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Hi, Tracy, how are you You're getting getting You're getting worse.
I'm getting worse.
Yeah, then the last three months, yes, and the rest of the no. No, no, But you must be very very relaxed.
I'm not shaving until the fence starts.
Cutting, right, Okay, that's coming. So that's that's good.
I did a dead LFT one.
Okay, uh barges.
This isn't after school Special, except.
I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.
Where's the best imposta?
These are the important question? Is that robots taking over the world?
No, I see the like.
In a couple of years, the AI will do a really good job of making the Odd Lounch podcast and people to say, I don't really need to listen to Joe and Tracy anymore.
We do have touching the perfect.
You're listening to lots more where we catch up with friends about what's going on right now, because even.
When the Odd Lots is over, there's always lots more.
And we really do have the perfect guest. It is kind of crazy, so the market is pricing in what is it a little over seventy basis points of cuts right now, which means like the Fed would need to cut every meeting through the end of this year, assuming it doesn't do a fifty basis point cut, which seems a little extreme.
Uh yeah, I saying it does. But remember Federal Reserve has no visibility. They have no trust in their models. That is why they so data dependent. So when people say, well, we can roll off fifty, why could you rule out if you sing of the governors or the former governors only two three months ago they were high for longer. Suddenly they've changed their mind. It's no longer high for longer. So that's sort of volatility, almost inevitable outcome of highly
volatile neutral rates. So prima facie, if you just look at it, seventy BIPs looks high. But on the other hand, I don't think you can necessarily rule it out. And if you start looking slightly longer term, let's say, look at December twenty twenty five January twenty twenty six, the market is still looking at somewhere around four as a policy rates. Now for the policy rates to me is too high. I think the numbers should be somewhere closer to three and a half, maybe even less than that.
So to answer your question, it looks like it's high they but FED has no confidence in their methodology, in their models, or a visibility what happens, and therefore it is possible that you might.
End up with it.
So we are speaking with Victor Schwetz, Corey strategist and one of our repeat Odd Thoughts guests. It is, of course the week that we have just seen a meeting from the Federal Reserve where they opted to hold rates as expected, but they definitely telegraphed that that rate cut was coming.
Joe, you know when I so, I didn't watch the press conference because I was on a train and I had an appointment. I had taken the day off of work. But it was nice because then I read the transcript this morning without the you know, without the distraction of Twitter and all the commentary, and I hadn't read any
of the various commentary from the strategists. But when I read the transcript, I thought of our last conversation with Victor, specifically, because it was so clear they, to your point, all they just want to see more numbers the models that suggest, Okay, unemployment is rising and the feeders are restrictive, and therefore inflation should come down, etcetera. All of these theoretical ideas. I don't get the impression they have any confidence. They just want to see more numbers.
That's it. That's absolutely right, And there was a reason for them. And the reason is that we live in the world of abundance. We have too much of everything, We have too much of capital, we have too much of most of the products. Technology keeps reducing marginal costs. There was a perception for a period of time that certain areas are in deficit or constrained, such as some of the metal, also labor, but even that is proving
to be not true. So if you live in a world of abundance rather than scarcity, economic models do not work. Because all economic models and investment model are predicated on constrained outcomes, that you're choosing the best possible outcome out of variety. If there is abundance, prices don't work. Prices don't signal the same impact, neither do they have the same impact on underlying economy.
Wit So Powell is definitely I feel like he's aware of the criticism that the FED is maybe too data dependent at this point, and in fact, in the press conference he was kind of at pains to emphasize that
they're not data dependent or sorry, what was it? Data dependency doesn't mean data point dependency, which is kind of funny, especially since we're recording this on Thursday, and we have had some very interesting single data points, including initial jobless claims rising to the highest level in nearly a year. But what does it mean to be data dependent but not data point dependent?
It means I have no clue. And essentially what it says is that, look, I don't know what I'm going to do because I don't understand why financial conditions are not tightening more than they should have. I don't understand why unemployment is where it is. Yes, employment cost numbers, for example, yesterday've come out point nine percent was really the lowest for about three or almost four years. So there is no evidence there is a wage spiral. If
you sing of goods inflation, it's continued to disinflate. Service inflation is coming back. Even idiosyncratic numbers like imaginary orner occupied rent, or differences between insurance policies in the market and what CPI numbers have or use car prices, all of those DA synchrisis also going away. So you could argue a legitimate question, what are you waiting for? And the answer is they don't want to be Arthur Burns. They don't want to be in a position that they're
revisiting sort of nineteen seventies all over again. And so he's basically saying anything is possible, anything is probable, and I cannot guide you in any meaningful way forward. The only thing I can say is that it looks like we're going to cut beyond that. We're either data dependent or data point dependent, or maybe we're not data point dependent, but we certainly not forward looking the way we should be.
