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I did a deadlift 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.
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No, I think that like in a couple of years, the AI will do a really good job of making the out launch podcast. And people say, I don't really need to listen to Joe and Tracy anymore. We do have.
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I think it's kind of weird to be worried about like some sort of recession or policy error on a day when like the market is basically at all time highs. Don't you think it's all strange?
No?
Really, I feel like normally we have these conversations about like something's going bad and like the market's down like fifteen percent.
Yeah, but market's not that prescient all the time. And I mean, as we know discussing on the podcast, a lot of that. You look at what's going on in the s and P. Five hundred, like a huge portion of that is just driven by a handful of companies.
Well, this is definitely true. The market is definitely not prescient all the time. But normally chatter follows the market.
Yeah, that's true.
But more and more people are talking about some sort of recession or or policy mistake by the Fed where they don't cut soon enough.
Yes, this is definitely true. So we have seen a little bit of softening in the labor market, we've seen inflation start to come down, and there's a lot of discussion about how durable that trend actually is. And yet if you look at especially fedspeak, if you look at fedspeak, they seem very hawkish.
I generally would agree. So here's the weird thing. Here's the thing that really freaks me out, which is that one of our friends of the pod, Neil Duddo, who has been like really you know, sunny and is always smiling and it's like always slaying the bears. Is a little nervous, Neil, Why are you nervous? That freaks me out that you're anxious?
Well, I just think it's important to look at the realized data, right, you know, everyone's looking at you know, what's the outlook and whatf they cut once? Is that going to reignite the entire economy and inflation? I mean, let's just look at the realized data, the information as it's been coming in. I don't think forecasting is particularly useful when all the Fed does all day long is talking about how uncertain everything is. To just focus on
what's actually happened. And what we know about what's actually happened is at the unemployment rate has jumped sixty basis points from its low point. It's rising at about thirty basis points every five months. If you you know, look at what's happened so far this year, which puts it on track to go up to four point four percent by year's end. That's higher than where the FED believes it's going to stay. And core inflation after a bumpy first quarter that by the way, is still edging lower.
It's likely that in May. Over the last year, core inflation would have run two and a half percent. So when you think about like a rules based framework, you know, I think it's important to sort of just acknowledge that across a variety of monetary policy rules, it all suggests that a less restrictive stance of policies required. And you know, I mean obviously back during the post GFC era, right, I mean, there was all this talk about, well, we don't want to run policy based on like a computer.
You know, what's the point of having it? Right, Like, you know you need to have some judgment. Well, if you're always uncertain about everything and you can't actually think, and you don't want you don't want to actually apply any judgment, maybe you should go to the rules. And the rules are basically telling you one thing, which is cut, and do it relatively soon.
Yeah, in my mind, it feels like at this point you could essentially do like an insurance cut, right, Like the momentum is kind of in your favor. And yet it seems like FMC officials, at least looking at some of the recent FED speak, they're really worried about this idea that like there's going to be a long tail in inflation, and if they're not really really going up against it, it's going to be the nineteen seventies all over again.
Yeah. I don't I don't really buy it. I mean, in the nineteen seven they took real interest rates negative, right No one's talking about doing something like that right now. I mean, I think what I'm talking about or advocating for, is that it's important to start a recalibration of policy. If they wait long enough, maybe they will have to go more. But the idea is to do a little bit now so you don't have to do more later,
and sort of stabilize economic conditions at the moment. I think what's important is that there's really not much of a right tail risk to the economy. I mean, I would agree with Joe in the sense that I'm not going to light my hair on fire over recession risk. But it's just important to note the areas of the economy that have been kind of responsible for some of
the slowing that we've seen this year. It's housing and consumption, okay, I mean, if you look at nominal retail sales and food services spending so far this year, it's actually basically where it was in December, so it's been flat for five months. And then when you look at new home sales, they've generally been slowing. If you look at new homes sold that haven't yet been started, it suggests that we're going to see continued weakness and residential construction spending over
the summer. So it's not just about the economy slowing. It is, but it's really about the areas from where that slowing is coming. And so I think it's important to just keep that in the back of your mind. And it's just to me, it's balance of risks, like what is the risk for the unemployment rate? Tell me the downside story for unemployment, Like why does the labor market retighten at this point? It's really hard to come up with it. And same thing and with respect to inflation,
like what's the upside scenario for inflation? So I think this sort of idea that they're just going to be a slave to the high frequency data and oh, just another few more months and we'll get there. It's kind of ridiculous when you don't have like a fundamental story for why that risk is really worth paying attention to. I thought it was really revealing. You know, I think at the last press conference, Jerome Powell was talking about import prices. He's like, well, you know, import prices rose
and we can't really understand why. And then literally like twenty four hours later, the import price number comes out and it was a complete dud, Like it fell substantially. And why would you worry about import prices if the dollar strengthening? I mean, how do you how do import
prices work? I mean, you know, it's just sometimes it's important to kind of stick with first principles, and so I don't know, I mean, I just they never really had a good explanation for y Q one was so firm in the first place, and they're sort of a slave to the high frequency data, and you know, I just think that you have to have like a fundamental
framework in place. And the way to sort of frame this to the markets is, look, labor markets are an important driver of inflation, and the way we think about the world and the lay the inflation, our impulse from the labor market is basically zero. We've we've trimmed excess labor demand, as is evidenced by job openings, which is a series that they've been paying so much attention to and if you look at at labor costs over the last year, they're running under one percent. So where is
the inflation going to come from? That supports a recalibration of monetary policy? Hice, And we can take by meaning my approach if that's what I would say. But you know, Joe, as you know, I don't have a PhD. I'm not at the FED, so you know.
