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Did you read our newsletter con trips this week? Neil Data and Scanda.
It would be terrible if I didn't. Not only did I read them, I lightly edited them.
That's right.
You did? You did?
You did?
I think I uploaded the text of them and then you edited them. I did a deadlist.
I'm both the most popular trader and most successful trader at citadel.
FEA is going viral.
H 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.
Black goals.
These are the important questions that robots taking over the world.
No, I think that like in a couple of years, the AI will do a really good job of making the out launch podcast. One day that person will have the mandate of Heaven.
How do I get more popular and successful?
We do have Welcome to lots More, where we catch up with friends about what's going on right now.
Because even when odd Thoughts is over, there's always lots more.
And we really do have the perfect guest.
I have to say, though they were both great, and I'm not just plugging our newsletter. Those were outstanding contributions, and they sort of build on something that Scanda pointed out earlier in the newsletter about how embedded or how important AI is becoming to the US economy.
Yeah, and like this idea like there are signs of slowing Oh yeah, I feel like we're in a moment where actually there just aren't really many people talk about the economy because we're either so transfixed by the goings on in Washington or certain big tech stories like AI that were in a period where there's this lull of like just the meat and potatoes, like what's happening with initial claims, what's happening with housing starts, what's happening with
the jobs report? And there's actually signs of slowdown?
Yeah, and there's also signs well, there's also signs of inflation picking back.
Yeah.
And so that kind of raises the question about what's the Fed's reaction function here. We thought it was sort of skewed towards preventing a recession a little while ago, but now like maybe they start caring about inflation again.
I don't know, But you know the other thing that's happened over the last week is that we have had this pretty substantial drop in ten year yields. As of the time we were recording this, which is March twenty seventh, we touched four point twenty five yesterday. We had been at four point six five on February twelve.
So it's like the curve inverted again as well.
The curve. It's a weird time, John Turk, what do you think, Why what happened that we were at four point sixty five percent on the ten year February twelve and right now we're at four point two eight eighty six.
Yeah, I think it's it's an interesting one.
I mean, as you guys kind of noted, I mean, I think we came into this year with a lot of excitement in terms of, you know, what the policy impulse would mean for the economy. It seemed that the animal spirits we're going to lead to a more meaningful real growth impulse. I mean, I think the famous Dan Druckie Miller said in a note or on a TV interview that he hadn't seen the business community that's excited
in like his forty years in the business. And you know, I think that We've had a little bit of a transition in like what that policy impulse means and the fact that it seemingly.
Is two sided. You know, as we're seeing today.
Tariffs are also a big part of that policy impulse, and as we've seen over the last few weeks, it has a very unevenness and too, either both the implementation and the scope. So I think, you know, the market kind of has had to adjust to you know, a policy impulse that seemed to be unambiguously positive to one that's more mixed, and I think the tenure is just you know, kind of a reflection of that. I would also note, as Tracy pointed out about you know, sort of inflation pricing.
You know, a lot of the moves, especially.
Since the middle of January, is has been in real gyields lower as in tenure break events have actually stayed
pretty firm. So you know, I think that the yeah, the economy is having to the market is sort of having to deal with you know, economy that's been a little more confusing, and you know, the policy impulse is is more muddled this time around, where you have you know, the potential for tax custody regulation on one side, and just a lot of tariff uncertainty that is potential in scope, much more drastic than we saw in Trump one point
zero ye. So you know, I think that that is, you know, sort of at the nexus of what's going on here. And you know, just to add one more thing, you know, you guys kind of made it up of like the meat and potatoes of the economy. I think that you know, for the last two years, we've been
in a very stable nominal GDP regime. It's we've kind of oscillated between high fours and high fives, and you know, the economy seems to be running on a few less cylinders than it has been in the last couple of years. You know, consumption is much more uneven and very biased towards the high end outside of the AI capex cycle really isn't that much capex. And we've seen that housing has been in a lull now for a while, and you know, hiring isn't that high.
So it's just a much more, you know, a lot more cross currents.
Than I think the market probably had anticipated six weeks ago.
So we are recording this on February twenty seventh. In about a week we are going to get us payrolls for February. We just had initial claims, as Joe mentioned, showing that they jump to the highest level so far this year, I think, increasing by twenty two thousand. A lot of that is the cuts in d C. What are you saying on the labor side of things, Yeah, I think that, you.
Know, from the labor market perspective, I still think the economy is in a decent equilibrium in terms of that we have a pretty stable unemployment rate, We're still churning out pretty respectable levels of payroll growth per month, and that that's you know, sort of been noted by the Fed now that you know, they're much less worried about the labor market side of their mandate.