So Tracy mentioned this recording this August. First, there's a non firm payrolls report that will come out tomorrow, probably by the time people listen to this. I just want to talk about some of the data that we've seen. Tracy mention it initial jobless claims around the highest in the year. The ISM manufacturing number came in Glubbalo expectations. The employment sub index of ISM outside of the COVID period.
This is the worst since two thousand and nine, which Bloomberg's Cameron Christ pointed out ADP, I don't know if anyone actually pays that close attention to it. It came in lower than expectations. Today we've got unit labor costs. They're expected to grow one point seven percent. They only grew zero point nine percent. I guess the question is, Okay, is there a risk of a policy mistake? Could things
be slowing down more rapidly than the FED things? And even with the concerns that they have that actually this is the moment and maybe things are going to get rolling.
There is there is a possibility of that. And you can also add to that quit rates. Quit rates basically return to normality. So everything is pointing to the fact that labor market is getting noticed. Height everything points to direction of a less robust wage increases coming through. There is no wage spiral. Now, could you commit a policy era, Of course you could. But one of the things I keep highlighting policy errors are important when you got scarcity.
If you have abundance, you can reverse a policy era in thirty seconds. In fact, even less than thirty second, one word potentially could reverse almost the entire impact of your policy era. So one of the things I've been highlighting is that there is a strong possibility of committing policy era if you're backward looking rather than if you're
forward looking. But the fact that we have too much capital, the fact that we reprising things, and a split second, the fact that central banks have unlimited toolkit that is growing on a daily basis. Even if you commit a policy era, you probably cannot perpetuated, So in other words, you will be able to reverse it quite quickly in my view.
I saw an interesting thing from Nick Collis over at Data Track this morning where he was talking about or asking if labor market normalization, which is how Powell couched it on Wednesday, whether or not normalization is the new transitory in the sense that they might be focusing on that, and the market starts to focus on it too, and then it turns out that, well, it's not really normalizing, it's in a downturn, and the Fed is making a mistake.
But just on the idea of abundance, I mean, you say repricing can happen very quickly, but going back to the transitory idea, that's not what we saw when we saw prices begin to go up.
That's because essentially what you had at the time is Federal Reserve insisting on transitory when it wasn't transitory. So in other words, if fed a Reserve wants to commit a policy era, they can. If they insist on perpetuating policy era, they can do that too. If they want to put the economy into recession, they capable of doing it. My point is none of it is necessary because even if you commit a era and you quickly realize you have,
you can unwind it incredibly fast. Whereas say, if you look at Paul Walker, if you look at greenspand they had nowhere near the same capability of achieving that outcome.
So there is a risk of an error, there is a risk of a recession. But your view is that the rate tool is powerful enough such that even if we were to go into a downturn, that that one lever for what various reasons, is powerful enough to reverse it fairly quickly.
Well, not so much, not so much raids, but Rada communication strategy. So the essence of Federal Reserve or any central bank these days Israeli communications strategy coupled with macro and micro prudential controls and coupled with specific policies designed to tailor circumstances that beyond your control that suddenly arises,
whether it's Silicon Valley Bank or something else. That's the essence, not so much rates, because in the world of a buve Lounden's price doesn't work as well because there is no scarcity. So all Federal Reserve needs to do is to change communication strategy, to change some of the liquidity positions, and that could be enough now. Ultimately, if you start looking really longer term, there is no doubt that rates
at some point in time do work. And that's what I'm saying that if Federal Reserve wants to commit a policy era, wants to perpetuate policy era and place the US economy or any other economy inter recession, they're capable of doing it. Just there is no reason for that.
Victor. Do you remember two years ago, I think it was also in the summertime, when the Fed said they basically like ruled out the possibility of a seventy five basis point hike, and then they went ahead and did it, and they sort of abandoned forward guidance, which had been this principle that they had been using post two thousand and eight financial crisis to guide the markets and damp and bond market volatility.
I don't know.
I've been thinking about that moment for a while now. It feels like we're sort of having a repeat on the data dependency thing, like it's another shift in the emphasis of the central banks communication policy.