I don't have a PhD. Tracy, do you have a PhD?
No, of course not. I have a postgraduate diploma.
I like the way you pose this question, which is that it's understandable in the abstract, to say you know, it's understandable in the abstract, to say, of you know their risk to both sides. But the owners does seem to be on the sort of hawks to say, okay, like, if we're going to get a re emergence of inflation,
where's it coming from? Because the story about labor markets and so forth was kind of a compelling story for years, except now we do have this pretty clear labor market slowing really across a range of a range of indicators. Here's my question though, like, all right, so they want to see a little more data they want to see
a little more disinflation. How much risk is there if like, Okay, they don't do July, they probably won't like September, maybe November, Like does it really matter, like if you know whether it's September or.
Noting November might matter.
Yeah, But like like when we think there, does it really get away from them if they like put it off a few couple more meetings.
I mean, the risks certainly build, you know, you know, I mean you know, I'm not going to say that the difference between July and September means the economy rolls over hard or not. But I definitely think the risks certainly build. The more they see, the more evidence they see inflation is slowing, and the more in transitence they sow in responding to it, the more the risk built for the economy. Because remember, I mean today's inflation data
represents yesterday's monetary policy. So what do we know about inflation. We know that inflation's already been slowing, and we know that monetary policy hasn't been changing, so a good first past estimation that inflation will continue to slow. So in that respect, they're going to be passively tightening policy by doing nothing. So in that, in my mind, that means that the risks continue to build. So you're talking about an economy that's only growing. You know, it's growing at
about two percent. Okay, fine, but the pressure will continue to build. And you look at the labor market. I mean, this is something a point that you brought up before. The only reason the labor markets look as good as they do is because the layoff rate is really really low. It's not like the rate of hiring has perked up
or anything. The rate of hiring remains low. So if companies are getting now to a point where they're feeling a little bit more cautious on the outlook, a very modest increase in the layoff rate will generate much weaker growth in employment. And to me, the fact that the Fed has been leaning in hard to this sort of positive supply story, that just adds to it, right because at that point, you know, any any weakness and employment growth will imply that much weaker demand.
Neil, you mentioned the idea of companies getting a little bit more cautious just then. I was overjoyed to see in one of your most recent notes, not just a mention but an entire rendering of the beverage curve, which is something that has been kind of like a hot topic in recent years. It's basically the relationship between job openings and unemployment. And for a while, lots of people were looking at the beverage curve as sort of like the key to whether or not we would have a
soft landing. But it was really interesting you were arguing that looking at the beverage curve, it seems like you could have an even larger increase in unemployment if things start to turn for the worst. Can you talk to us about that?
