¶ Intro / Opening
Bloomberg Audio Studios, podcasts, radio news. So here's why I'm so confused right now. Like, if someone said to me, just one reason, if someone said to me, look, you know, the economy is slowing down, clearly, job creation is in the tank, is decelerating, housing is in the tank, et cetera. There's a bunch of sectors that are soft.
When you'd rate.
Cuts, okay, that sounds good. Inflation has come down quite a bit from where it was, but it's still elevated. And then if someone said, look, the stock workers record high PPI just came in super hot, Inflation is still above levels, et cetera. Are you insane to even be talking about rate cuts, I'd be like, oh, yeah, okay, that makes sense too. Like I find many kinds of arguments to be very persuasive right here. I don't have strong views.
I'm not one for hyperbole. I try not to be right. I try to be a good journalist in that sense. But I would honestly say, like, this is one of the most difficult macro environments to call in probably my professional career, which is longer than I would necessarily like
it to be at this point. But as you said, if you look at the stock market, which feeds into financial conditions, right, look at financial conditions, like financial conditions do not look that restrictive at the moment, and yet you do have people who say that, actually we are still in restrictive territory and the labor market is weakening, as you said, and so we need a rate cut.
So we have this one body of people who are talking about a potential FED policy there, and then we have another body of people, including people from the Trump administration, who are talking about the need to do a different
¶ Unpacking Current Macro Confusion
the basis point, Yeah.
It's all totally. You could make the argument that the FED is either committing a policy or now are contemplating a policy. Then there's this whole dynamic with the fact that we know that there's this one incredible thing going on, which is all the AI spending, and how that actually intersects with macro is very confusing. So we have Jackson Hole next week, which we're going to be.
Ad I'm excited about jackson Hole. So the scuttle butt for journalists going to Jackson Hole is that apparently, like the room are even higher depend than normal because behind all the macro debate, which we just laid out. There's also the question of FED independence. Right, so interest in jackson Hole is like higher than it's ever been.
It's going to be a big Jackson Hole. Whatever the formal theme of the conference is going to be. You know, there's going to be some academic theme coming up. Whatever that is, that's not going to be the theme. The theme is going to be all of the talk about FED independence. I did a deadlist.
I'm both the.
Most popular trader and most successful trader.
At Citadel FEDA is going viral.
Uh barches.
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 odd Launch podcast. One day that person will have the mandate of heaven.
How do I get more popular and successful?
We do have.
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'skanda.
And I used to have you here in.
Our when Joe's confused, you're the guy we turned to.
Yeah, that's right. Let's start actually just quick take. We're recorded this nine oh four August fourteen, about thirty minutes ago we got that really hot PPI report. But also I don't know what that means, Like, is a big deal. What does it say? What's going on there?
Is it?
What does it mean for PCE? Is it means that margins are going to be crimped? What's going on there?
I mean, I think for PPI today should be seen as at least showing the inflationary side of the story is still there. Okay, not just in terms of like some of the aggregates may be distorted for a lot of reasons, but what matters for the FEDS inflation gauges got moved up a bit. Okay, So what you're going to be tracking for inflation for July, PIPPI both matter, and so that's going to be moved.
Up a bit.
So we're gonna be running it roughly two point nine percent on core PCE. Substantially, we are higher now than we were last year. It is like it's starting to look like the progress is starting to turn the other direction. Now there may be some reasons why it is transitory this time, that it is temporary, and yet it doesn't really feel great, and I imagine for Chair Powell there's
a feeling of wait. I remember in twenty twenty one in August that was pretty confident that it's just going to be short term, and then we saw some increases and I said, well, we got to focus on in the labor market back first, and then people kind of have held that against him accordingly, But now we have
¶ Inflation Outlook and Recent PPI
inflation picking up, and yeah, we also see a lot of job market maybe employment levels look fine. Yeah, the momentum the job growth that we're seeing in the latest release is understandably spooky too.
I asked Mary Daily this question before. But do starting points matter here? Because if you look at the labor market, the labor market as it's been really really strong in recent years, like certainly much stronger than people had expected. And so, okay, there are some signs of softening now it does seem to be losing momentum, but we are still starting from a place of strength. Does that mean potentially the FED can you know, maybe let that one go and look more at the inflation risk.
