Moody's Talks - Inside Economics - Beige Book and Betting on Oil Prices

Episode Date: October 22, 2021

Mark, Ryan, and Cris welcome Gaurav Ganguly, a Senior Director of Economic Research at Moody's Analytics and Chris Lafakis, a Director of Economic Research. They discuss global energy markets, the effect on the economy and where energy prices are headed.Full episode transcript found here.  Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics. And I am joined by a group of my colleagues. Of course, Ryan, Ryan Sweet, Director of Real Time Economics. Hi, Ryan. How are you? Hang in there, Mark. How are you? I'm okay. Not too bad. This week went by pretty quickly. And we got Chris DeReedies, the Deputy Chief Economist. Chris, how are you? Doing a while, Mark. Yeah. And you're still in the office, Chris. Last time I saw you, you were there. You're 24-7 in that office. now. No, no, I'm hybrid. I'm hybrid. You're hybrid. Okay, very good. And I was in New York yesterday. Oh, how did it look in New York? New York was quieter. But it was great. I was my first economic outlook presentation since the live presentation since the pandemic was good to be back. Oh, who'd you present to?

I went to see a, let's say, mid-range bank. I know if I should have. Oh, you don't know. No, no name. I don't know if we should, right? Okay. They were very gracious because I was a little bit rusty, but, uh, oh, can't imagine that. Yeah. You know, and live, live presentation is different. Yeah. I, I, I, I, I, I, I, I, I told you, I went to Miami for a real estate conference and spoke,

and I felt, I felt, uh, energizing. I had, yeah, I really enjoyed it. Yeah, I can't wait to do more. Yeah. And, uh, we're joined by two other colleagues. Uh, we've got Crystal Fats. Chris, how are you? Chris is all thing climate change and, of course, a lot of expertise in the energy industry, which is where we're going to head in the big topic today, energy prices. Chris,

good to see you. Oh, good to see to you. Happy to be here. Thanks for inviting me and let's have some fun. Absolutely. That's what we do here at Inside Economics. And Garab Ganguly. Garab is a recent new person to Moody's analytics. Of course, I've known Garab for Probably a decade, right, Grav? Yeah, I'd say it's more than a decade, Mark. Is it? Oh, geez. Really? I reckon I was trying to figure this out the other day, and I got lost in time. Was it 10 years?

We're really very happy to have Grove with this. Grav is a fantastic economist, headquartered in London, also an expert in climate change as well. And we've asked Girov to join us to talk about energy markets in Europe, which obviously a lot going on there. So good to have you. Hey, Grav, maybe tell us a little bit about yourself just to introduce you. I think everyone knows the rest of us, but maybe just a little bit about your background. Sure, sure thing, Mark. So first of all, thanks for inviting me on this show.

It's great to be here and great to have everybody else in here as well. and I'm the newbie. I joined Moody's Analytics three weeks ago, so new kid on the block, based in London, as Mark said, he's actually told you everything you need to know about me, I think. No, just kidding. So I have been working in financial services for the past 15 years across a number of different institutions

ranging from credit insurance, investment banking, to universal banking. My last job was actually at HSBC. Some of you may have heard of that At the group level, I was responsible for an economics research and analytics unit. We looked at emerging macro risks right across the group. So that's from Europe to Asia to Latin America and trying to work out what those risks might mean for the group's financial stability from a capital perspective and also how these should translate into scenarios for calculating loan loss impairments.

So that's been, that's a lot of what I've been doing. It's been pretty broad, so looking at economic risk, geopolitical risk, climate risk, sometimes even, you know, operational risks, whatever it takes from a bank's perspective, I guess. So, yeah, that's been my background for the last several years. I did a PhD somewhere back in the midst of time in economics. He's an Oxford PhD, an Oxford PhD. Yeah, yeah.

For my sins. And even before that, Mark, I actually trained as a chartered accountant. I was telling somebody that the other day that I actually started out life as an accountant and obtained an ACA qualification in London. So, yeah, Jack of All Trades, Foster, and I'm really happy to be on here today. Well, it's fantastic to have you. Hey, Chris DeReedy's, you have a PhD from Johns Hopkins, right? Yeah, John's Hopkins, right?

And those Oxford PhDs, they're pretty good to have, I'd say. That's what I hear. That's what I hear. That's what I hear. To be honest, to be honest, Chris, I've never actually worked out whether they'd mean that much than any other PhD, but that's what I hear. That's very good. Well, we are going to talk about what's top of mind, or at least it seems like there's a lot of things as top of mind these days. But the higher energy prices, oil prices have moved up quite significantly. Everyone's paying a lot more for gasoline. I know you are in the UK. We are here in the UK. U.S. and natural gas markets, coal markets, a lot to talk about there. And so we'll come back to that.

But before we get to the big topic, let's talk about the statistics, the economic statistics. And of course, we play a bit of a game to make this a little easier to digest. And we each call out a statistic and the rest of us try to figure out what that statistic is. And hopefully, again, the best statistic, I've said this, I think numerous times, but I'll say it again, the best statistic is one, just to remind everybody, the best statistic is one that's not so easy that it's a slam dunk, we all get it quickly, but not too hard that we can never figure it out. And also, a bonus if it has some broader point about what's going on in the economy or the prospects for the economy. Okay. And I traditionally start with Ryan. So, Ryan, I'm going to start

with you. All right. So I picked one that is top of mind, probably more important on everyone else's mind besides energy. And it's minus 7.2 percent, month over month. Minus 7.2 percent. This is a statistic that came out this week. Yes, yes. I stay true to that tradition.

Yeah. Yeah, people know that I break that rule every once in a while. I'm guilty of that. Minus 7.2%. To be fair to grab, it's it's, it's, it's an U.S. indicator. Yep. Is that a, you, did you calculate that change in the statistic or is that a stated statistic? It's reported.

It's reported as minus 7.0. Another hint is this was one of the big surprises of the week. So this factors into an overall number, which came in a lot weaker. Was this industrial production? Very good. Getting closer. Oh, you got a decline in vehicle production. Very good.

Oh, wait. Wait for it. Wait for it. Ding, ding, ding, ding, ding, ding. All right. All right. Here we go. Let's go with one of these.

My wife. You know, I got to talk to my wife. She keeps telling me, threatening that she's going to get me a bell. I got you a bell. Did you really? Can I see it? I got you and Chris Bells. Yep, Cal Bells.

Where are they? You're going to send it to us? They're right over there. Yeah. Oh, really? Amazon box. Yeah, I'll pull them out. Okay, okay, pull them out.

Pull them out. We've got to take the look at it. So, okay. So this is industrial production. So this is a measure of output. Correct. And it declined. Well, I'll let you explain it and tell us.

why you think this is an important statistic. Go ahead. So it fell for the second consecutive month. So this counts essentially the amount of production for motor vehicle and parts. And as everyone's aware, global supply chain issues, the semiconductor shortage is all weighing very heavily on industrial production for cars, vehicles. Our new car inventory is near record lows, and that's driving prices higher. And the supply chain issues are limiting the supply response. So, you know, we're not going to get, you know, an immediate, you know, relief on the price front because manufacturers can't ramp up production in response to higher prices because, you know, things are all bottlenecked throughout the supply chain. Right. And this decline in industrial production was a bit of a surprise.

And it did contribute to another marking down of our tracking estimate for third quarter GDP. and where do we stand on that now? What do we think third quarter of GDP is going to, and by the way, we get that statistic next week, which we do. Maybe one, yeah, we get that next week, a big statistic. What do you think? What are we tracking now?

