Moody's Talks - Inside Economics - Lousy Inflation and Life Lessons

Episode Date: June 11, 2022

Mark, Ryan, and Cris work overtime on a Saturday to break down the Consumer Price Index Report.Full episode transcriptFollow 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. I'm joined by my two co-hosts, Ryan Sweet. Ryan is the director of real-time economics and Chris DeRides. Chris is the deputy chief economist. Well, this is Saturday morning, a little unusual for us. Do you have a good start to the day? Yeah, so far so good. So far so good. Any data that starts with coffee is a good day. Wawa coffee? No, you've got your own espresso machine. I've got my own special blend. Yeah, Ecuador, little Colombian

Higaragua, you know, you've got a mix of up. I really like the Indian. I like the Indian coffee, actually. Oh, really? I didn't think they were a major grower, but apparently they are.

Can you drink Wawa coffee, or is it just so far below your standard? I love what I love Wawa coffee. I'm not. a coffee snob. All right. Despite the image that Mark tries to project, yeah.

Yeah, you're an collective coffee drinker. No. I mentioned, I mentioned Egypt. I mentioned Egypt. I can't imagine they have got coffee beans in Egypt. No? Do you know? I don't know, but coffee comes from that part of the world.

Around there. I don't know. I doubt, though. I think it's a little further south. You know, I've often thought that everyone should take, like, at least a half hour out of their day. You should exercise, you know, half hour, so something like that every day. You should take a half hour and just think about how to improve the way you live.

You know, like coffee. Like I don't think about it at all. I just walk into Wawa and I got my, get my hazelnut coffee, 16 ounce, three little half and halves, but it's got to be better than that, right? That's not even coffee. Come on. There you go. I knew it.

So what am I missing? I'm missing so much. Hazel, but plus the creamer. Yes. That's right. You know, I've got like you guys think about your coffee. You think people think about their wine. They think about, you know, what shoes to buy.

I don't think about any of that. I'm missing so much. I'm on autopilot. Yeah. You're thinking about the numbers. but I'm you know I got to do this I got to do this anyway um well here is Saturday morning the reason is that I was traveling yesterday on Friday and got delayed and so unfortunately we couldn't record that till this morning but that's okay we've got perspective now on that consumer

price report which was pretty miserable uh we knew it was going to be miserable but it was more miserable than we thought. So maybe let's just dive right into it. Hey, Ryan, just give us a sense of that report. I think you summarized it right there. It was miserable. The CPI, the consumer price index, was up 1% month over a month. That was stronger than we anticipated or the consensus. So the primary culprit was higher energy prices, particularly gasoline. And a lot of that can be traced back to Russia's invasion of Ukraine that caused global oil prices to spike and retail gasoline prices. We've talked about it on past podcast.

The national average, according to AAA, is at $5 per gallon. So unfortunately, we're going to go higher. So I think when we talk about the outlook, we can talk about energy prices because wholesale gasoline prices, which lead retail gasoline prices, which are going to lead the CPI for gasoline, point towards a national average of $5.50 over the next couple of weeks. So a little bit more pain at the pump to come. $5.50, you said?

I didn't know. That's based on wholesale. Wow. Okay. Wow. All right. The trips to Wawa are getting more and more expensive. Yeah.

Right. Going to have to walk. I know. But it's not just gas. It's food prices. They were more than anticipated in May. So overall, the breath of energy related, right? Diesel prices.

And a very bad crop season in the U.S. Oh, really? For what? Well, depends. If we're playing the stats game, I've got to hold on them. Oh, really. Somehow I missed that. So the grain prices are up a lot that are related to, not related to Russia, Ukraine,

but I mean, that's got to be partly related to that, but also to... We've got weather issues, right? We have ongoing drought, and then around the world, there's weather issues all over. There's been some trade agreements between a couple of countries where they're sending wheat to them in exchange for fertilizer, and that's exacerbating the supply issues that are global now.

Okay. So the number was, there's a little technical issue here. So, you know, we're all focused on the year of, year growth in the consumer price index. And there's seasonally adjusted data and seasonally unadjusted data. And if you do the year-over-year calculation, it's different. Do you want to explain that, Ryan? Just this technical, technical matter?

It's technical in the sense that important in that whether inflation was higher, peaked in March or peaked now in May, or may have not peaked at all. But, you know, can you just describe that issue for? Yeah, no problem. So the BLS reports it as non-seasonally adjusted. And that's in the report. That's what gets all the headlines in the press and on the news. And that was 8.6% year over year. So if you don't adjust for these seasonal patterns, which, you know, it's pretty easy to identify normal price changes from month to month. If you adjust for it, which is seasonally adjusted, which we look at, that was 8.5%. But at least historically, when you look at the difference between, you know, year-over-year growth in non-seasoned adjusted versus season-endjustice. It's really small. I mean, this is also a small to 10th. But as your point, it determines whether or not inflation is peaked already or we had a new 40-year high in May. Yeah. And your view is that we should be looking at the seasonally adjusted series in year-over-year, that would be 8.5, which would correct below the March peak of

8.6. A little bit of below. Yeah, yeah. Yeah, we're moving in the right-dra. I'm splitting some But that's a historical record. And, you know, if you read the New York Times or the press accounts, they're saying 8.6 new 40 year high, but you would say no. It's no, that was that was March. Correct. Of course, now given $5.50 a gallon, it could be, June could be a new high. So we're not quite there yet. Yeah.

Energy and food prices. I mean, there's no sign that food prices are going to start to moderate anytime soon. But, you know, the May gain was very, very broad. based, very few components of the CPI fell month over month or even year over year. But energy really left its mark. I mean, you and I were chatting about even the core CPI, which strips out food and energy prices, which are volatile. You know, economists, we look at core CPI because that's a good predictor of, you know,

what underlying inflation is and where it's likely headed. That was up 0.6% month for a month, identical to what we got in April. and year-over-year it was seasonally adjusted with 6%. Got it. You do this really great decomposition of the year-over-year growth into what's related to energy, what's related to supply chains and other factors. Can you walk us through that decomposition?

No problem. So this is decomposing year-over-year growth in the headline CPI. And what we do for the supply chain components, we went through the bowels of the report. Well, first do energy. Energy. Do energy first and then go to a supply chain. So energy's contribution to year-over-year growth in the CPI was 2.8 percentage points in May.

That's up from... Go ahead. Go ahead. Finish. I'm sorry. Double-jack. It was up from 2.3 percentage points in April. Okay.

So 8.5% year-of-year increase of that 2.8 percentage points was directly related to the higher energy prices oil, basically. Correct. Oil, gasoline, heating oil, things are done. Yeah, but they're all go back to. All grouped together, yep. Yeah, they'll go back to. So if I take 8.5 and I subtract 2.8, what is that? That's 3. No, no, no, no, 5.5.7. Correct. 5.7%. Okay. But that still doesn't do complete justice to the contribution to inflation of energy because, as we pointed out, it's led to higher diesel prices, which causes food prices to be higher. And it's also bleeding into things like airfares and other things. Yeah, because the relationship between, there's a very strong relationship between growth in jet fuel prices and growth in the CPI for airfares.

