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Can the Fed claim victory over inflation now? Yes, but... · The Financial Exchange Show

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Speaker 2: It's a Thursday here on the Financial Exchange, Chuck, Mark
1:17
Speaker 2: and Tucker with you and a bunch of economic data
1:19
Speaker 2: out this morning. We had some economic data yesterday that
1:22
Speaker 2: I want to touch on as well, and our top
1:25
Speaker 2: story is going to focus on that. There is a
1:28
Speaker 2: piece from Market Watches titled consumer Prices barely rose in May. Great,
1:33
Speaker 2: but here comes another inflation repor We're talking about the
1:35
Speaker 2: PPI this morning. So yesterday CPI numbers were good. PPI
1:39
Speaker 2: this morning came in kind of better than expected. I
1:43
Speaker 2: say kind of for a couple of reasons. The first is,
1:46
Speaker 2: so here here's what we saw. PPI came in at
1:50
Speaker 2: point one percent for the month on headline expectation was
1:54
Speaker 2: point two. Came in point one percent on core expectation
1:58
Speaker 2: was point three. So you say, say, okay, like great,
2:01
Speaker 2: like look at this, like we're you know, seeing you know,
2:04
Speaker 2: more progress on inflation. But unlike CPI, the Producer Price
2:10
Speaker 2: Index does get revised in subsequent additions. Again they get
2:16
Speaker 2: more information. I don't know exactly how or why, but
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Speaker 2: they do. The March PPI was revised from negative point
2:24
Speaker 2: four to zero, so a point four percent increase relative
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Speaker 2: to where it was previously, and the April PPI was
2:32
Speaker 2: revised from negative point five to negative point two. All
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Speaker 2: of this means that over the last two months, inflation
2:38
Speaker 2: was actually point seven percent higher I'm sorry, yes, point
2:42
Speaker 2: seven percent higher than initially reported in the PPI. And
2:46
Speaker 2: so when you come in with a point one or
2:48
Speaker 2: point two percent beat, it doesn't quite mean what you
2:52
Speaker 2: think it means. This is before we even get to
2:55
Speaker 2: the fact that the PPI doesn't actually measure what most
2:58
Speaker 2: people think it measures. And I kind of want to
3:02
Speaker 2: talk about that a little bit, just because it's instructive
3:05
Speaker 2: when discussing how this all ends up feeding into a
3:09
Speaker 2: bigger picture of inflation. So when we look at the
3:12
Speaker 2: Consumer Price Index the CPI, it's a really simple to
3:17
Speaker 2: understand measure. It may or may not be you know,
3:19
Speaker 2: accurate month to month and this and that for you know,
3:21
Speaker 2: various reasons, but it's simple to understand. Did the price
3:25
Speaker 2: paid by consumers end buyers of goods move up or
3:31
Speaker 2: down for those specific goods in the previous month? Services too,
3:35
Speaker 2: It's a whole bit. I used goods, but stuff we
3:38
Speaker 2: can we can throw that in there. The PPI is
3:43
Speaker 2: backwards from that. It does not measure the cost of
3:46
Speaker 2: stuff that producers buy on a monthly basis, So it
3:52
Speaker 2: doesn't measure like the cost of steel for an automaker. Rather,
3:57
Speaker 2: it measures the prices received by producers for what they
4:02
Speaker 2: sell during that month. So it's basically trying to tie
4:06
Speaker 2: the other side of the equation to CPI. It doesn't
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Speaker 2: actually talk about the input costs for what they are seeing,
4:16
Speaker 2: and so because of this, it doesn't measure what people
4:20
Speaker 2: think it do people think it measures like the cost
4:22
Speaker 2: of inputs to producers. It does not. It measures how
4:25
Speaker 2: much from the producer side it looks like they're able
4:28
Speaker 2: to charge to their end buyers. And so what we
4:33
Speaker 2: are seeing is over the last four months, mark, I
4:37
Speaker 2: think it's pretty clear that there has been no meaningful,
4:41
Speaker 2: measurable inflation that would be concerning to the Federal Reserve
4:45
Speaker 2: in any way, shape or form.
4:48
Speaker 3: I think that's a perfect summary. Inflation has come down
4:51
Speaker 3: a lot in the past two years, say the question,
4:55
Speaker 3: and we won't be able to answer this for at
4:58
Speaker 3: least several months, maybe longer. Is Is it due to
5:01
Speaker 3: a succession of lucky one offs falling energy prices falling
5:07
Speaker 3: prices in one sector or another, or is it due
5:12
Speaker 3: to a cooling off of what was excess a way
5:19
Speaker 3: too hot excess demand. There's evidence for both of those explanations,
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Speaker 3: and it's probably a little bit of both. The Fed's
5:26
Speaker 3: main concern is has underlying inflation? You can think of
5:30
Speaker 3: that as the trend or what's really going on in inflation?