1.4% at an annual rate. So we're below the consensus. So we partnered with CNBC, and we've been doing this for years now, Mark. When we started it. And we survey economists that have all these tracking models. and the median estimate among them is 2.3%. So we're a little bit below what...

Although I know we're one of the more accurate, I think, tracking estimates. And I think Atlanta Fed, the Atlanta Fed has its own GDP now, I think they call it. They do. And that's even lower, right? What is that? I think that's well below one. Oh, I think I... Yeah, that was a trick question.

I know the answer is 0.5. 0.5. Yeah. Yeah. So, and that's also quite accurate, I believe. They're pretty good to them. So it feels like it's going to come in around one. Okay, let me ask you this question. What probability do you put on the possibility that GDP is actually negative in the third quarter?

25, a third. And the reason why is that all the growth is going to be in inventories. And it's really hard to pin the advance estimate of the inventory builder decline. It's just inventory is very, really volatile. we get one more or two more important pieces into our high-frequency GDP model next week. We get durable goods orders. And then we get the advance number on the goods deficit and inventory. So, you know, after we see that, we'll have a really good feel of what GDP is going to be.

But, I mean, it's possible it could fall. But, again, I mean, that's, I mean, there's a lot of chatter. I don't know if you and Chris have gotten it. I've got a lot of questions about whether or not we're descending into a recession. I've seen that. And, I mean, that's a little premature. I mean, even if premature. Sure. I don't think that's the word. That's just wrong.

I was trying to be polite. Yeah. No, no, no, no. This, well, I don't know. That's my feeling. I mean, I think, actually, I was this fellow, David Blanche Flower. Girov, you might know him. I think he was on the bank of the B.O.E, wasn't he? He was in the BO.E's military policy committee a right ago. Yeah. And he's a bit of a, at least my points of contact with him. He's a bit of a, I don't know. a conicalast. He kind of is out there a little bit on issues. Was he, was he that way at the B.O.E? Do you recall? Yeah, I think so. Yes. Yeah. Interesting fellow. Yeah, very, obviously, very bright, thoughtful fellow, but he's kind of out there a bit. And he wrote a paper, I think with a Chicago, University of Chicago professor saying high probability of recession, or we already are in

recession. And I think they were focused on the consumer sentiment indices, which have fallen, you know, sharply because of Delta. There's a flaw right there. You don't put too much stock in consumer confidence. It's all Delta-driven, the drop in confidence. All you have to do is look at the yield curve, right, Brian? Oh, my God. We're not going down this rabbit hole.

Which is pretty wide, wide, right? That one is very wide, yeah. While we're talking about landflow and Europe, it's a similar sort of thing on this side of the water. I mean, again, consumer confidence fallen quite a lot recently in the UK. it fell about four points, but I completely agree you can't put that much store by consumer confidence itself.

That's so much driven by, as you said, Ryan, by Delta, and it's also driven in the UK, for instance, by people's views around supply shortages and what it's doing to their disposable incomes right now, but this is quite a fickle sentiment, right? I think I'd put more store by the fact that PMIs are starting to decline in Europe.

There's still an expansionary territory, but what we're looking at in terms of declines in industrial production, more and more manufacturers coming out and stating that they're actually suffering from shortages of raw materials or simply rise in prices. So there's a similar kind of view here that when we start thinking about third quarter output, there's a risk, not tangible risk that it could be negative. PMI, by the way, listener, is another measure of industrial activity.

It's just a survey-based. PMI stands for purchasing managers index. So there's a survey of purchasing managers, and based on that, they construct an index. And that's still very, very high. But Grav's making the point, I think you're making the point that it's starting to come in a little bit and might reflect some weakness in the economy. Yeah, the way I think about consumer sentiment as a indicator of potential recession is that a very sharp decline in sentiment for two, three, four months is a necessary condition for, recession, but it's far from sufficient. I mean, you know, that's that's not by itself going to get you there. In fact, that was, I was asked by a journalist about the Blanche Fower piece, and it, you know,

my immediate gut reaction was, well, that's really wrong. You know, I said something to the fact that less than 1% probability were going into recession, and that's, of course, the quote that got into the paper. I think Blanche Flower saw that and was, took a little bit of umber. and tweeted something. And the journal said, did I have any comment on the Blanchfauer comment? And I said, no, I'm not going to do that. I'm not going to respond. Oh, it was a tweet.

Blanchevlar tweeted this out and said, you know, are you going to respond on Twitter? And I said, no. By the way, good advertisement, good time to advertise. I am now active on Twitter at Mark Zandi. And I am being Mark Zandi. So, you know, feel free to follow me. I know Ryan's following me very carefully, right, Ryan? Sure, sure.

I'm not on Twitter. I'm not a big social media person. What about you, Chris Lafacchus? Are you, you know what? It's getting hard to say Chris and Chris and Chris D. Is that okay? Can we do it that way? Chris L.

Chris L. Are you on Twitter? Yeah, I'm on Twitter. Are you following me? I didn't know you were on Twitter, Mark. I mean, come on, man. I need followers. Let's go.

I'm going to find you. I'm going to sign up right after this. Okay, very good. But yeah, I mean, well, I agree with you guys about recession. But I at the same time, don't want to understate the tremendous stress that the production side of the economy is under right now. And it's evident in the IP data. And just like, just to give you an anecdote there, like, I was. No acronyms on Inside Economics.

Oh, I'm sorry. If you can be an acronym, you've got to define the acronym. Okay. IP, industrial production. It's, yeah, and so a real-life example. So recently, me and my wife were, and I don't even know if this is appropriate for inside economics, because it's my first time, but I will say it anyway. Fire away.

Okay, we were shopping for a car and we showed up at the Toyota dealership, and there were no cars for us to drive, right, to speak to this point of no inventory. and eventually we found a car at the Nissan dealership that we bought, and they gave us no discount off of the MSRP price, right, because there's, again, no inventory. And I saw that Toyota announced in September it would cut production globally by 40%. And it's not just the semiconductors. I was reading the other day about a shortage of magnesium production

that is used to make aluminum alloys in China because of the power and energy crisis in China, which I'm sure we'll get into later. But if you just look across the board, the supply side of the economy is under tremendous. I haven't seen it like this before. I've been in professional economies for 50 years. No, no, no. This is highly disrupted. The supply chain, no doubt, and related to the Delta, I think my my sense is that the Delta variant did serious damage to not only the U.S. but the entire global economy. I mean, these supply chain, particularly in Asia, and particularly Southeast Asia, where the supply chains begin. And so clearly the slower growth we're observing and maybe the stalling out, like China basically didn't grow in the third quarter, right?

I mean, and so, you know, clearly Delta has done a lot of damage, but that's a long, long step to, you know, recession, which is a sustained, you know, a persistent, broad-based decline in economic activity. I think we're, you know, a long way from that. But I mean, one quick point, one quick point, even though we have all these supply chain issues, industrial production is really close to where it was pre-pandemic. So even though we have all these hurdles, I mean, the supply response has been pretty solid. It's the demand has been so strong. Exactly. That's the other point to make. Hey, but this is a good time for me to give you my statistics.

