Jon Turek on the Macro Outlook for 2022

time to switch back to the macro. I was gonna say we've been distracted by the micro in attempting to put together a better picture of the macro in all fairness, but yes, you're right, it's been a while since we talked about the general outlook for the economy and for markets, and of course we are looking ahead to two and there are a lot of things going on and a

lot of things that people are concerned about. So obviously we have inflation worries, and then we have a slowdown in China as well, and then we have of course the fed's reaction function, and there's still a lot of questions over what exactly it's going to prioritize going into next year. Yeah, exactly right. And you know, I think the other thing about this environment and this court kind of applied, it's like nobody has any familiarity with this

type of economic environment. I mean, it's pretty new. So, yes, we've seen periods of elevated inflation before, for sure, but by and large, this is not like the nine sixties or sies. It's different conditions. Employment is growing extremely fast, we had a pandemic, were still in a pandemic, and so that is totally new. The policy responses that we've

seen are new. So I think kind of what makes this interesting is just like, yeah, everyone could like sort of reach for analogies, but there's no real experts who could say, you know, this is the playbook or anything. It's everyone is on some level doing a non charted territory. Yeah, it's a very unusual business cycle. And we've talked about this before, but we basically squeezed in like an accelerated

business cycle right after the pandemic. We have a very short, sharp recession, and then the recovery started almost immediately, largely thanks to the stimulus efforts from various governments. But of course the question is what does the cycle look like? Does it behave like other cycles. I've already seen lots of people talking about how we're late cycle. All the signs point to a late cycle, and it's like, well, it's been what two years since this started, Like that

would be a pretty fast cycle. Yeah. And then I guess the other sort of like medium ish to long term question is does something change meaning flee And I'm thinking about, say an inflation And you know, obviously prior to this we had you know, great moderation or disinflation or FED could never hit two percent. Now we have, uh, you know, over six percent inflation. But is this mean revert?

Does it just go back to the old way or do we enter into some sort of new regime where inflation is persistently above and there's much more inflation volatility. Sort of These are all like kind of difficult questions to know right now, but the big ones that people will be asking over the next year and beyond. Yes, indeed, so I'm very excited to have is our guest today, perfect guest for a macro conversation. He's been on odd lots before, at least a couple of times, and in

terms of sort of macro thinkers. I think one of the clearest and most useful guests that we speak to, UH please to welcome back on the show. John Turk. He's the author of the Chief Convexity blog and the founder of j ST Advisors. I think maybe this is his third time on the show, but someone who always get a lot of insight reading his stuff and having him on the show. John, thank you for coming back on Other loves. Hey, guys, thank you so much for

having me. We're going to talk about two. But what for you was the sort of big surprise of one? Like, what was your what was your lesson? What was your takeaway from what we saw this? You know, I think that one of the things that you know, really kind of changed. And this is pretty obvious, you know, ex post is kind of the stickiness we've seen in inflation

this year. You know, going back to before the year, there was kind of this obvious forward looking effect that inflation would be higher given the supply bottle next and also given the base effects from the pandemic, negative oil prices, etcetera. The kind of seeing the stickiness and broadening out of inflation, and we really haven't seen that in you know, almost

twenty years. I mean, there's this famous joke for the US that really the only thing that goes up in price is education and healthcare, and that's that's not been

the case this year. And I think especially as this relates to FED policy, is we kind of entered this year with this thinking of like, okay, was the FED reaction function, especially that had it changed post Jackson hole and they introduced this idea of flexible average inflation targeting, is would it be would that be the best position to look through and for the FED to basically avoid ECB moment where they were you know, kind of hawkishly

reacting to spot inflation that was not telling a demand story.

But now I think, you know, what's becoming clearer is that while there are supply bott elects and there are kind of supply fragilities that have weighed on spot inflation, there's clear that there's also excess to mend and that the FED has kind of had to had you know, this broader shift that's really started, you know, since June poem C, but it's kind of really been enhanced post Powell reappointment that you know, fate may still be the policy playbook, but it kind of has to adjust to

the force that fiscal policy was at the lower bound and you know, kind of change the nature of where nominal GDP is now and probably for the next twelve months. So how much of a role do you think demand actually played in the price pressures that we're seeing now? And I realized it's sort of tough to disaggregate supply versus demand in all of this. But maybe give us a little bit more color on on how you're thinking

