Moody's Talks - Inside Economics - Karl and Cars

Episode Date: April 15, 2022

Mark and Cris welcome Jonathan Smoke, Chief Economist of Cox Automotive and colleague Mike Brisson, Senior Economist at Moody's Analytics, to discuss the outlook in the vehicle market. Full episode transcriptFor more from Jonathan Smoke, follow him on Twitter @SmokeonCarsFollow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight.  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'm joined by only one of my co-host. Chris, Chris, the deputy chief economist. Hey, Chris, what's going on? We lost Ryan. I know. I know. You know, a lifer for this podcast, but he bailed on us.

I know. I know. I don't know what's happened. Family comes first, I think, you know. That's true. Is he at Hershey Park? Is that what he said? He's at Hershey Park?

Yeah, that's right. That's right. I took the family there. Loading up on chocolate. I have not been to Hershey Park. Oh, you've got to go to Hershey Park. I mean, I can't believe that. Well, you're kind of she-she.

You're shishi. You only go to, like, you know, Disney World or something with your kids. I haven't been there either with my kids. Oh, that's the heck. You've been to Disney World? No, no. Oh, well, I highly recommend Hershey, Park. I mean, I have this like, I had three kids and, you know, we all went to Hershey Park back in the day when I was your age. And I had this iconic photograph of my middle daughter, Anna, holding up Hershey Bar. And she was so happy to have that Hershey Bar. I'm telling you, it was like the best thing in the world. Actually, if I could find that, I'm going to put that up with the podcast, you know. So it's a, it's, it's a lot. I'm going to put that up with the podcast, you know. So it's, it's, it's,

like one of my favorite pictures of all time. The three kids, my wife and me and my daughter holding up to Hershey Bar with great excitement. Yeah. Sure joy. Pure joy. It was pure. It was pure joy. It was pure joy. But yeah, well, we'll miss Ryan. Actually, this gives me more of a chance to win the statistics game. Although I was beating him pretty easily, I would, I've been saying, I would say, right, Chris? Haven't I been beating him? pretty regularly. You've been on a hot streak. I've been on a hot streak.

Last week, last week he thought I was, yeah, I thought it was a plant. Yeah. That was amazing. Amazing. So I actually,

fair warning, I helped my statistics game this week. Uh-oh. In light of that, so just keep that in mind. And we have two guests. We have two guests. One,

our favorite colleague, Mike, Mike, how are you? Mark, how's going? Good. Mike's all things vehicles for us.

And good to have you on board because this is the topic of the podcast, the vehicle industry. We've got Jonathan, Jonathan Smoke from Cox Automotive. Thank you for joining us, Jonathan. Oh, it's great to be with you guys. Yeah. And Jonathan, before we dive in, maybe you can give us a quick sense of Cox Automotive. Just to give the listener, because you guys are doing lots of different things. It would be good for the listener.

Yeah, we are. And we're a privately held company, so the name Cox doesn't necessarily register with a lot of folks. But we are the largest auto services company in the world. You mainly know us from the brands that are more well known. We own Mannheim Auto Auctions, which is the largest commercial auction house in the U.S. and in several other countries as well. We also own the consumer. facing website's Kelly Blue Book, which has, I think, about 100 years of helping dealers and consumers understand vehicle values. And AutoTrader is the number one destination for shopping for new and used vehicles in the U.S. So we've got quite a bit of understanding of the consumer and dealer side of things, but we also own various software products that are basically the underpinnings of how dealers run their businesses. So it was very attractive when they were looking for a chief economist for me to think about the treasure trove of data. Because for those of us that have plied our profession at being a business economist, we know that having data is

sort of key to really having good insights. Absolutely. So that's what got me to do this. Cool. And interestingly enough, you were what I would call a houseer before you became a vehicle maven, right? You were in the housing, you're at realtor.com. You were at Hanleywood.

Yeah. Yes. And as a result, I've been a close client of Moody's analytics and back to the old days of economy.com. Oh, I didn't know that. All the way back to economy.com. That's right. You look too young for that.

I don't know how. Yeah. I am. I look a lot younger than I really am. It's at its disadvantages at times, but now I'm of an age that I enjoy it. But yeah, I started off in home building and actually ended up being responsible for strategy for a national public home builder. And as a result, really sort of tapped into my.

my economic roots to really build models and help understand that. And that's really, I think at one point, your team used to tell me that I was the single biggest user of data buffet. No way. No way. Because we were building models and downloading data at a local level trying to connect the dots with what was happening in housing. I ended up. You know my brother. You know my brother Carl well then. Oh, yes. Yes. And we, you know, we actually have. joint project that Mike and I have been doing for probably a year and a half, maybe two years on vehicle affordability. So yeah, the roots go back a long way, but started in housing.

So I did home building. I then created my own data company for a while called Housing Intelligence.com. And I had the best of all timing. I started that in the fall of 2006 and was doing extremely well until 2008. things got a little bumpy. I didn't predict that we would have a decline, but no one predicted quite the decline that we had. I ended up selling that business to Hanley Wood,

which is a media and data business for new construction. And that's actually where I first started getting the title of chief economists. And so really focused on home building and home improvement and building product type of industries. And then I was recruited by Realtor.com to become their first cheap economist. So I got to live in that elite world of the competitive economists that have been in that space across Zillow, Redfin, Realtor.com, you know, super exciting. And then the opportunity at Cox came up. And I had originally been from Atlanta. Cox is based in Atlanta. a fantastic kind of family run business and the opportunity to learn a new interest industry was

entertaining and to me in a way to kind of keep the juices flowing plus as I shared with you the treasure trove of potential data was was this the real kicker and I've been here five years now so fantastic well thank you for joining us it's a real pleasure and honor to have you and You know, we play this statistics game, and I'm hopeful you'll be able to play and willing to play. But I'm afraid to say with Ryan kind of AWOL, we don't have the cowbell, you know. We ring this cowbell if you get the answer right. And, you know, it certainly shows a flaw in our planning here. But, you know, my problem.

Supply chain problem, yeah. Actually, it's a brother problem. My brother Carl, you know, you know, I've been after, what I want to do is I want to give guests like you a cowbell, you know, I give, I give all the, we give a guest a bottle of wine, but I want to give a cowbell. But he won't give me budget for it. I don't know what the hell. You know, I got, Carl, come on. Give me some budget for this for the cowbells. And he goes, no, no, you know, budgets are tight.

Is it what he tells me. You know, my own brother, you know, no cowlinson. He brought a lean chip, you know. What's that? He does, doesn't he? He wants a lean chip. Oh, you know, global supply chain problems. It's tough to get those cowbells.