To your point, I think it certainly matters, It's not the only thing that matter. I think momentum and starting point both matter, and the starting point is better. The momentum is some of the weakest we've seen outside of recession in a while now. Some of them might be due to immigration, some of that might be due to tariff uncertainty.
Some of that might be due to.
Interest rates are higher, and that matters for some sectors more, even if the financial conditions you just talked about are still pretty accommodative if your time about capital markets. So these are all kind of confusing in terms of what is the actual, like labor market trajectory that's permissible. I think the FED is right now inclined to cut in September, given what we've seen in the labor market data. But I will just warn just as the data got revised
before it could get revised again. It may be the case that May and June were the weakest months for job growth and that we see some local acceleration just
¶ Labor Market Trends and Fed Decisions
because there's a little bit more certainty on trade policy than there was before. So there's still another job support before the September meeting, and there's another bat to inflation data that's also going to come out, and I think that will actually probably matter in the sense that typically you see price changes that are more volatile as you get into back to school season, holiday season, the turn
of the calendar year. What we've seen thus far is typically the more benign months, you typically don't see prices change that much. So there's still a lot to play for in terms of going into the September meeting.
So here's the thing I've been thinking about, trying to conceptualize what's going on. And you know, as Tracy mentioned, we talked to Mary Daily last week in Alaska and she's kind of the view right now or she says that she does not think that the tariffs will be particularly inflationary ors inflationary on a sustained basis, And you know, there's certainly an argument tariffs are tax increases, and tax increases we don't think of as inflationary. We think of
them as disinflationary if anything. On the other hand, they throw a wrench into supply chains. They have very different effects across different like they sort of strike me as like a bit of just like throwing sand into gears. And if you combine throwing sand into gears with really big deficits, and now that I'm middle age, I talk about deficits. We've got a pretty big July deficit number. It was ten percent higher than the year before. This
is despite the tariff revenue. If you're throwing sand into gears of industry, making commerce less efficient by creating all these frictions, and you're pushing in all this money by expanding deficits, that strikes me as a potentially inflationary cocktail.
I would agree.
I think that's possibly have both right, that there is some what I would call stackflation light right that it's obviously unemployment rates are still low. That's pretty distinct from the stackflation of the seventies. But the momentum in the labor market seems weaker because I think there probably is for any sort of trade sensitive sector, think about construction, manufacturing, retail, trade, wholesale, trade, warehousing.
¶ Tariffs, Deficits, and Stagflation
These are all showing weakness and job growth more recently, and so we're seeing that side of the equation that should be disinflation area at the margin, because less labor income should mean less consumer spending and at the same time you're putting in costs adding to the business cost structure in ways that businesses can't stomach bey on a certain point, right, So some businesses are probably roll positioned to absorbit the hit to margin, but there's a limit to that as well.
I think the issue with sort of.
The tariff flesh trade shock, the modeling of it is if you have costs be pushed through to consumers over time that can still be consistent with just real incomes sort of declining even if nominal income growth is onstead of your footing. And so that would be a very tricky backdrop for the fit to navigate.
Just going back to inflation for a second, can you walk us through what's going on with energy prices at the moment, because on the one hand, oil still pretty low, as we talked a lot about in Alasta that or yeah, people really care about the price of oil in Alaska, not necessarily the way that most car driving Americans do.
So it's funny like in America on oil to quote lower forty eight, which is a term I'd never used as much than in the last week. It's like an oil crisis is when it's really high there, it's the exact opposite and right, keep going.
That's right, Okay, so oil prices are low, but at the same time we're seeing some electricity prices rise, possibly a sort of crowding out effect from all the data center demand and AI enthusiasm and things like that.
Yeah, so I think that there's a bifurcation and energy prices. Right, So we have your standard commodity prices, specifically for oil, have stayed at the lower end of the range. Right, we're still diffinitely speaking in the maybe low sixties, right and WTI.
So these are prices that.
