Latest / Trend Watch / Episode 101: Progressives, Missiles, and Parasites

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Episode 101: Progressives, Missiles, and Parasites · Trend Watch

• 0:04
  SPEAKER_00: I'm your host, Neil Howe, and this is Trend Watch.
• 0:20
  [music]
• 0:31
  SPEAKER_00: Today is August 6, 2026, and this is Trendwatch.
• 0:36
  SPEAKER_00: Welcome back, everybody.
• 0:38
  SPEAKER_00: As usual, I have on my fellow analyst, Christian Ford.
• 0:42
  SPEAKER_00: So, Christian, how was your week?
• 0:44
  SPEAKER_01: Oh, it's been good, Neil.
• 0:45
  SPEAKER_01: I started my journey back down south.
• 0:49
  SPEAKER_01: I'm in Boston now.
• 0:51
  SPEAKER_01: I'll be leaving back to D.C. this weekend.
• 0:53
  SPEAKER_01: And I got to tell you,
• 0:54
  SPEAKER_01: the humidity is already worse, and I'm wishing I'm back at the lake today.
• 0:59
  SPEAKER_00: Yeah, well, you know, let's see if you wish you were back in the late come January, you know.
• 1:07
  SPEAKER_00: I'm sure it's all frozen up there.
• 1:10
  SPEAKER_00: Well, up here, you know, I'm at, I don't know, not quite 2,000 feet.
• 1:15
  SPEAKER_00: Humidity's no problem up here, right?
• 1:18
  SPEAKER_00: That's the advantage of a little elevation.
• 1:22
  SPEAKER_00: And, well, I'm glad you're coming back.
• 1:26
  SPEAKER_00: I'm sure you'll be happy back in the nation's capital.
• 1:30
  SPEAKER_00: So let's catch up a little bit.
• 1:33
  SPEAKER_00: We're entering,
• 1:35
  SPEAKER_00: you know,
• 1:36
  SPEAKER_00: sort of the slow month, I should say, vacation month in financial markets, right?
• 1:42
  SPEAKER_00: Although,
• 1:43
  SPEAKER_00: as we know from history,
• 1:44
  SPEAKER_00: sometimes big events and big financial events don't go on vacation.
• 1:50
  SPEAKER_00: During August.
• 1:52
  SPEAKER_00: But, you know, why don't we just go through in our usual order?
• 1:56
  SPEAKER_00: Let's start out with your recap on the economy and we can catch up on what's going on this week.
• 2:02
  SPEAKER_01: All right, Neil, let's start with the markets.
• 2:04
  SPEAKER_01: The S&P 500 closed down 0.18%, but over the last five trading days is up 3.66%.
• 2:12
  SPEAKER_01: Global Dow not looking as good.
• 2:14
  SPEAKER_01: It closed down today 0.29%, and over the last five days is up only 2.18%.
• 2:21
  SPEAKER_01: VIX is at 15.15%, looking pretty good there.
• 2:24
  SPEAKER_01: And as for the 10-year treasury, that is at 4.682%, pretty much unchanged from last week.
• 2:32
  SPEAKER_00: Yeah, and you didn't say that a couple days ago we had a new all-time high, right?
• 2:39
  SPEAKER_01: Yes, all-time high.
• 2:41
  SPEAKER_00: We just shot past it, right?
• 2:44
  SPEAKER_00: I believe that was on June 3rd, June 2nd.
• 2:50
  SPEAKER_00: And we just went right by it.
• 2:54
  SPEAKER_00: The VIX is down at 15,
• 2:58
  SPEAKER_00: but we could be pushing new long-term,
• 3:01
  SPEAKER_00: new all-time highs for a while and still be around 15.
• 3:04
  SPEAKER_00: It's part of this trend we've been talking about, about just sort of elevated VIX, right?
• 3:09
  SPEAKER_00: I think that people are nervous.
• 3:11
  SPEAKER_00: People remain a little bit nervous about VIX.
• 3:15
  SPEAKER_00: Right.