5:33
Speaker 3: And there are various ways to get at that. You
5:36
Speaker 3: and Mike Armstrong talk about a lot core that is
5:38
Speaker 3: ex food energy is one of them. The median or
5:41
Speaker 3: the trimmed mean ways of removing extreme price movements from
5:44
Speaker 3: month to month are probably the preferred ways of getting
5:47
Speaker 3: at it. Those measures of underlying inflation suggest that it
5:51
Speaker 3: remains somewhat elevated. This is why the FED has not
5:53
Speaker 3: preemptively lowered interest rates. They're also worried about things like
5:57
Speaker 3: the uptiket, inflation expectations and other factors, but that's that's
6:03
Speaker 3: mainly why. And again these are questions has inflation subsided?
6:07
Speaker 3: Is the main question? Truly subsided gotten down to the
6:10
Speaker 3: Fed's two percent target that we won't be able to
6:12
Speaker 3: answer for some time.
6:13
Speaker 2: So this gets us to this piece from Alison Schrager
6:17
Speaker 2: in Bloomberg Opinion. It's titled the FED can now declare
6:20
Speaker 2: victory over inflation? And the answer here, I think is
6:24
Speaker 2: a yes. But in that I think, and we talked
6:29
Speaker 2: about this at the end of last year, unemployment at
6:32
Speaker 2: the end of last year still under four and a
6:33
Speaker 2: half percent, Inflation not only you know, under four percent,
6:37
Speaker 2: was under three at the end of last year, And
6:40
Speaker 2: so I think by and large you can say, hey,
6:44
Speaker 2: the FED achieved its soft landing. It was kind of
6:47
Speaker 2: ugly getting there through twenty twenty two. In the first
6:50
Speaker 2: half of twenty three, we've talked at length about how
6:53
Speaker 2: the FED was not very good during an eighteen to
6:58
Speaker 2: twenty one month period. But for the last eighteen months
7:02
Speaker 2: or so they've been almost two years now, they've been fantastic.
7:05
Speaker 2: I think I think they've done a great job in
7:08
Speaker 2: getting to that soft landing. The question that's outstanding that
7:12
Speaker 2: I think you kind of touch on, is hey, does
7:15
Speaker 2: the tariff situation provide an invitation for inflation to resume
7:22
Speaker 2: an upward march over the course of the second half
7:25
Speaker 2: of this year, Because if it weren't for that question,
7:31
Speaker 2: I think I am dangerously close, in my opinion to
7:36
Speaker 2: saying the FED should probably be considering cutting in either
7:42
Speaker 2: June or July, because there are things that are starting
7:46
Speaker 2: to bubble up in a whole bunch of different places
7:48
Speaker 2: in the labor market that are pointing towards some real
7:51
Speaker 2: concern in the second half of the year, and you'd
7:53
Speaker 2: want to preempt that. But I don't think you can
7:56
Speaker 2: do it right now because it risks sparking additional inflation
8:01
Speaker 2: because of the tariff side of things, and not just
8:04
Speaker 2: the tariff but also the the labor supply side of things.
8:08
Speaker 2: I think is an underappreciated aspect of what's going on
8:12
Speaker 2: now that could potentially, you know, reignite some inflationary pressures
8:15
Speaker 2: as well. But that's that's kind of where I am
8:19
Speaker 2: right now.
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Speaker 3: Mark, Yes, you raise a couple of issues. The first
8:22
Speaker 3: is has is the disinflation we've experienced over the past
8:27
Speaker 3: couple of years. Is it attributable to the Fed's tightening
8:30
Speaker 3: And I don't know the answer to that. There's some
8:32
Speaker 3: evidence that the job market is cooled off if you
8:34
Speaker 3: look at job openings, for example. Vacancy's relative to number
8:39
Speaker 3: of unemployed people is a measure we like to talk about,
8:41
Speaker 3: and others have suggested some uh, some slackening and labor
8:46
Speaker 3: market conditions which would generally cause wage pressures to ease
8:51
Speaker 3: and thus inflation to ease. But there's not widespread evidence,
8:54
Speaker 3: and thus there's not consensus that it's the FED tightening
8:57
Speaker 3: that eventually brought inflation down. It could just be lucky
9:01
Speaker 3: special factors, much like most of the Surgeon inflation. And
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Speaker 3: I think this is Schreger's point, and I would agree
9:06
Speaker 3: with it. The Surgeon inflation is probably mostly attributable to
9:10
Speaker 3: special factors related to COVID, though there was that rise
9:14
Speaker 3: in underlying inflation core or trend, depending on how you
9:18
Speaker 3: want to look at it, which is probably attributable to
9:20
Speaker 3: too much demand. So again, there are different forces that
9:24
Speaker 3: work here, and researchers have argued will continue to argue
9:27
Speaker 3: about which is more influential. So I don't really know
9:32
Speaker 3: that the FED should be credited. And Powell himself would
9:34
Speaker 3: admit this, by the way. In fact, he may have.
9:36
Speaker 3: At the conference they had a few weeks ago, somebody
9:38
Speaker 3: said it. I forget who, but it surprised me. And
9:42
Speaker 3: it's just the right amount of humility to display when
9:45
Speaker 3: you're talking about inflation. So the flip side of that
9:49
Speaker 3: now is well, can we loosen monetary policy or should we?