of it. Yeah, you know, I think that what's looking at specially retail sales on things like two years stacks and seeing that, like how above trend nominal consumption is. I think it's I think it's amplified the supply fragility. So it's kind of created a perfect storm for prices. And you know, I don't think that it's only a demand issue, but you know, it's clear that you know, we had a recession where household income in aggregate went up,

which is obviously most peculiar. You know, the thing that's worth thinking about going into next year, especially as inflation will peak in Q one, it will come down in Q two. The question is, you know, what is the run rate. You know, what is the handoff that the economy is dealing with. Well, you know, looking back at the beginning of one, you know, you can argue the transfer payments and things of that nature made a big difference in wage replacement or even for some you know,

income quartels, you know, wage enhancement effectively. But you know, now looking into the economy into especially at the lower end of the income distribution, you know, wage growth is pretty robust, so you know, there is kind of this there's not this just big drop off because we're a year out from when there was a lot of retail sales.

You know, wage growth is broadening out in the economy and as really strong as we kind of had this reset of wages through the Amazon Walmart effect at the lower end, that it's hard to have this you know, big deceleration in demand that will you know, broaden outer help inflation come back to the said supercent target in

an environment where wage growth is really strong. And I think that's also kind of the point miss about this year, right, is there are the supply side fragilities, especially in that you know we're enhanced through in Southeast Asia through Delta when we had Malaysian shutdowns and that affective semiconductor fobs

and etcetera. But you know, income growth pretty much at least especially on the wage side across the Western world, has been really strong this year, and there's no real signs that, you know, this labor tightness is going to give away. We may get more labor surprised, participation rates may go higher, but labor is pretty tight right now,

so wage growth should continue. And I think that kind of you know, makes that handoff in terms of like, you know, things coming back from mean reverting to normal next year kind of tricky. I think this is a really interesting point. I'm glad you brought this up. Like this idea, it's like, okay, sure, the transfer payments are gonna come down, there's going to be at least some relative fiscal tightening or the fiscal impulse won't be what

it is. But there is also this thing you know called like endogenous way uh indogenous demand growth or they're not everything is just about transfers, and in an environment at which there's a lot of momentum, particularly at the

low end, that has to be a plus. One question though on this idea of like demand, because in addition to a high level of income growth and a high level of aggregate demand, we've also seen this shift that a lot of people are talking about, including many of our past guests, of goods consumption for services consumption that hasn't normalized. Some of us said that more than the actual demand itself, is what's contributing to sort of persistent

bottlenecks or maybe persistent inflation. If that normalizes, if like, okay, we get you know, it seems like, you know, I don't know what's gonna happen with the virus. But if that normalizes, can we get some further downward pressure on inflation even with demand remaining quite robust? You know? I think you probably will, you know. And I think that the broader point that I want to make is that,

you know, inflation will come down. The question now is what is the run rate and getting that run rate back to two you know, it's seemingly getting a little harder,

especially for next year. And I think within this good services you know, composition, is that there is goods pressure that is going to come down as you know, the economy does hand off back to more service oriented, Especially the US economy has always been but there's also this element that goods are not going to go back to where they were in the tents, where you saw many years of goods prices actually printing deflation and goods prices

were falling year year to year. And you know, given this level of nominal demand being a little more sticky, I think it's hard to kind of see that even as you know, we get into next year and it's like, well, everyone bought a washing machine or everybody bought a car.

I think, you know, that argument does hold weight. The question is doesn't get you all the way down and doesn't get you all the way down in some senses to print start printing negative prints and durable goods, and that I think is just it's just a harder back to have given the level of demand that we're continuing

to see. And I think, you know, that's that's kind of like the broader macro point of this to me is, you know, and especially I think this is especially relevant with the tenure at one forty and the market like very skeptical of forward looking growth. Is we're in the midst of this public sector to private sector handoff and everyone kind of doubting it. So you know, I think that that that story is actually more alive than the

market is given credit for it. Just real quickly though, do what does it need to come all the way down? Like what are the stakes of getting back down to versus maybe still being over the fence target? Yeah? Yeah, so you know, I think like the question for me next year on inflation run rate is it below three

or much above three? Because I think that you know, if we if we start getting to you know, if you do like simple math and you start going through, okay, what is Q two inflation going to start looking like? And let's say we assume that month over month prints go back to point ones and point two and point twos are actually pretty high relative to the last ten years. We've become kind of immune to that as we've seen

point sevens and point nine. But if you start getting point to month over month, Prince, you're still going to get back to an inflation number around two and a half by the end of the summer next year. And I think that number, while it's still high relative to the FENS target and in terms of their moderate overshooting,