• 3:16
  SPEAKER_00: Right.
• 3:17
  SPEAKER_00: About where their portfolio is,
• 3:19
  SPEAKER_00: demanding a little downside protection that's going to keep the VIX up.
• 3:26
  SPEAKER_00: Yeah.
• 3:27
  SPEAKER_00: So why don't you talk about, I don't know, we must have had the ISM PMIs come out, right?
• 3:34
  SPEAKER_01: That's right.
• 3:34
  SPEAKER_01: We had the ISM PMIs for July and they looked great.
• 3:37
  SPEAKER_01: Manufacturing rose from 53.3 to 55.6.
• 3:41
  SPEAKER_01: That's the strongest growth we've seen since May 2022.
• 3:45
  SPEAKER_01: In services, they were practically unchanged at 54.1.
• 3:50
  SPEAKER_01: Apparently, the World Cup helped keep the services strong.
• 3:53
  SPEAKER_01: That's what the survey showed.
• 3:55
  SPEAKER_00: Yeah, but I'm looking,
• 3:56
  SPEAKER_00: you know,
• 3:56
  SPEAKER_00: just amazingly in manufacturing and the World Cup probably didn't have much to do
• 4:01
  SPEAKER_00: with manufacturing, right?
• 4:02
  SPEAKER_00: But new orders, 56.7%.
• 4:04
  SPEAKER_00: Production, 59%, which is 59% of everyone responding say that they're up, right?
• 4:17
  SPEAKER_00: Employment, 53%.
• 4:20
  SPEAKER_00: Supplier deliveries are slow.
• 4:23
  SPEAKER_00: That's a sign that everyone's busy.
• 4:25
  SPEAKER_00: That's 59%.
• 4:26
  SPEAKER_00: You just look at all these things.
• 4:29
  SPEAKER_00: Customer inventories are low, which means that customers are demanding new staff.
• 4:35
  SPEAKER_00: Prices actually came down this month, which indicates how hot it is, right?
• 4:40
  SPEAKER_00: We can even...
• 4:41
  SPEAKER_00: I mean, obviously prices are coming down, right?
• 4:44
  SPEAKER_00: With the war sort of slowing down.
• 4:48
  SPEAKER_00: Backlog of orders are up 55%.
• 4:52
  SPEAKER_00: Exports and imports are both over 50%.
• 4:54
  SPEAKER_00: Anyway, you get my point, right?
• 4:58
  SPEAKER_00: And a lot of that is tied to the tech economy, right?
• 5:04
  SPEAKER_00: To that more than anything else.
• 5:08
  SPEAKER_00: What else do you have?
• 5:08
  SPEAKER_00: Any other indicators?
• 5:12
  SPEAKER_01: No, nothing else really now.
• 5:13
  SPEAKER_01: It's kind of a weird part of the month.
• 5:14
  SPEAKER_01: We'll probably have some more next week.
• 5:17
  SPEAKER_00: Yeah, I imagine.
• 5:19
  SPEAKER_00: The only thing I have to report is Lisa Cook actually did a speech in Alaska,
• 5:26
  SPEAKER_00: Anchorage,
• 5:27
  SPEAKER_00: and said,
• 5:29
  SPEAKER_00: it's interesting,
• 5:30
  SPEAKER_00: she said,
• 5:30
  SPEAKER_00: inflation is too high and I consider the risk to the rising,
• 5:34
  SPEAKER_00: I consider the risk to the inflation side of the dual mandate higher than the risk
• 5:40
  SPEAKER_00: of the employment side of the mandate As such,
• 5:43
  SPEAKER_00: I am prepared to act by raising rates if necessary.
• 5:47
  SPEAKER_00: And then she went on to say, I do not see signs of continued disinflation soon.
• 5:52
  SPEAKER_00: If I do not see signs of disinflation, I am prepared to act.
• 5:56
  SPEAKER_00: With five years of above target inflation,
• 5:59
  SPEAKER_00: the risk grows that higher inflation may become entrenched in wage
• 6:02
  SPEAKER_00: and price setting, et cetera, et cetera.
