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Why Inflation Is Starting to Spiral Again · The Financial Exchange Show

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  Speaker 1: Armstrong and Mark Vandetti.
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  Speaker 2: Happy Inflation Tuesday to the listeners out there on the
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  Speaker 2: Financial Exchange. It's Mike, Mark and Tucker with you. We
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  Speaker 2: had a release of the April CPI this morning at
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  Speaker 2: eight thirty am. We've got Michael Burry of Big Short
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  Speaker 2: Fame calling for a market crash again. We've got gas
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  Speaker 2: taxes incoming fed Share to discuss. But the definite big
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  Speaker 2: news report of the week is this inflation report. It
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  Speaker 2: is the topic on everyone's mind as gas prices surge,
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  Speaker 2: and we've talked about how there are few items in
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  Speaker 2: the world quite like gasoline that are as front and
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  Speaker 2: center to consumers expectations for where prices are going to go.
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  Speaker 2: Then gasoline and the inflation report that we this morning
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  Speaker 2: from the Bureau of Labor Statistics confirmed I think a
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  Speaker 2: lot of the fears and actually surpassed most economist expectations.
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  Speaker 3: So let's start right there.
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  Speaker 2: Mark on the April CPI report, which everyone knew was
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  Speaker 2: going to be a hot reading, nonetheless, but came in,
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  Speaker 2: thank you, Michael, came in a little bit hotter than expected.
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  Speaker 2: So starting off with the headline numbers year over year inflation,
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  Speaker 2: which is the one that you see printed most often
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  Speaker 2: came in at three point eight percent. Expectations were for
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  Speaker 2: three seven. When you strip out even the food and
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  Speaker 2: energy piece, you came in at two point eight percent.
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  Speaker 2: So even just looking at those core prices, you're now
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  Speaker 2: approaching three percent on the year over year figures. The
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  Speaker 2: month over month numbers after bumping up nine tens of
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  Speaker 2: percent in March, you saw another six tens of percent
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  Speaker 2: increase for all items inflation, and four tenths when you
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  Speaker 2: stripped out food and energy on the month over month reading.
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  Speaker 2: And so unsurprisingly here mark, if energy price is shooting up,
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  Speaker 2: you are experiencing higher than comfortable inflation. But you might
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  Speaker 2: be able to argue that we're starting to see some
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  Speaker 2: bleed through into other categories here as well, other than
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  Speaker 2: purely just energy. So takeaways from this month's inflation report,
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  Speaker 2: which again not surprising in terms of the release but
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  Speaker 2: hotter than expect, that.
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  Speaker 4: We have an inflation problem. The FED, which controls the
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  Speaker 4: money supply and thus short term interest rates and thus
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  Speaker 4: inflation in the long term, is the pretty much the
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  Speaker 4: only entity that can fix it. Fixing the inflation problem
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  Speaker 4: would probably require economic sacrifice. It did not in twenty
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  Speaker 4: twenty two. Inflation came way down from twenty twenty two
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  Speaker 4: to twenty twenty four, without a rise in unemployment, Without
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  Speaker 4: an appreciable rise in unemployment, some other measures of labor
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  Speaker 4: markets slack went up. So the question for the FED
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  Speaker 4: now is do we accommodate this inflation, this oil price shock,
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  Speaker 4: which has caused headline inflation to spike in the last
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  Speaker 4: two months, gone up by one point five percent. I'm
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  Speaker 4: just a cumulating. They the point nine yep from March,
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  Speaker 4: in the point six from April. This is the highest
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  Speaker 4: year over year inflation rate, the one that you recited
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  Speaker 4: three point eight percent in three years when everybody thought
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  Speaker 4: inflation was terrible. Um So, Mike, the Fed's got to
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  Speaker 4: decide do we accommodate this and hope it doesn't become embedded,
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  Speaker 4: Hope investors, firms, and people don't begin to bake this
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  Speaker 4: level of inflation into their price and wage expectations, or alternatively,
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  Speaker 4: does the FED push back.
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  Speaker 2: We'll get into some more of the details of the
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  Speaker 2: report in a minute, but I do want to stay
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  Speaker 2: on this subject of accommodating or not, because on the surface,
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  Speaker 2: an oil price shock on its own, if you think
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  Speaker 2: it could be resolved. You can make an argument for
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  Speaker 2: accommodating it. And by accommodating we just mean the Fed
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  Speaker 2: not intentionally trying to send the economy into recession because
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  Speaker 2: of a price shock in one category. Give me the
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  Speaker 2: counter argument now, because arguably, over the course of the
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  Speaker 2: last four years, we have had three separate price shocks.
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  Speaker 2: Now there is the twenty twenty two you know, inflation
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  Speaker 2: shock from a combination of stimulus plus COVID era shutdowns.
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  Speaker 2: There was the twenty twenty five price shock from tariffs,
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  Speaker 2: and now we've got a twenty twenty six price shock
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  Speaker 2: coming in from oil supplies. And all three of them
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  Speaker 2: showed up in the data. But arguably are also perhaps
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  Speaker 2: moving into consumers' expectations for what prices are you know,
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  Speaker 2: what are normal price movements?
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  Speaker 4: The Yeah, the counter argument, I think it's at least twofold.
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  Speaker 4: One is that the inflation rate now over the last
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  Speaker 4: year three point eight percent, and expected inflation too, which
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  Speaker 4: is the more important variable. They're way above the federal
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  Speaker 4: funds rate, which is three point five percent. Said differently,
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  Speaker 4: real Fed funds is now negative. Does that make sense?
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  Speaker 4: So you take the nominal, you subtract either expected inflation
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  Speaker 4: if you're being sort of pedantic about it, or just
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  Speaker 4: the last twelve months as.
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  Speaker 3: A rule of them.
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  Speaker 2: The target rate for the Federal Reserve right now on
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  Speaker 2: that Fed funds rate is three and a half to
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  Speaker 2: three seven five. And what markint Okay referring to is, hey,
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  Speaker 2: you know, when that rate is lower than the total
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  Speaker 2: inflation rate, it's tough to argue that the policy is
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  Speaker 2: trying to constrain inflation.
