John Men. A few weeks ago, you and I had a really interesting conversation with an author, Peter Touchin, who took to us about elite overproduction and how that causes horrible instability in society. You've got too many over educated people the likes of you and me, and not enough high status jobs for us to have, and that causes
no end of upset. And in the past we talked about this in the UK, we've managed to avoid the social unrests and some other countries we've seen when they've overproduced their elease by sending our elites abroad to the empire and got rid of them. Off they go and they can't stay here and cause trouble now here we are today and we have a similar problem, according to touch where we are over producing a lot of our
elites and we have nowhere to export them to. But we got a really interesting email from one of our listeners. And listeners, by the way, we love getting emails from you. We want your input, we want your questions, We want to answer your questions and comment on your comments on our podcasts and in our writings, so keep sending them. In this one, this email is just that this time around.
We haven't exported our elites abroad. We've just exported them into the third sector, all right, So one of them. So what this listener, thank you, Andy says. He says, this is not just about the wealth pumped the ultra wealthy. It's about the flow of funds to quangos, to NGOs, to bureaucrats, the civil service, retirees, godblated pensions, charity bosses, special interest groups and you know, I quote bloody lawyers.
Agrease with Peter or in that Peter singleed it lawyers as well.
Yeah, these are all part of the modern elite, and many are also the counter elites. Think about the current COVID inquiry and all these groups headed by QC's vying to get their special interest groups across. Who funds all these groups? Ultimately, very few of them have a productive role in society exiitn't increase wealth or increase its productive capital, but they have a disproportionate voice in society and their burden falls on the everyday work, the entrepreneur and the grafter.
That's them, the modern elite. We've exported into the third sector, and they're acting as a drag on the rest of us on the entrepreneurs and the grafters. They have too much weight when it comes to policymaking and to voice got to get rid of them.
I think almostly. I think that's really perceptive. I mean, you have consistently made the point about gift aid and the fact that you can essentially, as a wealthy person, hypothe kate, you know, a chunk of your tax revenue to the charity of your choice, as opposed to paying into the things that we've all democratically agreed are the priorities of the country. And I think obviously it's just
an extension of this. It's a classic phenomenon that we've seen over the last kind of like ten to twenty years. I think, where if you hide behind the label charity, you can basically do what you want and you know, operate with a certain amount of a patness. And I do think that that whole sector kind of generally needs
to be more accountable. And I think they're getting ready a lot of the tax breaks and making them much clearer of which kind of charities and endures, et cetera, get government funding, which is tax payer money, and making them more accountable for that is actually important and like a major thing that needs to be tackled.
They all get tax payer money. There is no such thing as a charity that doesn't get tax payer money. Every single one is getting your money and my money. Toward that too much, you'll upset me. But that was in the newspaper this morning. A small charity being discussed, in fact, quite a big charity in the scheme of becuts so many a time, one hundred and thirty million pounds in it. I won't name it, you can go
look it up. But the key point is this charity is one hundred and thirty million in It gives away thirteen million a year, which means it's going to mind itself down anyway unless it's getting a lot of new contributions in. I don't know how these people figure the numbers out. That they have no advice anyway, be that is it me. I looked at this and I thought, well, this was interesting. I'm going to look up and see what the guy who distributes the thirteen million could a year,
because I wouldn't have any trouble doing that. By the way, what he gets paid, And the answer is that his total pay is one hundred and thirty grand and that includes and get this, John, get this, twenty thousand pounds a year in pension contributions.
Oh, I know, this is what we're talking about here now.
Anyway, moving on, moving on. We were talking about talking about these elites, and someone suggested to me that we have a look at the Hidalgos in Spain in the twelfth century, because there was a point when in someone who's better at twelfth century history can write in and tell us more detail on this, because I can't find any more detail on it. But the Dalgos were the lowest of the low when it came to the nobility.
But the nobility of all types didn't have to pay any taxes, so and the Hidalgos were a fertile lot. So gradually we got to the point where practically nobody who had any money was paying any taxes, and that led to all sorts of difficulty and upset and India's social unrest, until eventually the head algoes were forced to start paying taxes. And that was a rather interesting example. I thought of the over production of elite, because these
elites weren't necessarily over educated or anything like that. They're just looking for the status.