I think that would be a nudge high. I do think that that gives the Fed enough room to say that listen, inflation is high, we're hiking, but there's marginal risk of us hiking too much that we're going to crush this thing, which I think really is the risk now, right. The risk now is that inflation comes down in Q two, but it comes down to four percent, it comes down to three and a half four percent, and in that world, does the FEDS say that is not tolerable to us?

That could meaning belief meaningfully affect inflation expectations and we have to act more aggressively than we have, you know, in the last few cycles. And I think that's kind of what the market is weighing now, right, is there's this residual risk premium that the FED is going to have to almost hit the kabbash or kind of smash this thing, because you know, spot inflation is going to start leading to a d anchoring of inflation expectations or

at a level that they don't see as tolerable. So I think that's really the big question of next year, and we'll probably find out, you know, late Q two, which is why for me, June f O m C

is the one that is circled. So I wanted to go back to what you said about the tenure yield so currently sitting at one point four or five percent or they're about And one of the big mysteries of this entire year has been why bond yields are so low, even in the face of the FED ostensibly beginning to taper it's balance sheet and maybe getting more worried about inflation.

And I've seen all sorts of explanations for it. One of our guests, Joseph Wayne, was talking about the idea that banks are just buying lots more treasuries than they used to and that kind of puts a floor or maybe I should say a ceiling on yields because you always have that huge chunk of demand they're waiting in the wings. And I've also seen other people talk about it.

It's sort of what you were saying, this idea of investors not really buying the public to private hand off, thinking that the FED is inducing some sort of policy error and it's going to have to backtrack at some point. So how are you thinking about the bond market at

the moment and what the tenure is actually telling us? Yeah, you know, I think it's especially one of the more prevalent questions right now, as we're gonna end the year probably with you know, between the eleven and twelve present nominal GDP growth, and you know that all the tenure does is rally, and we're entering pro FED hiking cycle and it's still rallies. And I actually think it does make more sense than it would appear on the face,

you know. I think looking at things like five year five year o I s, which the FED and you know, market participants kind of look at as as an estimate of you know, where the FED will get to in terms of the hiking cycle or destination, which equates to around the tenure was treasury yield. I think there is this element, and we're just talking about this of this residual risk premium that inflation got too high and the FED is going to have to react asymmetrically to it

next year. And that is why I think we've kind of had not only this this front loading of the hiking cycle, but also this relentless flattening as the market has had to weigh the probability that if the FED has to go let's say faster than quarterly next year, or has to go at a pace that's more than basis points of meeting, then the chances of the FED overdoing it go up. And we also know that we're

still in a very low our star world. So if the chances to FED overdo it, the chances that the forward looking bond market is like okay, that raises the odds that we're actually going to end up back at zero.

So you're in this interesting paradox where the bond market is weighing hikes but also weighing what kind of hikes we get, and the fatter that residual risk premium is that the hikes we get are destructive or too much given the level spot inflation or the worry about inflation expectations, that actually paradoxically raises the chances that the FED will

be back at zero. Because we're in this low R star world and the assumption is that the Fed over does it, that means the next move is to cut, and if they cut, that means they go to zero. I think that's kind of the calculation that the bond market is making right now, and which is why I think, you know, we're in this interesting time where you know, people like me have this you know, pretty positive view about nominal GDP growth next year, and then we look

at the tenures like, well, that's not confirming it. And I think the reason that's not the trade yet is the market kind of has to get through this this period of what is the peak of inflation and what is the inflation run rate? And those are both questions we don't have the answer to yet, and I think until we do, the market is not going to feel comfortable taking these quote unquote destination trades higher, especially neal. Is the possibility of a highly aggressive hiking cycle. Something

which we haven't seen in a long time. Is death showing up in risky assets anywhere? Is the showing up at the stock market? You know? I think that you know, we have had a little bit of multiple compression this year, I mean, especially looking at you know what forward earnings are projected to do. I think there has been some. But you know, a question I get a lot is well, the bond market is flattening a lot, so shouldn't stocks care?