It's tough to get those cowbells. But anyway, all right, but back to business. Why don't we start with the, there's been a couple of major economic releases this past week. The first was the consumer price index, CPI inflation. Chris, you want to give us a rundown on what was in the CPI report? Sure. I'll give you a high level because I don't want to take anyone. numbers away. So CPI inflation for March was reported on Wednesday. It was in line with, I would say,

broadly in line with consensus. Consensus was for inflation to be high and the BLS did not fail to deliver. Headline inflation was at 1.2% month over month, so from March to February. So that is high. It had been 0.8% the month before. So some acceleration. And then on a year-over-year basis, the number everyone's quoting is 8.5% year every year. So that is the highest since December of 1981. I don't know what you were doing back then, Mark, but it's a lot going on. It was just about ready to ask my wife out for a first date, I think, in 1981, believe it or not. You had to go, you had to be quick because the prices were going up, right?

That's right. That's right. That's absolutely right. I remember those days pretty well, 1981. I probably could tell you the unemployment rate. Let's see, June of 1981. That was kind of in between recessions. I'd say the unemployment rate was about 7.3.

Anyone, someone should go see June of 81. No, 7.3? Yeah, Mike's looking. Mike's looking. Yeah, Mike's looking. Anyway, what was I going to say? Oh, how much of this pickup of an infuriate? inflation, would you ascribe to Russia's invasion of Ukraine and the resulting surge in oil and other commodity prices?

How big a deal was that? Yeah, so definitely. Gas prices were up 18% alone, right? And BLS subscribes 50% of the increase to gas, right? Energy prices more broadly were up 11% in March, 3.5% up in February. So just compounding the impact there. If you want a little bit of, well, let's, you know, everything's relative, a bit of good news is the core inflation. So inflation less food and energy.

I guess, you know, I would say, you know, the obvious connect the dots, Russian invasion to CPI was gasoline prices. But obviously that affects lots of other stuff in the CPI, like food prices. Food prices were up 1% as well, right? Yeah. Because diesel prices. You got to ship the food, the stuff from the farm. to the store shelf and diesel prices are at record highs because of Russia invaded in Ukraine. I saw airline fares, right?

I mean, they were up, I think, a lot going on there related to higher jet fuel costs, that kind of thing. So felt like to me, correct me if I'm wrong, but I felt like, or if you have a different view, that, you know, a big chunk of what was going on here was Russia's invasion of Ukraine, kind of really. That definitely was the accelerant here. I will say owner's equivalent rent. We've talked about this before. So the housing portion of this, it increased 0.4% as well. The same as the previous month, but that's still kind of this underlying slow-moving factor that's going to continue to prop up inflation for a while.

The price gains that we've had over the last couple of years still have to make their way through the CPI inflation. Yeah. Okay. So the good news. What's the good news? Good news, I would say. I think you said good news. Yeah.

Relative. Relative. Yeah. The core inflation. So inflation, less food and energy, that grew at a 0.3% month over month rate, which was actually down from February, which was growing at 0.5%. So a little bit of deceleration, hopefully, going on in the core. So a 6.

But it's still 6.5% above last year's level. So the light is still green. for the Fed to move here, right? Clearly six and a half percent on the core is way too high. So there's little doubt, and there's actually no doubt that they're going to be very aggressive in May with rate hikes and quantitative tightening. I think one of the key aspects of the moderation

and core inflation, X food and energy, was a decline in used vehicle prices, I believe. I think that was flattish, but used was down. So I'd love to bring the Auto Maven into the conversation here. Jonathan, what's going on with vehicle prices? I mean, obviously, they went stratospheric, you know, back beginning about a year ago, I think, and are they now coming back down to Earth? So what's the dynamics here with regard to using? And also, correct me if I'm wrong, but I think the movements and vehicle prices have had a very significant impact in overall

inflation, if I'm not mistaken. They have. They, goods inflation has been the story. up until now, really. And last year, ground zero was the auto market and used the used market, which because of the Mannheim index that we put out, was, you know, the poster child for how extreme the inflation was, how quick we were seeing those prices move up. and it was all tied to the computer, the chip shortages, semiconductor shortages, and a lot of the supply chain problems that were very acute, but also clearly related to the environment and the amount of stimulus

and the real frenzied spending that especially we had a year ago. So, you know, jump forward to now and what we've been seeing this year has been a moderation in pricing. We've seen used vehicle prices, both wholesale and retail, come down in the first three months of this year. The CPI is tracking retail use prices, but there historically has been a pretty tight correlation over time with what the Mannheim Index sees. By the way, I'll put a plug, especially because of it's in your neighborhood. If you've never been, to an auto auction before. Sometime, you've got to go see Mannheim in Manheim, Pennsylvania.

The largest auto auction. I didn't know that. It is. Okay. The namesake is the town. And it is a thing to behold, because I would argue outside of the stock market, it is probably the best example of an efficient and live market that you're ever going to see in your life.

Plus, it's pretty cool and see all the vehicles. Yeah, where's Mannheim PA? Where is that? Relatives to Philly, where we live. It's north of you closer. Yeah, I've driven and I've flown, but I'm asking the wrong way for that. Well, that sounds like a day trip. Maybe we'll take a, you know, Moody's Analytics, you know, excursion up to Mannheim, PA.

There's a podcast up there. Oh, the reason why I bring up, the wholesale market is a very dynamic market. Historically, it has more price movement in it because effectively every day, the market is attempting to clear based on supply that's feeding the market and what the available demand is. And I will describe what we've gone through in the pandemic is the most extreme demand versus supply gap that we've ever seen historically because we literally had an absolute limited supply gap that we've ever seen historically because we literally had an absolute limited. supply situation because of new vehicle production stopping worldwide. There had been no scenario. Perhaps you can say World War II was this way, but in the modern era, there had never been a time that all the factories in the world were shut down and all of the supply chains

were shut down. Then you had the mistakes that the manufacturers made of actually canceling orders of goods and semiconductors was where there was a real problem. that. So it wasn't just about getting the factories back up and running. It was actually getting the supply chains running that feed that. And because of decades of globalization, generally speaking, there wasn't a lot of resiliency in the global automotive production landscape. And so we never got back to 100% capacity. We were getting close in the fall of last year when then the Omicron wave of COVID struck.

And then we've entered into another series of unfortunate events. We've been dealing with things like earthquakes in Japan, Canadian trucker strike, you know, the Felicity Ace, the cargo ship that caught on fire and sank, taking down 4,000 European luxury cars with it. So all kinds of random things have also contributed to this. So you've got acute supply challenge. challenge, boosted demand, because not only did we have stimulus and record low. Although, can I interject there quickly, Jonathan, on vehicles, vehicle sales never really got

very high, right? I mean, we were getting 17 million units per annum sales, you know, rock solid before the pandemic. And was there ever a month we got above that in the since pandemic hit? I don't think so. No, no. We had, we had a few, we had a few strong months. at the very beginning, when we reopened in the economy and we had more supply and the very

beginning of last year, have to check what the BEA numbers were. I don't think we ever got above much above. March and April of 2021, we got 18. Oh, we had a month or two. Yeah. But it feels like to me in this debate about demand, whether the high inflation is related demand or supply, in the vehicle market, it's got to be mostly supply, right? Right. I would say it was both. I think it has been more of a supply problem. And I, it's all theory, but I would say we probably would have sold more than 18 million vehicles last year had we had a supply.

