroy jobs and then demand goes down and it becomes this sort of spiraling effect.

What I'm argu what I'm arguing is that if everyone is using this technology and they're more productive, you can produce more. So output is going to go up and we're going to have more demand, not less. That's been the sort of historical template. And then if your productivity's going up, usually your wages go up too. Can you give some historical can you give some historical examples? If you take our business.

Which is of course, you know, we'll we'll do very well out of all of this. Of course. We will just produce a lot more, not just in terms of quantity, but in terms of of quality. And this is okay, I'll broaden it out from just our business, but in the in the areas where it is Labor augmenting. you're gonna get a lot more efficiency. Ac mae hynny'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd. If they can sell that.

then there will get you know, there there will be a better stream of revenue and that will feed back into wage growth. So it won't necessarily then mean that there's there's bigger or or lower profits. That it's very complex to work out what the the what the effect on on And then if you think of that there's there's going to be more production in the economy.

So then then you look to the demand side and that production actually equals income in the economy. So somewhere someone is being paid for that income and they're gonna spend that. Depending on you know, depending on what where you are in the cycle, depending on that where the savings rate is.

you're gonna th those people are gonna spend that. And just because we're not imaginative enough to know exactly what they're gonna spend it on, doesn't mean to say that they're just gonna that money is just gonna disappear. If I receive if I receive compensation for the for the extra production that I've achieved because of the the use of this technology that's made me way more efficient.

I'm then gonna spend that in the economy on whatever I wanna spend that on. Maybe it's like wood to make a fort for my kids in the back garden and there's like lump more money going into the lumber sector. There's there's you know, it's it's human desire.

So in terms of then as you just touched on, Freya, so the consumer say consumer goods become a much higher quality because of what's, I don't know, designed or manufactured or produced is of a much higher quality. So therefore the consumer to Like getting a much better product so their demand goes up. Can we just rewind? So if Freya got more money she would buy wood. Is that the one?

That's that's basically what I spend my disposable income on. The thoughts coming along really well actually. That's capitalism, Dario. You can do what you like with your money. In in this geo this world of sort of, you know stre uh d deterioration of uh of of geopolitics as well. We might actually need that fort. The only problem has been that when I when I tried to calculate the amount of concrete that I needed for the for the foundations of the fort.

Uh chat GPT got me to order probably enough to build a whole entire bunker. So that part of it didn't work out so well, but that's the only snafu I've ever had with uh with using chat g with that with using a an L L M. But to to to to be more serious for a second here, it it reading that blog What I found difficult about it was

the idea that taking frictions out of the economy was naturally going to make things worse. And it's like, wha w how could that possibly be the case? We're making things more efficient. If you think of a s another sort of specific example where they're talking about um the the the electronic payments. Um when when uh the B and digital currencies, when when um when the BIS introduced

its uh platform, um uh Pro Project Agora. The the rationale behind that was that this would reduce transaction cost And therefore more activity will happen in the economy. If you think of it another kind of specific example, if you're able to charge interest according to proximity of the of the ship to the shore um using GPS data, which you can do with all with um with these which you can do with these smart contracts.

then uh then there will be less interest that's paid by that specific um company that is is undertaking the shipping. But that doesn't mean to say that that just dissolves into thin air. That company then has more resources. And they will be able to either pay their shareholders more or pay their employees more. And then that money still exists in the economy and they will spend it on something.

So reduction of friction in the economy is a good thing. It means that there's gonna be more kind of resources to use and activity will take place that would not have taken place otherwise. But if they pay their employees more, I can see why that massively helps the economy. But if they just pay their shareholders way more, that obviously it does help a bit. Yes. Shareholders pay buy stuff as well. I mean there's a different marginal propensity to to consume that.

Rydyn ni'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd i'n mynd

um with regards to you know, hum humans are just lazy and so they're paying these rents for for frictions. Well fine, now those humans are gonna have more disposable income. It let's say that collapses the the the the profits of um of DoorDash, um then then that means that the consumer is gonna have more disposable income to spend on the wood to build the fort in the back garden or whatever normal people do with their disposable income.

All right. Dario. I've just got this image of Freya sitting in a wooden fort in a garden. Like It's not finished yet. It'd be a bit dangerous if I sat on it at the moment actually. No, I mean no, as I said, I think the history of this is clear and and no economists get sort of cancelled from pointing this out over and over again. But, you know, when you look at what's happened with technological change in the past, it hasn't caused mass unemployment. There's literally no examples of that.