And you can make an argument that five thirties may actually be inverted that you know, this time next year. And while that's always at least in two tens, that's always traditionally a harbingeer of recession. And you know, I think that actually that there should be this this d link between kind of the slope of the yield curve

and kind of equity market risk premium. When I think that, you know, from a distribution perspective, the bond market has to weigh the risk, especially in things like five or five year or ten year US treasury yields, is the bond market has to weigh the risk of you know, kind of the whole trajectory of a policy where it's like, okay, well, what's the percent chance they go too much with the percent chance that in three or four years they have to take it back, and thinking about that kind of

the whole scope visa VI the equity market, which is like, well, next year, earnings growth is still going to be really good. Even if the FED goes four times three earnings they

may have to come down a little. And I think that's what we've seen in forward pees coming down actually or at least not really moving all year, even though earnings growth and earnings estimates they need to be picked up, because I think there is that element, but the equity market is not going to be like, oh, in four or five years, the FED, you know, may have to go back to zero. You know, I think in terms

of time prisons, they're really operating on different ones. And the bond market is you know, leaning into its symmetry, and the equity market is leaning into its own. And I don't think necessarily, you know, they have to be saying the same thing. In fact, I think it would be odd of the work just on the idea of whether or not a great hiking so I goal would be bad for risk assets or what impact it would have.

Can you talk a little bit about emerging markets, because of course, you know, if the FED is raising rates, then theoretically the dollars should go up. That's bad for people that have a lot of dollar denominated debt or you know, historically it has been bad for many developing economies. So how do you see that unfolding? And I gotta say, like the dollar index already has been pretty strong going into the end of this year. Yeah, you know, I

think it's a it's a really interesting one. And I think that for e M. The question for the FED next year is not if they're hiking, but what they're hiking at relative to market pricing, and I think, you know, e M has had this tricky few months and you could really argue since the summer, partly because we've had to continuously add hikes, especially into the implied and it's kind of always still those added hikes have come with the the asymmetry that the next pricing is towards a

hike and not towards less. Right, we've kind of entered since June fom C market pricing for next year went from zero to one with the asymmetry of a B too. It went from two to three with almost the asymmetry of being four. And I think that's kind of what the dollar has leaned into, right, The dollar has leaned into Okay, they're hiking, and it's more likely that they hike more than less. And now I think we're entering

this like kind of interesting period. I think is especially relevant for emerging markets where I'm not convinced the next hype is actually dollar positive, where the the ray change from zero to one, one to two, two to three have all been dollar positive, and we've seen this pretty significant dollar rally, especially since Q three. But I think what's interesting now is if you get to if the market goes from three to four. There are a few

interesting externalities. One I think that lessens the odds that the FED is operating by themselves, and this I think especially matters for emerging markets because it kind of goes

through the dollar channel. Is if the fourth hike in the market price for the FED happens, I think that raises the chances that the e c B, the r b A, the ricks Bank, central banks that have been, you know, kind of more into this not necessarily transitory message, but next year is too soon, even if they've given up on transitory, I think that hike makes it much more likely that central banks like the ECB go hold on a second. Maybe two should be live in terms

of rate hikes. The other thing that I think is really interesting is if we went to four, that means to go to quarterly paces, the FED would have to go in March, but also that they would be hiking in the same meeting that they're basically ending HUEY. And now there's no necessary preconditioned to the FED having to have a gap between the end of KUEI and rate hikes.

We only know that the FED can heke while they're buying bonds, but I think in terms of a message or signal of intent, that would be a pretty big one where the FED would say there's no gap in between the end of keewee and raid hikes, and that would also, I think make it much more likely that central banks like BCB, like the r B A kind of have their moment of yet we're also live this year.

And then that kind of speaks to something that I think is very different this cycle than last, which is in this period was very FED dominant, very US growth dominant, but kind of looking into next year, you could be in this much more coordinated policy growth dynamic, which I don't think will have the same dollar spill over. Now.