Should be not painful for the consumer. Yet we also have electricity price increases. And the electricity price increases that we've seen, some part of that is due to natural gas price volatility, although natural gas prices more recently have come down, but there's also an there are a lot of things that go into electricity prices that are independent of that. So in a lot of regions of the country we're seeing capacity looks to be short for the longest time. A lot of these a lot of what
¶ Energy Prices and AI's Economic Footprint
you call thermal sources of electricity generation are typically not very economical. Right, We're economical as short runs since because we have more capacity than we need, so the ability to be paid for that capacity is not great. So that's why we retire coal plants, we retire nuclear plants. Now you're seeing the other side of that, right, and it takes a long time to build that stuff, and
so the retirements have are coming to a pause. For Hey, actually we might be short on capacity if the data centerler demands are there, and building new capacity is very expensive, very time intensive, and that seems to be an issue.
And at least a.
Number of major regions there's like the mid Atlantic region PJM. You're hearing this also show up though in terms of rates are increasing in Georgia. And New England has its own set of problems because it burns a lot of natural gas electricity but also doesn't have the requisite pipeline capacity.
I love that I'm double hedged to New England energy prices plus conned in New York. Although although I do have solar panels in Connecticut. Now, as we were discussing, so sometimes sometimes my bill is actually negative, which is lovely.
The Texas hedge. This is the thing, which is that so I mentioned in the beginning, so much investment happening in AI which doesn't seem to like, I mean, doesn't seem to be paying off economy wide yet. It's not like we've seen some great dissinflationary boom or all these companies suddenly getting more efficient. Though maybe there are I'm sure you can find pockets. But there's a lot of spending, and there's a lot of spending on gear, and there's a lot of spending on buildings, and a little bit
of spending on labor. You know, some people have been talking about this crowding out of fact. Jason Furman talked about it in a tweet that maybe this just feels like a fiscal crowded God, is that fair at this point or is it too soon to tell, like whether all this expenditures.
Has been writing about this quite a bit as well.
Yeah, I'm curious how you characterize.
It right down.
I mean, obviously there's some bid for resources that could otherwise be deployed elsewhere, and also a bit sort of if let's say you're an investor and you're obviously some level of capital constraint going on, if you're investing everything in AI and basically cutting spending an investment in other areas there's some sort of crowding out effect. But I would just also caution that's like a secondary effect right there.
The primary one is still that there's more investment. But do us on.
The electricity front though, is that connected or is that still just our manufactors pushing up the electricity cross and maybe data stiers are one.
I think the data center effect is something probably better to describe up until this very moment, like we're probably hitting something. I'm an inflection point, right, so you are like load demand for electricity has stopped sort of having the sort of its local stagnation. Okay, but we haven't
yet seen the pick up. The pickup is probably coming very soon, maybe right now, And as that happens and it has its pass through into pricing over the coming years, I think there will be some sort of so super cycle dynamic to this that is likely to weigh on costs and investment.
Just sorry, just a week there, Like those are like price increases in Georgia that people are talking about, or it's too early to say, oh, that's data centers.
It's a sort of yes and no question where the economously give you both answers because it's like if something stops going down and starts flattening out.
And starts to pick Yeah, yeah, there is a like.
It may not have started going up in outright terms, but the dynamic is, it's part of the dynamic.
So I think that I think it's it's both.
As we mentioned, Joe and I are going to Jackson Hole next week and the theme doesn't really matter. The theme is central bank independence. And if Powell is going to do what President and Trump is asking him to do, which is cut rates, I'm thinking how to characterize this question, How does like the central bank dynamic actually feed into the discussion around rates.
I mean, I think there is on one level of the Feder will tell you they're putting the blinders on and they don't listen to what Scott Bessen does. One of the most actively lobbying for was fifty basis points. And yet you can't deny that there is going to be some issue of how does the Fed do something in a way where it doesn't look politically right. Legitimacy in some ways of whatever the Fed does gets undermined.
There's an optics problem.
