Moody's Talks - Inside Economics - Rates, Rents, and Ramen

Episode Date: December 15, 2023

Michael Strain, resident scholar and the director of economic policy studies at the American Enterprise Institute (AEI) returns to the podcast to discuss the Fed’s big pivot towards rate cuts early next year and the resulting monster rally in stocks and bonds. The discussion then turns to what ails the collective psyche. Think rents and the price of ramen. For mor information on Michael Strain click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale 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 a few friends. I've got Chris DeRides and Marissa Dina Talley, my two co-host. Hi, guys. Hey, Mark. Hey, Mark. You're getting ready for Christmas. Every day. That's true.

We've been doing a lot of stuff recently, haven't we? Yeah. Yeah, we haven't asked me anything. Yeah. Ask me anything for the survey of business confidence. Right. Do you want to explain to people what that is? Sure. I think we've talked about it on the...

You can advertise. This is a good point to advertise a little bit. Oh, okay. All right. Not selling anything, though. So I think we've talked about it on the podcast before. You're always selling. Chris has always... Mirza, isn't Chris always selling? We're all always selling.

What are you talking to me? All of us are selling all the time. Yeah, exactly. Right. So you want to describe the survey business confidence? Just advertise that for a minute? Sure. So it's a Moody's analytic survey business confidence. It's a weekly survey that goes out to,

Anyone who'd like to join. So that's the advertising part. If you're interested, you can go to economy.com and you'll see a link to our survey. We ask 10 questions about the state of business, of your business, as a respondent specifically. So questions about your confidence over the next six months, information about hiring, pricing, a lot of different questions. The survey's been going on for what, 20 years now? I think 2003 is when you started it. Yeah, exactly, almost on the nose, I think, 20 years, yeah. Yeah, so it gives us a lot of great information.

It's very timely because it's weekly. And if you participate, the benefits include. You get, of course, a summary of the survey every week and what's going on. And then you get invited to an Ask Me Anything event periodically with Mark. So that's the... And you. And you. And you.

And you, yeah, right? And we had Dante on as well. So that was good. It was very good. Good. Well, I'm... Did you get any interesting questions on that that you want to share? Anyone have any off-the-wall questions?

No, they were all kind of in the strike zone, sort of, maybe one curve, but they, you know, even outlanded in the strike zone. So, yeah, I don't think anything, no. kind of AI and credit quality and labor market, you know, kind of the traditional questions that we get here on the podcast. Interest rates, lots of questions. A lot on interest rates. Which, maybe this is the time to move forward and introduce Mike Strain. Hey, Mike, how are you?

I am wonderful. I am wonderful. And I'm happy to be back on this excellent. Yeah, it's good to have you back. It's good to have you back. And just for folks out there, Mike is the Arthur Burns scholar. AEI, American Enterprise Institute, and you run the Economic Studies Group there. And Mike, when were you on last?

Do you remember it was about a year ago? Yeah, it was about a year ago. I don't remember precisely when, but it was in that one year ago ballpark. Kind of in the depth of the pessimism around the economy, I think. Yes. That's when the consensus was dark, pretty dark. Well, I remember the discussion where I was quite pessimistic. And Mark, you were much, much more optimistic.

optimistic and events have proven you right and have proven me wrong. I will now play the optimist and I will say you may have won the battle, but I may yet still win the war. Oh, cool. I can't wait to dig into that. And I really appreciate that. Mike, that was very kind of you to say, you know, particularly because Chris has yet to capitulate, you know, he's still hanging on. He's still hanging on. Ideal and probability. Mark. This is a little bit inside baseball. But everyone who listened to the podcast,

and maybe Mike, when you were on last, Ryan Sweet was on the podcast. He is left and gone on to do other things. But I just got a tweet from him saying, hey, Mark, you were right. So even Ryan Sweet has capitulated Chris.

What's that? No. Chris is making a deep metaphysical point that is accurate. And that is if you, if you use probabilistic reasoning, then you can never be wrong. Exactly.

But you can also never be right. Good point. Good point. Good point. And I do want to bring in one of our other colleagues, Matt, Matt Colliard. Good to see you, Matt. It's been a while. Hey, Mark. Great see you too. Yeah, it has. Congratulations. You have a newborn? That's right. Thank you very much. That's why I'm in the office as I look for a little bit of serenity, I guess. Quiet. Yeah.

I'll have to say you do look like a father. I'm tired. Yeah. Exactly. It's good to have you on board. Great to be. And good to have you back on the inside economics. So top of mind, here we are.

This is Thursday, December 14th. We're taping a little bit earlier than we typically do. But good day to do it because yesterday the Federal Reserve met, the FM CET and wow I thought that was going to be a quiet nondescript nothing's going to happen

meeting what Mike what happened I mean how do you characterize what's going on here and what the Fed's thinking well let me let me answer in in two different ways

I mean I think you know the Fed is a victim of a many many year push toward greater and greater transparency and has, you know, reached a level of transparency that seems to me manifestly counterproductive.