So it's more expensive to fill up the plane. It's going to charge them more. Yeah, right. Yeah, it makes sense. So how much of the 8.5% is, let's call it, the indirect effects of energy? I can calculate that. I haven't done it yet. Okay. But 2.8% is direct. It feels like by my calculation, it feels like almost another point, not quite, but almost another point is related to the indirect effects of the higher. And when I say indirect, not too far indirect. I mean, I got to shit, I got to move stuff from the farm to the store shelf, that costs diesel. That goes to the cost of diesel. And so I do the calculations, it's about a point. Not quite a point. But let's go, let's go with a point. So we went from eight and a half down to five, seven, take another point off. That's four seven. Okay. And then

let's go to supply chains. That's next. So what do you think the impact of that is on the CPI? So when you add it up, I mean, the bulk of the supply chain, constrained component, CPI, is new and used vehicles. But also includes bedding, furniture, children's apparel, things that are being really affected by the supply genes. That's one. Electronics, right? One and a half percentage points in May.

One and a half. Yeah, that's down. It was closer to two just a couple months ago. And you've seen that supply chain stresses, you know, eased a little bit. this is encouraging, but it was one and a half percentage points in May. Okay. And one thing that confused me a little bit is didn't use car prices rise in the month? And it had fallen for a couple months when we thought used car prices might have

rolled over and we construct our own measure of use car prices based on actual transactions. And that looks like that continued to weaken in the month of May. It's up a lot year or year, but on a sequential basis, it looked like a decline. And any sense of that, you know, why that happened? Is that just goes to seasonal adjustment in hedonics or what is that? It's hard to pinpoint, but they change the BLS, the Bureau of Labor Statistics, alter their methodology for how they calculate vehicle prices in the CPI. So now it's transaction base.

So I don't know if there's, you know, just growing pains as transitioning to the new data, but that could be one thing to keep an eye on. I think vehicle prices are volatile for a month or month, and this new methodology may be increasing volatility. Right. Okay. So if I take, you said 1.5 percentage points. So if I take, if I take that out, that brings that down to, what, 3.2%.

3.2%. Okay. Any other aspects of that decomposition? We have a reopening component. these are things that are sensitive to the reopening. So food away from home, for example, lodging away from home, airfares. And I added four tens of a percentage point to you over your growth in there. So that takes us down to 2.8%.

So how long do you consider something a reopening? I mean, we've been reopening a while now. Yeah, there's a great question. I mean, if you look at air travel, for example, I mean, demand was still depressed, but it's picked up a lot recently. I think that's just more normalizing of consumers' behavior. Okay, so until we get the TSA travel checkpoints, for example, back up and consistently. Yeah, I don't think it has to be all the way back up before we drop it because business travel is not going to recover soon.

But leisure travel is. Okay, okay. So maybe through the summer, you would continue to say that we're still reopening. Well, also, this is year over year. So you're capturing stuff that's happened over the past year, the reopening. Right. We can drop it once Mark's flying five days a week again. Yeah.

Well, it feels like that's happening sooner rather than later. It doesn't it feel that way? I mean, my number of invitation I'm getting to speak at different functions has risen sharply here in the last few weeks, a couple months. You too, Chris? Oh, yeah. I was just at the SPFE conference yesterday. That's a small business financial exchange.

So I'll give a shout out. And we have a super fan there. I want to shout out to Mike Farley. So, yeah. Oh, you're sucking up to the Mike Farley. You know, he really listens to us religiously and had a lot of commentary. It is funny. And now you're right.

I was at an event in New York, the beginning of this week, a rating agency event. Oh, actually was Moody's One. You know, it was rating agency, Moody's Analytics. Everyone was kind of there for, I think it was the first, they told me it was the first conference that involved everybody. And I heard a number of people come up and say they really enjoy the podcast. That's really great to hear. Yeah.

Okay. So where were we? Oh, so we're down to 28, 28, 2.8, which is in spitting distance of the feds. Federal Reserve's target, and I would say for CPI, consumer price index, that the top end of that target would be 2.5%. Correct. Right? Would you agree with that? I agree. Okay. So from that vantage point, from that decomposition, it feels like what you're intimating is that if I, this hyperinflation experience you now is largely, if not entirely due to the ongoing effects of the pandemic, supply chain issues, reopening, and most importantly, most immediately is the Russian

invasion of Ukraine and its impact on commodity markets, particularly the energy market. Is that fair to say? Don't say hyperinflation. If hyperinflation compared to where we were. Yeah, yeah. But it's not hyperinflation in the Imar Republic's sense of the word. I'm already getting inclined questions. Oh, is that right?

prospect of hyperinflation in the U.S. And now I always tell them, it's not going to happen in the U.S. Now they're going to be like, Sandy said, how hyperinflation is. Oh, I see. That's it. Yeah. It's a baseline. Why isn't it in the baseline?

Okay. Yeah, fair enough. Okay, I'll choose my words carefully. It's very uncomfortably high inflation. That's a painfully high. Painfully high is good. Painfully high inflation, particularly for the average American, right? Because you do that great calculation of, you know, what inflation means for the spending, right?

You want to give the listener a sense of that? Yeah, so having inflation up 8.5% seasonally adjusted year of year is costing the average household $460 in 20 cents per month to buy the same basket of goods this year as they did last year. Yeah, it takes to buy the same goods and services as the typical American household spent last year. they'd have to spend $460 more to botch that. So let me say it again. For the typical American household, they have to spend $460 a month more to buy the same goods and services that they were buying this time last year. Correct.

Right. Wow. That's a lot of money. And the typical American household makes what in a typical year? Like 70K, something like that, a little less than 70K? Chris might know off the top of it. That's like 65, right? Yeah, 60.

Between 60. than that. Yeah. Yeah, yeah, yeah. Well, it depends

which measure, right. Well, it sounds like we should have a bet on this one, which I can

win, finally, if we bet on this one. It's probably think it's like 68 and a half K

or something. But anyway, Ryan will tell us. Nominal dollars. Nominal dollars. Nominal dollars. Okay. So,

um, given this decomposition, it sounds like, it feels like what we're saying is that the number one

and two issues behind this high inflation is the pandemic and the Russian invasion. Is that fair to say? Yes. I think that's very fair. Would you agree with that, Chris? Yeah, I would stress, though, if we're talking energy, prices were up before the invasion, right? So they were anticipating the invasion. They were already on the right, right? The pandemic, reopening. I don't think so. What? I don't think so. All prices were headed south. They weren't headed north. Yeah. From last year? Yeah, yeah. Go back to the first. fall of last year. Yeah.

Go back before, like, this is a factual point. Yeah, yeah. Yeah. But they were certainly up from a year ago. Oh, yeah. No, no doubt. But they were,

they were starting to come back in. You know, it felt like they were headed. They were, what, I don't know, I can't remember, $75, 80 bucks a barrel.

And they didn't feel like they were going higher. They felt like they were going lower, you know, back the end of last year. And probably would have gone lower because of the Chinese shutdown, right? Because. Some weakness.

Yeah, weakness in demand. So West Texas Intermediate peaked in October, 2021, at $85 a barrel. Okay. Started falling. Yeah. And then. Exactly. Bottomed out, probably mid-December at $70.