Supply. Normal level of supply. Yeah. I mean, here's a statistic. Here's a statistic. Because I calculated this for this conversation. If I look at the five years prior to the pandemic, the average annual. sales rate was 17.25 million. Since the pandemic, it's been 14.65 million. So, you know, it's, that's, that's, that's, that's not demand. That's supply, right? I mean, you just can't, can't, can't produce enough. Yes. Yeah. You can, you can also, um, you know, another, another aspect is, is describing, uh, what is the fundamental demand. Uh, what's the natural demand for vehicles. And we've actually seen an, you know, increase in the scrapage rate, so the number of vehicles that are lost and have to be replaced, and that typically contributes to a higher level of fundamental demand. But I would argue, one, during

the pandemic, you also had people's preference moving away from shared and public transportation. And so there was a period of time that people who had no vehicles were looking for vehicles. But then what we started to observe with mobility and people's movements to different places for housing, whether it was buying housing or renting housing, but the movement away from dense urban centers to places that are more vehicle dependent created also a trend that we were essentially following what was happening in the housing market. And historically, vehicle demand is correlated with the housing. housing market, the more home sales you have, the more vehicle sales you have. The more homes are being built, the more pickup trucks are in demand all throughout the country. So that too has contributed to a higher level of demand than what we had before. I want to come back to sales, but before I do that, let's come back, I want to come back to price because I want to try

understand where prices are headed. So my simple way of thinking about this is that, okay, pandemic hits, factory shutdown, severe shortages, prices for new cars go skyward because they're so expensive and because of the pandemic, demand for used vehicles go skyward. So prices are just jumping everywhere. Okay, here we are today. we're still not producing, you know, the worst of the supply chain problems seem to be past us, but there's still issues and production hasn't quite gotten back to where it needs to be. Yet used vehicle prices seem to be new vehicle prices haven't rolled over yet. They've stopped rising, it looks like.

But used vehicle prices look like they've rolled over. Okay, so what's going on? Why? And where are we headed? I mean, where are prices headed here now going forward? Well, you know, as I was mentioning, wholesale prices, I believe, are the most dynamic and will truly reflect the market conditions at any given time more so than any version of retail prices. And especially new retail, which has this, you know, process of a manufacturer establishing what the suggested retail price is and then seeing actually with the marketplace. And that's a place we ought to go actually in the day.

because there's some extraordinary trends with people paying well above the MSRP, which was an unheard of concept prior to this current situation. But it takes an extraordinary imbalance of demand versus supply to take an asset that fundamentally is a depreciating asset and turn it into an appreciating asset. And yes, we had that scenario in 2021 where in most weeks, the prices at Mannheim were higher each week than they were the prior week. But that is not the case now. Well, actually, technically, it is the case again in April because we're in the heart of tax refund season. And a little unknown fact to the broader world is that every single year, and we've got data back to 1995, every single year, every single year. every single year, prices have gone up in tax refund season in the wholesale market, because there is always a temporary surge in demand and a limited amount of supply

that moves into the market at that time of the year. But outside of that effect, I believe we're fully back to vehicles being depreciating assets. Again, that doesn't mean we're going to see a price correction, a return to where values were previously. it just means that prices are performing on a go forward basis in a much more normal way, meaning your vehicle is likely to be worth 10% less a year from now than it is today. So economic gravity is taking hold again. It was suspended for a while, but now it's taken hold again.

Prices are coming in. So do you expect used vehicle prices to continue to decline here going forward, at least for foreseeable future next six, 12 months? And what about new? We do on the use side expect to see fairly normal depreciation, which should mean vehicle prices go down. Now, depending on how you measure that, though, things like the CPI, things like the Mannheim Index itself, naturally has price increases over time because vehicles constantly have new technology, new capabilities that essentially have an inherent inflation bias kind of built into it. So historically, wholesale prices have gained about 2% a year.

So if you adjust for inflation, that really typically gives you what the view is. And interestingly, with very high inflation now, and we think we're going to see a 3% decline this calendar year in the Mannheim Index, that really means a much bigger decline than normal in the calendar year for wholesale prices. And new, I guess that depends more on supply chain issues and if production picks up and so forth themselves. New is one where I would continue to expect above average increases in prices. There is some seasonality to how new prices come out.

Typically, the highest prices are when new models are being introduced. So it's the end of the year. And we're in the time of the year where prices are tending to come down. slightly. So indeed, December was the most recent peak we had in new vehicle prices and they've come down the last couple of months. But we're in an environment where supply is right around 1 million units, 1.1 million units at the end of March when typically we have 4 million units. We were just shy of 4 million units and at the same time. I'm sorry, what's that number of 1.1 million? What is that?

One point, that's the number of new vehicles sitting on dealer lots. Oh, dealer lots, okay. Inventory. The inventory. Okay. Yeah. So inventories are still, we haven't been able to get production up. Vehicle producers haven't gotten the production up yet to start rebuilding inventory.

No, and because inventory has been decimated, it basically means we will sell only what gets produced and delivered to the U.S. Okay. So you're saying, okay, that's coming in, economic law, economic gravity. taking hold again, new that's going to take a while before that really starts to come in to any meaningful degree. Hey, Mike, do you agree with that? Do you have a different perspective, any different perspectives on that? Or is that roughly with what you're thinking, on terms of new and used vehicle prices? I'm expecting the used vehicle prices to be pretty flat throughout this year, not have that much of a come down. That would make sense of what Jonathan said,

because they already saw a 3% decrease in this first quarter. So they're probably expecting it to be flat the rest of the year if you're expecting a 3% decrease for 2022. So we're thinking that it stays flat through 2022 and starts to come down in 2023. And that's a supply and demand story. So you have vehicle production starts to normalize in 2023. You also have the Fed putting the brakes on. So the demand side is something we should forget about here. There's going to be some loss of demand over the end of 2022 and to 2023 as interest rates rise. And that's going to be part of the story as vehicle prices come down. And new? What about new? New, I think the manufacturers are playing catch-up with the market. So we're going to see prices come up. So all those people

are paying above MSRP. The OEMs aren't going to leave that cash on the table. They'll start raising MSRPs. So the dealers can charge it and not feel so bad about it. They'll do it. something wrong. And there is one wildcard that's interesting to talk about because it relates to the CPI numbers as well, because one of the biggest gains for the month in March and in the year-over-year category is car and truck rental. And the rental car companies traditionally get all of their fleet from new vehicle manufacturers. They're new vehicles that get put into the rental fleet. But with the supply problems last year, rental car companies became net buyers of used vehicles instead of traditionally feeding the used car market. And that is continuing this year. And if that behavior

continues into the fall, we could see there's upside to the use prices and it's principally driven by those rental car companies whose economics are extremely positive because of the scarcity of vehicles and the resurgence in travel that's happening. all those people going to Hershey Park and the way. So just bringing this back full circle to what it means for overall inflation, I think what my conclusion is from the conversation is that vehicle prices really, which added significantly to inflationary pressures over the past year, that's not going to be the case in the coming year,

but it's not going to be a big drag on inflation until we get into 2023. That's what it sounds like you're saying, both of you are saying, roughly speaking. Yeah, I think there could be times, especially in the seasonally adjusted series, that it could be somewhat of a drag in certain months, especially as demand starts to soften. And indeed, the production starts to improve as might. All right. I'll take it.