Usually I go last, but because this is a bit of a hint of the conversation we just had, because my statistics is a little. I thought it was going to be hard, but now it's going to be easier because of this hint. So let me say it. 37 times, 28 times, 23 times. Yeah, I counted that. The number of references in the beige book to supply chain disruptions. Oh, you're the one who came up with that? Oh, I didn't know that.

Yeah, I checked it up. You're the one who did the counting. Oh, okay. That was too easy. That's control fine. I mean, it was pretty. We can make it sound like it. Okay.

All right, right. Wait, wait, wait, wait. For the listener, I guess it turned out to be too easy, but I thought I was being pretty clever. That 37 times is the number of times supply chain bottleneck or some variation of that theme was in the beige book that the Federal Reserve produces. So for each FMC meeting, each meeting of the operating market committee of the Fed, they put together a beige book, which is a compilation of anecdotes and other information about the, the different Fed district banks around the country. It gives you a good regional sense. And we follow that very carefully and actually construct an index to try to give people a sense of how the language in the Bayesbook translates into what it means for the economy.

And by that index, we're still at a very, the Bayesian book is still pretty upbeat and optimistic, although it's down from where it was. But the thing that stood out was all of these references pretty much everywhere across the country to supply chain bottom. To your point, Chris, you know, that Chris L, that's, you know, very key. Well, since you wrote the, you did the analysis on that report, anything else in the page book that struck you? There's one other thing that I found pretty cool. That was regionally pretty big differences, at least in terms of our index measuring the

strength. One, the strongest, anyone in my guess, what is the, in terms of the beige book, which district, better reserve district. I think how many are there? There's 12, I think. Yeah. Which district is the strongest.

And there's actually two districts that are, I think, equally as strong. The Dallas. Yeah, Dallas. Oh, you're looking it up, Chris. I can see you. No, I'm not. No, I'm not looking at up. He's looking it up.

I had a lot. I've really I'm a so good economist. I mean, I just came up with Dallas and that was it. I mean, do you want me to guess the other one? It looked like he was looking at the screen. No, okay. All right. Do you want me to guess the other one?

Yeah, go ahead. All right. I'm going to guess Richmond. I think it is Richmond, but I forget, actually. So I don't know. I think it's Richmond. I think it is Richmond. Guess what's the week?

Or not guess, but I'm sure someone knows. Chris L probably knows this too. You answer this question. What is the weakest district, according to the Fed Bayes book? That's actually a little bit tougher for me, but I'll guess Boston. Oh, geez, Louise. He's right. He's right.

You're looking. You're looking. Okay. Yeah, it's only because the Red Sox are down three, two in the ALCS. The only reason Boston's stuff on you. I don't want to talk about it, Ryan. I haven't looked at like the beige book in like five, six years. years, by the way. It's actually really informative. I pay it very close. There's no numbers in it

for the most part. It's all anecdotes, but it's, it's really informative. I mean, one thing that stood out was they were talking about, I look at the supply or labor supply issues and what, you know, they're attributing to, child care issues, which we've talked about a lot on the podcast, not a lot of references to UI benefits, but, you know, one thing that could emerge now is this vaccine mandate, you know, and whether or not that's going to be another, you know, labor supply issue. Yeah. Yeah.

What about, you mentioned the child tax credit. You mentioned that, right? Child care issues, yep. Child care issues, yeah. Okay. Well, that was my statistic. So who wants to go next? Chris L, you want to go?

Since you're on such a role, do you have a, well, actually, I'm presumptuous. I'm assuming you have one. You don't necessarily need to have one. Do you have a statistic you want to use or not? Actually, no. I didn't know what to prepare for this segment. No worries. No worries. No worries. That, that, no worries at all. Grav, do you have a statistic you want to use? Yeah, I could, I could come up. I could come up with one. So I'll use a non-U.S. statistic, just to make it clear. I think I'll go for, I'll go for the number 3.4.4. It's actually a percentage, 3.4%. 3.4%. And it's a non-U.S. number. Is it a U.K. That would be telling, wouldn't it? We're going to narrow it down now.

Sorry, what's that? UK CPI. No, it's not UK CPA, but you're close. You're very close. All right, Wade, don't tell us. It's definitely a UK series. He didn't want to tell us what it was. No, no, no, I didn't say it was a UK series.

I just said you were close. So it could be a UK series. Oh, okay. EU CPI. EUCPI. Closer, closer still. Eurozone. Eurozone CPI, exactly.

It's a September. It's a September. It's a September. number. And the significance of that is, of course, that the European Central Bank has a price stability mandate of 2%. And for several months now, monthly reads of Eurozone inflation have been coming in above 2%. And the latest reads at 3.4%. And actually, quite a lot of that has been driven by energy price increases. So of that 3.4%, roughly 1.7% represents energy price increases. So this brings us back to what we're talking about here, that energy price increases and not just being felt

in the U.S. They're actually being felt in many parts of the world. The U.K. has a particular problem with energy price increases, and we can come on to that later, but it's also being felt in the Eurozone, and it's being felt for a while. It doesn't look like this is going to go away anytime soon, I don't think. It's going to be several months before these kinds of price effects way. The ECB is quite still remains quite confident in its view that inflation is kind of hump-shaped, So it's picked up now. It's going to carry on this upward trend for a few months yet before it starts to come down. In the UK, it's a bit different.

They're much more concerned about persistent inflation. But I know we're going to talk about some of these things later. So I don't want to jump in right now. Garab, do you know offhand what the current inflation rate is in the UK? It's nudging nudge past 4%. Well, it's expected to, it's expected to, I take that back. It's expected to nudge past 4%. It actually dipped in September and came in at 3.1,

but that was kind of a temporary thing. But it's expected to nudge past 4% by the end of this year. And actually, the chief economist of the Bank of England, Hugh Pill, who seems to be very hawkish about inflation, his view is that it could easily go past 5% in the early part of next year, which makes setting monetary policy quite a challenge in the UK. And he in particular has been talking about the November rate meeting is possibly being very much a live decision where bank will be forced into raising rates.

This November. This November, as early as this November, exactly. So that's a big change. That's a step change in the UK. If you think back to the start of the pandemic back to March last year, everybody's scrambling out to put rates down to the zero bound or in case of the euro area, not do anything with rates because they haven't done anything with rates for about 12 years. but at least in the UK and other advanced economies

with independent central banks trying to rush back down to the zero bound and then thinking when will we ever get out of this? The UK now looks like it might be the first out of the blocks now and in lifting rates. Now they're not saying that they're going to do this because of the energy price squeeze. If they do do this, then at least in the words of EU PIL, it's because of underlying forces in the economy

that suggests that the economy is no longer needs to be at the zero bound, which I guess in plain speak translates into saying that activity has come back up. So this speaks to Ryan's earlier point when Ryan said that industrial production is pretty much back

to pre-pandemic levels. Well, that's true of various economies, industrial production, consumer demand, especially on the consumption side. It's all back to, it's all looking healthy. It's all back to pre-pendemic levels are close to being back to pre-pendemic levels. I guess the other

The other thing about the UK and the EU is the labor market is much closer to full employment than, say, the U.S., right? Because of the labor market schemes that were put into place, you never saw the high unemployment, or at least the kind of unemployment we saw here in the U.S. where we didn't have those kinds of various supports to the labor market. That's right. And in fact, in the UK in particular, we've been all very involved. wrong-footed over the course of the last 18 months in terms of thinking about potential

rise in unemployment. I remember when the pandemic struck, I think there was just massive panic amongst all economic observers, even in markets where you thought, well, you probably have a furlough scheme that would underwrite part of the labour market. Panic still continued in thinking about the issue because it wasn't clear how many people might just drop out of the labour force all together or simply not get furloughed. And so I think forecasts in 2020 were quite negative initially. Even the Bank of England was carrying very negative forecasts for unemployment right out to the end of the year because they were saying they just didn't have a handle an unemployment situation.