Um even reallocation of capital, there's gonna be like rotation and disruption. That I'm not sure in what world that's a bad thing. Maybe I'm being too Austrian about it, but just because there's a rotation of capital from one place where technology has made something obsolete to another place, that's not necessarily a bad thing for the macroeconomy. Surely that's a that's a good thing for the for the macroeconomy. Just just on the

On the sort of so so Darry raised sort of three different sort of um areas where this is uh this is these narratives are sort of building. There's there's the the e massive amounts of of CapEx and how shareholders are are understanding that. There's the sort of uh the doomsday scenario of everyone losing their jobs and then there's uh it what's the actual what's the actual data showing at this moment in time. Just on that on that first piece.

Um, what we've been trying to figure out is what's what's the trigger for this to become more serious.'Cause at the moment there's there's already been a rotation out of these these big tech companies, which is is something that we sort of we've been calling a shift towards phase two. Um, phase two being let's actually find who are the winners and the losers, but it's winners and losers from that. Um and and

the the sort of diffusion of these technologies out into the into the economy and who's gonna capture the pro productivity and who's gonna capture the profits. There already has been a rotation that we can see in in the stock market. Um, what what I'd be worried about going to our kind of macro story is that as the year progresses and as we go towards next year, Okay.

we we are expecting not the the sort of the mass unemployment and the the disinflationary aspects of of AI to win out, but actually the first phase um of of the impact of AI on the macro economy is the build out phase. So if anything, it's inflationary. And that's happening at the same time as you've got all of these labour market d dislocations. at the same time as you've got these um this uh this this positive fiscal impulse, which we'll probably get onto when we talk about tariffs as well.

So it this is a more sort of inflationary environment with a labour market reacceleration than the sort of the doomsday scenario. And if you think about how that's gonna affect the bond market, particularly the long end of the curve if uh if the Fed is is you know, falling behind. Um then we get to a stage where where you know those the the base off of which the return of it on investment is is calculated.

is gonna be a lot more exacting. And that could start to sort of bring out a bit more of these kind of Am I allowed to say cockroaches? I mean everyone said cockroaches. Fine. I'm not gonna get cancelled for that. Cockroaches. That honestly, the faces that Dario makes at me when I'm talking, you have to see they're so distracting. Disrespectful. Now I'm imagining you're in a wooden fort surrounded by cockroaches. I'm sorry. Right, right, right, right.

Let we're moving on. We're moving on about tari we're moving on to tariff. Right, can we Dario, can we stop worrying about these these tariffs now? We've had another another target, slightly differently different taro, but tarko nonetheless. after Supreme Court rulings. Can we stop worrying? I mean I have stopped worrying about tariffs. I've stopped talking about tariffs. I've find the whole thing incredibly tedious.

I mean, so basically the emergency tariffs were found illegal. Um, the existing sector level tariffs are still in place. So you don't have the sort of broad country tariffs anymore, you have the sector one. You've then added this extra ten percent tariff under this obscure nineteen seventy-four trade app, which apparently was designed for when the US had a fixed exchange rate and it's for dealing with sort of

balance of payments problems. But anyway, we always find it they always find some little law somewhere. They always do it. So the legality of that is a little bit questionable as well. That might get that might get questioned in the end. Um, where does that leave us? Well, I think that the overall government revenue is going to go down this year from these tariffs. Um

It's kinda kinda funny because whenever you say how much is something going to affect anything, the answer is always naught point three percentage points of GDP. And that's exactly the number that I've seen being put around for the impact of these tariff changes that government revenue is gonna go down by point three percentage points of GDP. Um so you can't make it up, or you can make it up. Yeah, you can't. Um that's on top of the fact that um

they were already introducing some tariff relief, which was about two percentage points of GDP. So suddenly you're looking at a point five percentage points of GDP tax cut this year in terms of government revenue. So on top of you know, fiscal policy that was already turning more expansionary. You're now looking at a smaller drag from tariffs. I think you've also got um

Yeah, we're gonna have less executive power. I think that's really what this was about. I mean, the the court was basically saying you can't just wake up in the morning and decide to put a four hundred percent tariff on some country now. And yeah and not consult Congress and yeah. Rydyn ni'n ysgrifennu. Rydyn ni'n ysgrifennu. Rydyn ni'n ysgrifennu. Rydyn ni'n ysgrifennu. Rydyn ni'n ysgrifennu. Rydyn ni'n ysgrifennu.