Anyway, associal Yeah, they kind oft bought them wrong with the Spanish elite. Yeah, we just producing too many of themselves.
That's interesting being an elite by luck, Yeah, which is what happens if you, you know, maybe you have a family charity, for example, a family foundation and you can all work for it. Kind of similar thing, right.
It is similar, I mean, but getting kind of dangerously close to the whole inheritance tax argiven as well.
But.
Make that a gift tax. I say, now that moves us on neatly, neatly, very neatly too. Today's elite, And we've talked about that today's e leader in terms of being the kind of people who have to find benefit pensions, who work in non productive industries, et cetera. But the other big signifier of being a member of the elite in the UK today is owning your home without a mortgage, right, and that's well over thirty percent of the population can kick back and not pay any attention to fast raising
mortgage rates and fast raising interest rates. They don't have to worry about this, and they even don't have to worry about inflation if they have one of those nice indus link defined benefit pensions. That's what I call elite.
Oh, I said, so I think andysixeen me you mentioned the gold plated coldplated pensions. But yes, I mean, I think the thing is the elite may have to they may have to worry attaining a little bit because it does look at it, if the ports of gold on which they are certain may not be as resilient, you may actually be able to go wrong with bricks and mortar. Yeah, you know.
You can't go wrong with bricks and mortar. You know where you are with bricks and motor John, you know where you are.
It's true, It's true. You do know where you are. It may not be where you want it to be, but you do know where you are. It's the latest the latest day of Rick's surveys, so the Royal Institution of Chartered Surveyors and the ages come out this morning as we're recording this, and with a kind of much much gloomier outlook and a major kind of sharp downturn compared to what has been going on in recent months.
So basically this is basically asking a load of state agents what they think is going to happen to the housing market, and in recent months while they were gloomy. Following the whole strum ash in October, with interest rates spiking, the kind of market started to recover and kind of February, mortgage rates started going down a bit and everyone started feeling more relaxed about the housing market again. But of course, exactly because what's happened is mortgage rates have gone back
up because it wasn't all liz Trust's fault. That was actually a fact that inflation was a problem. Interest rates did have to catch up. And so now that we're talking about mortgage rates averaged two year fire is now up to six point seven five percent, called the money facts,
Suddenly it's not looking so good again. And so the one that caught my eye is where the kind of stagents expect house prices to be three months from now, And they'd almost got back up to the zero line, because basically it's how positive or negative you are, so a number between you know, plus fifty or plus one hundred and negative one hundred, and he'd always got back up to zero, and the latest one went all the way back down from like negative three to negative forty six,
which is like a massive shift. And if you map that out, against what happens to nationwide house price growth. I want a chart and they'll be doing it in money distilled later on today. Then it's very clear that there's a very very strong correlation. So it basically says that, you know, if you thought the house price kind of correction was over, then you're wrong. It's we're going to see further house price falls this year. And that's just the nominal terms, let alone real terms.
Okay, how close are we going to get? Do you think to Nail's prediction of a forty percent nomenal? Now hang on forty percent rail.
For I think that's too perish. But the main thing that changes my mind on that one way or the other is whether the Bank of England basically over titans
on interest rates. And I think that's perfectly possible because the other thing that I've noticed this last week, a lot of the recruitment agencies, like I think three of the listed recruitment agencies have reported this week, and they've all mentioned that the jobs markets getting harder the recruiting, the number of attempts that people want is going up, and the number of permanents they want is going down.
In fact, I was reading yesterday, Anglish Page Group actually laid off some of its recruitment advisors in the UK because of, you know, a dipping activity, which is I mean, there's something, you know, there's a kind of ironic you know, I feel sorry for people were laid off, but you know, you' getting laid off because you're a head hunter and the job market is meant to be ragingly hot, and I mean, I think that kind of points to there's certainly a
cooling off that just hasn't come through to the data yet.
Yeah, and we have seen a fall in the number of vacancies, haven't We still above a million, but it's dance significantly.
And people also point out that that's partly because in the Internet, you had a job's just hanging about for longer because you don't get deleted. You know, you don't have to pay the Guardian you advertise your job anymore. So it's sitting on LinkedIn for like weeks and months, we you know, sort of like junk mail kind of responses, but nobody's actually taking these down. So I think that the vacancy's number is probably distorted by that sort of thing.