• 6:05
  SPEAKER_00: So she sounds like she's ready to flip.
• 6:08
  SPEAKER_00: You remember?
• 6:10
  SPEAKER_00: We looked at that last,
• 6:11
  SPEAKER_00: you know,
• 6:12
  SPEAKER_00: at the meeting, right, last time, where we had three people wanting to go up.
• 6:19
  SPEAKER_00: And you add lease, that's four, right?
• 6:24
  SPEAKER_00: So this is going to be interesting to see how Kevin Worsh manages that.
• 6:31
  SPEAKER_00: An interesting piece in The Economist on this,
• 6:34
  SPEAKER_00: discussing all the measures showing that when you look at surveys,
• 6:41
  SPEAKER_00: either of financial institutions or households,
• 6:45
  SPEAKER_00: long-term inflation expectations are creeping up.
• 6:48
  SPEAKER_00: One of the interesting ones cited is the Bank of America's most recent survey of fund managers.
• 6:57
  SPEAKER_00: 54% of those taking part expected no landing for the global economy in the coming 12 months.
• 7:04
  SPEAKER_00: As opposed to hard landing, soft landing, what about just no landing at all?
• 7:09
  SPEAKER_00: You know what I mean?
• 7:11
  SPEAKER_00: And what that means is inflation.
• 7:15
  SPEAKER_00: It's a somewhat facetious term for the Fred not really seriously trying to meet
• 7:23
  SPEAKER_00: the inflation target.
• 7:24
  SPEAKER_00: You see what I mean?
• 7:25
  SPEAKER_00: No landing, right?
• 7:26
  SPEAKER_00: Right.
• 7:27
  SPEAKER_00: University of Michigan's latest survey of American consumers,
• 7:32
  SPEAKER_00: the median respondent expected inflation of 4.2 over the next year.
• 7:38
  SPEAKER_00: And
• 7:40
  SPEAKER_00: they also, the respondents expect inflation to average more than 3% over the long run.
• 7:46
  SPEAKER_00: I think in their survey, the long run is five years.
• 7:53
  SPEAKER_00: So, you know, there you are.
• 7:55
  SPEAKER_00: And I think you also see not just the inflation expectations rising.
• 8:03
  SPEAKER_00: That's harder to see in the data right now.
• 8:06
  SPEAKER_00: You certainly don't see it in the...
• 8:08
  SPEAKER_00: In the 10-year or 20-year, 30-year break even.
• 8:13
  SPEAKER_00: But you do see signs of higher inflation and real rate risk premiums that are going up.
• 8:25
  SPEAKER_00: And I think that's really, I mean,
• 8:26
  SPEAKER_00: it's frankly the real rate and the inflation risk premium in addition
• 8:33
  SPEAKER_00: to Long-term rises in the inflation premium per se that's going up.
• 8:40
  SPEAKER_00: And the correlation between...
• 8:43
  SPEAKER_00: Between equity prices and bond prices is turning a lot more positive than it used to be.
• 8:50
  SPEAKER_00: And I think this is a sign that
• 8:54
  SPEAKER_00: the 60-40 bond portfolio isn't doing that well.
• 8:59
  SPEAKER_00: They're not canceling out each other's risk.
• 9:01
  SPEAKER_00: And I think what that means is that people are expecting...
• 9:05
  SPEAKER_00: When things go bad, that the Fed may be in a box and may not be able to cut rates.
• 9:18
  SPEAKER_00: Another way of saying that is that there are two sets,
• 9:21
  SPEAKER_00: there are two regimes that bondholders can accept when they look at what sort
• 9:29
  SPEAKER_00: of long-term yield to expect, right?
• 9:33
  SPEAKER_00: One is a supply shock regime and the other is a demand shock regime.
• 9:39
  SPEAKER_00: And typically,
• 9:40
  SPEAKER_00: we've always thought,
• 9:41
  SPEAKER_00: particularly in the decade after the GFC,
• 9:46
  SPEAKER_00: that it was demand shock we all worried about.