And you're opening yourself up to legal challenges. So I think some of this tariff uncertainty starts to go away. And I think that's going to be helpful because I think that the tariff uncertainty Was the main reason that companies weren't hiring. You know, that the last year, despite all this AI nonsense, what was really happening.

is that you were creating massive amounts of policy uncertainty and you were squeezing companies' margins by putting these tariffs on, particularly small and medium sized companies. And that was the reason that they were reluctant to hire. And that was the reason they were pushing these efficiency gains on their workers. And so um You know, those sorts of effects start to fade.

I don't think any company is going to be cutting prices. You know, the idea that all look they've reversed the tariffs or the tariffs are smaller. So now we're going to get this deflationary force. I'm really sorry to tell you, but that's not how this works. You know, companies put prices up. You've got they do not cut prices. That just never happens. And so, you know, companies that have already passed on these tariffs will just keep their prices where they are and

you know, and enjoy the sort of margin boost. Um companies that have had their margins squeezed because they couldn't pass on the tariffs will now be sort of made whole. And so, you know, we're not going to get any deflation from this. and actually I think people are just assuming that US inflation is going to come down because of goods inflation and they're looking at the components of US inflation and saying, oh look, it was all goods inflation. That's all tariffs.

Um, you know, as the tariffs level off or come down or whatever, that effect is gonna unwind and inflation will go back to target. I think that's wrong because actually what's happened here is that the US has had this bout of goods inflation while the rest of the world was in a sort of manufacturing recession. And what we're seeing is global manufacturing demand is beginning to pick up. You know, it's picking up in Europe. It's picking up in Asia.

And if you get a global manufacturing revival, I think you're going to see import prices in the US start to pick up too. And so I wouldn't bank on the idea that goods inflation is going to become a disinflationary force that's going to push inflation back down. I think that could be quite a dangerous assumption here, regardless of what happens with the tariff.

Yeah. I think for for a question for you then, I mean we can you can unpack the tariff uh uh Supreme Court ruling as well, but does this change our view at all around Europe, Japan and EM outperforming US equities this year or or Um, i in a sense the fiscal side of it means that there's

potentially a stronger demand impulse coming into into the US economy. Um but the the That certainly from a currency perspective is not as um pro dollar as as it historically would have been'cause the Fed isn't sort of supporting against the inflationary, sort of the twelve month outlook inflationary impact of that. Um

And then, you know, it's it's it's at the margin also supportive for the rest of the world. Um so again it puts us in that sort of to the extent that there's any part of the dollar smile that still works, it's the sort of the belly of the curve. um where it's a global a global sort of demand rebuild story. So you could there's there's some debate as to um how big is the US fiscal impulse this year. And we're sort of at the upper end of that, even before these these tariffs.

And and so you could start to get some sort of upside economic surprises, uh, if if we're right on that ta on that um fiscal impulse. peace with regards to to growth. So maybe that would be sort of beneficial to to to US equities. But we're we're seeing strong kind of tailwinds to

to the rest of the world as well. Um, and I think just to to the point on on, you know, does this mean we don't have to think about tariffs anymore, I think I I mean we still have to sort of think about them but more so as a sort of asymmetric risk. So there's less risk now that you're gonna get these big spikes in tariffs and that's gonna derail the economy and and prevent people from prevent firms from hiring.

There's there's more risk actually that we see further reductions in the amount that they're able to tariff because as Dario said, there's There is some legal uncertainty or that there is legal uncertainty around the section one two two tariff. um, which are only anyway temporary tariffs, so they only last for a hundred and fifty days. So you could even see if those come under legal challenge, you could see refunds of those tariffs as well.

and then at the end of the one hundred and fifty days it's then sort of beholden on on the administration to Find other ways of imposing these tariffs. So you've got your sort of section 232 and your section three oh one, and these are sort of bureaucratic processes which if if that uh is successful, then there's a much stronger statutory basis for tariff

going forwards and that would be the point where you start to sort of um settle down on what is actually going to be the the tariff rate. But as things stand, we think there is already a a positive fiscal impulse coming into the economy this year. it's it's just been made bigger by the refunds, um by by sorry, the the lowering of the actual effective tariff rate um as AIPA comes out of the system.

In addition to that, you've got the actual refunds which won't hit the economy until, you know, probably next year, uh maybe sort of even further into next year or or beyond. uh because that's a long kind of legal process. But uh the market economy being the market economy, there is uh already sort of trading apparently in these in the in these tax refunds.