And then resumed rising. That's right. They started rising because people started anticipating, you know, when did Russia invade? It was February or something. February. If you go back and look at the press accounts, it was already on the radar screen in December, people were starting to price it in. So I would proffer that prices would be lower, you know, 70, 75 bucks, which it wasn't too far from our equilibrium price. What we think

the price should be if you don't have these wacko things going on in the world, you know, consistent with the marginal cost of producing the marginal barrel of oil, which is in the fracking fields of the U.S. and getting that oil into the global marketplace. So, okay. Yeah, we're talking year over year, and we've been talking year over year, inflation. You have to, you know, the price of oil was already much higher than it was a year ago by that point, right? I'm just saying we had been headed south as opposed to headed north on oil, but,

but nonetheless, yeah. Yeah, yeah. Yeah. I'm not denying the Russian invasion. So, huge impact. So is the, is it the fair to then say that the inflation we're observing now is largely due to supply side disruptions to the economy as opposed to demand side effects? What would you say?

I mean, it feels like it, right? I mean, these are supply side issues, not demand side issues, largely. Yeah, I would agree that the majority, but there is some demand inflation, yeah. Yeah, I would say the demand pool inflation is most obvious in housing, in the rents, the homeowners equivalent rent, which is another aspect of this high inflation, which is, you know, And that's why, in my view, we're, you know, not at two and a half, two and a half. We're at, what do we calculate? Three, two. You know, that is the delta largely related to the acceleration and rent growth, which is, I guess, supply and demand, right?

Yeah. Yeah. Right. Yeah, we didn't build enough homes or apartments for the past decade. Right. Right. I mean, we have an affordable housing shortage. Vacancy rates across the housing stock are pretty close to record lows, you know, considering both for rent and for for sale.

And that goes to very weak building, home building since the financial crisis and the housing bust. But it also goes to some significant, I'd say recently increase in demand, right? Yeah. Yeah, you saw it in the CPI. Although you could argue that's reopening effects too, somehow. somehow, in part, right? Because had all these millennials that doubled up or didn't start households during the teeth of the pandemic and then have most recently. So that surge in demand, particularly for rental properties for rent, it, you know, then conflates with the lack of supply.

And then that adds to the rent growth that we're observing right. The very double, strong double digit rent growth for observing right now. Yeah, millennials are getting, I mean, a large number of 40 million of them are moving into their prime age first-time home buyer. But affordability is so low that they're getting pushed back into rental markets, and that's driving out tenant rents. Yeah. Okay. You know, there's a number of other, so we say, we say mostly supply side problems related to the pandemic and Russian invasion. Some demand side issues most obviously with regard to rents and housing costs.

You mentioned a little bit of that in airfares. That's, you know, we are seeing some of that. The flip of that is, though, we are seeing less demand for goods. Inventories have built there, and we're starting to see some price weakness for products that, goods products that are in, it's now an oversupply, I think. Like, weren't there declines in the price of household furnishings? No, or no, it was household, not furnishings, household goods, like cleaning supplies and that kind of thing. Right. Okay. So we are starting to see this because of the switch in demand from buying stuff to buying, well, services, travel. It's the most obvious restaurants eating out. That's having some impact on relative prices.

Yeah, there was also a year-over-year declines. Not a lot of them, but there was some in cell phones. That always happens though, doesn't it? I mean, that's technology. I can never figure that one out. But electronics, isn't it? I mean. TVs. TVs. Hidonics, right? Yeah, I think so. Hidonics, meaning quality adjustments, you know, the quality, even the price stays the same or goes up. But if you have these improvements in the quality, you know, the, of the TV or the consumer, any consumer electronics, the price will decline. Yeah.

Okay. So, but there's other explanations for the higher inflation that are out there. I'm just curious. I'm going to throw the few of them out there and just get your sense of it. one is around energy markets, energy prices. You know, we keep going back to the Russian invasion of Ukraine because that feels like that's pretty obvious. But do you hear this argument that it's regulation of the energy sector that's at work here, that that's the problem that in the U.S. Energy regulation?

No, they're saying that's the, that's called global oil prices. Because of the movement towards green energy, we've decimated the, yeah. fossil fuel industry, right? That's the, that's the argument. The theory, yeah. And it goes to why global, U.S. producers aren't ramping up production more quickly, that they can't, that, you know, they can't get a permit, environmental regulation, whatever it is. There are some, sometimes people argue this and don't give you a real sense of what regulation they're talking about. It's just regulation.

Any credence to that argument? I don't think there's any credence in terms of an actual, I can't, to your point, I don't think you can point to a specific action that's been taken over the last couple of years here. That says, aha, you know, this driller wanted to drill here, but was prevented from doing so, and therefore we have this issue. I think the argument rests on the sentiment that perhaps the administration, this is the theory, the administration is putting forward this idea that, you know, It's just not going to be profitable. There are going to be regulations coming in the future that will make it prohibitive to continue as a fossil fuel extractor. And therefore, no one's going to take the risk to invest a lot up front here if the market's going to go away later on. That's the idea.

So I don't, again, I think it's more about the environment, the sentiment rather than an actual action that's been taken here. Yeah. I mean, the one thing that I think there is an argument to be made that this move towards renewables away from fossil fuel is depressing investment in the exploration and development of fossil fuel. That is playing a role. But I don't think it's playing any role in the spike in oil and energy prices we're observing now. Nothing has changed on the regulatory front that would say, hey, we should go from where. were we before all this, 80 bucks a barrel, 75, 80 to 120. That's not anything related to, you know, to these, this move away from fossil fuel. That's, that's, that's a trend that's been ongoing. The thing I point out is that go take a look at oil, natural gas, gasoline prices, diesel prices everywhere else in the world. They're, they're up as much, if not more in other parts of the world. So how can U.S. energy regulation be the cause of that? It doesn't make any sense. You can just do a simple event analysis. When you get the big changes in global oil prices,

there's some news about Russia's invasion of Ukraine that day. Or the European Union banning Russian oil imports, that moves oil markets. The other thing I'd say is that, you know, investment is picking up. If you look at rig counts, they steadily rise. And it feels like there's some physical limitations on how quickly you can actually put more rigs into the ground. I mean, because every week I look at the Baker Hughes numbers and they rise about the same much as they, same amount as they did the previous week. It's only so. And if you go back in history and you take a look, it's only so fast they can kind of ramp it up. There's literally physical limitations on doing it. And I would say there may be more now because of the shakeout that occurred in the oil.

natural gas industries back, you know, a few years ago, you know, in the late, like it was 2015, 16, 17. And if you recall, there was a big shakeout. It's lost some, some energy companies. And I'm sure they're not immune to the labor supply issues and the supply chain problems. Yeah. The same, same kind of. And also getting equipment because of the global supply chain issues, as you point out. Yeah. Yeah. Same kind of deal. I read an interesting piece this morning that the real issue is not the drilling. it's the refining that we have really restricted refining capacity. So they're not going to drill necessarily if the refiner is not able to process it.

And refining, building a new refinery is really capital intensive with a very long time horizon. So we might be stuck for a while, even if we can extract more barrels of oil, if we don't have the refinery. The capacity to refine. Yeah. Is that what you think about 5 o'clock in the morning to do all you're reading? I read through the night. Do you really get up at 5 o'clock every morning?

Did he say that? Did he say it? He said an email at like 525. Oh. Oh, he did? Well, listen here, Mr. 3 a.m. I'm a night person, not a morning person. Well, I was up at 525.