We need it. Yeah. Okay. And to that point, the seasonally adjusted numbers went down for the Moody's Analytics price index, and they went up for the unseasonally adjusted in March because there is this big seasonal factor in March and April that Jonathan was talking about. as dealers start to build up inventory. So the seasonally adjusted and non-seasonally adjusted went in different directions in our right index.

So it is a big seasonal factor here too. Yeah. Hey, Chris, given all of this and everything else that you throw into the pot, would you say that inflation overall inflation has peaked in the U.S.? 8.5% year-over-year CPI through March. Highest it's been since 1981. Is that the peak? Or are we close to the peak?

What do you say? I think we're close. Close. If not already there, because so much of this is driven by energy and gas prices, if you do believe that there are no more sanctions coming to restrict some of the supply. And we will get some additional supply coming from other countries in short order. That should help to bring those gas prices down, maybe gradually, but at least they shouldn't accelerate much more from here.

And if the Fed is stepping on the brakes here, that also is going to reduce some of the demand out there. Okay. All right. Hey, maybe we'll play part of the game now, or I'm not, I'm not sure we're going to play all of the game. But I got a really good question that's apropos to the conversation up to this point in time. So would you mind if I put that forward? Just to mix things up a little bit. Is that okay?

All right, because it's a little bit different. So just remind everybody the game, the statistics game, we each put forward a statistic. The rest of the group tries to figure that out through questioning, clues, deductive reasoning. The best question is one that's not too easy, that everyone gets it right away, not too hard that no one will ever get it. And, you know, a bonus if you can make it apropos to the conversation and to recent statistics. Okay. So I'm going to, this is a little different. this is instead of me giving you a statistic, I'm going to pose a question to you.

And everyone has to look up. You can't look at your screens. I don't want anybody looking at the BLS-CPI report. But if you go into Table 2 of the Consumer Price Index report from the Bureau of Labor Statistics, that's the detailed accounting of all these prices for all these goods and services. So I don't know how many there are, but there's got to be a couple 300 of them. I will, whoever gets, and you can do this as a group, if you can get three items for which the year over a year price actually declined, you win. Okay, you're a winner.

So of all the goods and services in Table 2, hundreds of services, which items, goods and or services actually fell year over year in the month of March, March of 22? And there aren't many. Obviously there aren't many. Use vehicles. We just said it. Okay. That's one. And that's easy.

Use vehicles. Oh, wait, wait, hold it. Hold it. No, no, no, no. That's not down year over year. That's down month. Oh, month over month. Yeah, no, no.

Forget about that. I was wrong. That's not one of them. Okay. Let's see how good you guys really are. Smartphones. Smart phones. Yeah.

Ding, ding, ding. Very good. That's a good one. Why? because that's more of the quality adjustments, I think. Right. So the CPI tries to account for the quality of whatever it is you're buying. Like vehicles, they do the same thing.

And, you know, even if the price, the actual price is rising, the measure price and the consumer price index could fall because the quality of the product is improving like a smartphone. Jonathan, you were going to say something? I was going to guess something related to sporting goods. Pelotons are top of mind to me and suddenly. no longer being the focus. I think Pelotan's a little too narrow of a...

That may... Actually, I did read that. I think they are cutting their price, although they're going to raise their subscription fee. And the only reason I know this is because I'm an avid Peloton user. So, but no, that isn't in... I think that's too narrow an area. But no, not sporting goods. I didn't notice that.

There has to be some sort of commodity that was really high in the beginning of the year. So lumber, I know that skyrocketed in late 2020, early 2021. Does it come down at all? No, that's not it. Yeah. How about some type of personal goods that we were buying last year? I'm thinking, you know, something related to health care, probably. probably could be down on a year-over-year basis.

Just against sanitizer. Another kind of straightforward, no, that's that, no, not really. But think about, go back to Chris's smartphone. What else goes along with a smartphone? What else are you buying? The smartphone is the phone itself. Yeah, the service, the cellular. The wireless service, that's declining in price.

wireless service prices was declining a price that you're Mint Mobile coming online and what's that? Straight Talk wireless and Mint Mobile Yeah I don't know exactly discount carriers

Yeah but the measured price is down in the CPI year over year Technology What other technology PC? PCs they're down Yeah how about Consumer technology

like, you know, TVs? Yeah. Audio equipment. Okay, here's one that'll blow your mind. Oh, film and photographic, right? That's always down. BCRs? Actually, that is one.

Yeah, VCRs. They're falling in price. Yeah. Here's one that's really interesting. Checking in other bank services. Checking account in other banks, which makes sense, right? because, you know, obviously a lot of online competition for financial services.

But that, oh, one others, and I don't know what's going on here, might be just a technical artifact, of food at elementary schools, maybe because schools are closed. Yeah. Maybe they don't aren't opening. I'm not sure what that's all about. But that's it. That gives you a sense of what's going on. Usually there's a lot of things that have, you know,

prices are falling. You know, certainly is measured in the consumer price index, but not here. So I thought that was pretty illustrative. No cowbells, I'm afraid, but not bad, not bad. Does anyone else want to do, does anyone else have a statistic that's apropos to the discussion so far? I've got one for you. Okay, fire away, Jonathan. And this is really going to put Mark to the test.

Uh-oh. Geez. It's $204 billion. $204 billion. Is it something related to consumer purchases, consumer spending? I would say it's directly related to buying power. Oh, buying power. Import, export.

$1.4 billion. is it like I'm going to make this up just to, you know, throw it into the mix and maybe we'll get some clues. Is that, is that the amount that people have to spend on interest on their auto loans? It's a good guess. Huh? Yes. And I sort of tease the concept early. year when I mentioned something that was impacting the seasonal seasonality.

Oh, my goodness. This is really tough. Oh, refunds. Oh, tax refunds. Yes, $204.4 billion is the amount of refunds issued by the IRS as of April 1st this year. So the latest numbers have. Is that up or down? Or is that up track?