Um to the extent that that money is probably gonna get pulled into this year, which is not necessarily sort of greater money in the aggregate coming into the economy, but it's it's sort of

a form of borrowing, if you like, which transfers money to people that obviously want to spend it, firms that want to spend it at this at this moment in time. So that's a sort of an additional to uh demand this year and even if you don't have that, the anticipation of those refunds coming into the economy is is a further sort of ba boost to to demand this year. And that plays into our inflation here. And the sort of the constraint on the supply side at this

stage is the labour market. It's not this sort of AI efficiency is immediately going to is immediately going to solve all the problems of the supply side. We do we do see in the the sort of Google Trends data, um in the GitHub downloads, that there is a gradual shift towards actual deployment.

um rather than just sort of investigation. Um and that suggests maybe we're s we're coming towards a stage where you start to get some diffusion of these technologies into genuine productivity growth as opposed to what we've seen so far, which is just

a sort of confluence of AI capex and and build out with the uncertainty in the rest of the economy which has sort of temporarily boosted the the productivity growth. Yeah. I mean the other thing that I would I I would have noticed um is that Trump sort of seems to be less bellicose about Getting his way with tariffs now. I mean, he sort of he hasn't come out in a sort of determined way to reverse this entirely and get exactly what he wants. So it does feel like

he's slightly less hellbent on on getting these. Yeah, I think I mean I think this is a a a midterms year and there's an affordability crisis. And um, you know, Grace, uh our the our uh colleague that covers this has done very well in in sort of getting ahead of that and recognizing that that it's not so he has sort of two conflicting aims. One is to sort of like

put these tariffs on and look like he's being tough on on the rest of the world. And the other is to is to avoid a spike in inflation. Ironically, reducing the tariffs this year is yes math is just mechanistically less inflationary. But in terms of the overall impact, macroeconomic impact that has over a sort of a two year time horizon, that means more demand coming into the economy through fiscal policy, which in my book is inflation.

Okay, we've got to get on to question three. Um, Dario, is the global monetary cycle now turning? I think so. I think for the last two years we've been in this sort of normalization phase that central banks have been calling out. um, they came up with these sort of fantasy estimates of our star, the whole world believed them, and then they slowly sort of moved interest rates back towards neutral.

The most surprising thing is that that's just completely anchored bond markets. I mean, if you look at um bond market pricing. they're basically pricing neutral interest rates everywhere forever. And it's surprising because we know that estimates of neutral are completely useless. Like there's there's a joke in the FT that it was something about if you order a pizza.

at six pm on a Friday and the pizza company tells you it'll be sometime before ten PM. There's quite a big confidence interval there. But actually with these models, it's more like it will arrive sometime between now and next Wednesday. It's like the confidence intervals are so big. And so it's quite remarkable that um these have completely anchored bond markets in the way that they have, given that they're so unreliable.

And I think what's happening in Australia shows you where this can go wrong. Because, you know, it wasn't long ago um the the vice chair of the Reserve Bank of Australia came out with this three percent neutral estimate. They got nowhere near three percent and now, you know, they started raising interest rates again. They raised interest rates once in February. Um, markets talking about two or three more hikes this year.

Um, you know, that was not what's supposed to happen. Um, you know, the housing market started to rebound, core inflation started to rebound. They just got their neutral estimate wrong. You know, that can happen. Um, so in terms of where this monetary cycle goes from here. Um, I think, you know, I'm not seeing a lot of potential downsize surprises for inflation. So, you know, we don't really know where neutral estimate is.

central banks will have to figure it out based on, you know, either what is happening to actual inflation numbers or what is happening to the labour market. And in terms of the inflation data, you know, I can't see a lot of downside. You know, we talked about the US and goods inflation. I think it's more likely that goods inflation is going to keep going'cause of the global environment.

Everyone has been looking at the sort of real time indicators of inflation. So there's this company, Trueflation. I don't know if you've heard of them but they produce this sort of big data on inflation and they've been putting this chart out there showing you that inflation in the US has completely collapsed over the past sort of month and a half.

and sort of predicting that that's what's going to happen to the official data. And I've had people send me this chart saying, oh, look, look at the Triflation one, look at the official numbers. They track each other over time. So surely the official number is about to collapse. The problem with that is that what Trueflation don't tell you is they revise their data to make it look closer to the official numbers.

So in real time, I I honestly can't tell you like what to do with that number. You know, i that might be the true inflation number, whatever. What does a true inflation number even mean? But you know, what we want to do is work out what the official numbers are going to show for inflation, because that's what's going to drive policy. So I'm not convinced we're going to see this big drop. The only area where metrics like Trueflation had a a point.

was that we knew that the housing component of inflation was massively lagged by about twelve, eighteen months. We knew that sort of real time estimates of rents in the US had you know were deflating quite fast. But I think the scope for that to reduce inflation from here is basically gone. I mean the lag has basically played out. So I'm not seeing a lot of downside to US housing or shelter costs.