If we went to four next year, then the chances of five I think actually become this maybe the same or even less than the chances of three, because five would be the FED saying, okay, we're off, We're not on a quarterly pace. Something really bad happened and we

have to we have to address it right away. So I think in terms of the dollar, I don't know that it's obvious cell but I do think there are elements that are actually you know, topping, and I think from an e M perspective, you know, going into next year, I think the setup is fairly binary, as it usually is in the m UM, where you know, you could have a bed that's kind of priced for what it's

going to do. Right, it's for the first time we're not kind of incrementally adding hikes into the implies for next year at the same time that terms of trade and e M are off the charts. On the other hand, you could have an EM where the Fed says, oh, by the way, we really have to stop this thing because inflation is too high, and that's at the same time that you have political development such as Brazilian elections

in October, etcetera, and you have a further mess. But I do think EM is going into next year actually with some bet are buffers. Then people I think give it credit for given that because US demand is so strong, because the Chinese currency has been so strong this year, terms of trade are really strong, and current accounts have kind of sayed sticky to the surplus side. I mean, we've had this year, We've had South Africa have a current account circus, which is kind of unheard of. And

it's not to say that that will last. It won't but the question is, you know, the same thing with US inflation is kind of what does it come back to for e M. The interesting thing for next year is, you know, all these guys have pretty much have hyped

a lot in terms of trade, are really strong. If the FED is not doesn't have to say, oh, you know, inflation got to how we have to do something drastic, then this setup is actually pretty strong, especially as you know Chinese growth starts to you know, bottom around here. That was that was very interesting and useful framework. I want to can you just say a little bit more

about China? I mean, Tracy has been obviously covering it a lot, the slowdown in China, and yet we have seen the Chinese u N even during a period of dollar strength. I think the un has been even stronger. What is the dynamic there you expect a re acceleration,

what explains that und strength? And how are you thinking about China and its contribution to growth and uh sort of demand in Yeah, you know, I think China has been probably outside of the FED and inflation, I think one of the more interesting drivers this year where you know, we've clearly had this policy goal or crackdown on both the tech and property sectors that you know, obviously made Chinese assets underperform. But at the same time we've had

this massive out performance of the Chinese currency. And this is also this performance has happened in the context of Chinese growth, you know, kind of decelerating faster than it has pretty much anywhere in the West. And I think, you know something that I I've definitely you know, talked about with Tracy is this China has had this interesting policy posture this year where they came into this year

with two things. One, they wanted to get the credit impulse lowered because they thought, okay, you know, we did a lot in we got demand back, global economy strong. They have politically become more sensitive to no kind of new credit in the economy, especially as it relates to the property sector, etcetera. So I think that there's been this this impetus to bring being credit lowered and then that traditionally ways on domestic growth, which it did this time.

I think the difference that happened this time and why China wasn't this you know, kind of disaster for the global economy, as it really did have a pretty big deceleration and it's credit impulse is that China was able to not fully but replace a lot of domestic demand that they usually got through marginal credit increased via the

current account. And this is something that didn't happen the last two times that China has had these pretty stark credit decelerations that we saw post eleven which ended up in you know, kind of a commodity bus, and we didn't see you know, which followed China. Stimulus is China because of how strong US and European demand was, specially US.

China was running a current account surplus three percent this year, and this is in contrast to it basically drawing its current account to zero in and I think that China was basically made the calculation that they could import the demand that they were off setting by being tied on credit. It seemingly was a bet that worked. I mean, it's hard to say that, you know, China has had this robust growth theory it didn't, especially in a relative sense.

But China was not this massive drag on global growth this year, even though have you know, much weaker credit impulse. I think partly because it was able to import that you know, lost demand, and I think that's what kind of you know, they kind of set this up as China wanted two things from this year. One is, they wanted to offset some of the inflationary pressure that the rest of the world was feeling. One way to do

that is to have a stronger currency. And then the other thing is that they wanted to have this tightening either on the credit side, and won't really speak to the tech side as not an expert on it, is they wanted to really tighten credit post big credit acceleration they had then, especially as the property sector is extremely vulnerable right now, they wanted to replace that demand through the West, which is not too dissimilar to what the

West effectively did post GFC. Right the post GFC, the West basically lad not purposefully and probably not as purposefully

as China did this time. Is the s went into austerity and China stimulated, and kind of the way out was that, you know, Chinese demand carried the way, and this time it's China made the i think calculation that they were going to let the West leave, they were going to import that excess demand and that would let them, you know, achieve some policy tightening that they wanted to

do anyway without a big marginal cost of growth. This leads very well into the next question I wanted to ask you, which is about the policy response going into two, because I think there is I mean, there is this history that when things go awry in the global economy, China will start easing and effectively save everyone. And that might not be the case this time around, given what

you just laid out. But on the other hand, we are seeing China start to push back a little bit against the u N and also show some signs of easing. So it just cut the reserve vironment ratio, it's talked a little bit about rolling back some of the property curves. How should we be thinking about that policy response going into I think this is really one of the more important questions. I think I kind of come at it with a China is not going to go full easing.