But over the course of 21, it's become really obvious that all these schemes have completely underwritten labour markets. So we've seen very, very little rise in unemployment rates across a number of European countries. And when you look at the UK, then it's clear now that there's a lot of tightness. in the labor market. Just a month ago, we got the statistic of $1.1.1 million, if I can throw another statistic out there. That was job vacancies.

That was job vacancies. At 1.1 million vacancies coming out of a pandemic, when one million people are still actually, we're just about to rule off a government support scheme on furlough. So that was quite a statistic. In Europe, I think, what if I was just going to add this. Go ahead. Go ahead.

No, no, you go ahead. Go ahead. No, fair enough. Go ahead. Go ahead. Groff, sorry. I was just going to say that in Europe, what that means is that as we come out of all these employment support schemes, we don't necessarily go back to tight labor market conditions

because some of these countries have got longstanding issues with labor force. Spain's got very high youth unemployment. France has a reasonably high unemployment rate with a huge issue with skills, mismatches, and so on. Italy has its own issues with the labor market. So we kind of get back. unwind the situation and we start going back to the pre-pendemic structural issues. Yeah, I was just, you know, since you're showing off, I was going to show off too.

You said 1.1 million job vacancies in the UK, 10.4 million open job positions in the U.S. So not quite a record high, pretty close. But let's move on. Christy, what's your statistic for the week? I've got one for the big topic, but I'll save that one. In terms of this week, what happened, I'm going to go with 1.041 million. Million. All right.

There we go. You know this, Ryan? Yes. I'll let you have it. 1.041. Think about Chris. What's Chris? Oh, this is housing.

Where does he go? Housing. Is this, well, the only 1.041, is that the single family starts? Permits. Oh, permit. Single family permits, right? I had to make a little bit difficult, right? Yeah, yeah, yeah.

You got to mix it up a little bit. I'd make up for last week. Yeah. So tell us about the housing starts report. Yeah. Tell us about the housing. The starts report overall, it was weaker than expected than consensus, certainly down from the month before as well.

So, you know, since March, things have been trending downward, chocking up largely the supply chain issues. That seems to be, again, the reported reason why the numbers continue to be. week. And that doesn't look as though it's going to clear up anytime soon. And I'm, I'm concerned that, okay, so what? We don't build the houses now, but we'll build them later. I'm concerned we're not going to get the burst in building later on. The other thing in the report is a week, it was particularly weak in the multifamily sector, but that tends to be volatile. So don't read too much into that, but certainly it was, that was clearly dragging down the

overall numbers. Right. I mean, the one thing, Oh, go ahead, Ryan. The only thing I was going to add to Chris, I agree everything Chris said, but with this number, it's for September and this captured Hurricane Ida. So anytime you have heard, these permits are actually more affected than starts. Yeah, right. And the one thing about the starts I find a little odd or interesting is the multifamily starts, they go up and down every month, obviously, kind of lumpy because these could be big projects, is that they're cutting through the volatility, pretty. high, around 500,000 units, multifamily units per annum, which by almost all historical standards is a pretty high level.

It's at the higher end. Yeah. Yeah. Yeah, so clearly there's still lots of demand. The affordability issues, I think, are still pushing in the direction of more higher density. And I guess with rents accelerate, vacancy rates are still low, particularly for affordable rental, lower rent points

and cap rates which are you know reflect the prices investors are willing to pay for multi-family property

are very low meaning investors can't get enough of the multifamily property so that's a signal to build right so there's there's a

feels like we're going to get more building here more construction but you're as to your point it might be just constrained by the ability to get stuff to build with

yeah yeah Right. Okay. Okay. Hey, one statistic or one indicator that we've been following that seems to signal, hey, no problem with the economy. In fact, maybe the economy's going to pick up here. And that would be more consistent with my view. And I'm curious how you think about this, Ryan, is the 10-year treasury yield. Ten-year treasury yield has really moved up quite a bit. It was as low as 1.2, maybe 1.25 not long ago, 4, 6, 8 weeks. weeks ago, I think when Delta was at its peak, having its peak impact on the infections in the economy, it's now 1-7 or pretty close to 1.7. That's a pretty significant move. What's your interpretation of that? I'm really curious, and you do this nice decomposition of the 10-year yield so we can

get a sense of what's driving it. What's your take on that? So the way we do is we decompose the tenure into its three main components. long-term inflation expectations. So it's market-based, what investors think inflation is going to be five, ten years down the road. Also, the expected path of the real Fed funds rate.

So market expectations for the path of monetary policy. And then the term premium, which is the extra compensation investors need to hold long-term treasuries versus short-term. So when you decompose it, all three components of edged tire recently. The biggest move is an inflation. inflation expectations and, you know, kind of segueing into our big topic, it's energy prices.

So there's a very strong correlation and causal relationship between global energy prices or oil prices and market-based inflation expectations. So investors basically say, you know, higher oil prices today mean higher inflation down the road, and that's what's really driving the tenure up recently. And then on the other hand... Causal. causal, what do you mean causal? You mean?

Changes in oil, global oil prices, cause changes in inflation expectations. So we don't want to fall into that trap like correlation doesn't, you know, correlation means causation. That doesn't apply every time. But in this instance, it does apply. I find it so bizarre. I mean, oil prices go up and down and all around, you know, in weeks, months, you know, and this is 10 years. For years, I've been trying to figure this out. Yeah.

It's a mystery. Same thing with consumers, though. They see higher oil prices, gas on prices, right? That I understand. That I get. That I get. They're, you know, most people forecast it with a short-term ruler. They take what happened today, what happened yesterday, and they draw a line, and that's the forecast for the future.

I can see most people doing that. That's the way they forecast, but not for an investor. I find that bizarre, really. It's interesting. So the 50 basis point rise in the 10-year yield, how much of that is inflation expectations? A little bit less. and half. How much is this term premium?

A quarter. And the other one's the... Okay. So if you look at Fed Fund's futures, markets are now pricing in two 25 basis point rate hikes next year, which is a big shift from just a few months ago where, you know, they were thinking early 2023 like us, now they're thinking, you know, the Fed's going to move in 2020.

Well, that's consistent with what Garab was saying about the BEO kind of pulling things forward here, too. So it feels like all the central banks, or at least expectations. patients are forming that they're going to tighten sooner than was the case just a few months ago or a It was interesting when the governor of the BO, I think it was one of the governors, made those hawkish comments. You saw an immediate response in Fed fund futures. They just applied, you know, this is what the Fed's going to be doing next, which I think Powell's

much more patient than, you know, the BOE. Hey, I wanted to bring up, 10-year treasury yields is one of those indicators we follow on a consistent basis. One of the others is UI claims. Hey, Chris, they stayed low again this week. They did. They went lower. $290,000. Right. So that defies

Ryan's expectations, right? Ryan thought it was last week's decline below 300K was temporary. Are you still sticking to that, Ryan? You still think it's seasonals or is this something more fundamental going on here? Meaning UI unemployment insurance claims are declining, which is a good sign for the economy.