Is there no non dodgy data.
John, can you trust any of it?
Can't trust anybody that'll be the elites that will.
Right exactly between that and the mainstream media. Thank god we are not the mainstream media, I know.
Welcome to Maren Talks Money, the podcast in which people who know the markets explain the markets. I'm Maren Sunset Web. This week our guest is Brian Pellegrini, founder of Intertemporal Economics. We discussed the Bank of England's monetary policy versus the FEDS, and Brian's going to tell us why he thinks the Bank of England is doing a better job. John and I will discuss afterwards whether he is right on that or not. Hi, Brian, thank you so much for joining us today.
Thanks for having me Maren.
Great Now listen, I know that your particular area of interest at the moment and ours as well, by the way, is inflation. What's going on with it in the US, in the UK globally? Are we going to see inflation for towards the end of this year? If it does, is it all over a back to two percent forever? Or are things never that simple? So how about we just start with you giving me an overview of where you think we are with inflation.
We're likely to see inflation come down pretty rapidly in this second half of twenty twenty three, and I think it's going to be so rapid that it actually frightens
the central bankers a little. And people had focused very heavily on the supposedly hawkish aspects of Powell's statements the recent press conference and then the minutes that came out yesterday July fifth, and they've looked at the disclaimers that he said that basically that if inflation is higher than we expect, then we will continue raising What he's really saying, which is that if inflation reacts in a way that's better than we expect, we're going to react to that
as well. And I think if you look at the minutes, there was a lot of discussion about fear of how big and how powerful the lag and the effects of monetary policy are for the tightening that took place over the last year and a half. Right, So they're saying, is there another shoe that's waiting to drop or are we passed all that?
There's a feeling, you think, on the committee that they've done enough in the actual talk. The last comments at Pearl Gavee. He talked about the skip which you mentioned in your latest piece of work, the idea that it's really just appoors and there'll be more later. There's more rises to come, but if inflation does come down in the way that you expect, then there'll be normal rises. We might actually see.
Cuts, definitely. I mean he outright promised that. One of the reporters brought the subject up and it kind of was addressed but didn't get followed through on was that the projections all show lower monetary policy rates in twenty
twenty four and twenty twenty five. Then at the end of twenty twenty three, and a reporter asked why that was if Powell didn't see a recession occurring and neither do I in twenty twenty three at least, and his statement was, as inflation comes down, in order to maintain real interest rates at a constant level, the Fed would have to cut right. So by saying that, he's pretty maturely easing because he's sending everyone's expectations right, So he
sort of undercut himself. But he outright said if inflation comes down, they're going to do what they need to do. To keep real interest rates at a stable level, which they see as a magic number. And I think that as the FED is proven wrong and it's ex inflation expectations right, that they're going to be put in a very difficult position where they need to justify their past actions.
And in twenty twenty five, in the aftermath of an inflation area twenty twenty four, it's going to look pretty clear that this was done in reaction to the twenty twenty four presidential election. Right. The Biden administration has three
and about to have a fourth nominee on the board. Right, so Biden has a majority of the board that are beholden to him, and he's picked by and large of PhD economists that are people who are tend to be politically beholden to the person that chooses them, as opposed to a career bureaucrat who is less likely to be partisan.
That's just loose money to next year. But can I just go back a little bit, because this is a complicated business. This you expect inflation to come down in the US and the second half of this year significantly faster than it looks like the FED believe inflation will come down. So before we go any further, I want to ask you what it is that you think will drive that, why your expectations different to that. That seems like the key point before we move on to next year.
That's a great question. Well, I think that the aftermath of the supply chain unwined has been more dramatic than people expected. And if you look at the Institute for Supply Management's Manufacturing report and you look at customer inventories, what's really interesting is that the number of firms reporting their inventories being too low is still relatively high, but
not at crisis levels, right. So there's still disturbance in the supply chain, right, But the number of firms that are reporting inventories being too high is at crisis levels, right. And so if the number of firms that had inventory being too low wasn't elevated, then this would be all over the news that there's an inventory crisis. And so the inventory situation in the United States in the factory
sector feeds just about a one month lag. So factory prices in the United States lead factory prices in China with about a one month lag. And it's a pretty close relationship with the factory prices in China being more volatile, and so right now, factory prices in China are in outright deflation and they are down at levels seen in
prior recessions. So we should expect to see that feedback into US consumer prices with the appropriate lag, and that lag starts to show up in the latter half of this year, so we should in the next few months really start to see core inflation really start to come down appreciably.