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  Speaker 4: Yeah, that's a preposterous argument at this point. So the
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  Speaker 4: Fed's got a problem because real interest rates are generously
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  Speaker 4: we'll call them zero more accurately, it's probably fair to
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  Speaker 4: say that negative. That's very stimulative, Mike. So we've got
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  Speaker 4: prices going up in monetary policy being stimulated. That's problem
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  Speaker 4: number one on the Fed's plate. Another problem is inflation expectations.
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  Speaker 4: They're going up. You saw headline possibly be possibly creep
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  Speaker 4: into seep into core inflation. Headline inflation was up point six.
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  Speaker 4: Core inflation double went from point two to point four.
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  Speaker 4: There may be technical reasons for that, but I think
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  Speaker 4: over emphasizing the technical reasons misses the forest, which is
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  Speaker 4: the inflation problem. For the technical trees, which are sort
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  Speaker 4: of like whack a mole, there's one every month that
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  Speaker 4: you can cite as a special factor. So for at
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  Speaker 4: least a couple reasons, Mike, this is this is a problem.
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  Speaker 4: This is the biggest inflation. Were on the precipice of
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  Speaker 4: a crisis here. I don't want to call it a
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  Speaker 4: crisis yet, but we're on the edge of an inflation crisis,
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  Speaker 4: obviously the biggest in twenty twenty two.
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  Speaker 2: So taking a look at the details of this report
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  Speaker 2: here and breaking it down section by section, which I
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  Speaker 2: don't think is useful for predicting the future, but I
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  Speaker 2: think it is it is indicative of what people are
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  Speaker 2: actually experiencing. So first of all, food food prices, which
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  Speaker 2: were pretty flat during the month of Marsh did climb
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  Speaker 2: pretty substantially in the month of April. You might be
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  Speaker 2: able to blame that on diesel prices. You might be
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  Speaker 2: able to blame that on grocery stores raising prices in
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  Speaker 2: anticipation of higher prices from farmers due to the fertilizer.
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  Speaker 3: I'm not sure, but in neither case, the price for food.
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  Speaker 2: At home and away from home increased pretty dramatically. Overall,
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  Speaker 2: the food category increased half percent in the month of
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  Speaker 2: April seven tens of percent for food at home, meaning
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  Speaker 2: grocery store prices up pretty substantially in the month of April.
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  Speaker 2: Energy prices overall up nearly eleven percent in March, up
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  Speaker 2: another nearly four percent in April here, so combined substantial increases.
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  Speaker 2: Gasoline continues to be a big push on that front,
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  Speaker 2: but it's really across the board between fuel, oil, electricity,
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  Speaker 2: energy services, etc. All up substantially over the course of
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  Speaker 2: the last two months. The other interesting one that is
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  Speaker 2: worth mentioning because of the waiting it has in the
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  Speaker 2: overall composition shelter here mark so shelter for the last
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  Speaker 2: six months has been relatively muted, you know, averaging between
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  Speaker 2: zero point two and point four percent monthly increases compared
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  Speaker 2: to where we were a few years ago.
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  Speaker 3: That's welcome news.
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  Speaker 2: In April it shot up six tens of a percent,
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  Speaker 2: and I don't think I can easily look at that
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  Speaker 2: and blame it on gas prices shooting up or oil
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  Speaker 2: prices going through the roof. We're talking about things like
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  Speaker 2: rent prices that people pay or owner's equivalent rent that
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  Speaker 2: is going into this calculation. And this one again another
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  Speaker 2: important piece here because when we look at price movements,
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  Speaker 2: we're looking most importantly at core prices and stripping out
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  Speaker 2: some of the shocks that we get from food and
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  Speaker 2: we get from energy prices. This one is in there,
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  Speaker 2: and it is a massive component of that core prices
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  Speaker 2: we saw bump up six tens of a percent. My
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  Speaker 2: rent didn't go up in the month of April. Do
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  Speaker 2: you have a sense for why we might be seeing that?
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  Speaker 2: Is it actually something to be concerned about our rent prices,
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  Speaker 2: you know, suddenly shooting up this spring in what seems
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  Speaker 2: to be a pretty weak housing market.
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  Speaker 4: Well, they're imputed or inferreds, so we don't know. They
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  Speaker 4: don't actually go ask as you know, they don't ask
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  Speaker 4: people who are renting, would you pay less right compared
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  Speaker 4: to a year ago. Some of you pointed this out
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  Speaker 4: before we went on air today. I couldn't find a
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  Speaker 4: authoritative explanation for why that process might have generated an
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  Speaker 4: exaggerated core rate like it doubled from March to April.
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  Speaker 4: That's suspiciously large. There's no way energy prices because of
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  Speaker 4: the lag that that imputation process involves. So I don't
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  Speaker 4: mean to be overly technical. This is not I have
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  Speaker 4: no idea how they do this, So I'm not trying
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  Speaker 4: to totally technical and I'm trying not to word salad this,
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  Speaker 4: but I think I've already watched it. There's no way
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  Speaker 4: that's attributable to energy seeping into Core. So what happened there,
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  Speaker 4: maybe it's a little bit exaggerated. I'll just call it
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  Speaker 4: like a book keeping effect, sort of timing in the
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  Speaker 4: way that it's done. So maybe Shelter only went up
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  Speaker 4: point three, and maybe Core only went up by point
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  Speaker 4: three instead of point four. I'm really eager to see
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  Speaker 4: today's median rate, which the Cleveland Fed calculates. It strips
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  Speaker 4: out all the outliers, no matter where they originate from.
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  Speaker 4: It was point three last month. If median went from
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  Speaker 4: point three to point four, I think our concern would
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  Speaker 4: be or at least my concern would be validated.
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  Speaker 3: Mike, let's take a quick break.