No, I think it's a good sign. I think last week's improvement was just overstated. In the next couple of weeks, they'll move up. I'll move up, okay. It feels like we're around 300K now? Yeah. Is that word? Okay.

I was at 294, the forecast. So, I mean. Okay. Got us slack. Okay. You sort of got it. Oh. Now, correct me if I'm wrong, Chris, but the, this is for the survey week.

This number we just got, the $294 is for the survey week. And that's well below initial claims for unemployment insurance a month ago during the survey, a week for the BLS employment report. That's right. So that would suggest of the pandemic. We might be getting a pretty good, yeah, we might be getting a pretty good job number.

That would be the inference for the month back over. That's right. That's what I expect. I don't know, Ryan, what you're, what's your call? Early. It's early, probably. Yeah. It's too early.

I mean, Chris, what's your number? What's your got? 600,000. Ooh. Mark. All right. I think it's going to be a big number. I think it's going to be $750.

What do you think, Ryan? I think you guys are close. I think Mark's a little optimistic, but that's true to nature. I mean, it's going to be, I mean, we still get a few more inputs in our models, but, you know, next week we'll be discussing.

Okay, I'm going to end this conversation around statistics because we've got to move on. This took a lot longer than I expected. With this question, What is the going back to that question that the around recession, what is the probability the U.S. economy is entering into a recession right now? Very quickly, just, you know, what your sense of it is.

Chris, D. Right now? Right. You know, yeah, like it's headed in the recession. It's on the verge of recession. Yeah. It's certainly less than 10%. 10%.

Ryan? Two. 2%. That's our, that's our probability recession model is 2%. Oh, Chris, Carl, do you have a view? Don't need to. Yeah, I was also going to say 2%. 2%.

And Garab, do you have a view? I would intuitively go with Ryan on the U.S. economy. It's got to be closer to 2%. Because Ryan's never wrong. It's not below. Because, oh, yeah, we're like, yes. So I'm hurt. The same pattern.

All right, we're all on the same page. It's less than 10. Well, I'm on a on record. I said less than 1%. I said that, I mean, that just, I blurted that out. without any thought at all. But it feels right to me. You can point to our probability recession model.

It's 2%. It's 2%. It's 2%. There you go. I should have done that. I didn't think about that. Okay. Let's move on to energy markets.

And to kind of lay the table, Chris L. can you give us a sense of energy prices, oil, natural gas, coal, whatever you think is important? And I know the price increases are across the income. entire globe, but it varies a lot by where you are in the globe. Maybe you can give us a sense of that, just to lay the table here. Sure. Well, energy prices are surging everywhere. I would say that Europe is in the midst of a crisis. I don't think it's too much of a stretch to use that word with respect to energy prices in Europe.

Even in the U.S., natural gas prices have doubled since the start of the year. And the U.S. has one of the most plentiful reserves of natural gas in the entire world that is full of a robust private sector that has historically invested extremely aggressively in bringing hydrocarbon production to bear. So that's and the natural gas price increases have been more substantial in Europe. They've been present in Asia,

as well. So you're seeing global natural gas prices increase quite rapidly. Hey, Chris, give us some numbers. What are some numbers? I mean, I like I know oil, West Texas intermediate is sitting at 83, 84 bucks. Brent said 85, 86 bucks. You know, back in the teeth of the pandemic, it was, you know, almost zero. You know, at one point the futures were negative, as I recall. So, okay, that gives you contact and that's global. Oil prices are a global market. And so that gives you a sense of that. Natural gas. On the United States, we were at, you know,

three buck per million BTU. We're now at five, six buck per million BTU. Yes. What about, what about Asia? What are we in Asia on? So the price to import liquefied natural gas in Japan for September delivery is 1387 per million BTU. Great. And what was it before this, all this?

It was how low was it? In January. it was nine, right? So you're talking about 50% price increase. And obviously it's, it's, you have a level, you have a base effect there, right? Because you have a higher base price for liquefied natural gas. Japan doesn't have a lot of its own hydrocarbon production. So it has to import so much of its energy from other countries. And exporting gas is an extremely costly process because you have to actually turn it into a liquid by super cooling it and then putting it on a tanker and then having that tanker reach a regasification plant and then it gets regasified and used.

And so the transportation cost is very costly, process is very costly. And that explains the high base price for gas. And so the percentage increase is going to be not as substantial because of that. But still, I mean, these LNG prices are tied to, oil prices, right? And so when oil prices rise, gas prices rise. And the phenomenon is across the board. I would say there's multiple reasons why it's almost like... We'll get into that. We'll get into that. But in terms of the prices, Grav, can you give us a sense of prices in Europe? I know they're... I think they're even a much... I think Chris said a crisis. Would you

characterize it as a crisis? And that crisis has several dimensions. mentions. So I'll just move away from numbers for a minute to talk about the story, if I may. So in the UK, the UK doesn't depend that much on Russian gas, for instance, whereas in Europe, in mainland Europe, there's a lot of dependence on Russian gas. So there's a slightly different story there. If you look at continental Europe and this big dependence on Russian gas, that is causing a concern for the coming winter. So last winter was pretty cold. And gas supplies were depleted in continental Europe. Then we had economies. opening up and we had massive demand, which around the world, and we had gas shortages,

and we started seeing a big increase in gas prices. And now that we're looking at upcoming winter, the question really is, can Europe actually fill up with strategic gas reserves in time for that winter or not? And the answer doesn't look at a recovery delivery in Europe. And why is Russia not playing ball? Why is Russia not pumping out more gas? And I guess a couple of reasons behind that, One of those probably quite strategic. So Russia is holding back, it seems, on filling up gas into Europe. It's fulfilling all its contracts, by the way. So that's really important to bear in mind.

There's economics of gas from clearly here. You know, you have to play out. It is fulfilling all its contracts. The question is, why isn't it doing any more? And that seems to become a bit more political because of the second pipeline, the Nord Stream 2 pipeline. There's a pipeline that runs through the Ukraine that's awaiting approval from the European Union. The Ukraine is opposed to having this pipeline run through it, and it doesn't want this pipeline to be given approval.

And Russia seems to be playing some sort of game where it's using this particular pipeline as part of its discussions with Europe for putting out more gas. And it's apparently started filling up this particular pipeline with gas, almost waiting for Europe to say yes, so we can open the taps and supply Europe with gas. But yesterday, for instance, there was an auction that took place. for delivery, for near-term delivery of gas. And gas from didn't agree to supply more gas. So the current pipelines into Europe are carrying well short of their capacity. And I think prices went up to give some idea of short-term changes in gas markets. Prices went up 18% of the back of that news.

So that's Europe. And the UK, you've got other issues, including supply. UK is really bad on supply. So I'm really bad on storage. So in the UK several years ago, they decided to cut. back on storage facilities. So I think the UK has got about five days excess storage at most, simply because they scale back and it shut down some of the strategic storage facilities. And then you've got the problem that you've actually had gas operators go bust in the UK.

A lot of small gas energy supplies have gone bust. And that's creating a problem with actually taking on customers and creating a lot of uncertainty for customers and creating potential issues around energy security in coming months. The UK actually needs a lot of gas in coming months because about 85% of households rely on gas for home heating in addition to the fact that gas is actually, I think it's used for about one third of electricity generation. So it's going to be a lot of demand for gas,

not a lot of supply, storage issues, and then household utilities households facing pretty large bills. There are caps on the price of gas in the UK. And people are now coming off those gaps because these are one-year contracts And as they come off those gaps, they go on to standard variable contracts. And as soon as they go on to standard variable contract, they're now being slammed with the huge increase in the price of gas,

which has been more than five-fold in the last few months. So, yeah, I think that's right. It is a crisis. So just to make it clear to the listener, in terms of oil, it's a global market. So the price of oil doesn't vary very much across the globe. but the price is, what the price is. What you've been focused on, Garab, is the natural gas market, the market for gas.