9:53
Speaker 3: Is it restrictive? I don't know the answer to that either.
9:56
Speaker 3: If labor market conditions are deteriorating, then FED pol is
10:00
Speaker 3: probably too restrictive. But it's possible too that with inflation
10:05
Speaker 3: expectations ticking up and wage growth remaining healthy, that they shouldn't.
10:10
Speaker 3: Maybe the natural rate of unemployment is going up for
10:13
Speaker 3: structural reasons. It does fluctuate. If this is confusing, that
10:18
Speaker 3: is a normal reaction because the FED is confused. I'm confused.
10:22
Speaker 3: You never really know what the true state of the
10:24
Speaker 3: economy is, which is why monetary policy is never a
10:28
Speaker 3: mission accomplished type job. It's always a work in progress.
10:33
Speaker 2: I think the question on is monetary policy too tight
10:38
Speaker 2: gets at I mean, look, the easy way that you
10:42
Speaker 2: can measure that is, you know, hey, where are real
10:44
Speaker 2: rates right now? And if you're looking at it in
10:46
Speaker 2: terms of FED funds, you've basically been pretty close to
10:49
Speaker 2: a two percent real rate for the last couple of
10:52
Speaker 2: years right now.
10:53
Speaker 3: But which inflation expectation number should I subtract from nominal
10:56
Speaker 3: rates to get real rates? If you use Michigan, they're
10:59
Speaker 3: they're close to if that's bad. If you use others,
11:02
Speaker 3: they're taking Michigan.
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Speaker 2: Quite honestly, I'm not the point now where I don't
11:06
Speaker 2: think there's any valuable signal.
11:07
Speaker 3: So let's take an average of Michigan, New York Fed,
11:10
Speaker 3: and others. They're up relative to a few months ago.
11:13
Speaker 3: So the real FED funds rate has come down, because
11:16
Speaker 3: the stated rate minus inflation expectations is the real rate,
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Speaker 3: the rate that people make decisions based on. I worry,
11:23
Speaker 3: and this is not This worries not unique to me.
11:25
Speaker 2: The FED talks about it.
11:27
Speaker 3: That real rates coming down may not be the right
11:31
Speaker 3: prescription right now, or it could be a flavor market
11:33
Speaker 3: conditions are deteriorating. That's what makes this a little bit vexing.
11:36
Speaker 2: Let's take a quick break. When we come back, we'll
11:38
Speaker 2: talk a little bit more about some of the labor
11:39
Speaker 2: market data that we've gotten, just because I think there's
11:42
Speaker 2: some meetiness there and so we'll be discussing jobs after this.
11:49
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12:18
Speaker 4: All right.
12:30
Speaker 2: We want to talk a little bit about what we
12:31
Speaker 2: are seeing in the labor market, just because we did
12:36
Speaker 2: get some additional jobbles claims data for this morning, and
12:41
Speaker 2: there are parts of it that are a little not ideal,
12:46
Speaker 2: is I think the best way to describe it. So
12:48
Speaker 2: every week we get a set of new jobless claims
12:52
Speaker 2: and we get continuing claims data as well. The new
12:56
Speaker 2: jobbles claims often referred to as initial if you will,
13:00
Speaker 2: Those came into two hundred and forty eight thousand and
13:02
Speaker 2: four the week in line flat with a slightly upwardly
13:06
Speaker 2: revised two hundred and forty eight thousand and four last week.
13:10
Speaker 2: This is not overly concerning to me, even though we've
13:13
Speaker 2: moved up from you know, kind of two hundred and
13:15
Speaker 2: ten to two hundred and twenty five thousand weekly claims,
13:18
Speaker 2: simply because the last two years around this time we've
13:22
Speaker 2: kind of seen the same thing happening, with claims going
13:26
Speaker 2: to around two hundred and forty to two hundred and
13:28
Speaker 2: sixty thousand, and I suspect that the numbers I'm quoting
13:32
Speaker 2: are seasonally adjusted. There seems to be something a little
13:36
Speaker 2: bit out of whack in the seasonal adjustments that is
13:38
Speaker 2: leading to this, just because if you take a look
13:40
Speaker 2: at the non seasonally adjusted claims for the last couple
13:44
Speaker 2: of years, there's always a little bit of a peak
13:47
Speaker 2: in the summer that basically matches what we saw from
13:50
Speaker 2: twenty eighteen to twenty nineteen, the last two pre pandemic
13:53
Speaker 2: years that were you know, normal in the labor market,
13:56
Speaker 2: and most of that you know, short term non seasonally
13:58
Speaker 2: adjusted rise comes from usually municipal workers that are able
14:03
Speaker 2: to file for unemployment for the summer, think school bus drivers,
14:07
Speaker 2: people along those lines. And so I'm not overly concerned
14:12
Speaker 2: about the initial claims number unless we start to see
14:15
Speaker 2: multiple weeks where this is trending towards like two hundred
14:19
Speaker 2: and seventy two hundred and eighty thousand, just because at
14:22
Speaker 2: this point this is the exact same thing we've seen
14:24
Speaker 2: the last two years. So I don't think there's anything
14:27
Speaker 2: there right now. The continuing claims number is problematic, and
14:35
Speaker 2: this is the second time in three weeks that I'm
14:38
Speaker 2: now saying this continuing claims went from one point nine
14:41
Speaker 2: zero two million to one point nine to five six
14:42
Speaker 2: so a jump off around fifty thousand in the continuing
14:45
Speaker 2: claims number. And this is a deviation to the upside
14:50
Speaker 2: for the last three weeks now from where we have
14:53
Speaker 2: been over the last couple of years. So there is
14:56
Speaker 2: something that's happening on that front. What does this mean, Well,
15:00
Speaker 2: if you're not seeing a big jump in initial claims,
15:03
Speaker 2: it means that you're not really seeing anything meaningful from
15:05
Speaker 2: a layoff perspective. It's not that companies are laying people
15:08
Speaker 2: off in higher numbers, but it does suggest that because
15:12
Speaker 2: continuing claims are rising, you'd say, how to continuing claims
15:15
Speaker 2: rise if initial ones aren't. It's because people are having
15:18
Speaker 2: to spend more time unemployed and they're finding it harder
15:21
Speaker 2: to get back into a job after they lose one.