You know, the dot plot, the press conferences, all this stuff, if you're going to do, if you're going to do those things, and if you do what the Fed did yesterday, which was signal 75 basis points of cuts in the coming year and more after that, you know, then you're going to end up with bond yields falling. You're going to end up with stock prices rising. Why do I say that's counterproductive? It's kind of productive because financial conditions, which ultimately is what the Fed targets, eased much more than the Fed would like. There is, as a consequence of all this transparency yesterday, a heightened risk that the economy will reaccelerate like it did in the third quarter, a heightened risk that inflation will become more entrenched. And therefore,

a heightened risk that the Fed will not be able to do what Chairman Powell seems to want to do, which is to stop raising rates. You know, we saw the Fed kind of being a victim. them to transparency earlier in this cycle when it delayed and delayed and delayed tightening when it continued to purchase mortgage-backed securities at a time when home prices were growing a 20% annual rate month after month after month because it had pre-committed to a path and it didn't want to deviate from that path. And so the kind of simple answer is the Fed told the market it was done and that cuts were on the way and markets reacted, I think the deeper answer is that the Fed has gone way too far in the direction of transparency,

and that is risking its ability to manage the business cycle and really risking its credibility. So just to take one step back for folks that don't follow it like you and I do and everybody, everybody else on this podcast does. If you go back one meeting ago, I think in September, the chairman was in the committee was still saying high probability or a reasonable probability of a rate, another rate increase. In fact, in the dot plot that you mentioned, which is where the members expressed their forecast for the funds rate, there was another rate increase in 2023. And then it was, I can't remember maybe there was, was for one or two rate cuts in 24.

or something like that. Yeah, one or two. Yeah, but at this meeting, in the dot plot they released yesterday, no rate more rate increases this year, obviously, because the year is now over. They're not going to do that. And then next year, three 25 basis point quarter point rate cuts. And that seems like what you're saying,

that's a, that feels like a pretty big swing. And because it's a very clear swing, the markets are often running here. The Dow hit 37,000. We've got bond yields below 4% on a 10-year treasury, and financial conditions eased, and that may by itself create a problem for the Fed if the economy gets reduced and inflation starts to pick up again. Now, you know, the Fed knows this.

I mean, what were they thinking that markets wouldn't react this way or, you know, kind of, you know, they're well attuned to market perceptions and what investors are thinking. Do you think they're surprised by the market reaction? Or are they saying, well, that's fine. It's okay. It's consistent with getting inflation back down the target. This isn't going to forestall, you know, what we're trying to achieve here. Yeah, I think that's a great question. I would be surprised if they were surprised. I think that they, you know, may have been concerned that if they change the language in the statement from additional tightening to any additional tightening, they might be concerned that if they switch the dot plot from showing an increase

next year to instead showing three cuts, that the market might do this. What are their choices? Their choices are to completely throw out their entire transparency and communication strategy. You know, that would not have provoked a positive reaction in the markets. And it would have been an unpredictable negative reaction. Their other choice is to, you know, not say what they think, which is a very bad strategy for trying to preserve a long-term credibility. And so, you know, I think that they looked at a lot of the data that has come out since the previous meeting. That has altered their view of the appropriate course of monetary policy.

And then they're kind of in a bind where, you know, given their commitment to transparency, given press conferences, given dot plots, given forward guidance, given all this stuff, they kind of have to say what they think. And, you know, how concerned are they? I don't know. but I would imagine there's concern for sure. I mean, if the, as you mentioned, the 10-year treasury, I don't know what it's doing precisely this moment,

but it's below four. Yeah, earlier today, it was below four. And that's not where I think they want it to be. So here we are. They've been increasingly more transparent since Alan Greenspan when he was chair started this process towards strange. I mean, when I started as an economist way back in the day,

they wouldn't even tell us if they changed the fund rate. We had to figure that out by looking at what was going on in the marketplace, which wasn't easy to back it out by looking at changes of the money supply. Exactly. I mean, so talk about the sea change in transparency. People used to look at Chairman Greenspan's a briefcase. Yeah, exactly. Oh, yeah, I forgot that.

One color neckties is. Right. Talk about reading the pull up. that may have been that may have been too opaque. I'm wearing the middle. You know, but now we, I mean, now, you know, the chairman gets up there. Well, we're thinking about thinking about this. And, you know, we're, you know, talking about whether to think about talking about this.

And, you know, dot plots and, you know, is the chairman's dot, the median dot? Which dot is the chairman's dot? You know, can the chairman's dot just come and like pound the other dot? Some of them. They're like literal discussions that are taking place by people, you know, trying to invest money. And that, you know, that seems like we've swung a little too far in the other direction. Okay. But here we are.

Here we are. What would you do? I mean, if you were, because, you know, the Fed changes its policy framework every so often, you know, and it can change things again. What would you have them do here in terms of transparency? Well, I, oh, in terms of transparency, I would, I mean, I would, I would walk. a lot of us back. You would. No dot plots.

Yeah. Yeah. I would walk that back. I mean, I think they should be, I think they should be, you know, communicating their target funds rate. I think they should be obviously, you know, appearing before congressional committees when they asked to do so. I think, you know, putting some press conferences on top of that is, is a reasonable thing to do.