Yeah, it is. It is. And again if you go back, if you go back to those times, the reason we shifted is because j Pill quite correctly, was saying that neutral rates are becoming very unstable. You know, I can't see the stars he keept highlighting. He'd been highlighting it for years now. And what he basically saying, I don't know where neutral rate is in the nominal terms. Is it more like three three and a half percent that people currently expect or is it closer to four four
and a half. And if it is four four and a half, is it possible that in the next six or twelve months is going to drop to two and a half three percent. And so he has no visibility exactly where neutral rate is. He doesn't know what's going up or coming down. He is not even sure what forces actually are driving it so quickly up and down. I mean, we can talk about a number of forces, one of them election and electoral cycles. We can talk about geopolitics, we can talk about climate, we can talk
about healthcare. There is a number of sayings that outside the economic system that drives you. So in the past mostly what you had is economic cycles and capital market cycle. We're driving everything today. It's a force us outside the system. Now, what is the ability of Federal Reserve to estimate and anticipate any of these things outside macroeconomic system? The answer is zero. The ability to predict, the ability to anticipate,
the ability to price is zero. But these are the factors that are capable of swinging neutral rates quite quite considerably.
Well, you mentioned one thing just then, which is political uncertainty, And this is something I wanted to ask you, which is Okay, markets are pricing in roughly a little over seventy basis points worth of cuts at the moment for the rest of the year. How much of that pricing is due to uncertainty stemming from the political situation right now? How much of it is basically risk off getting priced into that market.
None. I don't believe anybody can price political outcomes, either with a Trump or Harris wins, or whether the Republicans swip and control the House and Senate and the presidency with a Democrat swip and to have it at full trifecta. What's going to happen at state election levels, because remember forty four states also have elections, sixteen governors or something running for elections. On top of that, I don't think anybody can predict, including investors. So right now, I don't
think anything is reflected. People are trying to do Trump trades and they have Harris trades. To me, it's not relevant. First of all, it's not clear what the trades are because one of the sayings, it's been very clear in European elections and increasingly US as well, that if you on extreme right want to take control and govern, people
will force you to abandon your most extreme views. This is what happened to Brothers of Italy, That's what happened to RNN, that's what happened to Urn in some ways, that's even happening to AfD in Germany. On top of that, the same happening with Republicans. They no longer want to cut welfare payments. They've abundant Project twenty twenty five if you say, with Kamala Harris, she's now saying fracking is
going to go forward. So the good thing I sing right now globally is that electorate is not mad enough, is not angry enough to go to the extreme. So if you want to have an opportunity to govern, you must abundant your most extreme views and extreme policies. And if you do abandon them, then really, how much of a real difference is there between the Harris trade or don't Trump trade or any other trade? So right now, to answer you a question, I don't think anything is embedded.
I think people are trying to trade and anticipate certain sayings, but at the end of the day, it's pretty useless because there is no way you will know that, and we might not even know that until January, because more than likely there's going to be quite a lot of litigation, often the vemby elections.
It's always striking to me how badly various political electoral themed baskets or trade ideas. Do you know that the Mexican peso was a Trump trade in twenty sixteen and was getting hammered every time he did well in the polls turned out to be one of the best performing currencies during his years of presidency.
Do you remember, Joe in twenty sixteen, after Trump won, every single cell side piece of research that came out was like Trump will make whatever great again. And it was everything from like energy stocks to the most esoteric, like asset backed securities. It was amazing.
Yeah, people, including cryptocurrency.
There's still other than the one in our in the studio right now, many lazy titlers of cell side notes, with the exception of the person we're talking to. But you know, the energy is a good example because energy did really badly under Trump, and then it did really well under Biden, even though the Biden baskets in twenty twenty would have said to all buy solar stocks, which have all done extremely mediocre. Actually, you also mentioned geopolitics, and I get that you can't really put together a
compelling electoral trade. Would you see any fingerprints of either of the geopolitical situation or the election on either the economy or markets right now? Is it showing up anywhere?
No? Non, I would argue, even Europe, where we've gone through quite a number of cycles because quite a few countries head elections and European Union parliament head elections. You don't actually see a great deal of fingerprints at all, either or an economy or ECB policies, or the market,
whether it's equity of fixing of any other market. So to me, and again, I think part of the reason these I keep coming back to that people not yet met enough, they are not yet angry enough, and so the extremes did not have the same pool as they otherwise would have.
Can we just go back to it? I would just like to go back to the US in the FED specifically. Again, so setting aside, you know, one of the concerns about a policy mistake or waiting too long is this notion. And this is sort of the implied insight of the some rule, for example, is that unemployment feeds on itself. I lose my job, I spend less, I spend less at your business, you layoff workers, your workers lose income, they spend less.
Et cetera.
That intuitively makes a lot of sense to me that unemployment contained its own momentum that builds on itself. But your view seems to be that it can be short circuited in a fairly short period of time. Can you reconcile that for me, and like, why you have this belief that, Okay, maybe it is a mistake to wait to September, or maybe the Fed should signal more forcefully than a rate cut cycle that begins in September will
be aggressive. But can you sort of reconcile this for me, why you believe that they can reverse a policy or fairly quickly.