If they don't do what the Treasury says, then they're clearly trying to push back against the Treasury in some way, and so then there will be one set of stakeholders who are upset, and at the same time there are others who will be saying, like, if the Fed does cut fifty basis points, it's like, Okay, they're just following
the Treasury, which just listened to Scott Besson now. And that is a dilemma for how you really handle the optics that Mary Daily talked about this on your episode, which was you got to try to just explain your decisions, try to be transparent, try to be consistent.
That was really important things.
It'll matter to a point, and yet I'm sure there'll be plenty of cynics that needs.
To start tweeting in all cats.
Uh did you see the headline yesterday. I think it was attributing CNBC that David Servos is.
Know you guys laugh. I like David.
We have never had him on odd launch and which is an oversight. I've always liked talking to David though, but I feel like, you know, we never got unfortunately, Paul McCully, the VET, the long haired iconoclastic guy from industry. Yeah, and David Servos is like the next best shot of this sort of iconoclassic guy who comes from Wall Street. I like David. I like David. I feel like, you know, he was like the closest thing to like a contemporary kind of a mccaulleyish character.
I will say, from a sartorial perspective, it would be very interesting.
Yeah, I like I've always loved talking to David.
I mean, he would certainly be a character, and so you probably get livelier press conference.
Press coverage. Do you have any thoughts on the derby? Every day the list of names gets longer. Do you have any thoughts on this process.
I can't take it seriously, right, I think as far as the number of names that have been thrown, I don't think Yellen is being consideractive.
These are these are things that seems to very very I.
Saw that, and yeah, there.
Are some names, so, I mean, there are some names to take seriously. I'm not saying that.
I do think the length of the list being offered, some of them are clearly not serious. Name is being put forth, but it may serve some tactical purpose for the kind of policies they want. If they're trying to broaden the list of people who they're considering. Get those people to lobby more actively and publicly for lower rates, then that might be something Nick Timrose.
But the Journal pointed this out in an article, which is that if you have one hundred people who all think that they're in the running to be Ventcher, that's a hundred people going on TV saying now it's a great time to cut rates. And then you're sort of like, wait,
¶ Fed Independence and Market Credibility
why is it Powell cutting rates? Everyone on TV knows now's the time. So yeah, there are some deep brilliance going on here.
I do have asked, though, like all the lobbying for lower rates, we have substantial number rate cuts priced in over the next twelve months, and yet long.
Term indust rates haven't really budged that much. Yeah, which is if you think about, like.
Where the pain points in the frustration are with like higher interust rates right now or at least if you to extendnything. Four point three percent fed funds rate is high, and that's part of the reason why tenure yields are at four point two four point three percent roughly speaking, like, you're not getting much effect from the rate atecuts being
priced right now. And I do think I kind of raise some questions about what is the actual objective here, Even if you get the rate cuts you so desperately wish, especially if it's coming, if it.
Doesn't feed into like the thirty year mortgage.
Rates, Yeah, exactly, like housing was the big pain point and you're not really getting that effect. That to me suggests like there is some level of a credibility gap if you're just saying I'm going to cut rates no matter, no matter what the inflation rate is, because I want to do it for political motivation. I mean, I want investors obviously need to be compensated on some level for risk, or also for the risk that maybe some in the
future rates might go back up. If the people who are arguing for lower rates today would argue for higher rates under a different political environment, that's not exactly. That doesn't lend itself to keeping getting long term interest rates lower.
And Oh, what's your take on why long term interest rates haven't gone lower?
I think there's probably two things here that stick out to me. One is, well, inflation still seems like it's there, right, We're haven't gone things back to two percent, and so there's just a risk of the Feds being caught off sides here, if the FED starts to cut more aggressively at a time when inflation might pick up, you can say, well, this time inflation is transitory, but it's like we're dealing
with potentially big macro adjustments. They might be costly, and if nominal incomes labor income growth is reasonably solid, the cost might get pushed through right to the consumer because the consumer can pay. And that's a that markets have to be sensitive too. So there's a level of well, you're actually adding more inflation risk, and so that needs to be compensated for.
There's also I.
Think a level of political manipulation risk, right if you actually did lower rates for reasons that aren't really grounded in data. I mean, Kevin Worre said, I don't care about data dependence. You're not doing things for like relatively neutral reasons, and you're doing things for political convenience.