Okay, interesting, Now I keep an eye on the true inflation numbers, which will pretty seem pretty good on the way up, and that they've led their official inflation numbers on the way up and they're now only just over two percent, which kind of tells us that this is coming right, and that then gives the Fed and excuse to slash rates into next year to set biding up for the election. Is that what you're thinking?
Definitely. The important factor to keep in mind is that Powell is not himself a partisan, right. He is a conciliatarian. Right. His job is to make a consensus on the committee so that it looks like the FED is doing things in a calm, collective and non partisan manner. Right. But if he has a majority of the board who are
outright partisans. You know, I don't want to demean these people, but they have their agendas and it's pretty clear from the minutes that there's a substantial portion of the committee that wants to ease And based on Chairman Powell's statements and his proclivity for repeating things that people say to him, we can tell who is influencing him, and it's pretty clear that that is the Biden group who are influencing him and will drive the Chairman's vote, which is approximately
fifty percent of the voting weight of the committee. In real terms, everybody has one vote, but in reality, the power, the consensus power of the Chairman is about fifty percent.
So taking that as the direction for FED policy, it looks likely that we're going to get some easing and in the aftermath of all this, right, what's interesting is that, you know, the Bank of England and the FED have both taken a bit of a hit to their credibility a bed, so the Bank of England both having very similar events, right, so they tightened and a leveraged part of the financial structure that they really didn't understand blew up, right,
in the UK it was liability driven investing. In the US it was treasury funding by regional banks that were acting like private equity funds. And they reacted to both of those of in roughly the same way, which was to paper it over and to act in an inflationary manner, right, and say, oh, well, this wasn't really our fault, you know,
don't ask us to solve all your problems. But and they papered it over, right, and people realize that that's an inflationary mess, right, that that tightening was undone by the papering that took place to replace the money supply
that had been shrunken. Right. But the major difference is that the FED has never been as open and honest as the Monetary Policy Committee is, right, So it's only happened once that the chairman has been out voted in the United States, whereas it's regular currents for the head of the Bank of England to be he's just another
member of the committee. And so the Bank of England has I think a more intellectually honest and intellectually open committee driving it that is willing to say, and this is really important recently that they've been willing to say we're not sure what's going on, We're going to be really careful. And if you look at the FED, it's a completely cavalier attitude. We've got it, has covered no problem. Inflation's a problem, and we're on top of it. We
got it, and you're welcome America. Is basically the Fed's message. That's going to have negative consequences for the FED and as a result, for investors. I think that if you're looking to bet on inflation expectations, the credibility that the Bank of England, the Monetary Policy Committee is able to nurture with its honesty and with its humility, it's going to be a lot more valuable than what's left over at the FED, which is going to look like a
completely politicized institution. And in twenty twenty six, depending on who's president, you know, it's a very good possibility that you have a replay of what went on in the transition from Lyndon Johnson to Richard Nixon. And Lyndon Johnson had a FED chairman who he brought in as a team player. Right Chairman Martin would never just change the interest rate for the ben fit of the president, but for policies right that happened to benefit the president. He
was willing to do it. When Richard Nixon came in, he fought constantly with Chairman Martin because he was a Democrat and wasn't going to do what Richard Nixon wanted him to do. Richard Nixon was a Republican. So Richard Nixon brought in a pH d. Economist, Arthur Burns, who was.
Poor Arthur Burns, which has called him poor Arthur Burns.
He did redeem himself to a certain extent in nineteen seventy four, but it's certainly in nineteen seventy two he was a political hit man for the president and acted accordingly, and then in nineteen seventy three justified his actions by saying, well, what would you have us done? You know, everybody wants to have low unemployment in good times. You know, the Fed's credibility was wrecked as a result.