That is very much a regional market, although to some degree that can be broken down by liquefied natural gas. You know, U.S. produces a lot of natural gas that it can ship through LNG to a place like Japan or Europe. But that's limited. There's a limited amount of capacity to do that. So natural gas price is very considerable. around the world. In the United States, they're low, as Chris pointed out, we have got a lot of

natural gas here in the U.S., and so that keeps prices low. In Europe, not so much you rely on Russia, and because of the dynamics you just discussed, that's causing prices to go skyward. The other two other things on price before we dig even deeper into the reasons for all this, and this is to you, Chris L. One thing I'm a little confused by, if you look at oil, it's, say, $83, WTI, $85 bucks, print. That's well below, you know, the peaks we saw back, like an 08, I believe the all-time high in 2008, we had the all-time high of, what, $140 bucks, maybe, $150 on WTI, something like that. Gasoline prices, though, feel like they're really high compared to even gasoline prices here

in the United States feel really high compared to $80 oil. We're at $3.35, $3.50 for a gallon of regular unleaded. And even back in 08 at the peak, I think we're at $4.25 or something. So what gives? Why are gasoline? First of all, do I have this right? Is this something weird going on? And if so, what's going on? Why are gasoline prices so high here? So the gasoline price is comprised of four components. One is the price of crude oil. The second is the retail markup. The third is the tax component.

And the fourth is the crack spread. And so this is the amount that refineries charge for their services, for the refining and the distribution of the crude oil, which is the raw product. They refine it, they create diesel. kerosene, jet fuel, distillates, residual fuel, gasoline, and then the gasoline is transported to the retailer and then it's sold. You know, there hasn't been a federal increase in the gasoline tax for, I want to say,

like 30 years since the Clinton years. Yeah, early 90s. And yeah, I mean, there are some states that have increased in. fact, we live in one, Pennsylvania, which over the last 10 years or so has instituted an increase in taxes, but it's really the crack spread. And this goes back to the supply issues, right? The supply chain. It's the, and I said it before, but I'll say it again, the supply side of the economy is under tremendous stress right now, and it's hard to hire qualified workers to source materials and parts and labor is expensive.

And as a result, there is a broad bleeding into the overall price level from the challenges in the supply chain. I just mentioned I didn't get a discount off of MSRP on that new Nissan. So it's creeping into inflation. So you're saying that the refiners can't ramp up a production of refined product because they're facing material. material labor shortages. Well, that's part of it, but they're also the aftermath of the hurricanes that happened in the United States.

Okay. Hurricane Ida did have an impact on this. Yes, yes. And the maintenance operations. And that goes to the broader reason for the increase in the oil price. A lot of U.S. oil production was shut down from the hurricanes as well. And so, and it impacted refineries. And a lot of these are located for the listeners on the Gulf Coast. And that's a major refining hub for the United States. So when a hurricane comes through and it does damage and it shuts in production and it forces refineries to go offline for a little while, that's a loss in product production.

And it shows up in inventories and it drives up prices. Got it. Hey, the other price that's up a lot is coal prices. And this, too, is more regional, global. It's not a global price because coal markets are more regional like natural gas markets. In some parts of the world, particularly I think in China, correct me if I'm wrong, but I think in China, they've really gone skyward. And part of the problem, one of the things is going on there is because coal prices are so high

that's causing some electric utilities to divers. to natural gas, which is contributing to the increase in natural gas prices. Do I have that dynamic, right? And what's going on with coal prices? So that's just a power shortage, right? There's a power shortage in China. And they don't really want to use coal, but they don't really have too many options right now. You mentioned that the Chinese economy didn't grow substantially in the third quarter. And they're very focused on top line economic growth. And so if it means importing coal to supply power, then they will do so. And this, by the way, this shortage of Chinese electricity is coming at the same time when Chinese authorities cracked down on Bitcoin mining.

And China used to be the largest Bitcoin miner in the world. And that takes electricity. And now the US is. And despite that, they're still importing coal just to meet the power demands of the Chinese economy. So that Chinese demand has really put upward pressure on coal prices. Hey, Garab, do you know in Europe is, I mean, coal is still a source fuel for a lot of electric production in parts of Europe. Are coal prices up as well? It's a negligible part of the electricity mix. And if you look across European countries, then. Yeah, I guess it's mostly Eastern Europe.

Yes, exactly. Eastern Europe has a much bigger problem. with coal than a much greater need for coal. Yeah. Oil, natural gas, coal, everything is up a lot. Some parts of the world more than others, given what's going on? What fundamentally is driving this? I'm sure there's many reasons. We've already talked about a few, but what do you think is the fundamental reasons for,

you know, what's going on here? Why are energy prices up? And this is to either you, Chris L or Grav, whomever wants to take that question. Well, I'll take that first because, and sorry, Chris said, I'll take the first because I've kind of given an answer to that from the European perspective, that there are regional stories behind this shortage. I mean, one point, Cressel was talking about China pushing into gas,

not having enough coal and having to rely on gas, etc. An interesting statistic for the UK, an interesting story for the UK is that in the month of August, we saw the lowest wind speed since 1961. Now, some people say that that's actually because, of climate change because of the rate at which Arctic ice caps is melting is actually playing around with wind speeds and it resulted in low wind speeds across Europe in August. Now the UK generates almost a third of its electricity from renewables. And when wind speeds fell, it had to rely more on gas, which pushed up, you know, which pushed

up pressure, which we can't win. We just can't win. Gas prices. And then if you get to, that's just one story, of course. I think the bigger story was actually around the global short- of the global increase in gas prices and the pressure on gas. In Europe, it's very much this regional story of what's happening with Russia and Russia's ability-stroke willingness to supply more gas in coming months.

Got it, got it. And, Chrisel, broadly speaking, what's driving this surge in prices, energy prices around the globe? I mean, abstracting from the kind of the idosyncratic things that are creating issues in different parts of the world, broadly what's going on here. Under investment and supply chain bottlenecks. Not demand? Well, demand is recovering, right?

Demand is recovering at a good pace. We're coming off of Delta. But demand always rises. And the problem has been that supply has not kept up with that pace of demand increase. Okay, I'm going to push back on that. Let's look at the oil market. Demand for oil is 100 million barrels a day, almost on the nose, which makes it really easy to remember. That's what it was pre-pandemic, and that's what it is today.

But it's sharply fell during the pandemic and it's sharply recovered coming as the global economy has recovered here since the beginning of the year. We're back to 100 million barrels a day. But the supply side of the market has not, hasn't gotten back to 100 million. It was producing 100 million barrels a day. Price of oil was 50, 60 bucks a barrel pre-pandemic. what's going on? And you're saying that that's because of the supply chain bottlenecks. I mean, that's what's going on that they can't ramp it up. They can't get the production up to meet the demand. Well, if you're talking about oil, the problem is there's a cartel that doesn't want to boost

output. Okay. Right. They withheld production. They cut it tremendously, 12 million barrels per day. I've never seen anything like it. And they're withholding some of that production. And the, the market, like the rest of the world, the market, have underinvested chronically. And I really, I can't understand it. Like I was reading the other day in the Financial Times, the CEO of Pioneer, which is a U.S. oil producer, talking about how his shareholders wanted him to return capital in the form of dividend payment, and they were going to punish him if he plowed money into expanding U.S. oil production and gas production.