Down 4% against 2019, which was our last sort of normal cadence. Despite the average refunds. being up 14%. So basically what has happened is tax refund season is about four weeks behind normal. And as a result, in the used car market, we typically see a surge in sales in March. And it didn't happen in March. It's happening now in April. And that's why we're seeing a lot of the seasonal adjustments really cause strange movements

and non-seasonal moving one way and seasonal moving the other way. Interesting. And it impacts credit, too, because delinquencies have an extreme seasonal pattern to them. And it's based on the receipt of funds that is pretty sizable because tax refunds will probably be about $400 billion this year. So why are they delayed four weeks compared to like pre-pidemic? The IRS is just so far behind. So far behind. Oh, interesting.

Okay. Okay. So, so that has depressed. I mean, the conclusion is that maybe depressing, like retail sales from March were soft and we'll come back to that in a second. That could be because refunds were shy of where they're typically by the month of March. By my calculation, I make a projection of how many people will receive a refund. And based on that estimate, I estimated using that number, that less than half of folks who will get a refund had received one by then, when at the same point in 2019, 77% had received their refunds by that point. Interesting. Okay. Good.

Oh, that's a great one. Should we move on? Oh, Mike, you got one? Okay. Yeah. I got two numbers. Two. Positive 7.6% negative 1.3%.

A couple of hints. This is a release. We used to cover on Economic View. We don't have it on there anymore, and I used to write it. And the other one is, this is the highest, the 7.6% is the highest growth rate since 2017. Oh, wow. Okay. So two statistics, up 7, 6, down, what did you say, 1.3?

1.3. And they're both year over year. And this is a release. Auto-related. Auto-related. Is it auto-financial? related? Yep. Is it the affordability? Loans are up 7, 6 and leases are down one, three? Nope. No. Close. We're getting, so it's balances are up 7.6%, but it counts they're down 1.3%.

Okay. Well, I got to get some credit. But you're right. That's a good one. So you're saying auto loans and leases, outstanding, are up 7.6% year over a year through, I guess, March. Yes. That's based on credit file data we get from- this is a credit forecast release we used to do. And you're saying that the number, oh, okay, so the number of people with vehicle loans is down one-three.

Yes, and that's the largest contraction since 2011. Oh, 2011. So the average is up. Oh. Yeah. So that goes to the higher prices, I guess. Higher prices, but it's also the first sign of depreciation. demand that we're seeing that maybe some affordability issues. I mean, our affordability index

that Cox and Moody's does together is at the highest level or near the highest level. It takes almost 43 weeks of income to purchase a median family income to purchase a new vehicle. We have that index going back to 2012. And this is at the same time we had the loan officer survey where they're saying they're loosening lending standards. So the diffusion index on the loan the lending standards from the loan officer survey from the Fed. And that's the spickets are open. All different credit scores are increasing than balances. So they're not constricting, thinking that there's a risk out there.

I think it's more on the consumer side saying that they're not going in. And we don't really want to take out a loan for this vehicle if we think the prices are going to come down in the near future. So I think it's the first sign of demand starting to get hit. Can it be demand destruction? I guess that's what you're saying. the prices are so high, I can't afford this so I'm not, I can't buy. Or they can't, isn't there's no inventory too? They can't buy because there's just no inventory.

Yeah, supply is definitely a part of it too because a big chunk of that total account decline year over year is in leases. Leases are down 11% in my read of the Equifax data year over year as of March. And the lease story is a supply, well, it is fundamentally a supply. It's traditionally manufacturers subvene and make those lease payments pretty more attractive than financing. And they are simply not attractive at all. So lease penetration is at the lowest level in more than a decade as a result. Interesting.

What prices is high, risks are really high for just these loans going underwater. And so even the lease side, does the lender want to give a lease out if they think prices are going to come down? so quickly that they'll end up losing a lot of that they'll take a lot of residual risk when they start assigning payments for those leases. Yeah, for sure. Yeah. I mean, things are so topsy-turvy that they just don't know what to make of it, right? So the natural instinct is turn cautious.

Yep. Not do them. Yeah. Okay, that was a good one. And in terms of credit quality, in terms of delinquencies and repossession rates on vehicles, that's still pretty good, right? Yeah, it's two and a half, two and a half percent, I think, is the total auto delinquency rate. And that's, would be prior to the recession, that'd be the lowest of all time. So it's come up from the bottom, which is close to one and a half percent.

But it's up to two and a half percent. That still would have been an all-time low prior to the pandemic. I guess, you know, when you think about it, why would, I mean, you got low unemployment, you got lots of jobs. You got, you know. Student loans deferred. Student loans deferred. You got vehicle prices that are up. So, you know, you got equity, you know, in the car.

Might have locked in a low rate, right? Locked in a low rate. Yeah. So it all feels pretty good. And underwriting has been pretty good or okay. It's okay, I guess, is the way you would characterize it. I would characterize it. Would you agree?

It's the early on, right after the pandemic, it was only high risk scores that were getting loans. They've gone down into the low prime, subprime, much more than they were right after the pandemic. So banks and finance companies are getting a little risky. Banks more than finance companies. So it's which is surprising. Now they are. But what the prior to that, it was all very high credit scores.

How about the loan term? Are there still a lot of seven year and 10 year auto loans? Loan terms are growing. That's part of the loan. that's expanding, the average is right at 70 months right now. Okay. And you are seeing an uptick as prices and interest rates are going up now. You are starting to see that move higher again.

But it's still a very low percentage that are more than seven years. Yep. Good news on that for data nerds. The Federal Reserve, they usually only release the 60-month interest rate and the 48-month interest rate, which is laughable since no one gets a 48-month loan anymore. But they're going to start releasing the 72-month interest rates sometime this year. So it's good news for all of us. And also, since we were talking about CPI, for data nerds in the auto business,

get ready for a major change in the new vehicle component of the CPI. You guys are really, really, they're almost too nerdy for my taste. Now we're going to get a lecture on the change in the vehicle price in CPI. PI index. Go ahead, Jonathan. Feel free. Go ahead. Well, we did housing not too long ago, right? We went deep in the... I predict my clients next month about new vehicle prices, you know, substantially revised higher. Oh, really? They basically have been testing a new methodology that I believe is way closer to reading

what is happening in the marketplace. And the last comparison I did would suggest that new vehicle prices are up more in the range of 19% year-over-year rather. rather than I think the latest one was closer to 12%. Oh, goodness. Oh, goodness. So we are going to see this is next month, you said, for the month of April? I believe for the month of April and the numbers that get released in May will include the shift to the new methodology.