One.
The political convenience can cut the other way at at another point in time. Let's say there are people who are doing things for partisan reasons today and maybe it's a different person in the White House in the future. And then there's also just the issue of well, there's just more instability.
I want more compensation for that risk.
And I do think like we're seeing if you look at the slope between five years and five year notes and ten year notes normally high, even considering that rate
cuts have been priced in. I know that Joe is a little term premium skeptic, and I, to some extent am too, But I do think that there's more suggestive evidence now that you are seeing more demands for compensation for risk, and that again kind of speaks to undermining independence if you think that this process of setting interest rates is not really being guided by something relatively neutral politically, something that's more focused on the data, but it's really
just about pleasing certain presidential preferences and whims on a short term basis. As a long term investor, I might want more.
Compensation for that. There's some some merit to that argument.
At least, don't worry at Jackson Hole. Joe and I are going to sit around a campfire and meditate on the of the term premium.
Yeah, that's right, we're going to get it figured out. Actually, don't these clowns in Washington, d C. Need to stop their addiction to borrowing money. I'm entering my AM radio.
This is this is back to your middle age.
I want to be a yaccur on a radio. Don't these clouds of DC you need to stop spending. But deficits are very large, like you know, setting aside politics, they're very big, especially given the low level of unemployment rate four point two percent. Like, we're spending a lot of money, and that's a lot of money, big pushed into the economy, much of it going to low productivity areas because of the growth of like healthcare, et cetera.
Don't we need to have some good old fashioned fiscal consolidation With inflation still at these elevated levels.
There're certainly an ard for it.
If you wanted to try and get demand down, then you could possibly do that, right, So if you think demand is a problem, right, then you probably wouldn't be so worried about the labor market, right.
So that's one part of it.
I also like folks that have been saying this, the tariffs are a big revenue raiser, right, One part of it is, Yeah, we're still seeing like either the fact is like it's just doesn't matter in the context of the deficit. Yeah, in which case it's not a big revenue Raser. It's one argument you can make if you think it's actually still a lot of money being raised and yet we're still seeing ten year yield dynamics as
they are. Maybe it's something else. I mean, I think the problem always with the story is about deficits and how they interest rates tend to always be there's like a missing link there, or at least there's not a lot of robust correlation here between the scale of the deficit and what interest rates.
End up looking like. And I do think like institutional.
Descriptions of what's going on kind of have a little more merit, Like we are doing some things at the Central Bank and in ways that can undermine investor confidence.
I think that strikes me as more compelling. But at the margin, if you wanted to address the deficit for whatever reason, yeah, there's probably a lot of room to do that when we've just did a pretty big sort of consolidation of corporate tax cuts and at the same time, like there's obviously an aging population that does have more demands for the major social insurance programs.
Thank you, Joe.
Yeah, I've become a crazy It's just like we need to I'm not gonna I don't give policy advice. By the way, Tracy were telling us Konda Amornath, executive director of employeeent Oh yeah, we should just twenty minutes, and probably should have said that.
Okay, so we're going to Jackson Hall. One of the nice things about Jackson Hole is that you can run into people well, you know, just if you're hiking outside of the lodge the hotel over there. If we were to run into Jerome Powell, what's the one question we should ask.
Well, the one question I selfishly am interested in is what are they going to do with the framework here?
Right?
So the framework review that was there was much fanfair about it in.
The whole fate thing.
This was the fate thing.
This was when they cited flexible average inflation targeting, that high employment wasn't inherently a bad thing or inherently inflationary thing. They made some tweaks to their framework. There are people who blame those tweaks for the reason why the FED allowed all this inflation to happen. I think they kind of messed around some counterfactuals. But they are doing the
same exercise now but just much more low profile. And maybe that makes sense because this is sort of a time of leadership flux where there is going to be someone else who's FED chair in a year, and maybe that person will want to have more of a say and doesn't want to be thomped on. But they have said that they want to do some of these changes to their framework and then do a review of their communication.
And especially at a moment when you have these conflicting forces where there are things that are pushing up inflation at the same time there are signs that labor markets are slowing, it just feels.