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  Speaker 2: When we come back, I do want to talk a
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  Speaker 2: bit more about the inflation problem that we are seeing,
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  Speaker 2: because who it's a problem for is the Federal Reserve,
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  Speaker 2: and their job is to control this stuff, and we're
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  Speaker 2: now facing i think arguably the third price shock that
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  Speaker 2: we have seen in four years, and that becomes reminiscent
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  Speaker 2: of other periods of time in history that we're very
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  Speaker 2: problematic for the economy, the stock market, the bond market,
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  Speaker 2: et ce quick break. We're gonna be talking about the
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  Speaker 2: FED and this inflation report next on the Financial Exchange.
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  Speaker 3: Mark.
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  Speaker 2: We were talking about inflation before the break, and the
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  Speaker 2: point that you made without fully going into the weeds
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  Speaker 2: on it was we're at a very dangerous place with inflation.
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  Speaker 2: Now I'll argue that it doesn't seem all that dangerous
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  Speaker 2: given that you're over your numbers are only three point
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  Speaker 2: eight percent. Recently, we dealt with nine percent year over
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  Speaker 2: your inflation. Why would you argue that this moment in
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  Speaker 2: time is particularly dangerous for because I think, yeah.
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  Speaker 4: For a couple of reasons. Expectations are going up. That's
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  Speaker 4: how inflation becomes embedded. The more embedded it becomes, the
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  Speaker 4: harder it becomes to kill. Second, and I can expand
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  Speaker 4: on that one. Sure, Look, we got like an hour
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  Speaker 4: and a half here to talk about this, so and
• 13:24
  Speaker 4: I'm gonna miss straight and I'm a lot Yeah, yeah,
• 13:26
  Speaker 4: we're going so's yeah.
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  Speaker 2: Yeah, yeah, Sorry advertisers going along on inflation.
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  Speaker 4: We'll do we'll we'll do live reads. It's no problem.
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  Speaker 3: God, I'm just here from music acts.
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  Speaker 4: Second, Mike, the FED has lost a lot of credibility
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  Speaker 4: because of the political pressure that the administrations put on them.
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  Speaker 4: I mean, I'm saying, like, if you love the president
• 13:47
  Speaker 4: and this offense, you turn your radio down for a second.
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  Speaker 3: But he's made it.
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  Speaker 4: Really hard for the FED to do their job. Warsh
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  Speaker 4: is coming in fairly or unfairly perceived as his puppet,
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  Speaker 4: ready to do his will that is lower interest rates.
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  Speaker 4: Warsh has made these preposterous arguments that a I will
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  Speaker 4: somehow usher in this golden era of productivity. We could
• 14:05
  Speaker 4: start cutting rates today in anticipation of that. I think
• 14:07
  Speaker 4: we're going to talk today about a story that makes
• 14:09
  Speaker 4: the case that AI investment is inflationary, at least in
• 14:12
  Speaker 4: the short term, because it pushes up demand for stuff.
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  Speaker 4: So that argument doesn't hold water, and it might end
• 14:18
  Speaker 4: up being right, but we won't know for five years,
• 14:20
  Speaker 4: so this could not be happening, and worsh may turn
• 14:23
  Speaker 4: out to be a great fed chair.
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  Speaker 1: Mic.
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  Speaker 4: I think you've chasened. You've encouraged me to adopt sort
• 14:28
  Speaker 4: of a chasin posture with respect to this. Let's wait
• 14:30
  Speaker 4: and see. But the evidence, the facts and evidence, as
• 14:33
  Speaker 4: Chuck Zada would say, are not good. So for a
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  Speaker 4: lot of reasons, Mike, you can see all these things
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  Speaker 4: converging into a perfect inflation storm. The parallels with the
• 14:42
  Speaker 4: seventies are not perfect, but they're eerily reminiscent.
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  Speaker 1: They really are.
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  Speaker 4: We had food and energy price. If you look at
• 14:51
  Speaker 4: CPI in the seventies, it looks like a camel, you know,
• 14:53
  Speaker 4: the couple. I think camels have two humps, right, I
• 14:55
  Speaker 4: don't know, uh Met one got a couple hump in there.
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  Speaker 4: We're hitting another We're going we we we just hit
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  Speaker 4: a trough and we're going up another hump. The FED
• 15:06
  Speaker 4: seems committed to lowering interest rates, which is indefensible in
• 15:10
  Speaker 4: the current environment. So I don't I don't find a
• 15:14
  Speaker 4: lot of reasons to be hopeful about the Fed's ability
• 15:17
  Speaker 4: to tackle this.
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  Speaker 2: Mike, Yeah, I do worry about the Fed's credibility. I
• 15:21
  Speaker 2: especially worry about those expectations. And a conversation I was
• 15:24
  Speaker 2: having just yesterday with somebody buying a new car, giving
• 15:28
  Speaker 2: their existing Toyota to their daughter, and intending on buying
• 15:32
  Speaker 2: a new Toyota this spring for some forty odd thousand dollars.
• 15:37
  Speaker 2: And the question to me was, Hey, we went to
• 15:39
  Speaker 2: the credit union. We can get a you know, loan
• 15:42
  Speaker 2: for this car at four and a half percent, you know,
• 15:46
  Speaker 2: do we buy it now, do we buy it later?
• 15:48
  Speaker 2: Should we take the loan, should we should we borrow
• 15:50
  Speaker 2: the money? Should we take it from you know, cash
• 15:52
  Speaker 2: reserves that we have. And I won't go into what
• 15:55
  Speaker 2: the you know, what the conclusion was, but those are
• 15:59
  Speaker 2: the types of decisions that very much are affecting them
• 16:04
  Speaker 2: from an inflation expectation standpoint. Hey, should we just buy
• 16:08
  Speaker 2: this car now, because I bet the price. You know,
• 16:10
  Speaker 2: based on what the prices have done the last few years,
• 16:12
  Speaker 2: it looks like they're going to continue to go up. Hey,
• 16:15
  Speaker 2: you know, in the context of other interest rates that
• 16:17
  Speaker 2: I'm seeing four point two percent or four point five percent,
• 16:20
  Speaker 2: which would have been unthinkable you know, five years ago,
• 16:26
  Speaker 2: that doesn't seem quite as bad as borrowing money at
• 16:31
  Speaker 2: you know, six and a half percent for a mortgage,
• 16:33
  Speaker 2: for example. So yeah, let's go ahead and borrow it,
• 16:36
  Speaker 2: and we'll keep our cash invested, or we'll go do
• 16:38
  Speaker 2: something else with it. These maybe that's not the perfect
• 16:42
  Speaker 2: inflation expectation story, but the price of the vehicle one
• 16:45
  Speaker 2: absolutely is when people fear or expect prices to be volatile,
• 16:52
  Speaker 2: when they expect them to go up substantially, they start
• 16:55
  Speaker 2: doing things that don't make a ton of sense.