Than they were saying Q three.
You know, but I think what's a little bit worrying is that the labor market is kind of coming into this, you know, whatever the DC impulse is. You know, I would say a little bit more vulnerable to shocks than it's been maybe over the last few years. And I would I would namely say that because the hiring rate is still quite low, which means it doesn't take much in terms of you know, negative payroll impulses to sort of lead to more drastic jumps in the unemployment rate.
So you know, I don't necessarily look at it right now and say, you know, there's an obvious threat to three months the labor market being materially weaker than it is now. I still kind of get the sense that it's pretty stable, but I would say that kind we feel a bit more vulnerable given that we don't have the cushion of a decent hiring rate. So probably a
bit more vulnerable. You know, if this DC impulse is more of a shock, that could you know, it could spiral a little quicker now than say a year or two ago.
I saw someone make this point on Twitter. I wish I could remember who so I could give them credit.
He said.
One encouraging thing that we've seen lately in the markets is that at long last, there are hints of the inverse correlation between stocks and treasuries re emerging. That was the famous condition of the twenty tens that if stocks went down that day, your treasury is probably did well,
and you got that beautiful hedging effect from that. And then it famously blew up in the immediate wake of COVID, where you'd have these big down days in stocks and also big down days and treasuries as inflation took center stage, is the main source of economic worry, et cetera in
recent days? Are we potentially looking at signs that we might go back to something resembling more pre COVID patterns And is that a sign that the price on the so called fed put is not so as far out of the money as it had been in recent years.
Yeah, it's a good question. I'm not sure, you know.
I think that, you know, the simple empirics that have kind of come out is that when core PC is printing below three, you'll get a decent buffer from treasuries in the way of a growth shock that will, you know, cush and get the risk asset side of your portfolio.
And when you know.
Core PC is above three, you don't have that, and you can their worlds, as we saw in twenty twenty two, you lose. You lose on both. I think that it's it's a little early on in terms of kind of getting a sense for like what the tariff impact on spot inflation is going to be, because you know, I think that what's different to me about this time versus you know, Trump one point zero is the psychology of price stting is totally different.
Yeah, and as.
We see every Q one, you know, even in an economy that's you know, much more balanced in terms of inflation, where we you know, we've noted that you know, companies don't feel this same ability to pass through price, but we see every Q one the price resets. I've still been pretty strong, especially as its place is now like Canada, who are you know, being inflicted in all this?
It seems that you kind of have to keep.
An open mind that you know, spot inflation could move a decent amount if the price centers feel that in the post COVID world it's much easier to pass through any pain on their input side to the output side. So I think, from like a base case, I think it's fair to say that, you know, we're not durably going to a core PC plus three world, so that Treasury should sort of.
You know, the underlying fundamentals of the sixty forty should be okay.
But I wouldn't say it's all you know, it's it's kind of all clear for return to the pre COVID world. We just don't really know yet how price centers are going to internalize this pass through.
Yeah, Joe, I remember Tom Barkin over at the Richmond Fed making exactly this point, this idea that one of the things companies learned from the post COVID world was just how fast and perhaps just how far they could push on price. And so that's still lingering in their minds, even if they're not doing it as much as they were back then. So it seems like they could raise them very quickly if they if they saw a jet No.
I'm fascinated by that. The reminder that price increases can be part of the corporate playbook is not going to be forgotten. By the way, I should mention John Turik as the founder and CEO of JST Advisors. Been a few years since we had them on. It's nice having
them back. Let's talk about the DC impulse. So I think right now, these cuts that we've seen towards federal employment, you know, very few people would say they're going to meaningfully change the dial on you know, deficits, et cetera at this point, but they're real, and there happened, and there's a lot of anxiety and there are a lot of people who are out of a job that never expected to be And there are a lot of stories we saw in a recent there was I think there's
the Conference Board survey respondent saying that expectations of fewer jobs existing six months from now that spiked in the survey highest level. Now, I think since like twenty thirteen, talk to us like a little bit about like how you are thinking about the sort of macro impulse from the labor market cutting that's happening in DC.
Yeah, I mean I think that, you know, as a as a baseline, you know, it's hard to see that it being a you know, an outsized factor in terms of like kind of the status quo in the labor market. But I think, you know, kind of as I said, I think you have to kind of take it in the context of the hiring rate in the economy is lower now, so I think the labor market as.
A whole is more vulnerable to.