15:25
Speaker 2: And this matches all the other stuff that we're seeing
15:27
Speaker 2: out there about the slowdowns and hiring slowdowns and job postings,
15:31
Speaker 2: college grads that are having trouble finding a job. This
15:35
Speaker 2: messhes perfectly there. And the problem here we're now at
15:40
Speaker 2: a point, excuse me, continuing job as claims for this
15:45
Speaker 2: week are now seven point two percent above where we
15:52
Speaker 2: were at this time last year. And the problem with
15:57
Speaker 2: this is, for the last few years, continuing jobless claims
16:01
Speaker 2: have generally been running anywhere from like two to five
16:04
Speaker 2: percent above you know, prior year numbers historically, aside from
16:10
Speaker 2: twenty twenty three. Once you start seeing continuing jobbless claims
16:16
Speaker 2: growing more than you know, nine ten percent year over year,
16:20
Speaker 2: they tend to go up quickly from there, and there
16:22
Speaker 2: tends to be a fairly rapid deterioration in the jobs
16:26
Speaker 2: market at that point. And so we are starting to
16:29
Speaker 2: get dangerously close to that range where if we get
16:35
Speaker 2: continuing claims starting to print above two million, we're pretty
16:39
Speaker 2: much there and things start to get pretty dodgy in
16:41
Speaker 2: a hurry. And we're only around fifty thousand continuing claims
16:43
Speaker 2: away from there right now. So's that's the concern that
16:46
Speaker 2: I have in the labor market is it's not massive
16:49
Speaker 2: layoffs right now, but this is all stuff that starts
16:52
Speaker 2: to build in an uncomfortable way if it goes further.
16:55
Speaker 3: Yeah, you sum that up perfectly. I don't think there's
16:57
Speaker 3: anything I could add to the continuing claims discussion, but
17:00
Speaker 3: I will point out that the longer somebody has been unemployed,
17:03
Speaker 3: which is one thing continuing claims measures correct me if
17:05
Speaker 3: I'm wrong, Yes, the longer it will take them to
17:08
Speaker 3: find a job. And if anybody's ever had the experience
17:11
Speaker 3: of being unemployed, you know what I mean. You wait
17:14
Speaker 3: for four weeks, and then you're waiting. It's the fifth week,
17:17
Speaker 3: it's the sixth week, you're sweating it a little bit more,
17:20
Speaker 3: and you know at that point it's going to be
17:21
Speaker 3: harder than you had hoped. The point I made in
17:24
Speaker 3: the last segment about the FED not knowing what the
17:27
Speaker 3: right rate of unemployment is tied to this notion of
17:29
Speaker 3: continuing claims. What if the structure of the economy is changing,
17:32
Speaker 3: maybe because of tariffs, Maybe we're changing the productive mix
17:35
Speaker 3: in the economy to adapt to these, which is their
17:38
Speaker 3: goal after all. Sure that could mean people stay unemployed
17:41
Speaker 3: for longer that pushes up the natural rate. Don't get
17:46
Speaker 3: put off by the fancy by the pretentious term natural rate.
17:49
Speaker 3: It just means the rate of unemployment consistent with stable inflation.
17:52
Speaker 3: It's what the economy can support. Given the way everything's organized,
17:55
Speaker 3: the natural rate could be rising. This is what makes
17:58
Speaker 3: the Fed's job harder if they push on the if
18:01
Speaker 3: they if they if they push down on the throttle,
18:04
Speaker 3: put push down on the pedal, whatever the accelerator. When
18:07
Speaker 3: the natural rate is rising, they're going to overheat the economy.
18:10
Speaker 3: So this is what makes their job interesting and challenging.