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  Speaker 3: Yes, yes, yes, they they.
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  Speaker 2: Start to put their money into assets that are not
• 17:04
  Speaker 2: assets because they're worried about the price of those things
• 17:06
  Speaker 2: going up. And one of those could be cars, another
• 17:09
  Speaker 2: one could be non perishable goods. But the problem with
• 17:13
  Speaker 2: those expectations, you know, on an individual level, if you
• 17:16
  Speaker 2: think that Toiletrice paper is going to get way more expensive.
• 17:19
  Speaker 2: It's you know, likely, it's unlikely to ruin your financial
• 17:23
  Speaker 2: situation by you know, filling a closet with toilet paper
• 17:26
  Speaker 2: because you're worried about prices going up. But in the aggregate,
• 17:30
  Speaker 2: if everyone believes that vehicles are going to become ten
• 17:33
  Speaker 2: percent more expensive a year from now and twenty percent
• 17:35
  Speaker 2: two years from now, and that tomatoes are going cans,
• 17:38
  Speaker 2: tomatoes are going to go through the roof of the
• 17:40
  Speaker 2: course the next twenty four months.
• 17:42
  Speaker 3: Then they start bringing forward purchases.
• 17:44
  Speaker 2: They start buying stuff faster and storing it, and that
• 17:48
  Speaker 2: exacerbates an issue of inflation, because you're adding demands to
• 17:52
  Speaker 2: the equation that wouldn't otherwise exist.
• 17:53
  Speaker 4: Yeah, inflation has economic costs that manifest in sort of
• 17:58
  Speaker 4: subtle ways, the little changes in people's behavior. You gave
• 18:04
  Speaker 4: a couple of examples.
• 18:06
  Speaker 3: One other, sorry, one of the big ones. I to
• 18:08
  Speaker 3: interrupt you.
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  Speaker 2: But if I think that prices are going to go
• 18:12
  Speaker 2: up at four percent next year, there's no way I'm
• 18:15
  Speaker 2: taking a two percent increase in my salary. I Am
• 18:17
  Speaker 2: going to go and negotiate heavily with my employer. And
• 18:21
  Speaker 2: there are very few costs quite like salaries and compensation
• 18:26
  Speaker 2: that contribute to the overall and that's.
• 18:28
  Speaker 4: The textbook mechanism. Firms, companies, and people incorporate their expectations
• 18:35
  Speaker 4: into their wage and price demands. Now you could say, well,
• 18:39
  Speaker 4: that's not realistic. I don't walk into my employer's office
• 18:41
  Speaker 4: and demand a cola. But on average, that's a reasonable
• 18:45
  Speaker 4: way to think about how inflation expectations in this case
• 18:50
  Speaker 4: going up. And in the nineties we had the reverse process.
• 18:53
  Speaker 4: People didn't demand large enough wage increases given the level
• 18:57
  Speaker 4: of inflation, the rate of inflation, and their increase seeing productivity.
• 19:01
  Speaker 4: So that was a virtuous cycle. This is a is
• 19:04
  Speaker 4: a nasty.
• 19:04
  Speaker 2: One, by the way. I know people love talking about
• 19:06
  Speaker 2: individual prices. Egg prices down thirty nine percent year over year,
• 19:11
  Speaker 2: unfortunately being offset by tomato prices which are up thirty
• 19:14
  Speaker 2: nine point seven percent and beef prices which are up
• 19:17
  Speaker 2: fourteen point eight percent year over year.
• 19:19
  Speaker 4: So on average, your omelet might be a little cheaper.
• 19:21
  Speaker 3: Those eggs are the big that's true.
• 19:23
  Speaker 2: Yeah, your eggs compared to you're almost compared to a
• 19:25
  Speaker 2: year ago. You're better off, songs unless the tomatoes tomato
• 19:28
  Speaker 2: isn't there quick break wall Street Watch coming up next.
• 19:41
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:43
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:48
  Speaker 1: on the Financial Exchange Radio Network till now full whoa
• 19:53
  Speaker 1: street Watch tracking the stocks, theodato and the headlines driving
• 19:57
  Speaker 1: markets so far today right here on the Nachel Exchange
• 20:01
  Speaker 1: Radio and that.
• 20:01
  Speaker 5: Marcus today is seeing a modest selloff after the April
• 20:04
  Speaker 5: Consumer Price Index revealed consumer prices rose three point eight
• 20:08
  Speaker 5: percent from a year ago, marking inflation's highest level in
• 20:12
  Speaker 5: three years, driven by higher gas prices. Right now, the
• 20:18
  Speaker 5: Dow is off about two thirds of a percent, SMP
• 20:22
  Speaker 5: five hundred is down three quarters of a percent, Nasdaq
• 20:25
  Speaker 5: down over one percent, Russell two thousand is down one percent,
• 20:31
  Speaker 5: Tenure treasure Field is up four basis points at four
• 20:34
  Speaker 5: point four five seven percent, and Oil is up over
• 20:38
  Speaker 5: three percent higher, trading at one hundred and one dollars
• 20:41
  Speaker 5: a barrel. Ebays Board said it has rejected video game
• 20:46
  Speaker 5: retailer Game stops unsolicited fifty six billion dollar takeover proposal,
• 20:51
  Speaker 5: saying the proposal was neither credible nor attractive. Game Stop
• 20:55
  Speaker 5: shares are off by one percent, while eBay stock is
• 20:58
  Speaker 5: down by half a percent, Meanwhile, Financial Times reporter that
• 21:01
  Speaker 5: Nelson Peltz's Treon Fund Management is seeking investor backing forbid
• 21:06
  Speaker 5: to take fast food chain Wendy's private, after the restaurant
• 21:10
  Speaker 5: operator shares have fallen more than forty percent over the
• 21:12
  Speaker 5: past year. Wendy's up by fourteen percent today. Elsewhere, shares
• 21:17
  Speaker 5: in telehealth company Hymn's and Hers sinking ten percent after
• 21:21
  Speaker 5: it swung to a quarterly loss as the companies moved
• 21:23
  Speaker 5: to alter its weight loss offerings drove up costs. The
• 21:26
  Speaker 5: company also cut its profit outlook. In under Armour stock
• 21:30
  Speaker 5: dropping by eighteen percent after the athletic apparel company posted
• 21:35
  Speaker 5: a fall in quarterly revenue.