Things that you know, kind of net net shouldn't be as big of a deal. And I think that's kind of gotten the market's attention as we you know, we've kind of, like you know, over the last few weeks, entertained more left tail risks is that, you know, the starting conditions really matter when you're dealing with exogenous variables, and you know.
The starting conditions for the labor market are.
You know, it's steady, but it's not bulletproof, and it has been bulletproof, you know, probably for.
The last three years, maybe really since COVID.
So yeah, I think, you know, it's hard to say, you know, it's hard to map out the sort of the spillover in terms of like you know, what number claims will be in four weeks, But I think you really have to keep an open mind to the left tail side that the starting point isn't great.
By the way, Tracy, for people listening who want to understand this sort of why some of the engines that are not that we're growing are not there anymore, I thought, you know, so Neil's more points, real lend coomes aren't rising anymore, the housing market is no longer showing the signs of life. Local government spending is clearly there is a fiscal retrudgment. Clearly it's not just what's happening in DOSE, it's also state and locals which are no longer flush
with money. So like they're like, this is when when John here is talking about you know, not as many engines are firing. There's some pretty big forces that sort of give people caution or why the hiring rate is not great right now?
Yeah. Absolutely. And John, you brought up earlier the tariffs, and I think some of those are slated to start as soon as next week. How long would you expect it would take for the effects of those to feed into the US economy, either in terms of corporate earnings or the inflation rate.
You know. I think the interesting thing about tariffs as opposed to a lot of other policy measures is the impact is like fairly mechanical, so you know it immediately it has its effects impact, It immediately has its you know,
direct trade impact. And I think, you know, kind of the deeper questions will be like what are like the broader externalities, because I you know, something that like really fascinated me was Governor maclam gave us a Bank of Bank Bank of Canada gave a speech last week and he was talking about sort of like what these numbers would mean for the Canadian economy, and he was saying, well, you know, they're huge because you know, trade is twenty
five percent of the national income in Canada trade with the US.
Excuse me?
Will that impact because it'll eventually sorts sort of you know,
feedback into the US. So, you know, I think that, you know, in terms of the scope, I think that the two things now that are sort of critical are you know, in terms of who eats sort of the cost corporations really you know, take a bigger share or while they try to pass it on, and then I think, you know, sort of the you know, the next the next big dominant will be the question of like what is the bigger impact the mechanical effect on price or
the more psychological effect on growth, where it just becomes very hard to operate in an environment where you know, we're a you know, a tweet of away from or sorry whatever platform uses.
Now from like a you know, it's very hard to plan in that sort of world.
You know, we had two weeks ago we thought we were delayed until April, and then today it comes out
that they start next week. You know, I think those are kind of the two like very immediate questions that will get a real feel for, I think pretty quickly, and then you know, kind of zooming out the bigger questions is like how does the global economy absorb this because some of these numbers this time around, and I think it's a big point emphasized, where like a lot of the tariffs last time, we're really focused on China and substitution effects like kicked in pretty quickly, and also
the companies had.
Time to sort of digest that this was coming. Where this time around, both.
In terms of scope and who it's applicable to, seems much more vast.
So you know, I think that will be uh, really crucial.
To watch Tracy. Something I've been thinking about a lot is that if you want to find like the sort of first of all, admire the fact that Trump still pushed primarily primarily to truth. So even though Twitter is sort of the spiritual home of trump Ism is on Twitter. So the fact that he's sticking the truth social I sort of admire.
Do you think talks to him wondering.
Like what does Elon think about this, that he's still holding out on truth social anyway? You know, I always think, like, you know, there's sort of like a core pillar of the sort of Trump coalition in the United States is like small business owners and small business optimism. You know, it's been through the roof since the election, but they
don't like tariffs by and large. And if you look at any regional business survey, et cetera, you'll find a lot of clearly politically inclined respondents who are excited about the Trump administration and then say, but we're worried about trade. And I'm actually, for the first time, especially assuming these tariffs go into effact, extremely excited about the headline numbers of the FIB survey in the coming months. So you have this core Republican constituency which is totally on board
generally with everything except tariffs. I think that's gonna be something interesting.
You know, It's going to be really interesting to see whether I guess political allegiance trumps some of the feelings around business effects. Ooh, I said Trump's there's a pun for you.
It's crazy his name is Trump. Sorry, I always think, like, what an amazing appam anyway, I mean, you owned the casino and his name is Trump. I know this has been observed hundreds of times, but it still always blows my mind.
Thank you Joe for reminding us.
It's his real name that blows my mind all the time.
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