I either is not going to be well, there's a National Party Congress, so we go pedal to the metal, you know. I don't really think that will be China's policy posture. I think what we are seeing though, is and this became extremely evident when we had three separate macro economic stabilizer events in China that I think China is putting a floor in terms of where they're going to let growth go. And I think this became really

not worthy over the past two weeks when three things happened. One, as you noted, China basically said, okay, you want it's gone a lot and we're comfortable with a strong huan policy, especially as we're in this broader context of dual circulation and wanting to increase message demand, but it's gone too strong, and they hyped forex reserve ratio from seven to nine percent. Then we also saw from the Stitate Council in the Peelborough that there is more of a fiscal backstop that

will probably kick in next year. And then on the monetary side, we saw that they're going to cut the triple R rate again. And have you know, at least in the market been a little more aggressive on the liquidity side. So I think we've had these three theory independent macro stabilizers that have all kind of happened at once that I kind of think give you the message that listen, China is not going to go into next year and start doing massive fiscal or massive infrastructure or

massive monetary stimulus through rate cuts. You know, I wouldn't even be surprised if you know, the loan prime rate or you know, kind of China's now default policy rate doesn't actually move down at all. But I think China is going through the process of kind of narrowing the confidence into both their growth range. And I think we've reached the point now where growth has gotten too low

that they wanted to pretty much pick up. And I think what you will see in you know, the next two quarters is the credit impulse will pick up, and China wants that, but they don't want it, you know, necessarily going bananas. So I think that's kind of what's different this time is that China is not going to

be this big marginal impulse to global growth. But I think China, especially as we've seen over the last two quarters, is the fear of China being this big drag on global growth I think we'll receive going into the first half next year. Oh no, bring it back a little bit to the United States, and you know, one of the you know, thinking about this possibility of multiple hikes and maybe four and you know, maybe at some point of things where to go get a little too wild,

maybe five. And obviously that's nobody. That doesn't seem like that's anyone space case. But I'm thinking about you know, of course, at the end, near the end of twenty and the FED unveiled its new framework flexible average inflation targeting, And in addition to this sort of new framework change, we heard share Powell talk about things like inclusive growth and a true commitment to sort of maximum employment in

a way that seemed different. Do you think, you know, if you think about how the market and investors are anticipating Fed action next year and beyond, would you say that it's a reflection of essentially the FED having met its goals and the FED having delivered on its commitments.

Or is there a belief that actually, in the end it will be the same old Fed and that for all of the talk of a new rainwork and uh perhaps a slightly greater weight on the employment side of the mandate, that in the end the FED is going to sort of be the Fed it's always been. No, It's it's a good question, and I think, you know, on the surface, I think a lot of people would say that it's you know, kind of same old Fed,

But I I don't think so. And the reason I don't think so is you know, I think that part of what's made this recalibration FED pricing very uncomfortable is we were thinking about in the first half of that the first FED rate hike was going to come in, and we've basically gone from no hikes until two three hikes in two in a very short period of time, right, And I think that that has kind of come with the broader perception that this is a FED that flinches,

this is it's you know, the fate is kind of dead, and you know, I think going into next year, there is a possibility that fate does die, but it's it's a possibility the fate dies with in kind of what the FED told you in their monetary policy statement, which is that the goal of fate is to be reactive, right, It's not to be pre emptive. However, there was one thing that the FED said they would be pre emptive on, even in within the context of faith, and that was

inflation expectations. And inflation expectations as we've known this year is kind of this messy concept. But I think what's easier to say, and you could read the Jeremy Read paper and different papers have come out on this year. That's kind of show how messy it is to kind of manage. And we know that CLARAA looks at things like c I E. The Fed's common inflation expectations indicator.

Is that the FED could decide that spot inflation so above target for so long has a risk of the anchoring that it could require a faster pace, and that would actually be consistent with their monetary policy strategy. And I think, you know, going into next year, more of a base case world, right where the FED kind of hikes three times. It ends quie in March at least. Looking if you assume the first hike is going to be in June, well, what's going to be the case.