• 21:37
  Speaker 3: I'm Tucker Silva, and that is Wall Street Watch.
• 21:40
  Speaker 2: Talking a lot about gas prices these days. According to
• 21:43
  Speaker 2: Triple A, the national average for a good old gallon
• 21:48
  Speaker 2: of gas is sitting at four dollars and fifty cents
• 21:51
  Speaker 2: right now, unless you're in California, which case it's six
• 21:53
  Speaker 2: point fifteen. That's up substantially, as everyone knows, and plenty
• 21:58
  Speaker 2: of states are talking about their gas tax as a
• 22:00
  Speaker 2: few of them have eliminated them temporarily. One state has
• 22:04
  Speaker 2: cut it a little bit, and we are talking about
• 22:06
  Speaker 2: it at the federal level. I don't really know if
• 22:09
  Speaker 2: anything's going to happen at the federal level, but I
• 22:11
  Speaker 2: think it's worth talking about this in the same context
• 22:14
  Speaker 2: that we talk about the Social Security Trust Fund and
• 22:17
  Speaker 2: the Medicare Trust funds and how all those programs work,
• 22:20
  Speaker 2: which we know are all functionally broken, and unsurprisingly, at
• 22:26
  Speaker 2: least in my mind, guess what, the US Highway Trust
• 22:31
  Speaker 2: Fund also functionally broken. It's insolvent structurally, does not have
• 22:36
  Speaker 2: enough revenue to ensure the projects, and it faces a
• 22:41
  Speaker 2: projected shortfall right now of over two hundred and forty
• 22:45
  Speaker 2: billion dollars by twenty thirty three. The shortfall is very
• 22:48
  Speaker 2: plainly the budgeted projects that the trust Fund is supposed
• 22:51
  Speaker 2: to pay for versus the revenue it is expected to
• 22:54
  Speaker 2: bring in. Assuming we keep the gas tax of eighteen
• 22:58
  Speaker 2: point six something like that eighteen point something since in
• 23:05
  Speaker 2: place without waiving it right now. So first things first,
• 23:11
  Speaker 2: would waiving the gas tax in the short term bring
• 23:13
  Speaker 2: down gas prices? Of course it would in the short term,
• 23:17
  Speaker 2: if you got rid of an eighteen cent tax on
• 23:19
  Speaker 2: the price of gasoline, it would bring it down, at
• 23:23
  Speaker 2: least temporarily.
• 23:24
  Speaker 4: Presumed what's happening to demand?
• 23:25
  Speaker 3: Yeah, that's what I want to get at squence. I
• 23:28
  Speaker 3: don't think we should.
• 23:29
  Speaker 2: Sorry, it's eighteen point four cents and it's been there
• 23:32
  Speaker 2: since since nineteen ninety three, so clearly inflation isn't keeping pace,
• 23:36
  Speaker 2: which is why the trust fund is functionally insolvent. We,
• 23:42
  Speaker 2: you know, should not ignore the fact that we have
• 23:45
  Speaker 2: a litany of underfunded government programs, and what happens when
• 23:49
  Speaker 2: the Highway Trust Fund is functionally broken is that we
• 23:54
  Speaker 2: have to bail it out and basically spend money via
• 23:57
  Speaker 2: deficit spending in order to get these important structure projects done.
• 24:01
  Speaker 2: I don't think anyone looks at the state of the
• 24:03
  Speaker 2: US highway system and says, wow, that is, you know,
• 24:06
  Speaker 2: the defining characteristic of America in twenty twenty six. It
• 24:09
  Speaker 2: might have been in nineteen sixty. Today I don't think
• 24:12
  Speaker 2: it's quite the.
• 24:13
  Speaker 3: We shine it.
• 24:14
  Speaker 2: We should appreciate it, though, Oh it's it's fantastic, But
• 24:17
  Speaker 2: I don't think anybody looks at it today and says, well.
• 24:19
  Speaker 4: It's not a novelty anymore. Hey, let's go drive on
• 24:21
  Speaker 4: the highway this Sunday for.
• 24:22
  Speaker 2: The you know, for the whole day, right, So One,
• 24:26
  Speaker 2: there is the funding problem for our nation's infrastructure, which
• 24:29
  Speaker 2: is arguably crumbling across the country. Two would be what
• 24:34
  Speaker 2: does cutting the gas tax actually functionally due to due
• 24:39
  Speaker 2: to prices? Because in the short term, while I can
• 24:43
  Speaker 2: make an argument that prices could fall, I'm not sure
• 24:46
  Speaker 2: what it would do over the you know, six month
• 24:49
  Speaker 2: time period. So talk to me about demand destruction when
• 24:51
  Speaker 2: we talk about you know, oil prices and gas prices,
• 24:53
  Speaker 2: and why waving the gas tax might not actually be
• 24:56
  Speaker 2: a great idea.
• 24:57
  Speaker 4: Well, in the short term, demand isn't very sensitive prices.
• 25:00
  Speaker 4: You got to go to work, supermarkets need food. Sure,
• 25:04
  Speaker 4: they can't make other arrangements. In the longer term, people
• 25:08
  Speaker 4: can change their behavior. I guess that's how I'd summarize it.
• 25:12
  Speaker 2: So if gas prices are higher, I may not plan
• 25:16
  Speaker 2: that family vacation to Colorado and drive all the way
• 25:19
  Speaker 2: there because it's going to cost me forty percent more
• 25:23
  Speaker 2: in gas.