At the same time, I'm looking at the break-even price of oil production, and it's way lower than the current oil prices we have. And so I think right now the market is sending a strong signal for producers to ramp up production and make money. And I don't see a dramatic increase in the active rotary rigs looking for natural gas. And it's rising for oil, but not at a very strong pace. And so for whatever reason, whether it's a lack of willpower on the part of oil producers, or there are some technical problems, they physically can't get the workers or they can't lease the equipment or whatever it might be, or some other reason. There's a lot of pressure on the supply side of the economy across industries, not just energy. or housing or automobiles or what have you. It's not happening, right?

Production from the market is not happening. OPEC is not boosting production. And then you get these hurricanes. And then you get, by the way, this surge in gas prices that is prompting switching. You know, now if you're in Europe, you're going to use oil to generate electricity instead of gas because it's cheaper because the gas price went up several times. So it's a combination of factors that have driven. Okay, so this is the way I would characterize it. Let's use the oil market as our benchmark because this dynamic is playing out in all the energy markets.

And, of course, there's a lot of other things going on, as you've just described. But what happened was the pandemic hit. Demand gets crushed. We go from 100 million barrels a day down to what was the low in terms of global demand. Was it 85 million? Yeah, yeah, that's about 85. 85 million barrels a day. Supply falls too. I mean, the suppliers say, hey, I can't sell oil. Prices are going to zero in the teeth of the pandemic. So they drop production all the way down.

OPEC slashes production. Everybody slashes production. Fast word to early this year, vaccines, the economy reopens. Everyone starts to travel. Demand goes right back up. We're now back up to close to 100 million barrels a day, right where we're pre-pandemic. But the producing, They're starting to ramp things up, but it's been very, very slow to do that. And you're saying, okay, what are the reasons for that? One of the reasons is supply side bottlenecks. I can't find workers. I can't find the materials I need.

Another reason I've under invested for some time, particularly in the coal industry, obviously, because of the issues around carbonization and climate. And that's an industry that doesn't have much of a future. so no one's been investing in that. And then here's the third reason you throw forward is, well, maybe something's going on in these markets where the industry players are saying, I'm going to try to remain as disciplined as I can,

even though I can make a boatload of money by producing more at this price, I'm not going to do that because I'm going to enjoy these higher prices for longer. So it's just taking some time for them to respond to the higher prices in ramp up production. But it sounds like you think that's a matter of time. Is that a good way of characterizing it, The way I just put it forward.

It is. I would just do a slight correction. So we're forecasting like 98, 98. Beware. Beware correcting me. This is a very deep. Go ahead. Okay.

Yeah. What is a million or two barrels per day amongst friends? That's the only thing I would say. But like, yeah, I mean, yeah. But like, you're broadly spot on. It's that I do think it is a matter of time. I do think that the market through the price is sending a strong signal to producers right now. I expect them to respond by investing more in oil and gas production.

There's no, you know, President Biden is not going to stop you from drilling, I promise. You know, that's cooked up, you know. And with respect to pipeline being the source of all evil, that's not the case either, right? The problem is we need more investment from U.S. oil and gas firms. And I think they can make money unless their input cost have just escalated so astronomically that the break-even price is over $70 per bill. And even then they're still making money. So I expect the supply to come back. And also, OPEC, I mean, you have to expect them at some point to loosen the grip on some of these production cuts and supply the market and return to kind of their pre-pendomendom.

levels, which they're not at right now. Got it. Okay. So I want to do two more things in this conversation. The first is a question around, well, what is the impact of these higher prices on the economy? How big a deal is it? I know it varies a lot where you are in the world. And I want to talk about that.

And then I'm going to end. You guys, I want you to think about this while we're discussing this is where are we headed? What is, and we'll use oil as our benchmark. What is, what are, do you think oil prices are going to be a year from now? So, and let's go first to the question of what's the impact. Garab, I suspect that this is a big deal in Europe because Europe consumes a lot of energy but doesn't produce very much. Do I have that right?

You have that spot on mark. It's, it is a big deal in Europe. And it's a big deal going into winter. And part of how this plays out will depend on how cold winter is and when the winter snap actually occurs. So the longer we have, the milder, the longer and the milder winter, the more time Europe has to fill up with strategic reserves, which makes this less of a problem as in when a gold snap occurs.

If that cold snap occurs sooner and lasts for a long time, then I think Europe is facing a fairly difficult situation in winter. And I guess that spills over into social discontentment as much as it does into economic costs. You've got the issue of rising energy prices. I gave you some numbers at the start of this, that there was 3.4% September headline numbers. for inflation in the euro zone, of which 1.7 percentage points is actually energy prices.

And it's been that way for a while. So in the five years before the pandemic, energy prices barely contributed anything to inflation in the euro area. They actually detracted from inflation during the pandemic because it fell so sharply. And now it's just skyrocketing. So if this continues over winter, this is a big deal in terms of, in terms of disposable income and the pinch on consumers. But it's also a big deal in terms of, I guess, social factors. Yeah, it makes sense. I want it. Sorry, I just say switch over to the UK, it's probably even worse. And that's because of Brexit concerns that's causing supply shortages of all kinds. It's not just because local demands up and people can't get stuff done on time. It's also because

the whole economic institutional setup of the UK has changed. And they're really struggling to deal with that right now. So in the UK, I guess you've got a bunch of compounding factors which will add to the problem, which takes us beyond this particular topic, but just to point that out. Yeah, just to connect the dots back to something you said about BEOE Bank of England monetary policy, you know, sort of the, I think the thinking here in the U.S. would be, yes, inflation is higher, the higher energy prices are adding to that. And yes, that's a negative supply shock, particularly in the UK because you don't produce as much oil or the EU, more specifically.

So you get weaker growth, more inflation. And as a central bank, you have to make a decision. What do I do with that? You know, do I respond to the higher inflation or do I respond to the weaker growth? In the U.S., the answer would be, well, it depends on inflation expectations. If inflation expectations remain stable, I respond to the weaker growth. And I keep my foot on the accelerator. I don't raise rates.

but if it's adding in the inflation expectations in a meaningful way, you know, after you adjust for all the measurement issues that Ryan was talking about, then I will start to tighten monetary policy quicker. So which is that kind of frame the way people think about it in the UK? And, you know, where does that lead us in terms of BEO policy? So I think people do think of it in that frame, but I'd add to that that you've got to start thinking about you've got a size supply in the UK post-Brexit. What is the actual productive potential of the economy?

Certainly not what we used to think it was back in 2016 before the Brexit vote. Now that this has happened and we're coming out of it and starting to size the actual optimal level of output in this economy and working out that perhaps it's considerably lower perhaps than we thought it was. Then that gives us another view of what's equilibrium level of output. What's the natural level of full employment output in this economy? That has to come into play in the Bank of England's considerations, I think. So if you were sitting in the B-O-E, would you advocate raising rates in November, given everything that you know so far? I'm probably more devish.