• 9:48
  SPEAKER_00: And so when the market went down,
• 9:51
  SPEAKER_00: everyone thought deflation, recession, consumers don't want enough.
• 9:57
  SPEAKER_00: And of course,
• 9:58
  SPEAKER_00: that means that the Fed is going to have to really cut rates and it means
• 10:01
  SPEAKER_00: the inflation is going to go down, which is great for bonds.
• 10:04
  SPEAKER_00: You see what I mean?
• 10:05
  SPEAKER_00: So in that case, then the term premium for bonds is actually negative.
• 10:13
  SPEAKER_00: People want to hold them.
• 10:15
  SPEAKER_00: But I think increasingly it's turning the other way.
• 10:18
  SPEAKER_00: All of these things basically mitigate in favor of expectation of higher yields, right?
• 10:25
  SPEAKER_00: And we've certainly seen it, right, over the last couple of months.
• 10:29
  SPEAKER_00: I mean, we know that, right, Christian?
• 10:30
  SPEAKER_00: We have to look at these things
• 10:31
  SPEAKER_01: every day.
• 10:33
  SPEAKER_00: And I don't think it's obviously just because of Kevin Warsh,
• 10:39
  SPEAKER_00: but I think that's what he's inheriting.
• 10:42
  SPEAKER_00: And I hope at some future point we can really talk about,
• 10:45
  SPEAKER_00: not in this podcast,
• 10:47
  SPEAKER_00: but I do want to talk more about His,
• 10:50
  SPEAKER_00: you know,
• 10:52
  SPEAKER_00: his ideal regime of,
• 10:54
  SPEAKER_00: you know,
• 10:55
  SPEAKER_00: no communication with the world and
• 11:00
  SPEAKER_00: cutting back hugely on the balance sheet of
• 11:02
  SPEAKER_00: the Fed and going back to sort of the pre-GFC regime whereby,
• 11:08
  SPEAKER_00: you know,
• 11:10
  SPEAKER_00: banks had to hold a certain amount of reserves and,
• 11:14
  SPEAKER_00: you And the bank did open market operations to sort of manage those reserves to sort
• 11:21
  SPEAKER_00: of get the Fed out of the economy.
• 11:24
  SPEAKER_00: And also,
• 11:24
  SPEAKER_00: the Fed is no longer going to talk about what they expect long-term yields to be
• 11:30
  SPEAKER_00: or what inflation will be or anything else.
• 11:33
  SPEAKER_00: Here's the problem, though, right?
• 11:37
  SPEAKER_00: Everyone knows that the Fed has to make decisions, right?
• 11:40
  SPEAKER_00: And here's where I think where she's been getting it wrong.
• 11:46
  SPEAKER_00: You can't just tell the markets, you know, look at the economy, look at global markets.
• 11:53
  SPEAKER_00: You know, you can't tell investors, look at global markets, don't look at me.
• 11:57
  SPEAKER_00: Because everyone knows that the Fed has an essential function.
• 12:01
  SPEAKER_00: If the investors think that the market...
• 12:03
  SPEAKER_00: That the Fed may cut rates to zero a few months from now,
• 12:07
  SPEAKER_00: to take an extreme example,
• 12:08
  SPEAKER_00: that's going to lead to very different expectations as to
• 12:11
  SPEAKER_00: where long bond rates will be,
• 12:13
  SPEAKER_00: as opposed to if they think that they're going to hike it up to 10%.
• 12:17
  SPEAKER_00: So it's crazy for worse to say,
• 12:20
  SPEAKER_00: I expect investors to come to their conclusions about the future with no assumptions
• 12:27
  SPEAKER_00: as to what the Fed is doing.
• 12:29
  SPEAKER_00: You know what I mean?
• 12:30
  SPEAKER_00: That's just crazy.
• 12:31
  SPEAKER_00: The Fed has to act.
• 12:33
  SPEAKER_00: The Fed is a critical player in all this, right?