And it's not a level shift in price. It's going to actually affect the growth rate over the past year? Well, yeah, they're restating the historical series by shifting this methodology, yeah. But you think it's going to show an even growth rate? greater acceleration in new vehicle prices. So we may not have peaked on that situation then if that's the case. I might need to change my tune here. But it's important for this intellectual exercise of where used vehicle prices need to go

because the absolute relationship that governs where used vehicle prices has to be what new vehicle prices are because they are the tether or the anchor to which the used vehicle prices can't get too far away from. And we think that new has not been measured accurately, historically. And this will be a big move in the right direction. Okay. Well, let's keep our eyes on that one. That's interesting. Hey, Chris, is your statistic relevant to prices or should we move on and come back? Or what do you want to do? It is relevant. So let's get it out of way. Okay. Then fire away. It's a two-fer. 4.7% and 20%. 4.7 in 2020.

Is this in the CPI report? It's derived from the CPU. Oh. This is your own concoction? No, it's not my own concoction. It is released, officially released at the same time. But it's not part of the Consumer Price Index report. It is not.

It is not released by the BLS. Oh. is one month to month the other year every year? They are both year over year. They're both year over year. And are they related to prices? They are. Is it the PPI for producer pricing?

No. No. No. I told you I had to make it hard because of last week. No, I know. Yeah, you know. Last week was hard, but yeah, yeah. Last week was the food price index, I believe.

Yeah. Yeah, from the UN. Jonathan, Michael, any thoughts there? You're saying it's related to, it's derived from the consumer price index, right. CPI. Fuel related? Both.

Both over a year. Is it something we cover, you know, regularly or is this kind of more of an esoteric series? It's more of an estatoric series. It's from the Atlanta Fed. It's from the late. How about the Fed? Atlanta Fed. Is the wage tracker?

Nope. That's a cool one. This is another cool one. This is a wage tracker. Yeah. We tracks wages. Geez, Louise. Can you give us another hint without giving it away?

Atlanta Fed. Think of the magnitudes, right? Yeah. Can you give us one and not the other? Well, if I give you one, you'll guess the other. We'll get the other. Okay. All right.

I give. You guys give? You guys give? Uncle? All right. You all give. So 20% is the flexible price CPI. And 4.7% is the sticky price CPI calculated by the Atlanta Fed.

Right. Right. You know what? I never look at that. I look at all the Cleveland Fed median and trimmed mean. But I don't look at the Atlanta Fed. It sounds like I should. So explain this to people and what is it saying.

Yeah, so the idea here, kind of like the difference between the headline and the core, you're trying to abstract some type of volatility, if you will. The idea here is to look at each of the 300, 400 individual price components and identify those prices that tend to move very rapidly. Right. So gas prices are a good example. They move very rapidly within a, say, a three-month period. And there are other prices that tend to be sticky. They don't move around all that much.

They're more gradual. So the idea is to separate out all the different prices in the CPI report into these two categories and track those measures over time. The reason why you probably don't look at it most of the time is because they tend to be pretty stable, right? It doesn't really give you much more information. But at a time like this, it does give you some sense of what's going on. And in particular, the theory behind the sticky price index is that actually should incorporate more of inflation expectations. If there are prices that you can't really change all that frequently that tend to get stuck, then the price setter is going to incorporate more of the inflation expectations. You know, that's an interesting point.

Yeah. A very interesting point. Yeah. Yeah. So four points are more influenced by people's inflation in businesses inflation expectations. That's right. That's right. Because the flexible, you have, well, if I get it wrong this month, I can, the market will adjust relatively quickly.

but these other ones maybe. What did you say sticky was for what? 4.7%. Okay. Because house prices are key, I mean, not house prices, but the housing costs, consumer price index is a big part of that, I would assume. Yeah, that's right. Did you say that already? Okay.

Yeah. Yeah. And so the sticky price index was 4.5% last month. So it isn't, you know, it is indicating that consumers certainly are still worried about inflation and that's feeding into the expectation. and prices as well. Interesting. That was a good one. We have to start following.

Jonathan, did you know that? That's the rest of your Fed, the Atlanta Fed. No. It's not something I thought. You're not as data geek as I thought you were. I thought you were really, one of those really. Yeah. Mike's a day, really a huge data geek.

I think Mike processes, I think he's, I think, Jonathan, you told me before we started that you were the biggest user of our data buffet, data service. Yeah, one point. One point. I think Mike is now. I was going to start charging me. Yeah. Carl's going to get exactly. There you go. He's definitely making your life more difficult. I know that. Talk about budget cutting, you know. So anyway. Okay, well, I wanted to talk about the other big economic release of the week and that was retail sales. That came out. And, Chris, you want to give us a run down there? What did what happened with retail? sales for the month of March? Yeah. So I'd say on the surface, retail sales look healthy. They grew half a percent in March. Right. So that that's good. In the sense, consumers are still spending.

They're not they're not cutting back dramatically. However, if you dig into the data a little bit, what you find is that much of that increase is due to rising prices. Right. So gas station spending, for example, was up 8.9%. Right. That's a big contributor. to that measure. What else can I tell you? There was a revision to the retail sales for February. They increased from 0.3% to 0.8% growth. That actually is important or is relevant as we think about GDP in the first quarter.

So these retail sales numbers do feed into the GDP calculation. I think Ryan's gotten into this in the past about the control retail sales and whatnot. So from that standpoint, our GDP estimate has actually gone up. a bit for the first quarter. So that's that's the positive. But again, there's some cross currents here. People are increasing their spending, but not organically. It's because they're facing these higher prices.

Yeah. Well, Scott Hoyt, who's another one of our good economists who is all things retail. I think he was formerly chief economist, J.C. Penny. He sent data yesterday. He's showing retail sales, nominal retail. sales, that's what you're talking about, you know, the 0.5. And then so-called, well, not so-called, but real retail sales after inflation. And this is deflated with retail prices. So, you know, corresponding prices to what's being measured here, retail goods. And this, I didn't know this,

but the real retail sales has not increased at all in about a year. It, you know, it increased about a year ago when the economy reopened, when vaccines became available, and then we had the American Rescue Plan that helped support demand. But since about March, April last year, they're, they're flat. There's just no increase in real retail sales, which is a part of that may also be shifting now because people are out and about. They're traveling again. So spending on services is improving. So overall consumer spending continues to move forward. So part of this is just a shift in preferences is back because the pandemic is fading. But nonetheless, I found that pretty fascinating, you know, very interesting.

Yeah, I guess related to that non-store, I don't know if you caught this, but non-store retail sales actually fell. Yeah, I saw that. 4%. Big decline. Yeah, that does suggest people are changing behavior, right? Going to the supermarket. They're going back to stores again.

Yeah. Yeah. Interesting. So, yeah. Well, the other part of the story here is vehicle sales. Right. And they remain weak. So in the month of March, new vehicle sales were 13.3 million annualized.