No, only kidding. 625. Yeah, it's going to say. I got my Wawa coffee at 625. Fortunately, they're open 24-7. So that's another good thing about Wawa. So if this is the case, inflation is going to persist, right? If these bottlenecks are truly difficult to overcome the demand remain, unless we get demand down.

Well, in demand, it is coming down. It's going to ramp up. It's coming down, but it's going to be coming down fast enough. Yeah, no, not fast enough. Yeah, I know. I mean, it's going to take a while to get, all I'm counting on, all I would like to see is for prices to stop rising. Because once they stop rising, then inflation is going to moderate very, very quickly. I mean, if we get prices coming in, which I don't expect, you know, until we move into next year,

particularly for oil prices, you know, refined product or a crack spreads might. So a difference between refined product and base in the underlying oil may gap out because of the lack of capacity. But that's going to improve, too. The capacity is a little thing. But at this point, I'm just rooting for stable, you know, oil. And by the way, natural gas prices are up a lot, too. But that goes to Russia invasion of Ukraine because Europe is oil supplies are getting disrupted. They get all their oil, excuse me, their natural gas from Russia.

They can't get the gas, therefore the prices up. And now liquefied natural gas from the U.S. is now being shipped over to Europe because of the price arbitrage. They can get so much, the LNG guys, the natural gas companies can get so much more for their gas in Europe than they can here that it makes sense to put it to liquefy it, put it on a ship, sending over to Europe and then, you know, use it there. And so the price of natural gas is like $10 per million BT2 more than double what it was, you know, back a year ago. So that the Russian invasion is affecting, you know, energy prices in lots of different ways. Okay, one other explanation.

I just want to throw out there and see what your reaction is. Corporate greed. That's the other thing. I knew you're going to bring this up. Yeah. What do you think? So the argument is businesses, particularly large corporations with market power, are jacking up prices, gouging to take advantage of the situation.

And that's significantly contributing to the high inflation we're observing now. What do you think of that, Ryan? I don't know no that's not happening it widespread it's not this inflation is not corporate greed it's economics it's why what do you point to to say supply demand well okay but you know there's strong demand wrong I say scowgian there's no concentration in any industry right yeah we don't have a monopoly and well me packing energy the administration you think they're monopolies well, oligopolys.

Or yeah, maybe not straight up monopolies, but no, but there's like, I don't know how,

like three meat packers that account for the bulk of the process meat in the country. I'm picking on them because that's the most, that's the poster child for this idea.

Energy companies to the second, you know, or next on the list. No? What would you, what would you point to to say, hey,

that doesn't make any sense to me. It's not, I mean, first corporate profit margins, have been pretty stable. They actually started to come down a little bit. Okay. That was exactly where I was going.

Yeah. I explained that. So, you know, what is it? Why is that important in regard to this question? If it was corporate greed, you'd see profit margins really start to increase noticeably because they're passing on more and more of the higher input costs onto you and I. But they've been pretty much, they bounce around from quarter to order. They're coming in.

They're coming in when you break it down by declining. firm size, small businesses, that's really coming in. Large businesses have compressed as well. Yeah. The profit margin, meaning the price, the company, the business charges, the industry charges, and the cost of producing whatever it is that are producing labor costs, material costs, and everything else. That's the profit margin.

So they were gouging if they're taking advantage. That margin should be rising, right? They should be raising prices a lot faster than the price, the cost of whatever it is that takes to produce it. And that is not happening. The direct opposite is happening. But having said that, I do think it is important that lawmakers, the administration Congress, you know, put a bright, shiny light on business pricing practices because

that's in their remit. You know, they got to keep everyone honest, making sure that no one does take advantage of the situation. So when, you know, the president gives a talk about meatpacking, it will come in different ways. I don't think it's given a specific speech about it, but, you know, in press conferences and other things, you mentioned that I don't know that's, I have no problem with that. It keeps everyone honest, you know, make sure. Yeah, I know, I agree. And it's just, I'm not saying that gouging doesn't happen. I mean, gouging, you know, you can see clear evidence of gouging

after natural disasters at gasoline stations and around the affected area. You know, gasoline will go through the roof and there's some gouging there. But in aggregate, I don't think gouging is the primary reason you have inflation. Then, yeah, okay. Chris, you agree, disagree? Any color there you want to add? Yeah, I agree. I agree. If you think about gas or oil, it's an international market set globally. So, yeah, you have some large companies, but still, they're not large enough to set the price of a barrel of oil globally. Yeah, I agree. Okay, here's another one. And Chris, I'll direct this to you first. Money supply. Money supply is taken off here. I saw Ryan roll his eyes.

I'll go to Chris first because he will be more objective about his answer. Ryan's will be more fun. Yeah. So, you know, historically way back when folks would, economists would look, central bankers would look at the growth in the money supply as a gauge of where inflation is headed. So, you know, the intuition is if the central bank, the Fed is providing a lot of liquidity to the system, providing a lot of cash, money supply to the system, like they did during the pandemic. You know, they stepped on the accelerator and pumped out a lot of liquidity. Then that ultimately leads to inflation in or conversely. You know, if they pull liquidity, then that causes inflation to slow. That's the intuition.

So, Chris, what do you think of that argument here? Well, we know that inflation is always a monetary phenomenon, right? Okay. No, well, I think certainly money, so that's the monetary risk view, right? Yeah. They distill it just down to this one argument. Nothing else matters. Demand supply.

Forget it. It's just the money supply. I think that's reductionist. I think money supply certainly has an influence. Don't get me wrong, but I don't think it's the primary drive. if you look historically and try to correlate shifts in money supply and then subsequent inflation, and it's a pretty weak. You can find periods where it's relatively strong and then other periods where money supply went up and inflation did nothing. Right. So I don't see it as the primary factor

infecting inflation. It's kind of a sideshow it feels like to me. It's not a fundamental explanation for what's going on. That's right. It's kind of a result of not a cause of what's going on. Yeah. Well, in the extreme, if you take it to the extreme, sure. Yeah, to the extreme. You can always find examples for it. That's the case. The Ymar Republic, as I mentioned earlier. Because in that case, the German government was fighting a war, didn't want to pay for it. So they pumped out a lot of, I guess, marks. I think they were marks at the time, to pay for the war. And that just created the hyperinflation of that period. So that would be a case where money supplied, directly caused the inflation that was over.

But it doesn't feel... We're not at that level, though, right? We're far from that situation. So does it have an impact? Certainly. Yep. But I don't see it as a primary driver of the type of the inflation that we're we are experiencing today.

We had the same debate after the financial crisis because the money supply spiked after financial crisis. And that didn't lead to high inflation. And the other thing that gets lost in the The discussion is the velocity of money. So how quickly money is changing hands. And that's very, very depressed. I think it's the lowest since the 1980.

And it doesn't look like a mean revert. So unless the velocity of money picks up, the money supply can keep growing without generating inflation. Yeah. I mean, the way I kind of intuitively think about it is that, you know, money supply ultimately has to affect credit growth. So the banking system, financial system has to take that quote unquote money provided by the Fed and turn that into loans and provide that to businesses and households. That generates economic activity, which at some point could push you back past full employment, which creates wage and price pressures and then ultimately inflation. And that's why if you go back out of the financial crisis, that chain was completely short-circuited. The Fed stepped on the accelerator, created money, but didn't create any credit.