Yeah? Sure, So, as you mentioned, the beverage curve basically relates changes in the job vacancy rate to unemployment. And you know, for the better part of the last last year, we've been, you know, sort of the labor markets have been operating on sort of the vertical part of the of the beverage curve, right, So you can trim job openings or labor demand, I mean, job openings are a
proxy for excess labor demand. You can trim excess labor demand without seeing much of an increase in the unemployment rate. And that's more or less what we've seen for the better part of the last year. But if you look at where the latest points are kind of lining up, it looks like they've you know, we're basically we've normalized. So in other words, any further deterioration in labor demand from this point will imply, you know, higher unemployment. We're
no longer on that vertical part of the curve. And so that's what I'm concerned about. And I think the risk is, you know, unemployment never just goes up a little bit, right, I mean, it's it's either up, you know, a lot, or not at all. So we've kind of been what we've seen in the last year has been somewhat a history oracle in the sense that we've seen a you know, a fairly you know, notable increase in
the unemployment rate and we haven't seen recession. But I mean, how far do you really want to push that experiment, particularly when broader measures of labor utilization suggest that, if anything, the U three unemployment rate at the margin is probably overstating the degree of health in the labor market. I mean, if you look at things like the quits rate, they're actually lower today than they were right before the pandemic. That's of course true for the hire's rate as well.
You know, as I mentioned, I talked about unit labor costs. But the fact that labor turnover is so low and the quits rate's been coming down, that would suggest that there's not really much wage pressure out there. I mean, if anything, it's more likely at this point that firms are holding their workers flat relative to last year, more so than than changing their pay you know, for moving their payoff rather and so you know that that again,
I mean, so where where's the inflation coming from? If the labor markets are not consistent with an inflation or impulse, and FED believes that they're running a very very hawkish policy, they should be much more concerned about potential downside risk to growth than upside risk to inflation. And what do we know about growth? We know that growth is slowing relative to where it was last year in two important sectors, housing and consumption.
Tracy, can I say something that bothers me a little bit?
Uh?
Sure, you know now I'm nervous.
No, No, it's not that bad. But so listening to like the FED officials, I'm trying to think, I don't want to express an opinion here because I don't do that, but can I just say people, So there seems to be a Neil described the date of the labor market
as the hiring rate is down. So if you're looking for a job, your odds of getting a job have declined, right, But we haven't really had a layoff cycle, and so there seems to be like some comfort with this dynamic that it's like, okay, like this is softening, but like people who don't have a job in looking for a
job just because they're not recent layoffs, like they count too. No, for real, you know, it to be like this view was like, oh, well, it's okay because it's just that the hiring rate is down, but at least we aren't seeing like layoffs. It's like, yeah, I'm glad we're not seeing me as layoffs. But also the people who are looking for a job are finding it harder and harder. That's not good either, No, of course not.
I mean as an inventory thing works, right, guys, I mean you don't have right, I mean it's just basically it's taking longer for the excess housing and then the process that's driving up inventory. It's the same thing with unemployment, right, Like if you lose your job. At any given month, people are losing the job. It's taking those people longer amounts of time to find a job. Right, so over time you continue to like, right, it's like a bathtub model of unemployment.
Yeah, no, I get how the I get how it works. I'm just saying, like, they count too.
You should make a T shirt Joe that says they count to.
They count too.
Actually, this reminds me so. One thing I was thinking about is like, so much of the labor market titaness was driven by the services sector in recent years, and you know, we saw the displacement of workers there and then it took a while to get people back, and and there was a ton of pent up demand and everyone wanted to go out to restaurants again or go
on vacations or whatever. I do feel like potentially the peak of that is over, which kind of begs the question of, well, if you're not going to get additional tightness in the services market, then where does it come from. I don't think it's going to come from like AI investment and everyone suddenly becomes a chat GPT prompter or something like that.
To that point, if you look at average hourly earnings in retail trade and leisure in hospitality, they've slowed precipitously over the last year. I mean, those are the two industries, those two sort of service industries that gottled so much attention during the COVID pandemic because you know, sort of a proxy for kind of low end service work. You know, these are the people with hyperpensity to suspend. But their wage growth has been slowing over the last year. So again,
I mean, where's the inflation coming from? I just keep coming back to this point, like, where is the inflation coming from? You know, people, you know, you can point to oil or something. I mean, I just don't really, that's not really a broad increase in prices. Ultimately, the labor markets are an important driver for how the FED thinks about inflation, rightly or wrongly. But right now, unit labor costs are basically zero, So you know, I think that there's room for prices to keep coming down.
Obviously in private and in public and in every statement that any member of the FED has ever said, with kind of one exception, but I'm not going to say.
With this Wait, okay, I'll ask you afterwards.
They'll they'll say, politics just does completely not matter, you know, it's not our jobs, like time things around the election. Nonetheless, Neil, do you think the reality of the calendar right now? We have there's a July meeting, there's a September meeting, and then there's a meeting that's literally two days after the election or something like that. Does the timing of the calendar Do you think it's affecting how the FED is thinking about the timing?