And as I said earlier, you know, pre-pandemic, we were rock solid, 17 million, at least units per annum. So I guess I throw it back to the two vehicle mavens. When are we going to get back? Well, I got a bunch of questions. I guess when are we going to get back to something we would consider more consistent with long-worned? trends, which I guess would still be 17 million years per annum. And in that vein or in that context, how much so-called pent-up demand is there out there, right? I mean, people putting off purchases because they couldn't get a vehicle because they weren't being produced or some demand

destruction like Mike was talking about because prices are too high. How much is that pent up and going to come back in sales in the future? And Mike, I should preface this, but saying Mike and I've been having a long-running debate, although I think I'm like now in his camp or something. I think he moved in his direction. I'm not sure. But anyway, but let me throw that to Jonathan first and see what Jonathan has to say. Well, I think we've got years before we see the supply problems, which we were discussing

earlier, are the dominating theme in the new vehicle market. because this is not a scenario where you just bounce back to what the production once was, because you've got multiple new kind of factors leading to the fact that production is actually likely to be less over the longer term, or at least severely constrained for a period of time. One, we're undergoing a shift to electrification, and that means retooling plants. the plants tend to be more expensive. As a result, there's more combinations, more partnerships, and in essence, I think you can argue lower long-term global capacity for production.

And now, because of the pandemic and what we've seen with the dependencies on weak parts of the supply chain, plus issues with certain parts of the world, Russia, China, becoming less reliable in the future, there's more of a focus on resiliency than absolute lowest costs. And I believe that's reducing overall capacity, reducing overall efficiency, and the net net is global production probably peaked in 2019, and we're probably not going back to that number anytime soon. So the way that we look at it from new vehicle sales is, is that we had the potential in the short term to be selling 18 plus. We have built up pent up demand.

We think it's in the neighborhood of three to four million units combined across retail and fleet, which further adds to the assumption of supply sitting on dealers' lots or traditional measures of supply in total units or day supply is likely to be well below normal for years as you slowly get that production back up to capacity. But the reality is that the challenges in 2022 will likely persist through the end of the year. And this is more of you start to improve in 23 and end is 24. That's not what we thought coming into the year. Coming into the year, we thought this was the year you start to see gradual improvement.

And then by 23, you're getting to some new pace of activity that's likely 16 to 17 million. But we think that's been pushed out roughly a year. Wow, interesting. So as I mentioned earlier, the average sales since the pandemic hit is 14.65 million that's annualized. We were 133 in March. So where do you think we'll be at the end of the year, Jonathan, roughly speaking? Are we going to be at 1465 or are we going to be still? We're calling for 15.3 for the year. And I think the range is likely 14, 9 to 15.3. So in other words, I think there's, I think there's. risk to the downside to the 15-3 that we currently forecast. Okay. And you said three and a half to four million in pent up demand. That's the demand that was put off during the pandemic that will come back at some point here when there's enough supply. Yeah, there's a solid two million at least in fleet that would be

buying. And it's not just an issue of prioritization and making those vehicles available. it's literally production. The manufacturers have prioritized where the chips go and where their staffing issues or preventing them from being at 100% in a factory. They're only producing certain vehicles, the most profitable vehicles, the most profitable configuration. So we've got strange shortages,

even in things that you would think would be more expensive, like bans and things that are important for delivery. that there's a substantial amount of pent up demand that's going to take quite a while to get to a level we can produce. Interesting. Hey, Mike, you heard that. I think my guesstimate for pen up, and to be humble here, estimating pen up demand is not easy because estimating trend demand for the vehicle. I've tried this over a 30-year period, and it's really tough to do, particularly given the pandemic and the effects that has on preferences and driving and depreciation. rates and so forth and so on. But I'm coming up with like two and a half million units in

pent up demand. Do you have a sense of, do you have a view, Mike? Yeah, I know you do. Closer to two. Because I keep a close eye on those miles traveled as well as the employment at vehicle maintenance facilities to be able to try and keep track of who's bringing the cars in for longer, who's basically driving through the demand that they have. and who's not driving as much. So you have two different ways that you can decrease the amount of demand that's not being fulfilled. I don't keep as close on eye on the fleet side as Jonathan, but we do have those total numbers, which do include fleet from the BEA.

Yeah. But I'm just more concerned in the short term with the neon issue. I know we'd beat that drum before, but the neon issue. The semiconductors, 50% has been taken offline. Neon prices are up. the semiconductors producers invading Ukraine by the way. Yes.

Yeah, Russia invading Ukraine. So Ingass, I believe, it's located in Maripal. So they've been shut down. Yes. That's where they're located. So they're not producing. They were shut down immediately. And cryo in Odessa and they shut down. And they said

they don't think they're ever going to be able to open back up. So, because they don't have supply of the the raw material to make the pure neon for these lasers. So I'm concerned that they've these large producers, so Intel, TNSC, they have six months supply and backlog, and then this is going to be burned through faster than they can find new sources of supply. So I think there's a real risk to how new semiconductors are going to be produced in the second half of this year.

Yeah, just to connect the dots for everybody. So Russia invaded Ukraine, Russia, Ukraine produce a bulk of the neon for global export markets. That neon is used for lasers that at chips. The chips are obviously used in vehicles. So if I don't have neon, can't produce chips, I can't produce cars. And that's what you're saying. It hasn't had an impact yet because there's a backlog that producers are blowing through. But it feels like this is going to be an issue in the second half of the year going into 23.

very definitely i got that right okay johnson ducre is that right is that right is is there any new that's right okay and i don't know if if most of the production forecasts have baked in those challenges because if you look at the production forecast they start to improve at the end of this year and that injects risk okay all right that's a little depressing hey uh the we this we've been chatting here for i think a little over an hour So I don't want to keep, I want to respect your time. So we've got probably another five, ten minutes to go. So the question to the group is, do we want to talk about, I'll give you three choices.

One, electric vehicles, two kind of new innovations in the vehicle industry around the way we sell cars and the way we buy cars and what are in cars. what is a car and or three the stagflation stackflation because that's kind of people's top of mind you know and we kind of been dancing around that this whole podcast we began with high inflation we talked about weak retail sales that's kind of in the spirit of stagflation okay so what do you guys want to do you want to talk about mike wants to talk about the fillies i know but you know we'll have to table that Jonathan, you're our guest. I'm going to let you choose.

You pick which one you want to choose. I choose stagflation. Ooh, interesting. Interesting. I think it's super relevant to be talking about. And we can have another session to talk about. Absolutely. And new innovations and mobility.

Absolutely. Well, definitely. And then by then, my brother Carl will have approved the budget for the cowbell. And I can give you a cowbell. But anyway. It could be a while. That could be a while. That could have been a while.

Geez. We'll have autonomous vehicles by then. Flying autonomous. Flying autonomous. Yeah. Okay. So, okay. All right.

Chris, you level set. Define stackflation for the folks out there. What is, because I think people, they know, they've heard stackflation, they know they don't like it.