In fact, because we were all de-leveraging. Households were being forced to reduce debt. The banking system was forced to capitalize at a higher level. So you didn't get the credit, therefore you didn't get the growth. And it took us a long time to get back to full employment. So money, ultimately, inflation is a monetary phenomenon. But there's a lot of chains along the way. It's not money.

And then immaculate conception, inflation, it's money and then all the chain of events I just described. So, you know, I don't think you can point the money supply as an explanation for reasonable, reasonably useful explanation for what's going on right now. Especially given a lot of that money is in checking accounts. Yeah. That's because of your point about velocity. It's sitting there. It's not doing anything.

It's not, you know, I'm sure it's going to help support consumer spending in, in dark times. Hopefully that those dark times seem to be coming. So hopefully consumers will use that. No, but, you know, better than even odds of recession. That's pretty, you know, it's going to be pretty hairy. Let me ask you another question. Let me ask this. Are there any other explanations for the high inflation that we're suffering now that you've heard?

you know, supply, you know, obviously supply shocks, pandemic, Russian invasion, demand, rent. Wages. Oh, yeah. That's another good one. Yeah, that's another really good one. So the idea is that, you know, if you've seen this big acceleration in wage growth, not, it hasn't kept pace with inflation in most cases, but that that increase in wage growth is now, causing or inducing businesses to raise prices more aggressively to raise inflation. What do you think of that argument as an explanation for what's going on?

Ryan follows this one closely, so I'll let him chime. Well, the causation goes the other way right now is that high inflation is causing changes in wages. So it's not, unless that causal relationship flips, then I don't think wages are growing fast enough to be generating stronger consumer spending. In fact, what matters more for spending is not wages. It's real disposable income. And that's actually falling.

So I think that's the counter argument is that, you know, yeah, the concerns about a wage price spiral, we have to worry about it. But there's no evidence so far that that wage price spiral where higher wages leads to higher prices and we just keep going around and around has set in yet. Right. Okay. So you're saying, okay, we've seen this exurgeon inflation related to all the things we discuss, mostly supply, a little bit of demand. And that's affecting wage growth, the workers, particularly low wage workers where the wage growth has been most strongest and where the labor supply disruptions related to the pandemic most significant have been demanding and getting higher wage growth. but it doesn't appear that that wage growth is now translating into higher prices and inflation. Correct.

In most cases, I mean, there might be some industries, businesses where that's the case, but it doesn't feel like that's happening in a macro economics. And you say that based on, I know you do a fair amount of econometric work here to try to disentangle this Granger, so-called Granger causality test, that kind of thing. And you're not finding in those tests, the wages driving prices. It's really prices driving wages at least so far, which is if it did start, the causality did start to become more self-reinforcing, that would be a big problem.

That means this inflation is going to be more persistent, but you have not observed that yet. No, not yet. And the measure of wages that I use is the employment cost index. That's the best measure of wages. Right. Not average hour earnings. Because controls for all the next. a composition of jobs, things like that.

So average earnings can get skewed based on calendar quirks and also a mix of jobs. So it favors low-paying jobs. Then average average earnings can be depressed. So the employment costs and things adjust for that. So that's why I think that's the best measure. Okay. I was going to say one other thing about that. Oh, actually, I was in Washington for a meeting of the economic advisors, the Congressional Budget Office.

there was a session, I don't think I'm violating any rules here. No, it's in the public domain. So one of the participants nicely showed that real wages are declining except for folks in the bottom part of the income distribution. So if you go look at the folks in the bottom 20, I think even the bottom 40% of the distribution, I might be stretching it, probably certainly the bottom 20. wage growth has outpaced inflation, which is very obviously unusual, you know, in the last 35 years because of the skewing of the income distribution, low wage workers have been hit hard. But in recent, actually, even before the pandemic, wage growth for low wage workers had caught up to wage growth for high wage workers. And since the pandemic, it's like a switch went on. And I think in part because of the character of the pandemic, it hit industries that employ a lot of low wage workers. And of course, immigration has been significantly curtailed and then the trade wars and everything else.

I think put low wage workers in a better position negotiating with their employers and they've gotten bigger pay increases. So I thought that was quite interesting, you know, observation. Okay. The other thing that came up recently is I had a question of, you know, will, you may even know, like Janet Yale and the Treasury Secretary, came out and said that the Biden administration was thinking about recalibrating the tariffs, the Trump imposed on China in other countries, is that going to help bring down inflation? And I thought it was going to be on the market.

Recalibrating meaning reduced or eliminate. I don't know if she said eliminate, but just maybe tweak them. Yeah. Tweak means reduced, though. Yeah, yeah, right. I think they're going to reduce them, but not,

I don't know if they're going to remove them. Yeah, I think they might, not on all products, right? Right. Some things are going to keep in place and some they'll reduce or eliminate. And you're saying on the margin that might help, but it's on the margin. Yeah.

Yeah. But that's true. I mean, I think the estimate we came up with is that the Trump tariffs added seven tenths of a percentage point to price levels. So if you take that out, if you got rid of all of them all at once, and that would reduce inflation by seven tenths of percentage point, which, by the way, would be enough to get us from 3.2 to 2.5. I'm just saying. I'm just saying. All right. 3.2.

We didn't have to use any energy. That's where we landed after we deposed everything, right? Okay. All right. Well, this takes us to the outlook because we've now, at least to our satisfaction, I'm sure not to many other people's satisfaction. We've explained why inflation is so high. And based on that diagnosis, if you believe,

that the worst of the fallout from the Russian invasion is at hand, meaning, let's take oil. It's sitting at $120 per barrel for WTI, a little bit more than that for Brent, that that's kind of sort of the peak in price. And if you believe that the pandemic effects are fading, not that the pandemic's going to go away, we're going to have more waves,

but that each wave is going to be less disruptive than one before it. So supply chain issues start to iron themselves out. And by the way, it feels like that is happening. I'm curious what you think about that. But if you buy into those two things and third, that the Fed can calibrate monetary policy, you know, in a way that slows the growth in the economy because it's been growing very strongly so that it doesn't blow past full employment in those wage price problems we were just talking about manifest, then it feels like inflation should moderate here going forward.

And we can talk first about that narrative. What do you think about that narrative? I just laid out for you. And then after that, we can talk about the timing of all this. But what do you think about that? That's kind of our baseline view. You know, our forecast, our most likely scenario makes those assumptions. And you can see inflation monitoring that inflation, now I hesitate to say it's P.

But it's peaking, and it really does depend on oil prices when it actually does peak. But it is peaking because oil prices, you know, we're assuming that we'll continue to move higher here in a consistent way that inflation will moderate going forward. What do you think of that at that outlook? Chris, I'll turn to you first. I like the general assessment. I think in the short term, though, I don't think we speak. I think the summer is going to continue to present a lot of inflation. So we may get a higher number here.

I think oil prices are going to remain high. They may even go higher for a while. But as we get past the summer, past the summer driving season, I think then you might start to see some of that moderation you're talking about. So it's just a question of the time. Maybe another quarter versus an immediate decline. But I think you're right in terms of all the other fact. I do believe supply chains are improving every day.

maybe not at the speed we like, but I think they're getting better. I think China has shifted on its policies, so that should certainly, around zero COVID, so that should certainly help to ease things a bit here. I am worried about the food piece of this. And I know that for U.S. inflation is actually not a big, a huge component, but I worry that that, for other countries certainly could keep inflation persistently high. I've been watching wheat prices. So you want a scary number?