In June? You're probably gonna have a sub four percent unemployment, right, You're going to have prime age EPOP that's probably going to be back at pre COVID levels. And I think there is this implicit bias from the FED, and it may not come across in a higher you start or

higher natural rate of unemployment. Is that the natural rate of unemployment probably did rise post COVID, and it may have not risen drastically, but I think the FED is going to be less comfortable with the idea that you can get back to three and a half percent unemployment and then have no marginal inflationary cost, especially at this point in time when inflation is in the sixtes. So you know, I think going into next year, there is this idea that it's like kind of all over the

same old FED. Whatever the data comes in is that is. And I do agree that the FED is now less preemptive in terms of policy being the dominant variable, not the data. The data now is definitely the valiant and variable, and that was kind of the FED shift post June.

But I think you know, looking into June and you look at the Fate checklist, you know something that claritists gave a speech on in August UM that really called people by surprise is well, I'm he said, I'm looking at the Faith checklist and I could see it being hit by the end of And I think it's reasonable to say, since you know, the labor market progress we've had since August and the continued price pressure we've had, that that has just been moved forward six months, and

it's I think it's pretty consistent to say that Fate will actually be hit in June of next year, and the FED won't be you know, kind of same old fetting it in terms of, Okay, how do we come up with reasons to hype when we're really only scared about inflation. I do think inflation is the dominant variable and kind of this recalibration policy. But I think it's this recalibration of policy also happened in the context of a labor market that is healing much faster than it

has in past cycles. So before we go, John, you know, I wanted to get your take obviously, just sort of risky assets, and we talked about them a little bit before about whether there's any evidence of them pricing in an aggressive hiking cycle like maybe the bond market is. But by and large, it's been an incredible year. I mean, and I think there's sort of two things that stand

out for me. Is like, one is, you know, at least in the US, but also I think elsewhere headline stock induscries have just an insanely well smp up something it'll you know, something like just like an incredible year. On the other hand, we have seen this pretty intense sell off in what was really hot earlier in the year a lot of the growth the stuff textu meme stuff, etcetera. I'm just sort of like curious, like, you know, how

you're thinking about this. I don't know if you wann't like have a call on sort of like the SMP or think about that. But within the macro context, how does all of this play into the part of the market that sort of most people observe most directly, which is the stock market. Yeah, you know, I think it's

it's interesting going into next year. I think that there's kind of this like broader narrative that we've been alluding to that you know, the economy is not really going to be able to deal with this public deprivate sector handoff. The FED is going to be a big, you know, impediment to the market. And you know, something I do think is true is that you know, the quote unquote FED foot has been restruck lower. Yeah, you know, and and in terms of like distribution of where like multiples

can go. Given that, I do think it is significant.

But you know, I think more broadly is I think the market is actually readjusting now to the possibility that the FED may have to be more drastic next year than especially originally intended to, but also in terms of like, you know, the last ten to twenty years of what it has done, and I think like that's become like really obvious, and things like you know that really you know, techie stuff and arc and those type of things where you know they just cannot handle a hawk is shed.

But I think, you know, in terms of the market at large and in terms of the SMP, I think we're getting to actually closer to an equilibrium point. And I think a lot of people I think I I mean, I think going into next year, we're getting to the point now where a lot more hikes next year versus you know, too fewer hikes next year. It's actually getting

pretty close in the odds. I mean, I think given where spot inflation is, there is this bias too kind of assumed that you know, the asymmetry is into more and the asymmetry was into more hikes for a long time. But I think the interesting thing now is we're getting close to a pretty nice de Delibrium point where you know, inflation maybe four, but it also maybe two and a half.