18:15
Speaker 2: Another data point on this, and this is from Neil
18:19
Speaker 2: Dutta at Renaissance Macro. One of the things that they
18:24
Speaker 2: look at is the Atlanta Fed has a wage growth
18:26
Speaker 2: tracker and one of the components that the Atlanta Fed
18:29
Speaker 2: tracks is the percentage of employees that are receiving zero
18:34
Speaker 2: wage growth compared to last year. The reason being companies
18:38
Speaker 2: typically they don't like to again, think of it just
18:41
Speaker 2: from an ego perspective, if you did, you know, work
18:45
Speaker 2: one year and I came to you and said, great work,
18:47
Speaker 2: I'm cutting your pay by three percent, you'd be like,
18:49
Speaker 2: buzz off, I'm gonna get a new job. Like no,
18:51
Speaker 2: like you, just you. The ego can't handle that. We're human.
18:55
Speaker 2: But what companies do sometimes when they're trying to, you know,
18:58
Speaker 2: manage their margins and their business as they say, okay,
19:00
Speaker 2: we're just not going to give raises this year, the
19:03
Speaker 2: percentage of individuals that had no wage growth compared to
19:08
Speaker 2: last year is now at thirteen point two percent. That's
19:11
Speaker 2: up one point one percent from last year. The range
19:13
Speaker 2: this typically goes in is between about ten percent or
19:16
Speaker 2: eleven percent on the low end and about seventeen percent
19:19
Speaker 2: on the high end. We've been rising for the last
19:22
Speaker 2: couple of years, and so that is again indicative of
19:25
Speaker 2: a weakening labor market. And this is another series that
19:28
Speaker 2: typically starts to correlate with rising unemployment when it moves up.
19:33
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Speaker 5: Boeing shares are retreating by five percent, while shares of
21:12
Speaker 5: jet engine maker ge Aerospace are off by two percent. Meanwhile,
21:16
Speaker 5: Oracle stock is jumping nearly fourteen percent after the cloud
21:20
Speaker 5: computing company beat earnings and revenue expectations for the previous quarter.
21:26
Speaker 5: Oracle said it expected dramatically higher revenue growth in the
21:31
Speaker 5: financial year that began recently. Elsewhere, Games Stops sinking over
21:36
Speaker 5: nineteen percent after the video game retailer announced it will
21:40
Speaker 5: sell one point seventy five billion dollars of convertible senior notes,
21:45
Speaker 5: with proceeds earmarked for general corporate purposes, including making investments.
21:50
Speaker 1: And after today's.
21:51
Speaker 5: Closing bell, we'll see earnings from Adobe. I'm Tucker Silvan.
21:55
Speaker 2: That is Wall Street watch Peace in Bloomberg, and I
21:58
Speaker 2: guess it's not like it's exclusive scoop from them. Rather,
22:02
Speaker 2: this was a comment that was made by President Trump
22:06
Speaker 2: yesterday quote, we'll be sending out letters in about a
22:08
Speaker 2: week and a half, two weeks to countries telling them
22:09
Speaker 2: what the deal is, Trump told her reporters Wednesday at
22:12
Speaker 2: the JFK Center for Performing Arts, where he was attending
22:14
Speaker 2: a performance. At a certain point, we're just going to
22:16
Speaker 2: send letters out. And I think you understand that saying
22:18
Speaker 2: this is the deal. You can take it or leave it.
22:20
Speaker 2: And this is talking about tariff rates. So it seems
22:24
Speaker 2: like we're doing this again, even though we just did
22:26
Speaker 2: this in April. And I think that the market is
22:32
Speaker 2: certainly not expecting to be surprised to the upside on
22:36
Speaker 2: tariffs at this point. And I think the reason for
22:39
Speaker 2: that is that, by and large, aside from the recent
22:43
Speaker 2: jump in the tariffrate for steel and aluminum imports. Other
22:49
Speaker 2: tariffrates have by and large been coming down. The China
22:52
Speaker 2: tariff rate has been coming down. The negotiation with the
22:57
Speaker 2: UK resulted in a little bit of softening there, but
23:00
Speaker 2: still maintaining, you know, the baseline ten percent tariff. So
23:04
Speaker 2: I don't think the market is really expecting too much
23:09
Speaker 2: of a shift on this. And I mean, I guess
23:13
Speaker 2: you kind of wonder is the market complacent here? But
23:16
Speaker 2: the theme for the past couple months has been, Hey,
23:19
Speaker 2: we're going to toss out, you know, a rate that
23:21
Speaker 2: looks prohibitively high at first, and then we're going to
23:24
Speaker 2: walk that back and come down from there. And so
23:26
Speaker 2: I think that is kind of what the market is
23:29
Speaker 2: expecting here.