I'm probably a more devish person, so I'd probably advocate holding off raising rates in November. It's a really difficult call to raise rates in November because on the one side, one hand you've got the whole supply side problem, and you really wonder to what extent raising rates is going to solve a supply side problem. And then you've got these additional issues with, okay, actually the productive potential of the economy might have come down and you've got to worry about inflation expectations and the fact that you've got a 2% target but you're facing the prospect of 5% inflation. There's a very difficult call.

But I'd probably be more cautious and a bit more doubt of and not raise rates in November. Yeah. Well, I think it's nuts to raise rights in November. I think way too premature to do that. Yeah. Anyway. I'd be planning to agree. Remember the ECB coming out of the last recession?

Yeah, they jumped at the first chance to raise rates, and that was a big mistake. And it was like 2011, I think. And if you go back before that, the Bank of Japan did the same thing, right? Jumped to the first chance to raise rates and look where they've been ever since. Huge error. Hey, Chris, okay, so how big a deal is it here in the U.S. that, you know, these higher energy prices? You know, we now produce pretty much as much as we consume, I think, roughly speaking.

So in theory, not big a deal. Is that kind of what you think about it? Well, I mean, it's going to hurt consumers. If you look at what they spent in Q4 versus what they're going to spend in Q4 this year, you know, last year relative to this year, they're going to spend about $120 billion more annualized in the fourth quarter compared to a year ago. And what's the math on that as a percentage of GDP? It's about half a percent, six times a half a percent. Okay. So, and it won't, you won't show up that kind of stress because, you know, Q of GDP, we report sequentially.

And so if you look at compared to Q3 of 2021 instead of Q4 of 2020, the increase isn't going to be too substantial. But, I mean, this acts as a tax cut. I mean, as a tax increase. It's taking money away that would be spent otherwise. on other goods and services, and it's inflationary, right? And it reduces the value of real economic activity. And so I, I mean, it's probably going to be closer to like 10 or 20 basis points on GDP growth. But, I mean, it's substantial. And I don't know, and I'd love to hear Ryan's thoughts on it, what the Federal Reserve's view on this. Well, wait a second. Wait a second.

Wait a second. You did half the story, though. Yes, it hurts consumers. but it helps producers. So what's the net of all that? I mean, I think the body line is. Yeah. No,

they're ramping up production. They're going to, as you say, they're going to ramp up production. Yeah, I expect them to. I mean, yeah,

but I like, but what are they doing? They're like paying dividends. I mean, like, where did, and what's the spending rate versus the savings rate

for those people that are getting dividends? It's, it's probably like 15% savings. And consumers generally have like 5% savings rate. So on, net, it's a negative. Okay, but it's probably a small negative, right? Don't you think, Chris?

I mean, it's gotten smaller. I mean, the U.S. has been through the Shell Revolution, like, come pretty close to being net energy neutral, but it's lost market share in the pandemic for sure. Okay, go ahead. Ask your question to Ryan. I'm curious what he says. Yeah, I mean, Ryan, you've, and I got a question from this, from a reporter at the Houston Chronicle, like this week.

she says, well, is the Fed going to move faster because of increases in energy prices? So are they thinking transitory like for everything else? I mean, it creates a little bit of a communication issue because, I mean, the Fed's been beating the drum that all the inflation that we've seen recently is transitory. Now you have higher oil prices, which will boost headline inflation, but also bleed in a core through, which excludes food and energy prices, you know, the volatile components of consumer prices via higher transportation costs. but the feds learned their lesson from the past

and that fluctuations in oil prices, either rising or falling, are temporary and that this isn't going to cause on the raise rates sooner. That's what I said as well, so I feel a little bit better about my response. Oil prices, or the impact of rising oil prices

will be a positive on Q4 GDP. Because the increase in production will offset, more than offset. And I also think I'm more optimistic that the hit to consumption will be smaller because we have a lot of cash. So this shock is not going to be like it was in 08. So I think it's going to be a net positive. Not a lot, but positive. And how do we figure out the answer to this?

I think you two have to take it outside is what I think. Yeah. Yeah. But I will say Ryan watches. By the way, Chris, I'm with Ryan on this one, baby. I'm with Ryan on this. Well, Ryan has nose and nip is better than I do. So I don't want to argue.

I don't want to put up too much of a fight. Okay. We're going to end this this way. As I said, I want to know, and I know, Garab, this is a stretch for you because you've got to put these things in dollars. You know, we're forcing you into dollar terms. But oil is sitting at, let's use Brent, 85 bucks a barrel. What is Brent going to be on October 22nd, 2020? 22. And I'm going to go, I'm going to go with Chris D first. Because always my mistake is to go

with everyone else. Just go to him last and he finds the middle point of the forecast. No, I'm not doing that. I'm not falling for that again. Chris is calculating the historical average right now. Well, what he's doing, he's looking at the futures market is what he's doing. Just crypto. Just looking at Bitcoin. 75. $75. $85 now, $75 a year from now. Okay, Ryan. I was going to go $75, but since Chris, I'll go over 70.

I'm going to go a little lower. 70 bucks a barrel. Okay. All right. Grav, where are you? And you can say, hey, I don't want to do, I don't want to play this game. No, I wouldn't do this. I'm going to do this.

I'm going to do this. I'm even going to do it in dollars. Yeah. It's fine. Okay. But I was actually going to go, well, first of all, I was going to say lower. Okay. I'm going to say that because I'm going to agree with Chris Lafakis that actually production is going to ramp up over the next 12 months.

OPEC's going to get, their pockets are going to fill out, and then they're going to get, they're going to have some rumblings, and then they will increase capacity. And I think the global oil market will just start getting better supplied at some point. So I'm going to go lower. How much lower? Well, I was tempted to take 10 bucks off. But that's been done twice now. So I'm probably going to have to say somewhere between, you know, 75 and 80. see that I see how he does that he's very crafty he's very crafty just put a range of that very crafty

and you can take the midfying that range you know 77 would be fine all right garav is on record for 77.5 77.5 chris is so grava is 77.5 chris is 75 Ryan you said 70 70 70 okay I think we've got some uh I think we've got some anchoring bias uh going on here I think we do too Chris L what do you think what the price is going to be? Well, the number in my mind before Chris went and started us off was $100.75. You know, it is anchoring bias. That's what it is. No, but before he said anything, I had this number in my head.

I don't know. Maybe for fun, I'll go $7. No, no, no. You, everyone knows on Inside Economics. There's no, I don't know on Inside Economics. I know the price is going to be, Chris. L. 75. Well, okay, you know what, guys, I'm going to, I'm going to blow you out of the water, 60 bucks a barrel, because you know why? That's the equilibrium price for oil. That's where it should be

in the long run. And I think it takes about a year, maybe a little longer than that, you know, maybe it's, you know, spring of 20, 23, but I think 60 bucks barrel. Ben, Ben, Ben, who's our producer, who's listening into all this, you write all this down. This, This is, this is, we're going to come back on December 22nd, 2022, and we're going to find out who won that bet or this hasn't been a bet, but we're going to see who was right. Okay. We're going to call this a podcast. This is a great conversation. We covered a lot of ground.

Hopefully you found it informative. Do want to remind folks, go to economy.com, hit on, hit inside economics, the button and tell us what you want us to chat about. We pay a lot of attention to that. We also would like you to rate us, you know, on these. podcast. We value that and we'd appreciate you to go up to Spotify or Apple or wherever you get your podcast and give us a rating. Really would appreciate that. So with that, we'll call it a podcast. Take care, everyone.