No, okay, because I think that it's sort of your damned if you do, damned if you don't. Right, let's say that they they don't want to respond to the calendar, right, Like, let's say that they want to hold off on cutting because they're worried about doing something that looks political ahead of the election. Okay, that in and of itself is political, Yeah, okay, right, because what are the chances that, Okay, we should I mean this inflation data are slow and we should probably
get on with it, but we're not going to. In the process, the economy is weakening as a result of that. Then you have a new president that just gets that comes into office or just wins the election, and then boom you start the easing cycle with a fifty bases point move right, Like, how does that look? Yeah, so it's sort of I just think that you just focus on the data, do what you think is right. I do think that there's precedent for the FED moving in
events of an election. I mean there's this nonsensical talking point around Wall Street about how, you know, never has the FED cut interest rates in a September meeting before an election? Well, okay, BERNANKI launched open end at QWI in September of twenty twelve. I mean like it's like one of these things where it's like, yes, I guess that's technically true, but also irrelevant because we were never taking rates negative. So instead they launched an open ended
asset purchase program. I mean, is that enough? So? I think the FED has shown that it's willing to do things at politically sensitive moments, you know. I mean many of the people that are talking about how the Fed's political have also been the ones talking about long and variable legs right for the better part of the last you know, eighteen months, And if the FED does something in September, like, how does that help bide in any meaningful way? In November?
Neil I'm going to ask you to do our job for us. But Joe and I are supposed to go to Jackson Hole in August. On the off chance that we run into Jerome Pal hiking through the woods or something like that. What should we ask him?
Tell him that he should be cutting through the world, Just tell him to cut. I would ask him, if the unemployment rate rose two tenths of one percent in twenty twenty three, with the real economy growing three percent, why would it stay flat for the next two quarters with the economy slowing?
Oh, this is the set right the dots?
Yeah, how does that work? Explain it to me? Oh? Man like that would be one question I would ask him.
I think Pal is going to be running away from us in the woods.
And I would also ask him, does he think that inflation is a lagging indicator? Like Ben bernanke yes.
Ran, that seems like one source of firmness. And our friend Connor has been pointing out. Connorson has been pointing out that if you look at some of the apartment reads, those are actually doing pretty well, and there are signs affirming there was a story in the journal. I think last night or this morning, we're recording this on the twenty sixth, talk about how investors are sort of bullish
because this supply constraining effect of the rate hikes. There's going to be sort of minimal new supply coming online, and so that creates upward pressure on rent in the long term. That is one area that people we have not seen the slowing that people would like. If you're asking the question where does the inflation come from? Could it come from shelter in some measure or another?
I think it ultimately boils down to the labor market, Joe, I mean, I don't like to get I mean I think, frankly, the reads story is essentially like an interest rate play. I'd be perfectly honest with you, okay, right, I mean reads are rallying, whire eats rally and reads a rallying because interest rates have come down, and that's like reats are thought of, like, you know, like an income substitute. Right, So it's I think that's that's largely what's going on.
It's just it's a derivative of lower interest rates and the FED expectations. But I ultimately think what drives rents is how people pay for those rents, which is wages and salaries, So you have to tell me why wage
and salary income accelerates. I mean, like, if you get into a situation where you know shelter costers are quite sticky, but people are seeing their income slow down, that just means they're going to have to cut back in other areas, which will then drive the prices for those things down. So I just I think that's part of the issue with this kind of bottoms up approach. I kind of like to look at it sort of more of a top down perspective.
Tracy, have you gotten the five dollars McDonald's meal yet?
No?
I haven't.
Are you going to?
I mean, I guess, Wait, what's in it?
Have you not seen it?
No?
I haven't legit. You can get a small fries, a coke or a drink, and like a chicken sandwich for five bucks.
I don't like the chicken sandwich, or.
There's something else. I think there's two options. I think it might only be chicken.
I only see what the McDonald's app chooses to show me nowadays, and it hasn't shown me the cheaper meal unfortunately, Neil.
Will you try it? Do you?
In my diet? You know? Okay, just make a sure but if if Subway brings back their five dollars foot longs, I might go for it all right.
I like the idea that the Fed needs to cut when Suboy brings back its five dollar foot.
Longs, that that General Mills story today will be interesting. I mean, if focusing on trying to boost volumes, like, there's only one way that can happen, right, volume.
It's a volume over price.
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