Yeah. 74%. And that is the share of wheat crop that has been harvested in North Dakota, which is a big wheat produce producing state. Normally at this time, it's at or slightly below 100%. So that gets back. What is that? 74% is what?

The share of the plant. wheat harvest that has been produced. So we're well below where we should be. Is that because of drought? It's weather conditions. It's, I think, a whole host of things.

Have we, I haven't looked at wheat prices recently. Are they moving up? Have you looked? So if you look at the spot price, look at every day, it's north of a thousand. Okay,

give me context. Okay, I gotta go back. Let me look it up. Okay. look it up. All right. But before you look it up, I want to get your buy-in on what I, the narrative, the path I just, or the explanation, what's the word? The narrative. The outlook, yeah. The outlook for the inflation outlook. No, I'm on board. You're on board. I think the, I think the contours of our

forecasts are broadly correct. I just, I'm worried that the deceleration is going to be slower in what we're anticipating because that goods disinflation isn't as strong as I was hoping it would be at this point into Chris's argument that services inflation this summer is going to be really picking up. Let's talk about that for a second because I'm, you know, I'm confused about that. I mean, we had Gene Soroka on the, he's the executive director of LA ports and he made the point that all the warehouses in Southern California. And the Southern California has, according to Gene, I think this conforms with my understanding that there's more warehouse space there than anywhere on the planet and that those warehouses are pretty much packed to the gills, right, with stuff

because of, you know, even despite the supply chain issues. So that feels like that's going to put, and you can hear Target and Walmart and other retailers talking about inventories, overlaying inventory, feels like we should be seeing some price cutting here or discounting, you know, as we move into the, certainly into the Christmas buying season. Doesn't that, wouldn't you expect that? It is, but isn't that in goods that are a small component? of the basket, right?

Okay, so we're not buying, we won't, we already bought all the furniture we need. Right. So, okay, prices will come down there, but that's not a big driver of inflation, right? Furniture, closing, household goods, household appliances, power washers, you know.

I know in the Zany budget. That's a big part of the basket. Yeah, it's a big part of the basket here. Yeah. But, yeah. For others. But, But I mean, going back to Ryan's point, why about goods, the price declines, that feels like that got to be out there.

It's coming. Yeah. Even on vehicles. I mean, come on. It's got to be. I mean, there are the supply chain issues I think have been more serious and it's going to take a little longer to work through them to get global production up. But that feels like that's also going to happen. Although, you know, maybe the Russian invasion is having an impact there too because I think it's affecting equipment related supplies to like Europe where, you know, Germany were pretty.

produced a lot of cars. Certain components, wiring harnesses. All right. So wheat prices are $1,085 per. Okay. Looks like a bushel. The lowest in the past year was $640. Before Russia's.

Before Russia's. 640. 640. What was the peak in this since the Russian invasion? 1,285. Okay. Okay. And is it moving higher?

now? It's kind of leveled off recently. Okay. All right. Well, we've got to watch that carefully. Yeah. We'll watch that very carefully. Elevated.

Yeah. Well, back to goods for a second. Lumber prices, they continue to move a lot of sharply large, aren't they? Yep. Yeah. South is $600 now. And now was the poster child for the supply chain disruptions a year ago, right? They were $1,600 per $1,000.

Yeah, for a thousand square. Board square feet. So now we're down to what, 600? Something like that? Below 600. I think on Friday it was like 585 or somewhere on there. Okay, so that's a good sign. Yeah.

Hey, I think, you know, the three key assumptions that are driving the outlook, the pandemic, it feels like we're, feel pretty confident about that one. I mean, it can't be confident about any of this stuff, but more confident that the pandemic is fading and these supply chain disruptions are going to debate and we're going to start seeing some price weakness, if not outright declines in some of these goods prices. On the Fed policy, which we're going to come to in a few minutes, because I want to talk about what this all means for monetary policy, I think we feel pretty good about that. The one that I'm most concerned about, and Chris, you kind of went there in your comments,

is have we seen the worst of the economic fallout from the Russian invasion? So here's my question to you. you know, the reason why oil prices recently jumped, you know, it felt like we had seen the worst of the run-up in oil prices when the U.S. sanctioned Russian oil. And then, you know, prices seemed to be coming back in. They were back below $100 a barrel there, you know, not too long ago. But then the European Union came along and said, we're going to also sanction Russian oil. And that's even more serious than the U.S. doing it because the Europeans buy a lot more oil

from Russia than we do. And that makes a bigger hole in the oil market and is behind this jump or this spike in oil prices. The question is, do you think the $120 per barrel for WTI reflects, fully reflects, the EU sanctions on Russian oil? And I should throw into the mix. It's not only they're not going to buy oil. they're also, I think, contemplating requiring any insurer that insures oil vessels that take Russian

oil and takes it over to China or India or wherever else doesn't get that insurance. We're going to abrogate that insurance policies, which obviously significantly complicates the shipment of oil. I'm assuming that that 120 is roughly a peek and reflects the reality of the EU is going to sanction and maybe abrogate insurance policies. Do you have any sense of that, any view on that? I mean, any thoughts on that? Do you think I have that right? I think you might have that portion, right? But there we're still going wrong. Yeah, exactly. Exactly. Or another country, right? What if India does decide, you know, based on pressure also reduce or another country? Yeah. I'm just throwing out there could be some other factors here that,

Or I guess any other event, you know, the ship gets stuck in the Suez Canal or something, you know, kind of event or terrorism attack. Gulf Coast Hurricane. Is that a possibility? It's herding. Oh, Gulf Coast. Yeah. I was thinking of somehow Middle East in my mind. Oh, yeah.

Oh, we've got these shifting weather patterns. Yeah, exactly. Right. A refinery goes out, though. That's certainly within, if we're, again, based on this article, if we're really so. dependent on the refinery capacity. If we get some other shutdown, it might not affect oil price,

but it might have- Gas, diesel, gas, fuel, all those things. Yeah, that's a great point. That's a great point. Okay, so we're running on time, and we haven't played the game. Should we play the game? I mean, there's one more thing I want to talk about

and what this all means for policy, monetary policy and markets. And then we could play the game, or do you want to just shelve the game for a week or what do you want to do? Oh, people love the game. Okay. That's the commentary I got. I'm sure people are upset.

I think he's got like a baseball game to play or something, you know. We'll make it a quick game. How about that? I just used my number of 74%. So I got to come up with a new one. Oh, that would have been a bad number, though, right? I mean, how in the world do we know? North Dakota, whoa, whoa, you and Chris.

74%? Are you out of your mind? I didn't email you and I didn't tell you what the number was like what Chris does. What was that one? Come on. That is so rude. Come on. Actually, I take that as a compliment.

Because if he thinks that, I, yeah, that, yeah, I'm doing pretty damn well. You can start, you can start with Chris. Yeah. And I do apologize. I didn't respond to your trolling, trash talking, trolling, trash talking stuff that you have to admit that was a good one, though. The last two have been pretty good. They're all good at it.