23:31
Speaker 3: Yeah, the lack of any reaction I think confirms that
23:34
Speaker 3: if the objective is to reduce the trade deficit, and
23:36
Speaker 3: I don't know that it is because objectives have shift
23:39
Speaker 3: from national security to stemming the flow of drugs to
23:43
Speaker 3: reshoring manufacturing. I don't know which of those three, maybe
23:48
Speaker 3: all in part are the ultimate objective here. You might
23:53
Speaker 3: be able to do one out of the three with
23:56
Speaker 3: these bilateral negotiations country to country, for example, reducing the
24:01
Speaker 3: flow of illegal drugs in exchange or not imposing punitive
24:05
Speaker 3: tariffs Canada and Mexico will put more security on the
24:08
Speaker 3: border or something. I'm oversimplifying, but you get the Maybe
24:10
Speaker 3: you can achieve that, but if you do that, they
24:12
Speaker 3: make those concessions, you then have to not follow through
24:15
Speaker 3: on the punishment, so that's not going to result in
24:17
Speaker 3: any reshoring or additional revenue. Similarly, if you want to
24:20
Speaker 3: use tariffs to raise revenue to replace the income tax,
24:23
Speaker 3: I love the idea of replacing the income tax personally,
24:25
Speaker 3: so I'm biased here. I don't know that tariffs are
24:27
Speaker 3: the best consumption tax to affect that, but sir, let's
24:29
Speaker 3: just suppose they are.
24:30
Speaker 2: Great.
24:31
Speaker 3: If you do that, you need to keep the revenue
24:34
Speaker 3: coming in, which means you can't resure you need to
24:36
Speaker 3: keep buying the imports to replace the revenue.
24:38
Speaker 2: Correct.
24:39
Speaker 3: So I'm not going to go through every scenario. You
24:41
Speaker 3: get the point. These objectives are all politely put intention
24:46
Speaker 3: You can achieve them all, and ultimately, I think it's
24:49
Speaker 3: the trade deficit that concerns commentators incorrectly. If you did
24:55
Speaker 3: want to reduce it, the right way is we've talked
24:56
Speaker 3: about is to increase savings, allowing us to finance our
24:59
Speaker 3: own investment, not requiring the inflow of feign dollars to
25:02
Speaker 3: do it. That would also reduce consumption, of course, so
25:04
Speaker 3: we'd have a lower standard of living in the short term.
25:07
Speaker 3: Slightly separate issue. As you could tell, this gets complex quickly. Yes,
25:11
Speaker 3: I just don't know what the objective is here, and
25:13
Speaker 3: even if it were one of the three that I
25:15
Speaker 3: mentioned and maybe something I didn't, are these likely to
25:18
Speaker 3: be achieved under the current strategy, which seems pretty slap
25:21
Speaker 3: dash and not really coherent.
25:24
Speaker 2: Which then gets us to what we've seen in the
25:26
Speaker 2: last month or so, which is, it's not just terrif
25:30
Speaker 2: rates that are the main thing being negotiated. Now, we've
25:33
Speaker 2: seen export controls from both the United States and China
25:37
Speaker 2: in particular become front and center. Now, the United States
25:42
Speaker 2: has for a number of years restricted export of high
25:46
Speaker 2: end semiconductors to China, in particular in order to prevent
25:50
Speaker 2: them from using that technology for military purposes by and large,
25:57
Speaker 2: which seems to be a pretty good reason to restrict
25:59
Speaker 2: the export. China, in the last month has decided that okay,
26:03
Speaker 2: we're not exactly thrilled with you know, the the tariffs
26:06
Speaker 2: and how you're treating us. We are going to start
26:10
Speaker 2: to restrict exports of rare earth materials, which are used
26:15
Speaker 2: in a number of different critical you know uses. The
26:21
Speaker 2: most notable one they're you know, heavily used in electric
26:24
Speaker 2: motors as components of magnets. UH. They are also in
26:28
Speaker 2: certain cases, uh used for military applications because of magnets
26:33
Speaker 2: that you know, need to be able to operate under
26:35
Speaker 2: extreme temperatures and not melt and or lose magnetism during
26:40
Speaker 2: you know, those periods. And so with China being the
26:44
Speaker 2: dominant producer, in some cases the sole producer for some
26:47
Speaker 2: of these rare earth materials, it's put the United States
26:51
Speaker 2: and other countries in a pickle because China has not
26:53
Speaker 2: simply restricted the export to the United States, It's been
26:56
Speaker 2: restricting exports to other countries the EU, India and other
27:00
Speaker 2: places as well. And this is very much something where
27:06
Speaker 2: that the President on this. There's a couple instances that
27:08
Speaker 2: China did this to Japan maybe about fifteen years ago
27:11
Speaker 2: was an instance that I found on the rare earth
27:14
Speaker 2: side of things, But otherwise you haven't seen a ton
27:16
Speaker 2: of this. But I know that one of the things
27:20
Speaker 2: that Trump administration is asking other countries to do as
27:24
Speaker 2: part of trade negotiations is to crack down on, you know,
27:29
Speaker 2: Chinese transhipments of goods that are trying to skirt tariffs, uh,
27:33
Speaker 2: trying to untangle supply chains from China, you know, basically
27:36
Speaker 2: saying hey, EU, UK, stop you know buying so much
27:40
Speaker 2: from China as well. And I have to think that
27:44
Speaker 2: the reason China is, you know, applying these rare earth
27:47
Speaker 2: export restrictions to other countries is to say, hey, you're
27:51
Speaker 2: talking to the US about you know, cutting us out.