Arthur Burns was one of those chairmen who was thought to be more interested in the state of the economy in general, in people's living standards and lifestyles, than he was in actually bringing inflation down. It's not that he couldn't have brought inflation down. It's just that he had too many priorities, right.
Yes, And but who's setting those priorities. It's his political boss, is really the answer. Among the Watergate documentation, right that came out was a confidential letter from Richard Nixon to Arthur Burns in November of nineteen seventy one, and he says that people don't care about they don't like inflation, but they don't vote based on it. They vote based
on unemployment. Richard Nixon blamed his loss in the nineteen sixty presidential election to tight monetary policy by the prior FED chair, and he said, don't let that happen again in nineteen seventy two, make sure I get elected. Burns did that, and so I think that certainly in nineteen seventy two, Burns was acting explicitly politically in holding off on raising interest rates until he felt that the lag effects would be past the election. So I think that
is definitely the case. I think after that, right in nineteen seventy three, then the issue of too many priorities really starts to come out, right, and then it becomes, well, what do you want us to do? Like, you know, we want unemployment to be low, and we don't want the housing industry to be too hurt and these things. So, you know, just to a certain extent, then it becomes
too many pots on the stove to mind. But a lot of that was justification and an attempt to hold off the political criticism that was taking place as the
Nixon regime was collapsing. And at this time Arthur Burns was having, you know, a realization that this man who he admired and that he had helped was a dastardly person and not a good guy, right, And so you know, in his personal diary, Burns talks about finding out the dirty tricks that Richard Nixon had played on him to teach him lessons about being you know, so called about
being loyal and never questioning the president. And so I do think that he was a bit naive in nineteen seventy two, and in the course of nineteen seventy three, that realization happened. All those lessons that he learned, right, and any potential for reformation of the FED was then lost in nineteen seventy seven when Jimmy Carter came in and got sick of him and said, well, I want easy money, and just like the last guy had what the heck?
Yeah, And then we had William Miller exactly, and he didn't ask very long, but he had that idea that raising interest rates raised inflation. Yes, yes, didn't we have that resily in Turkey never goes away.
And the results were shockingly similar. Right, And the thing to remember is William Miller had an only eighteen month term. It wasn't because Jimmy Carter didn't like the job he did. He got promoted.
Right.
The Treasury Secretary was critical of the Fed of saying that they were not tight enough in nineteen seventy eight and that they needed to tighten. Meanwhile, Jimmy Carter and William Miller wanted to stimulate fiscally, and Jimmy Carter wanted to send everybody fifty bucks in the mail.
Yeah, he would have had such a good time if he'd been president during COVID.
Well, this similarity between the events of the oil shock events of nineteen seventy three, nineteen seventy nine and COVID and the Fed' reaction to it, right and the Bank of England are mirror images. Right, And the result has been the same inflationary mess, and we'll see if they learn that lesson, But that idea that something has caused a temporary but severe degradation of the supply capacity of the economy but did not touch the demand side of things,
and the FED is completely in. The central banks in general are flummixed by how to deal with that, because they say, well, should we tighten and crush demand to fit supply and then cause some sort of a long recession, or do we try and bridge that gap and let it cheat and hope that well, this diminution of supply
will be covered by inventories. Right, And the result is that all three times right, teen seventy three, nineteen seventy nine, and in twenty twenty, the central banks and the governments completely overestimated the hit to demand that was going to take place, and as a result, they not only validated but doubled down on the price increases that were in the system by you know, supporting demand at a time
when it really didn't need to be supported. So they really haven't learned any lesson on that aspect that if you have something bad happens, it's totally out of the blue, you're kind of got to just take your medicine right,
you need to allow demand to fall. And instead of trying to say, well, maybe we can be the candy man and help everyone avoid this unfortunate incident, Ben Broadman gave a speech back in May where he describes that and basically saying, you know, it was up to us to come in during COVID and replace the shrunken money supply with newly created money. And they did not expect it to sit in bank accounts like it did, and they did not expect then demand to then come roaring
back shortly after. And the situation is remarkably similar to the events of nineteen seventy nine.