You're good at it. You're good at. I got to hire someone to do it for me. Can we just clarify? I don't know if you have a very good one. loyal following because people will like message me, you know, this is very disrespectful to Mark. I'm like, you don't know, but you can do it in 17 years. Yeah. That is hilarious. Got a loyal following. Oh, that is great. I love it. Look it out for you. I don't think people

realize this is just. Thank you guys. Yeah. Give Ryan hell. This is just for fun. If you've got a good, hey, here's a challenge. You've got a good meme for me to fire away at Ryan. I'll take it. Yeah. Yeah. Yeah. I mean, I need, I need, I need, I need help here. I've never done this trash talking, trolling thing. It seems like, fun. Yeah.

You're good at it. I don't know about the trash talking. Yeah. I think you've done a fair amount of that. I have, oh yeah, that's true. It's the trolling on the internet.

Well, whatever it is. Okay. All right. Let's talk about monetary. Are we doing the game? Well, let's end up on the game.

Okay. Okay. Because I just did complete the thought here, their conversation around inflation. It was pretty obvious. Markets did not like that number yesterday. I was a little surprised at how, I mean, of course, it was a little hotter than what we anticipated. Not on core, we got core six-tenths.

That was percent increase in the month. That was what we expected. We expected eight-tenths on the top-line inflation number. We got one. That's the month-over-month increase. So it was a little hotter than expected. And so you would anticipate some sell-off in the stock market and bond yields to rise, bond prices to fall. But boy, that was a pretty big correction yesterday.

I mean, I think to your treasury yield jumped over 20 basis points on the day. It was a big move. Yeah. So what do you think? I mean, markets seem to be taking this a lot harder than we are. I mean, my view on the inflation outlook didn't change as a result of yesterday's number. You know, I would have had the same conversation, same outlook about inflation, you know, a week ago, as I were having this morning. So nothing changed for me, but for markets seem to change.

Is that because the Fed? Yeah. Yeah. Okay. So what are they now assuming on the Fed? Three, 50 basis point rate hikes, June, July, September. So September was fully priced in a 25 basis point rate hike. And then after the CPI, it moved up to 50 basis points.

Right. What's the terminal rate? That's where the markets think the rate's going to end up at its peak? Right around three. Still around three, not higher than three. I think it was a little higher than three. A little higher than this three. Three percent.

And right now we're at one percent. We're going to get a half point increase next week at the June FOMC. meeting, half a point at the July meeting. Now the market says a half a point in September. That gets you up to two and a half percent. And then a series of quarter point rate hikes until we get to three, three and a quarter or three and a half somewhere in there. And that's what happened yesterday. So they're saying, okay, the Fed's going to look at this number and say, uh-oh, I've got to step on the brakes even harder. Yep, exactly. Well, you know, I mean to ask you, there's I, there might be some logic to that, right?

Because the one thing that we didn't talk about, which I think is critical to the inflation outlook is inflation expectations, right? And they had inflation expectations. There's a lot of different ways of measuring inflation expectations, you know, look at consumer surveys, look at business surveys. I like the bond market measures because that's money, people putting their money where they're is. And if you look at those measures, they had before yesterday's report come in and we're back pretty close to the Fed's targets. But now they feel like they're migrating a little higher. So that would suggest the Fed does need to send a stronger signal, either through the language they use or through action or both, probably both, and to get those inflation expectations back down,

again, consistent with their targets. So I was thinking, you know, maybe And by the way, this migration up in inflation expectation was that happening even before yesterday's number. But I'm sure with yesterday's numbers, it's been reinforced. That, you know, right now we have as our terminal rate for the funds rate at 275, that feels a little low to me in the current context. What do you guys think? Ryan, you're sticking with the 275? Yeah, because I think we would not even get there. The Fed might break the economy before we get to.

Oh, that's right, because you think the recession risk. for very high here. Yeah. But given our baseline outlook, everything that we just articulated. Yeah, I think when we update the baseline, we should probably go to three. Probably go to three. One more.

Well, I don't think we have a 50 basis point hike at the September meeting. We probably should put that in. That feels like it's going to happen. It's a done deal. You any... Reception is a done deal? No, the 50 basis points.

Oh, the 50 basis point in September. Yeah. Do you assign any probability to a 75 or 100 basis point. Shockin-aw. That's to Ryan. Yeah, I don't think they would do that. Especially 100, that would be full-fledged panic mode.

And markets would just not like that. Well, if you want to tap down inflation expectations. Well, we're not that far away, Chris. Yeah, yeah. I mean, just give you sense of the best measure in my view, when I look at every morning is one year five year forward. So that's inflation a year from now in the subsequent five year period. You abstract from all the weirdness in the near term, but get to kind of what people think it's going to be in the intermediate term. Last I looked, that was a, that was, you know,

2.7 percent, something like that. So it needs to be a two and a half, you know, to be within the Fed's target. So it's not too far away. It's on the high side, but it's not too far away. It's on the high side, but not too far away. So 7,500 basis points would be, I think, really pushing a sledgehammer, you know, and really risking the, to concerns about recession risk, if they overdo it, do you look at mortgage rates yesterday, fixed mortgage rates? 5.85% on the 30-year fixed. So, you know, they're moving, that's already moving up pretty significantly here.

Okay. All right. Is it one, like, for, you're talking 250s versus one. 75, right? You actually, in terms of a total, you may not have to go as far. Oh, yeah. Or it's just a, you just front load it versus, I'm not saying we send a message. Yeah, I don't know. If you're trying to break the psychology. Yeah, you just think, but you know, yeah, it feels like you might break the economy, you know, to Ryan's point. I mean, that 50 basis point, like at the last meeting, that was the first time in decades that they moved by 50 basis points up.

So going 75 would be. I mean, so far, that's my point. The 50 really didn't do much to the expectations, right? The other way you think about it, though, is financial conditions. Because that's ultimately, it's monetary policy affects equity prices, bond prices, value of the dollar. Credit spreads.

Credit spreads and ultimately the economy. So if you look at financial conditions, I would say that that feels pretty close to where the Fed would want it, right? stock market is now down based on yesterday's move i think 18 percent not quite a bare market from the peak you got 5 in 5.85 percent mortgage rates what are credit spreads brian or are they uh they are 450 high yield corporate bonds spreads for okay they're not too high though that no they're historical averages around 500 yeah but i guess there's compositional issues in yeah okay so maybe it is higher than it looks like um dollars up, not a lot, but it's up pretty significantly from where it was a year ago.

So it feels like financial conditions are where you'd want them. Yeah, I would agree. I think they want a little tighter. You do, okay. So do you think they're actually going to raise 75 basis points? I don't think so. But I think I wouldn't put a zero probability on it, though. Oh, yeah.

Oh, no, no, no. It's not zero. All right. All right. Okay, very quickly, and then we're going to go to the game. What is your odds of recession over the, the next 12 months over the next 24 months. Chris? 12 months.

Why is he delaying? I asked them the same question last week. I try to remember what I said. I think 40%. I haven't changed. 40%. And then my, is it 18 months or 24 months? 24. 24. I think you said 55 or 60 or 60 or something. Yeah, 60. 60. So 40 and 60. 40 over the next 12 months, 60 over the next two years. Ryan? 45 over the next and then I'm 75 okay that's roughly the same I think yeah hasn't changed that much yeah now I'm the same

I'm one third probability over the next year and close to even odds but not quite over the next 24 okay but if the Fed does what Chris wants them to do yeah then yeah then it goes up it's over yeah well I want some to do I just was I like it I like how you yeah Spend the story a little bit.