Like what the FED is going to communicate is going to be confusing.
I want a good example of this from your episode with Mary Daily was basically saying, well, we have goods inflation that might be tariffs, but like services x housing looks to be like not inflationary. And the FED basically said the same story in twenty twenty one. And then it's spread, and it's spread because for some people say, well, it's because the lad Marcus is too strong. They kind of missed that goods prices matter to service prices. So think about insurance, think about the.
Cost of goods matters there.
If you think about leasing rental, airfares matter are affected by energy prices, food services prices are affected by food prices, and so the FED could easily be caught off sides again. And I think that's something that I worry about. Independent of whoever is the leader, where it's Chris Waller, whether it's Kevin Warsh, whether it's David Servos, David Zervos.
This is something that I think is really unappreciated.
You know, we've seen car insurers saying that they're going to raise rates because the cost of parts is expected to go up under terraffs. And there are all these sort of hidden connections in the economy, as we've learned on our trip to Alaska once again, where you could see terraf inflations start to show up. So one example is, you know, you think you're buying Alaskan salmon made in Alaska, caught in Alaska, but it turns out a bunch of that salmon gets sent to China for processing and so
it gets reimported into the US. And so even something like Alaskan salmon, you would see a teriff impact.
I know we should do we didn't do a fish episode, but that was really I didn't had not realized how much American fish is processed in China that reimported the miracle of shipping. I have one last, one last question. Things are like, so stocks are doing fine, He's like, oh, it's doom and all this stuff and polit up politics and the deficit and interest rate, et cetera. Like stocks are like super or looking is it one hundred percent? Yeah, But that's because it's all this like tech money and
AI spending. It doesn't totally satisfy me. There's other parts the finance in doing are like, what's going on there that does not seem like a market that is worried about all these things that we talk about.
Yeah, it does seem like there's more growth optimism in CAV markets. And I think tech is part of the story right now that seem to five hundred kind of adjust for reclassification is about half tech, right, So it's clearly growing in terms of its relevance. And at the same time, all this tech spending is probably keeping the business cycle afloat on some level, at least more so than would otherwise be the case.
But if you look at stuff.
Like even in equal weight to SMPU, you look at other sort of measures that may be more neutral to the tech dynamic. They've also shown these amount of optimism, right, so those that are also telling you there's a lot of confidence, that confidence might be misplaced, but over at least of the short run, like there's some wisdom in it, and that to me is like a reason to probably
shade against taking the bleakest view right now. And I think even if you look at the jobs report that everyone I think right fully said has a lot of weakness in it, look at total hours growth among rank and file employees, if you look at total income.
Growth among those workers, it's.
Pretty fine, much fine. It was that was actually okay, And so we might have gotten the worst job support already. If we don't, then obviously the FED can probably have
more confidence cutting. But if it's actually the case that, like there's actually was a we had a Liberation Day shock, but it didn't break things, especially because things got reversed to a large degree, then you might be left a situation where it's just slowing growth in real terms, and maybe the nominal trajectory of the economy that total dollars spend, total dollars earned aren't as adversely affected, and that might not be a world in which you expect both high
¶ Evolution of Fed's Policy Framework
rate cuts or anything that's sort of deeply recessionary, at least in the short run trade.
So you know, I did run into Jerome Paul, you know, Jackson Hall, just like serendipitously, I forgot about Yeah. No, it was like it was you hadn't come yet and it was just in the lodge and you were sitting there with a couple of people.
I think, did you say hi?
Yeah? And I froze, like I did. I froze because I couldn't write. Think it didn't seem like the right time to like actually like to shop in retrospect. I should have liked said something about the dead and like, you know, because I had seen Dednco that year, and I should that would have been a good thing.
But I said, so.
It's really beautiful here, injected litle. I've never been like I sounded really stupid.
I yelled at one of his secret service people without knowing it was one of his secret service people. He was like, he was stuffing a bag into the airplane, oh, in a really violent way. That was crushing my own bag that had something kind of breakable in it. And so I was like excuse me, stop doing that, and then he got really angry.
Yeah.
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