Difference now, of course, is that we're not going to get a pull Volka coming in to shove and trust rates up as up to the levels they were then and make it all go away. But we're going to get this bout of disinflation coming through that makes everyone feel just fine. So I suppose the two questions, then what is that that will drive a resurgence of inflation.
I think we can agree that we expect inflation to be very volatile going forward, But I wonder what you think it is that will drive the next bout of volatility, and let you ask us answer that bit before I bring up the secondary question.
Really, what it comes down to is the is the tightness of the labor market. Right. So, the labor market is extremely tight. So that means that if any sort of increase in orders occurs, right, a business needs to then not only find new workers, but steal them away from others. Right. So until you get an appreciable loosening of the labor market such that excess capacity can build up, so that there are second and third lines of production
available to businesses that they can bring online. They can operate profitably as they are, but if a big order comes in, they can fill that order without having to raise prices appreciably. Is the big difference, right, And so the labor market remains tighter than tight in the United States in the UK, right, And that was something that was extremely tight in twenty nineteen, and the dislocation to the labor force that took place in twenty twenty and
twenty twenty one made that much worse. Right, So we were already in a bad place, and COVID sort of jumped us into the middle of a bad equilibrium. The problem is is that you have, and we had talked about this. You know why America is not going back to work even now as the words participation rate is returning to its pre COVID rate. The people are different, right, So the older age ranges the participation rate has fallen, but lower ages young workers are participating at sky high
rates because wages are growing so fast. So the capital structure in terms of the people, the number of people, who those people are and what they do, has changed relatively significantly in the past three years. So you need to change the physical capital structure, the actual machines on
the ground to get an efficient operating economy. But how do you do that if you don't have the workers to install the machines, right, So that's the problem is that you're stuck in to catch twenty two, where you can operate relatively smoothly as long as things aren't going too fast. But as soon as you try to step things up, the system starts to barate down because there is not that excess capacity available, and there is no way to restructure the system because they will never allow
that excess capacity to build up. Anytime unemployment starts to rise, they ease, They say, who whoa we don't want to be responsible for a recession, right, And you know that's that's really the key is that to get from an inflationary equilibrium to a low inflation equilibrium, you need a bad recession that kind of comes out of nowhere as
far as people are concerned. And the FED doesn't want to be the one responsible for causing a recession just to cause a recession, right, because well, you're all making too much money, right, who wants to be the one
that does that. So what they do is, and this happened in the nineteen seventies and it's happening again today, is they say, we're gonna run things a little slow, slower than potential growth, right for a few years, and if you're just patient, it's gonna take two or three years, but we'll get there and we won't have to have a recession. The problem is is that you never get there, right because a they don't really know what the rate of potential growth growth is because it's not a thing
you can measure, right. And the second thing is is that even if the growth in raw dollar terms, right of the potential growth rate of the economy keeps moving up, right, the efficiency the flexibility of that does not grow or does not change unless you've got a real, a significant amount of capacity that people can work with. Right, so that restructuring of the capital structure needs space. And so as long as they keep one of the and this is the one of the indicators that I watch very closely.
In the minutes of the FED meetings, the staff report section lists how long until they think the output will be below potential output? Right, So, right now we're in an excess demand situation, excess output. And that has been so output has been above potential since COVID start, or since since shortly after you know, the worst days of COVID, right Q three, twenty twenty. And what's basically happened is they've kept pushing back and forth this magical date that
we will exit the inflationary equilibrium. So they say we expect it to be output to be above potential until twenty twenty four, and then in this last meeting they said until twenty twenty five, and during the worst of the inflation they were saying twenty twenty six. So they move it back and forth, and we'll never actually get there. Right. Is the issue is that they'll say, oh, we just need to be patient. We just need to be patient.
But the solution never comes. And that's exactly what happened in the nineteen seventies and it's developing again today.
And that's exactly how you create a high and volatile inflation environment. Okay, so here we are, we've established all the bad news. How on earth does an ordinary investor deal with this kind of environment? Where does their money go?