All right. Well, the problem with playing the game at the end of this conversation is we've talked about a lot of statistics. So it makes it more difficult. But let's give it a shot. Chris, you want to go first? Sure. 9.8. Oh, can I say?

Oh, go ahead. Just to remind everybody, the game, the statistics game, we each provide a statistic. The rest of us try to figure that out through questions and clues into Dr. reasoning. The best question is one that's not so easy that we all. get it quickly, one that's not so hard that we'll never get it. And hopefully it's related to the topic at hand or not something that came out at the beginning of the year, something more recent than that. Okay, so go far away, Chris. 9.8%. 9.8%. Do you want some units? Okay. Basis points. 9.8 basis points? Yes. 099%. Is it an interest rate?

It is related to interest rate. It is related to. to an interest rate. To interest rates. Interest rates. You got it. Now, come on. No, no. It's not the yield curve.

No, of course it is. Oh, that's it. Oh, you just complicated things. He said nine basis points. We would have gotten it right away. That's the whole point. Yeah. Talk about ruining my Saturday morning.

We talked about no collusion. Well, okay, but only the three of us understand what you just, what you're saying. Go ahead and explain it. All right. So it's the yield curve, the difference between the yield on a 10-year treasury security and a two-year treasury security. We've noted in the past that when it inverts, we have a recession within 15 months, at least historically, it's always been a great predictor. So it came down a lot yesterday. I think he's wrong, Ryan.

I think if you're in a round, take 9.8 and round that to 10, I think it's up nine basis points. The spread is nine basis points, I should say. 9.8. Where'd you get the 9.8? Okay. For the record, the 10 year was last quoted at 3.165. Okay. The two year was 3.067. Simple difference. 9.8. Okay. Well, you blew away my statistic because mine was going to be 3.067. Yeah. Well, because it is the news, right? I mean, that's the, As you pointed out, Ryan, you noticed right? And when you said the two-year was up a lot, I didn't ask anything about that.

No, I know. Because it was my statistic. Oh. And that's really, now we should explain it. I mean, that is the clearest barometer of what investors think the Fed's going to be doing. So if the two-year rises or falls, that's investors saying, hey, they're going to press on their brakes more strongly or or take them off the brakes or personally accelerate or more. So that's a very key measure to use.

And back to the yield curve. So the difference between the 10-year and two-year treasure yield, that yield, that spread, nine basis points. That's pretty narrow. But it was, it's not the narrowest it's been, right? Oh, it actually did invert in early April, for a couple days. But it widened out again a bit.

And now it's back down. down below 10. Right. And I do want to point out that that's why one of the key reasons is why my odds of recession over the next two years is high, you know, but less than even odds, because we haven't actually inverted in a meaningful way, you know, a hard, what I call a hard inversion over a long period of time, which would be a clear signal of future recession. But the flattening of the yield curve, you know, nine basis points, that would be consistent

with an economy that's really going to slow here. It's kind of right on the edge of recession. By the way, I wanted to point out, we had the business survey. We do this business survey every week. We haven't talked about it in a while. I just got it for last week. The most prescient indicator in that survey is the percent of respondents that say present business conditions are improving.

So they're saying they're getting better. if that falls below 20%, that historically signaled recession, and it almost nails the timing of the recession, it went below 20% last week, 18%. Now, when I say this, it gets below 20 for a month, you know, at least four weeks. That's been the case, but it's only been one week, so we'll watch this very, very carefully. But that kind of sent off a little bit of an alarm bell for me. We saw that happen. That's consistent with all the real survey.

Oh, well, I'm not changing it yet. That is still consistent with close, but not recession. I don't know. All right. Okay, Ryan, you're up. All right. Don't say 3.165. Yeah, yeah.

Give you the 30-year treasure you. I'll give you an easy one. 46.8. 46.8. Is that a eumish? Yeah, I was going to say that. Sentiment. Yeah.

Yeah. Because that's the only thing. They're really. Expectations. Yeah, expectations. Record low. Yeah. What?

I think it's a record low. Even in the financial crisis? So the headline consumer confidence is below what we saw during the pandemic, lower than we saw it during the Great Recession. It's the lowest since the early 1980s, I think. Hold it. Wait. You said record low. Is there a record low or is it?

Hold on. I'm looking. Yeah. Really curious. Yeah, it's a record low. Oh, my gosh. Wow. It's lower stock prices and surging gasoline prices.

Yeah, no, I can explain it. I mean, the conference board survey, which is more labor market oriented, which the labor market strong is much higher, but still, that's pretty depressing. Yeah. The political breakout is ridiculous. Yeah. Oh, that. The Republicans need two odds.

Yeah. No, they need a, well, I won't say anything. You need a cherry drink. They need, have you ever had Nogronis? Have you heard of a groney? No, you got to have, it's a great kind of summer. Now here, this goes back to where we started, the quality of life. You've got to think about, you know, improving your life.

Spend a half hour, do it, maybe 15 minutes. That would be good. And explore the world of Nogronis. They, you know, very popular drink these days, but very good. You should know that, Chris. It's an Italian drink. It is. drink ngronies? Oh, you don't like niggurately? No.

Well, here, here's the problem with you, this is why you don't like ngronies. You only have one ngroni. That's the problem. You've got to have at least two ngronies. The second, I'm telling you, there's not many things in the world when you consume more of it, it tastes better the more you consume. Would you agree with that statement? Would you agree with that statement? That's a fact. That's an economics. First sip of coffee is better than the last sip of coffee, right? Generally. The marginal return is diminishing. But this is not true with Nogronis.

It goes the other direction. There is a, there is a, you know, a point where it starts to go down. I haven't been down. I think there's a PhD thesis in the works. Well, after this conversation, I definitely having a couple of the gronies tonight. Yeah. So I highly recommend it. And I'm just saying, I just gave you a life tip.

That's a life tip. I consider that to be a life tip. Highly valuable advice, you know, the two-nogroney piece of advice. I'm going to look to you guys in the future at these podcasts for a life tip that's going to make my life better. It's not all about me making your life better. You've got to help me make my life better. Deal? Try something other than hazelnut coffee tomorrow morning.

How about that? I guarantee. The bar is low. I'm not kidding. All right. Ryan has no comment. He's just thinking about his next meme to go after me. That's like a feel it already.

I have a question for you, Ryan. Yeah, go ahead. Vet services. This goes right to your household. What's going on there? Is it up or down? It was down. No, prices on the month.

Oh, it's the CPI, yeah. CPI price, yeah. Why? I have no idea. Oh, I can tell you why. I can tell you why. I have got good intuition around this. It's a price normalization.

During the pandemic, everyone got dogs and cats and birds and whatever, and there was a surge in demand, and now we're on the backside of that, right? We went from, she's still so busy. Huh? She's still really, really busy.

But not busier than she was two months ago. This is your wife, who's a vet. Yeah, she's about busy. So busy? Probably the same. I can ask her. It's just a theory.

It's just a theory. It's just one month, too. It could reverse. Well, I can come up with an explanation for that, too. I know you can. Okay, this is a good podcast. Not that I'm recommending we do many of these on Saturday mornings, but I think this is pretty good. It's good.

Yeah, okay. All right. With that, we're going to call it. call it a podcast. Thanks, everyone. Take care now.