• 25:24
  Speaker 4: Otherwise, I mean it's possible people drive a little bit
• 25:27
  Speaker 4: less this summer. But I think most Americans think of
• 25:30
  Speaker 4: a vacation domestically by car as the economical way to
• 25:35
  Speaker 4: do it. They're not gonna they're not going to not
• 25:37
  Speaker 4: drive to yellow Stone or a wally World. You know,
• 25:42
  Speaker 4: it's that's that's.
• 25:43
  Speaker 3: A fictional reference. So I know what Wally World is.
• 25:47
  Speaker 1: Okay, I don't know.
• 25:48
  Speaker 4: I don't know how you spend your weekend.
• 25:51
  Speaker 2: The point being here, Yeah, an eighteen cents cut to
• 25:55
  Speaker 2: the gas tax may temporarily help. It may also ultimately
• 26:00
  Speaker 2: convince people that, hey, you know, prices are going down.
• 26:02
  Speaker 2: I'm going to keep doing my plans and keep driving
• 26:04
  Speaker 2: as much as I should. It does not contribute to
• 26:06
  Speaker 2: demand destruction in the way that higher gas prices would.
• 26:09
  Speaker 3: I personally actually like over the long term.
• 26:12
  Speaker 2: Wouldn't be opposed to a flexible gas tax that once
• 26:15
  Speaker 2: it gets over four bucks a gallon, it does get reduced.
• 26:19
  Speaker 2: But I think the trade off would very clearly need
• 26:21
  Speaker 2: to be Okay, how are we going to rebuild the
• 26:24
  Speaker 2: Highway Trust Fund? And my answer would be, once gas
• 26:27
  Speaker 2: prices go back down below four bucks a gallon, you
• 26:30
  Speaker 2: jack that gas tax up, you know, and double it.
• 26:33
  Speaker 2: But I don't think either of these things are going
• 26:35
  Speaker 2: to happen. I don't think Congress is going to have
• 26:37
  Speaker 2: the willingness to cut the tax right now, and he
• 26:39
  Speaker 2: would need Congress to act here. I don't believe that
• 26:43
  Speaker 2: the president can change a tax rate based on executive
• 26:45
  Speaker 2: order alone.
• 26:46
  Speaker 4: Now he may not know that, but I don't think
• 26:49
  Speaker 4: you can.
• 26:49
  Speaker 3: So we will see. As all of this is.
• 26:52
  Speaker 2: Going on, everyone and their mother is brainstorming how we
• 26:55
  Speaker 2: can bring down prices in this price surge moment that
• 26:58
  Speaker 2: we're experiencing right now. That's why people are talking about
• 27:01
  Speaker 2: cutting the gas tax, other areas that people are looking at.
• 27:04
  Speaker 3: You could ease beef tariffs.
• 27:06
  Speaker 2: Right now, we tariff the heck out of any beef
• 27:08
  Speaker 2: imports that come from anywhere in the world other than
• 27:11
  Speaker 2: the United States. And as we've talked about on this program,
• 27:14
  Speaker 2: due to how long it takes to raise cattle, it's
• 27:18
  Speaker 2: unlikely that beef prices domestically would come down anytime soon
• 27:22
  Speaker 2: without those imports. On the other hand, cattle farmers aren't
• 27:25
  Speaker 2: exactly raking in the dough and haven't been over the
• 27:28
  Speaker 2: last few decades, and now it's kind of their moment
• 27:30
  Speaker 2: to shine, so they would be adamantly opposed to that.
• 27:34
  Speaker 2: You have all these special interests, and ultimately there's one
• 27:38
  Speaker 2: thing I can think of that might bring down prices,
• 27:40
  Speaker 2: which would be eliminate tariffs, and that would work directly
• 27:44
  Speaker 2: against the President's own stated objectives.
• 27:47
  Speaker 4: That was the worst policy I've seen in my life
• 27:50
  Speaker 4: or read about here or just about anywhere, except for
• 27:53
  Speaker 4: some that's not true.
• 27:54
  Speaker 3: I've seen some really bad stuff in the US.
• 27:57
  Speaker 4: Oh oh yeah, well, I mean.
• 27:59
  Speaker 3: We Argentina way worse than what we're doing now.
• 28:01
  Speaker 4: Yeah. Well, I mean we're well on our way.
• 28:07
  Speaker 1: Mike.
• 28:08
  Speaker 4: You know, these are all second and third best solutions.
• 28:12
  Speaker 4: And by that I mean cutting gas tax prices. I
• 28:15
  Speaker 4: mean everybody agrees. The President would probably agree that it's
• 28:18
  Speaker 4: a gimmick, sure, because ultimately you're going to make the
• 28:21
  Speaker 4: revenue up to fund I mean, infrastructure is critical to
• 28:24
  Speaker 4: long run economic growth. You don't want to hamstring that
• 28:29
  Speaker 4: like you're robbing Peter to pay. You're robbing President Peter.
• 28:33
  Speaker 4: I was going to say, you know the expression to
• 28:34
  Speaker 4: pay Paul, but it's actually robbing President Peter to pay.
• 28:36
  Speaker 4: Excuse me, robbing future Peter to pray.
• 28:38
  Speaker 3: President Chief Peter. You know what I'm saying.
• 28:40
  Speaker 4: We're robbing the future here. That makes none of these
• 28:43
  Speaker 4: policies make any sense. They all seem very scatterbrained, reactive,
• 28:48
  Speaker 4: and just not well thought out, and I'm not just
• 28:50
  Speaker 4: like picking on the President though he's obvious the buck
• 28:53
  Speaker 4: stops with him right now. It's Congress too. And as
• 28:57
  Speaker 4: we talked about monetary policy, have you ever seen such
• 28:59
  Speaker 4: a can fu state on the part of the FOMC?
• 29:03
  Speaker 4: And my god, there's a leadership change happening right now.
• 29:06
  Speaker 4: If we come out of this in any reasonably stable
• 29:09
  Speaker 4: economic condition, it'll be like a small miracle.