There's two aspects, right. One is that standing still, there are going to be time when you can make what look like high nominal returns, right, But you've got to be cognizant of what is your real return? Right? So you have to be thinking in terms of where is the red hot locus of inflation going to be? Right? So, where is it that prices are not only being validated, but money is flowing to and expanding those prices? Right? And you know, these are the situations where you have
things that eventually make it into the news. Right. So container shipping was in twenty twenty one and twenty twenty two an example of that. Right. I think that in the food and fuel complex now with renewable diesel, the connection between vegetable oils and particularly soybean oil and diesel prices, which is globally used for transportation, right. I mean in the United States, we love our gasoline, so that market
have been connected for some time. But now the majority of the diesel sold on the West Coast is actually renewable diesel made from vegetable oil. And this is different from biodiesel, which is recycled and has to be mixed. Right. Renewable diesel can directly be used in the engine and
is exactly the same thing as petroleum diesel. So you have now a point where there's any if there's a shock to agriculture markets or to energy markets, those two things are connected and will feed on each other because if diesel prices go up, farmers will plant more soybeans, and to plant more soybeans, they're going to need more diesel.
Okay, So it makes sense for investors to have exposure to agriculture one way or another and have exposure to the energy market.
I think, well, yes, and I think to look for places where supply chains are distended. Right. Low elastice items places where supply chains are distended, and those are the places where you're likely to get these explosions in prices. The other aspect is to think about the election cycles and the credibility of the banks. Right So the simple fact is that the FED is on a political calendar that right now that's a lot shorter than the Bank
of England. And so even if you didn't think that there was more intellectual credibility and quality on the Monetary Policy Committee, which I do think there is, But even if you didn't have that opinion, simply the pressure, the political pressure that the FEED is in is likely to
get them to ease prematurely. And so you know, you have like this horse race between the Bank of England and the FED going on where they're both saying we're going to stay tight as long as we need to, and you know, we're going to hold stick to our guns. I would bet on the Bank of England and against the FED in this, and I think that that the gap and credibility between those two banks is going to grow, and that's going to have an effect on the currency.
It's going to have an effect on interest rates and asset prices in general.
So what's it going to do to act prices in the US going into the end of this year.
Well and to the end of this year, there's probably going to be a really nice boom. Everybody's going to go, oh wow, inflation is going down and the Fed's cutting interest rates and everything's great, and it's just like, you know, we all wanted it to be okay.
So this is going to turn out with being a fantastic year for equity markets.
For example, probably at the end of the year. Yeah, but the first half of twenty twenty four and inflation starts to come back and people start to get worried, and then it comes apart pretty quick. But yeah, to twenty twenty three at the end of the year will probably look like a pretty great year for equity markets.
And what about gold? Is that a good hedge against inflation, against this kind of inflation.
Yes, it is. I mean, the concern is that the central banks start to interfere with the gold market because they don't want it to become an alternative to currencies. It's a very good hedge against low real interest rates. That's sort of it's a hedge against not inflation, against low real interest rates. So the problem is is that in the next inflationary cycle, the problem is that they're going to not be able to raise interest rates without
inverting the yield curve almost immediately. So the central banks are going to be stuck in a little bit of a position, and the way that they're going to deal with that is yield curve control. Right, They're going to fall up the Bank of Japan and prop up the long end of the of the yield curves. So you could have a situation where real interest rates very suddenly increase.
So I would not be buying gold right now. I would wait until the gold market gets slaughtered in a suddenly increase in real interest rates, and then I would buy because then there will be a lot of shakeout. But in the meantime it's going to look very tempting, but I would be careful.
All right, Brian, let me ask you then that you've given us a view on gold, but let's see what your view on gold is compared to another sset class. I'm afraid I always ask this question at the end of a podcast, and I think I know how you're going to answer it. If you had to hold four ten years, four ten years gold or bitcoin, which would it be gold?
Definitely?
Definitely we're never going to get the wrong answer. Are We were always going to get the right answer.
All the all the questions about bitcoin aside or whatever. Like, I'm pretty sure that people will st value gold in ten years. I'm not so sure about bitcoin. Yeah, and that's that's the bet.
That's a very fair way to put it. Brian, thank you so much for joining us today. He hugely appreciated my pleasure.
Thank you for having me.