27:55
Speaker 2: You do that you're not getting rare earths. And it's
27:58
Speaker 2: I'm not saying like this is right or wrong. I'm
28:01
Speaker 2: saying this is what China is absolutely talking about with
28:05
Speaker 2: these countries. And it really puts it really puts the
28:13
Speaker 2: objective of untangling from China in question as far as
28:17
Speaker 2: something that can be achieved, simply because there's no way
28:19
Speaker 2: to spool up the rare earth production capacity in a
28:23
Speaker 2: short enough period of time to be able to fight this.
28:26
Speaker 2: It's not particularly complicated production, like I've done enough reading
28:31
Speaker 2: on it to be dangerous. In the last couple of
28:33
Speaker 2: weeks You basically need a bunch of you know, space
28:38
Speaker 2: that has you know, rare earth deposits in it. You
28:41
Speaker 2: need to be willing to throw a bunch of chemicals
28:43
Speaker 2: at it. You need to then have a processing facility
28:47
Speaker 2: for the stuff, and you move on with your life.
28:51
Speaker 2: It's it's messy. It produces a bunch of toxic you know,
28:54
Speaker 2: excess stuff inness in that. But it's not a particularly
28:58
Speaker 2: complicated process to extract and get this stuff. It's just
29:03
Speaker 2: really messy, and to get the quantities you need it
29:06
Speaker 2: takes a little bit of time to set that scale up.
29:08
Speaker 3: Given this is not my area, but I think it's
29:12
Speaker 3: safe to say that we need Europe's help in containing China.
29:15
Speaker 3: That seems to be the state Again, what is the objective?
29:17
Speaker 3: I just wish somebody would problem is.
29:19
Speaker 2: I think Europe is by and large captive to China.
29:21
Speaker 3: Right, but if we were more helpful with them on Russia,
29:25
Speaker 3: they may be more This is you know, geopolitical strategy.
29:27
Speaker 2: And yes, now we put on our geopolitical analyst hats.
29:30
Speaker 3: Yeah, I'm so unqualified, But it seems that the economics
29:33
Speaker 3: are clear enough. Export controls are far preferable to trade
29:39
Speaker 3: wars and they seem to be a political, a geopolitical
29:44
Speaker 3: and national security excuse me, imperative. We need Europe's help
29:48
Speaker 3: with this. Why are we imposing punitive tariffs and getting
29:53
Speaker 3: into all this bickering with Europe over various things and
29:55
Speaker 3: voting with Russia at the UN over European interest This
29:58
Speaker 3: makes no sense to me. We need their help with China,
30:01
Speaker 3: they need our help with Russia. We should be coordinating
30:04
Speaker 3: economic with national security policy. I don't see that happening.
30:08
Speaker 3: I'm just a bystander, relatively uninformed, frankly, and I wonder why.
30:13
Speaker 2: I think with Europe, I think there's a real question
30:17
Speaker 2: as to as to basically how tied in they are
30:26
Speaker 2: to China from a political and influenced perspective at this point.
30:31
Speaker 2: And I think there are real questions there as to
30:35
Speaker 2: the desire and means to a certain extent to untangle
30:41
Speaker 2: themselves from China, because I think, by and large, there's
30:45
Speaker 2: some pretty decent evidence that European politicians are fairly convinced
30:52
Speaker 2: that maintaining the current state of affairs with China is
30:55
Speaker 2: the best thing for them, even if I don't necessarily
30:58
Speaker 2: believe that, and so I do think it is the
31:00
Speaker 2: question of, then, hey, how do you put pressure on Europe?
31:03
Speaker 2: I'll still give it. What's the balance of carrot and
31:05
Speaker 2: stick there? Again, I'm not the geopolitical expert, but it's
31:10
Speaker 2: I hear people talk about, well, you know, you've got
31:12
Speaker 2: to engage your allies on the China questions. You kind
31:15
Speaker 2: of look at Europe and how they've dealt with China
31:17
Speaker 2: the last fifteen years, and you go, well, how much
31:19
Speaker 2: of an ally are they when it comes to the
31:21
Speaker 2: China piece. Obviously there are other pieces where you can
31:25
Speaker 2: say that they are far stauncher allies, you know, certainly
31:29
Speaker 2: militarily and economically. But from the piece of hey are
31:33
Speaker 2: they willing to confront China over some of these things?
31:37
Speaker 2: I don't know how many facts are in evidence there,
31:39
Speaker 2: And I guess that's what I'm trying to anry.
31:40
Speaker 3: Other than the UK who has our interest in the Pacific.
31:43
Speaker 3: We're a pacific naval power UK to a much smaller degree,
31:48
Speaker 3: just as was the case in the nineteen thirties.
31:50
Speaker 2: Let's take a quick break here. When we return, let's
31:55
Speaker 2: see what should we talk about now? I guess we'll
31:58
Speaker 2: talk about this Boeing seven eight to seven crash in India,
32:02
Speaker 2: So we'll talk about that right after this.