• 29:12
  Speaker 3: Let's take a quick break.
• 29:13
  Speaker 2: When we come back, stagflation working its way around financial
• 29:18
  Speaker 2: circles again, We're going to define it. We're going to
• 29:20
  Speaker 2: talk about whether or not you should be worried about it.
• 29:22
  Speaker 2: Next on the Financial Exchange.
• 29:23
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• 29:27
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• 29:30
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• 29:34
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• 29:38
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• 29:41
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• 29:46
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• 29:49
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• 29:54
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• 29:58
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• 30:00
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• 30:27
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• 30:28
  Speaker 3: Mark.
• 30:28
  Speaker 2: We've talked a lot about stagflation over the course of
• 30:31
  Speaker 2: the last four years, in part because it's a fund
• 30:34
  Speaker 2: made up word that people like to bring out there,
• 30:36
  Speaker 2: in part because it is arguably the worst condition that
• 30:40
  Speaker 2: you can possibly get for an economy, a combination of recession,
• 30:45
  Speaker 2: stagnation and high prices and prices that are increasing over time.
• 30:51
  Speaker 2: People like to describe it as such. In twenty twenty two,
• 30:53
  Speaker 2: we did not get a stagflation.
• 30:55
  Speaker 4: We haven't had it.
• 30:57
  Speaker 2: We are now in one right we are not in
• 31:01
  Speaker 2: one right now. We're not in a moment of stagflation
• 31:04
  Speaker 2: right now.
• 31:04
  Speaker 3: Now.
• 31:05
  Speaker 4: Growth appears to be it about trend.
• 31:07
  Speaker 2: We're at two percent GDP as in the most recent report.
• 31:10
  Speaker 2: I think it's very tough for me to argue that
• 31:12
  Speaker 2: we get there when companies like Google and Facebook are
• 31:17
  Speaker 2: going to spend seven hundred billion dollars on AI infrastructure
• 31:20
  Speaker 2: this year. I have a tough time saying that we
• 31:23
  Speaker 2: get there unless you see that part of the economy
• 31:26
  Speaker 2: just drop off a ledge. What would the economy look
• 31:28
  Speaker 2: like if those companies weren't spending a seven hundred billion
• 31:31
  Speaker 2: dollars great question might be pretty ugly. In the meantime,
• 31:34
  Speaker 2: they are, and so I will buy that we could
• 31:37
  Speaker 2: land ourselves in stagflation. I get especially concerned about it
• 31:40
  Speaker 2: when we're hit with multiple price shocks. But we're not
• 31:43
  Speaker 2: there right now, just as we weren't there.
• 31:44
  Speaker 4: Internal workers are experiencing a bit of stagflation. As of
• 31:48
  Speaker 4: last month, average hourly earnings year over year was three
• 31:53
  Speaker 4: point six, inflation was three point eight. So for the
• 31:56
  Speaker 4: first time in three years, this is average. So there
• 31:58
  Speaker 4: are some people who did a lot better worse, But
• 32:00
  Speaker 4: for the first time in three years, workers' salaries are
• 32:04
  Speaker 4: not keeping up with increases in the cost of living.
• 32:06
  Speaker 4: Said differently, standards of living on average, not for everybody
• 32:11
  Speaker 4: are falling, so for some people this will feel like stagflation.
• 32:14
  Speaker 2: Here's my problem with that. I agree, you know, workers,
• 32:18
  Speaker 2: it is what wages are stagnating, and that's not great.
• 32:20
  Speaker 2: I would also say that kind of to me like
• 32:25
  Speaker 2: saying that housing is in a recession, like either the
• 32:28
  Speaker 2: economy is in stagflation or it's not.
• 32:31
  Speaker 4: And well, there is no terroisical term. There is no
• 32:32
  Speaker 4: technical definition of stagflation. Right, it was a term made up,
• 32:35
  Speaker 4: as you point out, it's this hybrid term stag for
• 32:38
  Speaker 4: stagnant inflation, for inflation obviously a combination of below trend
• 32:42
  Speaker 4: growth and above fill in the blank two percent, three percent,
• 32:46
  Speaker 4: and we're now at four percent inflation. It's just shocking.
• 32:49
  Speaker 4: Let that sink in. We just came off a big
• 32:51
  Speaker 4: inflation shock, we thought it was behind us. Then we
• 32:54
  Speaker 4: get tariffs, trade wars, an actual war in Iran, and
• 33:00
  Speaker 4: reporting a big percentage of the food services labor force,
• 33:04
  Speaker 4: and obviously inflation comes back, so you could say this
• 33:07
  Speaker 4: is self inflicted. It's just shocking to me that we're
• 33:09
  Speaker 4: dealing again with double the Fed's target rate of inflation
• 33:13
  Speaker 4: and a four year span good at.
• 33:15
  Speaker 2: The same time that the incoming chair is talking about
• 33:17
  Speaker 2: desperate need to cut interest rates. So yeah, that part,
• 33:19
  Speaker 2: to me is quite shocking. Housing market, as I was
• 33:23
  Speaker 2: just talking about, expected to have a nice little spring
• 33:27
  Speaker 2: push here and falling well short of expectations. Home sales
• 33:32
  Speaker 2: barely moved a year over year. We're looking at four
• 33:35
  Speaker 2: point zero two million existing homes used homes if you will,
• 33:40
  Speaker 2: that's sold in the month of April. That's almost the
• 33:43
  Speaker 2: exact same rate that we saw a year ago. At
• 33:46
  Speaker 2: the same time, you are seeing the inventory levels continue
• 33:50
  Speaker 2: to tick up a little bit, maybe not as fast
• 33:53
  Speaker 2: as people were hoping, but we are now sitting at
• 33:55
  Speaker 2: nationwide just over a million homes for sale as of
• 33:59
  Speaker 2: April of twenty twenty six. Last year, we were at
• 34:01
  Speaker 2: nine hundred and fifty nine thousand, and Again, what I
• 34:05
  Speaker 2: always find useful is what did it look.
• 34:07
  Speaker 3: Like pre pandemic.