And a saying Clodia sum yes, actually pulling back from your rule, and for a very good reason. For a very good reason. First of all, we had a massive dislocation of demodern supply curves for goods and services and labor over the last three to four years. Secondly, we're getting very tremendous changes in the structure of the labor market itself, so increasingly Bureau of Labor Statistics is not
really capturing the labor market. And well, the labor market does, whether it's a gig jobs, whether it's a multiple jobs. There are many studies of we're done over the last five six years which basically shows that methodology that Bureau of Labor Statistics employees understate labor participation by at least two percentage points, which means all of this law labor participations aren't actually true. They also significantly therefore are understating
the hours work and overstating wages per hour. So it's a structural shift that are occurring right now in a labor market, combined with a gradual volatility of the modern supply curves that we have experienced that really blonds that rule. It doesn't really allow that rule to function. But beyond that, and that's something as including it doesn't address. Beyond that is sort of my pet idea of abundance rather than scarcity.
But just understand, regardless of whether the rule holds firm and I get that because no rule is going to be ironclad.
And you know that talked.
About it in the pressor yesterday. He was like, this is something that has happened throughout history, but it doesn't mean it's always going to in the future.
It's absolutely not an iron law at all. And you know there are others.
Not a law of nature, it's not a law.
Neither is the curve inversion a law of incoming recession, as we've seen over the last couple of years. Nonetheless, just the insight, just the core intuition of negative momentum building on itself does that concern.
Yes, yeah, it is because ultimately people do need to consume. Ultimately people do need to spend. We have a problem measuring exactly where we are. But the intuitive reaction what you've just said, Joe is absolutely correct. So that's why I keep saying, can we have committed policy era? Yes?
Okay.
Can we wait too long? Yes? Could there be a price that will be exacted from the economists and the market because we waited too long? The answer is yes. Can you quantify it right now? The answer the answer is no, okay. And the only twist I have that we have a capability of reversing it faster than what we did fifteen years ago, twenty thirty years ago.
Joe wanted to go back to the FED. I want to go back to politics because I opened up one of your recent research notes and I had a minor heart attack because one of the things in it it asks the question what links us to the nineteen thirties and the nineteen seventies. So the idea here is that in nineteen sixty eight, investors, as you say, did not know they were going to face a devastating decade where basically they wouldn't make back their losses on stocks until
like the nineteen eighties or the nineteen nineties. As an elder millennial who has only just started building wealth in the stock market, I came to it kind of late. This is a very frightening prospect to me. What was your conclusion.
Yeah, absolutely, anybody who was investing in nineteen twenty eight, twenty nine would have spent until nineteen fifties getting at least real value of the investment. Everybody in nineteen sixty eight would have waited until early nineteen nineties again to get the real value. The conclusion was that they stum around. There rare some differences compared to twenty thirties or late
sixties seventies. One of the key differences is that at this stage, volatility of economic and inflationary outcomes are much less pronounced than what we had in those periods. The other difference is that the policy makers have a much wider set of tools that they available to them or to offset any extreme volatility that is likely to emerge.
And I guess the third area is nineteen thirties have their nick nifty fifties, you know, nineteen seventies have their own nifty fifties, but those were fairly conventional companies that just happened to have the right positioning in the time,
and they provided some degree of stability. Today, the equivalent of the old nifty fifty is actually driven by incredibly strong structural and circular drivers, mostly technology, but not just technology, anything productivity driven, which we really didn't have in nineteen thirties, and we really didn't have in nineteen seventies. This way relatively technologically benign areas compared to what we have today. So theoretic our equivalent of nifty fifty, and by the way,
composition could change. It doesn't have to be a Magnificent seven or Magnificent four or you know, fang or granola. That composition will change, what constitute that basket will change. But the basic principle that we now have companies capable of growing and growing productivity almost irrespective of the environment that they're facing. That's quite different compared to what we
had in nineteen seventies. So my conclusion was, yes, there is a lot of similarities between the two political geopolitical lack of consistent commonly greed business economic, social political model on a global basis. That's why other people propagating other models. So there is a lot of commonalities, but there are differences which should result in better outcomes. If you're a millennium, just investing should result in a better outcome than those generally.
I guess, on the plus side, even if I experience like three decades of wealth building, I guess I'll be doing odd lots for the next thirty Literally, what I.
Was gonna say is, literally, you took it out of my if neither of us accumulate enough savings to retire, and it means we're doing odd lots until our eighties. Tracy, I am happy to keep doing it. I enjoy that. I'm happy to be here in the year twenty sixty four, still recording podcasts with you.
I commit to that now.
I want to be here, but you can carry on.
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