They don't want it. But what is it exactly? Say, well, there's some differences of the definition. I would say it's a combination of, inflation and low growth so higher unemployment combined with with high inflation so do you would you say if inflation stays you go back to your sticky price say around 5% for 5%

and unemployment is let's say 4 or 5% right now we're at 3 6 so let's say it's closer to 5 so 5 and 5 if we had 5 and 5 you know a period of 5% unemployment a period of 5% inflation would you consider that stackflation? Well, that's a good question. I probably wouldn't because I think of, I think of, well, it really depends on the trend, right? Yeah. If you're saying inflation is high, but trending downward and unemployment maybe is up, but stable or actually trending down, then yeah, maybe it's stagnation for that short period, but in the sense of it being a problem that I have to worry about. Let's say that that's the world we live in for, you know, at least a couple years. Would you consider that stagflation?

Jonathan, would you consider that stackflation or how would you define it differently? Well, I think of stagflation as the late 70s and that seemed more extreme and a longer period and relatively unique. But I really

wanted to hear what your opinion was. Well, I don't think there's very little likelihood we get to well, the 70s and 80s, that a period of, I don't, you know, a period double digit, consistent double digit inflation. And a period of not double digit unemployment, but very high unemployment, five to 10% unemployment. So we went back, Mike, did you look up?

What was June unemployment in June of 1981? I said 7.3. I made that up, but I'm just, that could use. Are you kidding me? It's second quarter. Yeah. Okay. Wait a second.

We're going to stop for a second. I want everyone to recognize. What do you think? All right, Ben. You have to slice in the Kyle Bell. And I'm sure the seasonal adjustment factor was off and it was actually 7-3. I'm just saying. I'm just saying.

But anyway, that I don't think there's any, I don't think we're going back. That's pretty hard to get to that kind of scenario. So in my view, if you get five and five, five percent inflation, five percent. unemployment, that's going to feel really ugly, bad. And it already feels bad, but that's going to feel really bad. And I consider that it be stackflation. But let me ask you this question. And maybe I should say also the reason I don't, there's a lot of reasons why I don't think we go back to the 70s and 80s.

I mean, you know, people don't recall, but the 70s and 80s took almost a decade. didn't have to get to the 70s and 80s. With regard to inflation, that became a problem beginning in the 60s. You know, the very expansive fiscal policy, you know, Vietnam War, the great society. It was also related to labor market dynamics where we had a lot of cost of living adjustments built in. So if wages rose, that got into prices, if prices rose that got into wages, which got into prices and you got into this wage price kind of spiral. You know, the Federal Reserve didn't really understand the role of inflation expectations. We didn't, that wasn't even a thought back in that period that, you know, that was something

that we learned how important that was coming out of that period. So I think there's a lot more differences between now and the 70s and 80s and there are similarities. But that doesn't mean we can't go into, you know, something that is stagflation-esque, like a five and a five. But I would say, you know, and I'll give you my view on the likelihood of that. and then I'd be curious, you know, your views and whether you'd push back is that the probability of that happening of us going into any kind of stagflation environment is pretty low. And the reason is, the fundamental reason is it's a policy choice.

There's a choice. You know, it's the Federal Reserve has to allow that to happen. And based on the very painful experience of the 70s and 80s, when they learned that the only weight out of stagflation was a very, very prolonged and severe. recession. In fact, two recessions back to back with double digital unemployment to get us out of that mess. They would much, they would err on the side of pushing us, they would push us into recession earlier to ensure that we didn't get into that stagflation environment. So, you know, if it felt like we're going down that dark path, they'd say, okay, I'm going to raise rates now and we're going in and we're going to ring out these inflationary pressures and get inflation

expectations back down to something more consistent, that it's a choice. And they're not going to take, they're not going to make that mistake and make that choice. Always, you can always make a misstep and you could misread and they could, you know, you could end there, but I say the probabilities of that are pretty low. I said put them at one in 10, you know, something like that. What do you think, Chris? Do you have a different perspective, a different review? I actually think it's even lower than that. Even lower than that. The Fed is, well, the wild card here is some politicization of the Fed, right? If we, if the, uh, the next president then we're appoint someone to, you know, favor certain policies that could backfire.

But I think fundamentally it's kind of ingrained in the Fed at this point, given the 70 and 80s experience that, you know, inflation has to be, has to take priority, right, of the dual mandate at the end of the day. And so I do think they will slam on the brakes hard as necessary to get inflation under control at the cost of a recession. Yeah, good point. Hey, John, is there, Mike, anything you want to add to that conversation around stagflation? The oil independence of the United States means that we're not going to have an aggregate supply shock the way that we did in the late 70s.

Great point. We're less dependent on oil and gas than we were at that time as an economy. So those things I think also help with the case that it's not very likely to happen without the I didn't even think of Chris's point about politicizing the Fed. I didn't even cross my mind. I'm scared of that. Yeah. But yeah.

So I don't think it's very likely to happen. Yeah. Jonathan, any perspectives, any views? Yeah. I think I agree with all of the arguments that you guys are making that make it a less likely outcome. What I'm observing, though, is this interesting thing that Wall Street seems to be presenting as we have two likely binary. choices ahead of a stagflation or recession and actually even your podcast last week I think that was pretty depressing wasn't it yeah was it 75 he went to the dark side on us yeah not the very dark side

it's pretty dark I thought you said but it sounds like it sounds like making the choice and looking historically I was looking back at what vehicle sales were in the late 70s and definitely that environment of high interest rates and stagulation scenario was not super supportive of strong vehicle demand. But yet if we had a recession that broke that and that recession played out more like the 2001 recession, which is sort of where my head went in the discussion from you guys last week, that sounded like a much better environment for the vehicle market. So I guess I would root for the recession over stagnation.

Yeah, I'm with you on that one. Okay, very good. Hey, Jonathan, do you have a Twitter handle? Yes, at Smoke on Cars. That's a great one. That is a great one. And Mike, do you have a Twitter handle? No, I don't.

Okay, smart move, by the way. And I know Chris does. What's your Twitter hand? But you're a LinkedIn guy. I never check that kind of guy. Yeah, yeah. And now I'm at Mark Sandy. Just saying, or at, you know how to spell Marksandy, right?

Marks Andy, at Marks Andy. Okay. And you're not a LinkedIn guy. And I am not a LinkedIn guy. I've not evolved into, that's a higher level of being. I've not gotten me yet. Anyway, Jonathan, it was fantastic having you on. I appreciate it.

And we're definitely having you back because we have to talk about EVs and all these cool things going on in the auto sales market. Mike and I are working on EV affordability analysis. So maybe that that would be used. Okay, very good. Very, very good. And Mike, good to have you. As always. You weren't as combative this time.

I don't know. Well, maybe because I agreed with you. You agree to my forecast as well. That's how it works. Okay. Fair enough. Very good. And with that, we're going to call on a podcast.

Take care, everyone.