So that was pretty interesting, John, I hope you agree. I think Brian's fascinating. And he was also, of course right that I recorded that interview with him before we had the USCPI numbers out earlier this week, and obviously they're now back to well, not not quite to target, but what you might consider to be reasonable levels. And he's looking at that and saying that he thinks that the Bank of England has done a better job than
the FED. But the FED has got inflation. Well I don't know if they've got inflation, but inflation is back to reasonable levels. And in the UK our last number came an a eight point seven percent.
Yeah, it's very it's very kind of Brian's atypicalty here anyone saying a good thing about the UK, plus too the Fed in the US. I mean the one thing, and that really was an interesting conversation. But the one thing that I would say, because I saw someone else kind of tweeting about this the other day about how, oh, you know, the Fed's preserved its credibility and that's helped
a weait inflation. I hate set it, but I think the strongking Great stockpilely natural gas and shal oil kind of you know, buried beneath American soil that they've kind of been digging out for you know, the last kind of ten years or so, actually really helped with inflation.
I mean, energy has been the fundamental thing making the numbers look bad in Europe and the UK in general, and the thing that's made Britain stand out as an outliers the energy price cap and the way that basically the difference between the way we subsidized electricity bills and the way that for example, the Spanish did it and
the Germans did it and the French did it. I mean, I think that we're going to find it by the end of this year the euro European area, including the UK, inflation has largely kind of converged and the Britain's not going to look as much of as much of an outlier as it was before. But other than that, I mean, it's interesting that you're saying that, you know, the Bank England structure is more intellectually honest.
It's interesting, isn't it from because from my point of view, we look at the Bank Vieland and we think, well, maybe it's intellectually honest, but that doesn't mean that it can see past its own group.
Think yeah, And I mean there is an element of you know, it's fine to be intellectually honest. But if all you're doing whenever you sit in front of the Treasury Committee is saying computer said no.
No, it isn't it the models are, then I'm saying what we thought they would say.
Yeah, there's a defence between kind of like humility and kind of baffled it's not my fault indifference, which I feel is slightly more the way to the bank in England.
John, We've got a special file now for hate mail from the bank villain.
Stop talking about my gold plated pension.
Giving a rest on the now. You know, the interesting thing about what Brand says is that's he's clearly going to be right that inflation in the US is going to be very low or getting significantly lower going into
the end of this year. He said even solo that it's going to begin to frighten the FED and make them feel that they're wrong again on their expectations, and then they need to put in this difficult position where they need to look at what they've done in the pastan and justify it when they've maybe gone up possibly too fast by the end. But you know, Brand really doesn't think this is over, you know, and he looked at the numbers that came out this week on CPI.
He said, yes, absolutely, that's what I expected. But look underneath and there's a lot of things going under there that makes economy really vulnerable to inflationary shots shocks going forward. You know, the labor market is still very tight. While the most acute period of labor market shortages passed, it's still a mega mismatch between skills needed and skills provided, and you can see the titness at every level. So he doesn't see this as being over at all. He
is still talking about nineteen seventies. We're ducks over the next step for five years.
Yeah, And I mean that's sort of that I think would be certainly our base case as well the idea of inflation volatility again and obviously no effect wants to keep real interest rates at a certain level, as Brian sort of mentions, but that suggests that unless they are willing to look through all this and and sort of Brian implies, but he doesn't apply, basically states that the kind of politically compromised, then we're likely to see a more kind of like pro inflation kind of tone from
whoever the next kind of the government is. So yeah, I mean I think that's I think we'll get a lull and everyone will be a little down fo sense of confidence.
Yeah yeah. Well then let me end with one quote from what Brian wrote just after when we did that interview with him on the CPI. This does not represent a potential soft landing for the FAD, but rather an inflationary pressure bomb waiting for them to take their foot off the break.
That's good.
Thanks for listening to this week's Maren Talk's Money. We'll be back next week in the meantime. If you like our show, rate review and subscribe wherever you listen to your podcasts. This episode was hosted by me Maren Sumset Web. It was produced by Summers Sadi and Obria Ruffin, with help from Stacy Wong, Additional editing by Blake Maple's Special
thanks to Brian Pellegrini and of course to John Steppek. Finally, my weekly reminder sign up to Johns daily news letter money distilled link in this show notes, I can't believe that there are any of you who haven't signed up yet. How many times do I have to tell you? Get on with it, you won't regret it.