As I said, I don't think we're going to get much downside to goods inflation. And then the bit that everyone is forgetting is that super core inflation, which is services X housing, is still running much too hot. And it has been running hot. And that's a global trend. I mean, that is literally happening everywhere in the developed world, that the super core measure is still too hot.

It's not sort of so hot that it's threatening to put inflation up four or five percent, but it's keeping inflation, you know, in this sort of two percent range. And that's, you know, in an environment where the the global economy's been quite weak. So if you've got this reacceleration, I think that's going to become more of an issue.

Um, I did this note a few weeks ago, sort of comparing the developed economies, you know, which one had the most inflation risk, which one was most likely to give you that sort of reverse course that the Bank of Australia had delivered. And I think it's the US just based on these sort of three metrics. So one is

How close is the economy to full employment? And the US is pretty much at full employment. How much policy stimulus is coming? Well, we've had a lot of interest rate cuts over the past two years. We've now got you know, potentially one percent in fiscal boost coming this year.

And on top of that, the third indicator was, you know, how tight has immigration policy become? Because the US isn't the only country that's that's tightened immigration policy. A lot of these developed economies are doing it because of the politics. And actually the US is just the the immigration policies are just much more stringent than what we're seeing in the rest of the world.

So I think if you do get that reacceleration in the labour market, I think that gives you much more chance of a policy pivot from the Fed than the other central banks. And so then you're left in this discussion of well, you know, Kevin Walsh has promised he's going to cut interest rates because of the AI productivity ferry.

Um I think what people forget about that is that, you know, Greenspan didn't use AI as a reason to cut interest rates. He used AI as a reason not to raise interest rates because in nineteen ninety six Um, a lot of his colleagues on the FMC were becoming quite hawkish. They were worried that the labor market was overheating. they wanted um to raise interest rates. And so Greenspan was sort of using this as an argument against the Hawks.

And I wonder if that's how this is gonna pan out. You know, instead of Walsh coming in and cutting interest rates aggressively. Maybe by then, you know, the labor market is reaccelerating, the hawks are becoming more hawkish, and it's becoming a sort of defensive play. You know, Walsh is having to defend against the prospect of rate hike. ac yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n mynd.

then that that to me raises the risk that they just fall behind the curve. You you could almost envisage a scenario where coming towards the end of the year. all of the the metrics that the Fed would sort of traditionally traditionally use to forecast inflation are looking warmer. So you've got sort of unemployment higher with regards to to uh sorry, vacancies higher with rego regards to unemployment.

and you've potentially got wage growth starting to to to bottom out, um, and you've got a very low NFP break even and uh the the the labour market is has has sort of reaccelerated. And that sort of that any more than one cut gets pushed further into into the future and Walsh is sort of like pushing against that. But then if you actually get inflation c picking up next year, in line with what those leading indicators would be saying, you could very easily see Walsh going from being

Trump's sort of man that is is trying to cut rates to Trump's the the pariah that has allowed inflation to sort of get a get away from uh from from the Fed. So

you can see that turning around very quickly. I think um we we are in an environment where an economy globally actually where the the natural rate of interest is higher and I use that in in sort of inverted commas because that whole you know d in addition to sort of being very difficult to actually understand in real time.

the the the natural rate of interest is probably endogenous to the policy environment, um especially given what's happening in terms of of private sector leverage. If you have an environment as we did in the twenty tens where you've got Economy, you've got uh fiscal austerity in at l at least in the first half of of that period, and you've got monetary policy that is

the the the cure all, um, so very accommodative monetary policy, and you've got a private sector that is deleveraging, you're gonna ha you're not gonna be able to sustain high sustain high levels of interest rate. Whereas now we've got pretty much the reverse of all of those things and so the economy is able to sustain higher levels of of uh of of interest rates. And I think we're sort of finding out where where that is.

And especially for the US with the the um the shifts in immigration policy, they're sort of at the forefront of the the the sort of rebuilding of inflation and sort of testing where the new secular trend in inflation is as well. Yeah. But um I I do say this always. If you look in the group description of this podcast

You'll see my email. Please do email me. If you're an institutional investor and you wanna have our get our research on a trial basis, uh please get in touch and we'll happily set you up. Thanks, Freya. Thanks, Dario. Thanks all for listening. Bye bye.