• 34:09
  Speaker 2: Well, we were at one point one four million homes
• 34:12
  Speaker 2: for sale in April of twenty nineteen, So to I guess,
• 34:17
  Speaker 2: my point would be we are very close to what
• 34:20
  Speaker 2: the housing market from an inventory perspective, looked like prior
• 34:24
  Speaker 2: to the COVID pandemic, when listings dropped some fifty percent nationally,
• 34:31
  Speaker 2: we are unlikely to see home sales tick up so
• 34:35
  Speaker 2: long as mortgage rates need to stay where they are, which,
• 34:38
  Speaker 2: to be clear, as of yesterday they were at six
• 34:40
  Speaker 2: point four to nine percent on average, according to Mortgage
• 34:43
  Speaker 2: News Daily, and with the ten year yield moving up
• 34:47
  Speaker 2: another four tenths of a percent this morning, we're likely
• 34:50
  Speaker 2: above six and a half percent by tomorrow, and so
• 34:54
  Speaker 2: we it'll be interesting. I'm not sure what I would
• 34:59
  Speaker 2: tell somebody if if they asked me, hey, does it
• 35:01
  Speaker 2: seem like a good time to sell your home right now?
• 35:04
  Speaker 2: Obviously that is heavily regionalized, but at the moment, it
• 35:08
  Speaker 2: seems that there's a lot of young people worried about
• 35:10
  Speaker 2: their working conditions, not working conditions, their ability to find jobs.
• 35:15
  Speaker 2: The mortgage rates are still very elevated compared to what
• 35:20
  Speaker 2: people think of as the status quo. When you're at
• 35:22
  Speaker 2: six and a half percent, I think there's a mental
• 35:25
  Speaker 2: framework thing that is a lot different compared to when
• 35:27
  Speaker 2: they were below six percent, and a inventory situation that
• 35:33
  Speaker 2: is improving, but in many parts of the country still
• 35:37
  Speaker 2: well below what we would consider to be normal.
• 35:40
  Speaker 4: So isn't the answer to that question should I sell
• 35:41
  Speaker 4: my home right now, isn't it always? It depends Like
• 35:43
  Speaker 4: if you're moving for work, yeah, you sell your home,
• 35:46
  Speaker 4: don't be that's a foolish yeah consideration. But if you
• 35:49
  Speaker 4: were trying to be opportunistic about it, we'll go ahead
• 35:51
  Speaker 4: list it. If you're here in the Metro West area
• 35:54
  Speaker 4: where we broadcast from Metro West relative to Boston, or
• 35:56
  Speaker 4: on the south shore of Boston, your house will sell
• 35:58
  Speaker 4: in a day for ten percent over at. But if
• 36:00
  Speaker 4: you're out say where I am, closer to four ninety
• 36:04
  Speaker 4: five on the outskirts, you might be on the market
• 36:07
  Speaker 4: for three months, and if you really need to sell,
• 36:09
  Speaker 4: you might be taking aircut.
• 36:10
  Speaker 3: Yeah, it's it is an ever changing market.
• 36:13
  Speaker 2: But I think what is clear is it is not
• 36:15
  Speaker 2: a market that's conducive to a lot more home sales,
• 36:18
  Speaker 2: and those home sales that are that we're missing out
• 36:23
  Speaker 2: on right now, if you were expecting that increased pace
• 36:26
  Speaker 2: does a lot in terms of missing economic activity. We've
• 36:30
  Speaker 2: talked about this phenomenon before, but when you talk about
• 36:34
  Speaker 2: buying and selling a home, the amount of economic activity
• 36:37
  Speaker 2: that gets generated off of that financial transaction is pretty incredible. Right.
• 36:42
  Speaker 2: There is move there are moving costs. There are redecoration costs.
• 36:46
  Speaker 2: Assuming you're not doing any major renovations, there could be
• 36:49
  Speaker 2: major renovation costs.
• 36:50
  Speaker 4: Though good housing doesn't drive the economy, economic growth drives housing.
• 36:55
  Speaker 4: Look at China. You can build a lot of houses,
• 36:57
  Speaker 4: and this is a bad example in part because China's
• 36:59
  Speaker 4: economy is relative vibrant. But people buy a home because
• 37:02
  Speaker 4: they expect a better future. So those investments that you
• 37:04
  Speaker 4: talked about by tech companies and potentially productivity enhancing stuff
• 37:10
  Speaker 4: are really what matter. I just don't want to put
• 37:14
  Speaker 4: the cart before the horse.
• 37:16
  Speaker 3: I'm not saying you did that under No, I understand.
• 37:19
  Speaker 4: So you're talking about like an accounting immediate accounting sense.
• 37:23
  Speaker 3: No, you're right.
• 37:23
  Speaker 2: I don't think that policy shouldn't be to increase housing
• 37:28
  Speaker 2: activity in order to generate economic activity.
• 37:31
  Speaker 3: You're right.
• 37:31
  Speaker 2: The economic activity, the optimism that people have about their
• 37:36
  Speaker 2: future should drive the.
• 37:37
  Speaker 4: Yeah, it's like you could tell your kid you want
• 37:39
  Speaker 4: to generate some economic growth and scessarily go out mul lawns,
• 37:42
  Speaker 4: don't worry about school. No, Actually, they should be investing
• 37:45
  Speaker 4: in the buildings so called human capital. Their future earnings
• 37:48
  Speaker 4: will be higher. It's sort of long term growth versus
• 37:52
  Speaker 4: a short term.
• 37:52
  Speaker 2: Pop do both markets markets strongly in negative territory. As
• 37:57
  Speaker 2: we close in on the eleven o'clock hour, we've got
• 38:00
  Speaker 2: the S and P five hundred off seven tenths of
• 38:02
  Speaker 2: a percent, Nasdaq off one point one, the Dow Jones
• 38:05
  Speaker 2: Industrial Average off two thirds of a percent, mostly on
• 38:08
  Speaker 2: this hotter than expected inflation reading and continued turmoil in
• 38:12
  Speaker 2: the Middle East. We'll be right back with a lot
• 38:14
  Speaker 2: more on the financial exchange.