And I think like the odds are kind of close, and I really think you should be on the side of two and a half given what base effects will do starting Q two next year. And when you get into that two and a half world, that's still a world where the feed is hiking because inflation is above target, and in terms of the fake checklist, it's all hit. But it's not a world where the FED is kind of,

you know, hitting the brakes on the cycle. And I think as long as the feed is not hitting the brakes on the cycle, market and the economy can deal with with higher interest rates. Now can it deal with you know, in two years or three years, when the FED gets back to an assemblance of neutral. But I

have a different view. Yes, but I think you know, in terms of next year, and you told me, you know that the unemployment rate is three and a half, inflation is two and a half to seventy five, and the FED is at eighty seven and a half basis points on FED funds. My guesses stocks did Okay, I'm not saying that you know, it's another twenty percent year, But in that kind of backdrop, I think I'd rather

over twelve months. I'd rather be imbed. John Turk, thank you so much for coming out odd lots always a pleasure and I always I always learned a ton of have a have a happy New Year, and well looking forward to revisiting. Maybe we'll get you on a summer of to do the halfway mark sounds good. Thank you so much for having me. Yeah, I mean I think you know, summer is the big one. We kind of know what the inflation in game is. Thanks so much, Sean,

all right, take care of John. Thank you. You know what, I love talking to John for many reasons, but one thing that really stands out to me is just his clarity. Yeah.

The thing I really like about John is that he kind of looks at everything on a probability distribution basis, So he's always trying to weigh tale risks on either side, whereas I feel like other people are going, you know, they're usually just focusing on one thing, like runaway inflation and not necessarily looking at the other side of that

probability distribution. But I thought, for instance, what John was saying about these sort of asymmetric risks to the inflation outlook, the idea that like, on the one hand, maybe we have four and a half percent inflation, on the other hand, maybe we get down to two and a half percent, Like, this is something that I've been thinking about with the piece I did on Whack inflation, and it seems like, yes, everyone's worried about inflation right now, but really what's going

on is it's not necessarily relentless price increases, its volatility in those prices and the difficulty of actually predicting where they're going to go given all these different factors around

supply and what's going on. Well now with the omicron variant. Yeah, absolutely, the way he talked about distribution very useful, and specifically I thought this idea, it's like, okay, like all years so we've had this big dollar rally, and I thought that was really helpful hearing him explain that, but all year we've had this sort of relentless like maybe they'll hype a little bit more, maybe go from zero to one,

maybe we go from one to two. And this idea that once you get to around four possible hikes in two, once like that becomes closer to say the market's base case or a possibility, then we really start to uh, it shifts in both directions. So we've had all this sort of like upward biased to the possibility range. We might still have that, but not much more, and then you start thinking about maybe three, you know, once you're once you're at four, maybe three is more likely than five.

And hearing him explain why and that was really useful. And I think also he offers probably the clearest, in my opinion, the sort of the clearest explanation for why in a year where there's been so much anxiety about inflation, we've really just seemed like nothing going on at the long end of the yield curve. Yeah. Absolutely, And I thought his point about inflation expectations was also very good because despite all the handwringing that we're seeing, you know,

consumer demand has been relatively strong. Most people are saying that it's not a good time to buy things at the moment, which kind of suggests that they expect prices to come down, right. Yes, I don't know about you, though. I have like five washing machines in my basement that I've been buying on expectations that I'll be able to flip them for flip them for more later. So yeah, I'm definitely. Uh, I've definitely been hoarding consumer durable goods

as as investments. You're you're not doing that, Tracy you know. The sad thing is I can't even tell if you're joking or not. I am joking. You might actually have five washing machines. I do not have five washing machines. I do have a washing machine, though, which I feel extremely privileged to have in New York City. I've never had one in my apartment before. Yeah, that is very convenient. So we leave it there before we start doing like

washing machine product reviews. Yeah, although we could do that too, but yes, let's leave it. Let's leave it. Wait, actually, wait, can I see one thing? Wait? Wait, can I see one thing? Yeah, of course, I speaking of washing machines. I had the most problem, which is that a I have like some smart washing machine, so I couldn't use it for a couple of weeks due to like a

software glitch. So that's a modern problem, but that'd be I couldn't get a repair person for the washing machine for like over two weeks because, of course, you know, labor market tightness and service market types and everything. So I do think by the story of my washing machine is a sort of like quintessential micro economy story. Maybe you need to write that up as an add thoughts post. That's a good idea. I will do that this week. All right, let's leave it there. All right, we are

actually leaving it there. This has been another episode of the ad Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wisn't Thal. You can follow me on Twitter at the Stalwart. Follow our guest John Turrek. He's the author of the Chief Convexity blog. His hand on Twitter is at j Turrek eighteen.

Follow our producer Laura Carlson at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesco Leavi at Francesco Today, and check out all of our podcasts at Bloomberg unto the handle at podcasts. Thanks for listening.