32:06
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32:40
Speaker 2: All right. Earlier today, a Boeing seven eight to seven
32:45
Speaker 2: to eight passenger jet carrying two hundred and forty two
32:49
Speaker 2: people took off from Amedabad in India and crash shortly
32:55
Speaker 2: after takeoff. It looks like it was less than a
32:57
Speaker 2: minute or so after take off the place the plane
33:01
Speaker 2: was en route to London. Now, we don't know anything
33:05
Speaker 2: yet about the reason for the crash. It is completely
33:11
Speaker 2: unknown at this time. Boeing stock is as you would expect, though,
33:17
Speaker 2: selling off on the news and potential, you know, concern
33:20
Speaker 2: about this. The stock was down about seven percent at
33:23
Speaker 2: one point earlier today, down about five as we speak
33:28
Speaker 2: right now. And obviously the concern for Boeing is, hey,
33:34
Speaker 2: is this something that was our fault? Given you know,
33:39
Speaker 2: the issues that we had with the seven thirty seven
33:42
Speaker 2: Max with those two crashes a number of years ago.
33:46
Speaker 2: The seven eighty seven is a completely it goes without
33:50
Speaker 2: saying it's a completely different airplane from the seven thirty
33:52
Speaker 2: seven Max, but it's a completely different safety profile. And
33:57
Speaker 2: that the seven thirty seven Max had those two crash,
34:00
Speaker 2: which is, you know, pretty shortly after they first went
34:04
Speaker 2: into service. The seven eight to seven has been operating
34:08
Speaker 2: for fourteen years now. There are about twelve hundred of
34:11
Speaker 2: them that are in service, so you're talking tens of thousands,
34:16
Speaker 2: really hundreds of thousands of flights that have happened. And
34:19
Speaker 2: this is the first incidence of a hull loss for
34:24
Speaker 2: the Boeing seven eight to seven, and so historically when
34:29
Speaker 2: you look at the safety record of the airplane, it
34:32
Speaker 2: is exceptional. It is something where they did have some
34:36
Speaker 2: problems early on with concerns about some of the lithium
34:39
Speaker 2: ion batteries that were overheating it in a couple of
34:42
Speaker 2: instances actually you know, catching fire while on the ground.
34:47
Speaker 2: We have no idea what the cause is here. But
34:50
Speaker 2: again that was a problem that you know, was thirteen
34:52
Speaker 2: fourteen years ago that subsequently we have not heard anything
34:55
Speaker 2: about since then. And so I think we just need
34:59
Speaker 2: to see what comes out of this. Obviously just a
35:03
Speaker 2: horrible event here in a horrible occurrence, but we don't
35:09
Speaker 2: know anything about this at this point, and I think
35:14
Speaker 2: we just need to let the investigation run its course
35:17
Speaker 2: before we can say anything more about exactly what's going
35:22
Speaker 2: on here. But that is where things stand with this.
35:27
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36:36
Speaker 2: United Natural Foods, who is a wholesale food distributor. As
36:39
Speaker 2: you would expect from their name, they were hit with
36:43
Speaker 2: a cyber attack that breached its systems and left it
36:45
Speaker 2: unable to fulfill orders for a number of days, and
36:49
Speaker 2: that ended up leaving a number of stores without their
36:53
Speaker 2: products simply because they could not process the transactions. And
36:58
Speaker 2: the big thing is that you're continuing to see an
37:01
Speaker 2: uptick in the prevalence of cyber attacks and obviously, you know,
37:06
Speaker 2: heading into some kind of new territory when you talk
37:08
Speaker 2: about consumer facing retail businesses. And this is something that
37:14
Speaker 2: I think is going to continue to get worse and
37:17
Speaker 2: I'm not sure if it ever gets better, given the
37:20
Speaker 2: fact that cyber criminals can oftentimes stay one to several
37:24
Speaker 2: steps ahead of authorities and operate across you know, jurisdictional
37:28
Speaker 2: boundaries where you might not have authorities who even want
37:31
Speaker 2: to enforce any you know, particular laws against them, or
37:37
Speaker 2: you know, conduct extraditions to where they could potentially be prosecuted.
37:41
Speaker 2: So I don't see this as being something that gets
37:44
Speaker 2: worse before it gets better. It might just get worse.
37:47
Speaker 3: If it's the result of a if it's a state acting,
37:50
Speaker 3: if this is an act of cyber terrorism that is
37:52
Speaker 3: state sponsored, almost certainly Russia comes to mind. They're engaged
37:56
Speaker 3: in a campaign of sabotage throughout Europe. Right now, we're
37:59
Speaker 3: large removed from it here and thus kind of blissfully unaware,
38:04
Speaker 3: but Europeans know this all too well, and messing with
38:06
Speaker 3: the food supply is a great way to terrorize a population.
38:09
Speaker 2: That occurred to me, let's take a quick break here.
38:11
Speaker 2: When we come back, we got a lot of fed
38:15
Speaker 2: talk to get to and we'll also be talking the
38:19
Speaker 2: US dollar an hour or two. Also a couple of
38:21
Speaker 2: interviews stick around