But I think, I think forward guidance. you know, was useful following the financial crisis of 2008. I think it's been more harmful than helpful in this kind of pandemic era business cycle. Again, locking the Fed into a schedule for quantitative easing, quantitative tightening transitions. I think the dot plots are too much. I think there are too many press conferences. And yes, I would walk. So I would walk some of that back.

You got to do it carefully. And, you know, there's no reason to act like there's an emergency and, you know, affect that change with little notice. But, you know, I think, I think the Fed could say we adopted a number of, you know, pretty extraordinary communications strategies and transparency efforts following the 2008 financial crisis. And, you know, that episode lasted a long time. then we rolled into a pandemic.

And, you know, we're going to, you know, we've got both of those in the review mirror and we're going to normalize a little bit. You know, what surprised me a little bit was, you know, one way the chair could, Chair Powell could have influenced the market reaction to this pretty sizable change in the forecast for the funds rate. I'm going to raise rates to, I'm going to cut them three times next year, would be in the press conference. And I, you know, I didn't get a chance to listen to.

it completely, but I didn't get the sense that he was trying to walk that back or shade it or, you know, hey, say, hey, guys, don't read too much into it. You didn't get any of that, which is surprising to me. Yeah. And that, and that, and that, and that, and that, and that, Mark leads, leads, uh, this group on this podcast to try and figure out which dot is the chairman's dot. Yeah, right. Yeah, good point. Good point. But, Chris, let me turn to you real quick. What do you think of that assessment? I mean, how do you interpret what happened yesterday in the Fed's decision and what it means? Yeah, I agree with you.

It seems as though the chairman just let it be and then kind of fed the fuel, if you will, for the market rally that we had. I do agree with the, I see limited value in the dot plots. I'm actually surprised that the market put so much stock in that they haven't been terribly predictive, right? So I don't know how much value we get. They may just add more confusion, as Michael's saying, than any. anything. I do like the press conferences now, to be honest, that I think some ability to

question and have a little bit more transparency than what we had in the past is good. But yeah, I think some middle ground here, perhaps what we need. Yeah, the weird thing is, if you look at the market forecast for the funds right now, they're pricing three rate cuts and then some. I think the futures are six, six, six re cuts next year, I think. So the market is taken with a bed, pardon me? Oh, I'm sorry, the market, yes, that's right. There's six rate cuts, right?

Yes. There's six rate cuts, right? I mean, that's very aggressive kind of rate cutting. I mean, that's almost like you got, it feels like you almost have to have a recession. We're back to that. You need a recession to get, it feels like, but I don't think they're forecasting, I don't think investors are forecasting recession, do you? Well, I was I was wondering about exactly the same thing.

I mean, if we had recorded this conversation three days ago, I would have offered as a hypothesis for the divergence between market expectations and the Fed's higher for longer strategy that the market thought there was going to be a recession. You know, maybe, maybe not, but that's at least a plausible theory that fits the facts. I was very interested, as it turns out you all were this morning to see that the market thinks that we're going to have a federal funds rate 12 months from now with a three handle. And, you know, I don't know. I mean, I think you got to ask, you know, do they, does the market think there's going to be a recession? I think you've got to ask that question because that is, that is a aggressive pace of rate cuts. In an election here, right? Yeah.

Well, I always go back to this kind of perplexing situation where the recession signals in the bond market, depend on what bond market you're looking at. I mean, if I go look at the corporate bond market and I look at the yield on junk corporate debt, so below investment-grade companies and the interest rate on that debt compared to Treasury, that difference, that spread is a kind of a measure of investor angst that they're not going to get repaid by businesses because of some problem in the economy, which will impair cash flow. The spreads are narrow. You get no indication there that investors are at all worried about recession.

So it feels like, to me, there's something else going on here. It's not a recession signal. Maybe it's liquidity. You know, I just don't know. Usually, usually when I can't explain something, it means it's going to get revised or there's a liquidity or technical issue or some other thing that's going on. It just feels really odd to me. It doesn't, it's hard for me to connect the dots back to. And the other thing is, would the stock market rally 500 points if the investors are seeing thinking recession?

That, you know, this doesn't square, right? So it doesn't feel like that's what they're saying. There's something else is going on here. I just can't just can't put my finger on. I can't. I mean, it could be the divergence. inflation forecasts. You know, it could be that

the markets think that the Fed, I'm sorry, it could be that markets think that inflation is going to fall much more rapidly than the Fed thinks it will. You know, I did a, I have a kind of Taylor Rule model that I,

that I use, that does a terrible job with the 1990s and 2000s, but does a great job with the 1970s. And so that's why I've been using it for the last few years. That's right. It's forward looking.

And that predicted, that model predicted, you know, before the meeting. I ran it last week. That model, that model predicted a funds rate in the threes. Just kind of given. Really? Yeah, given SPF, survey professional forecasters forecast of core PC inflation, CBO forecasts of core PC inflation, you know, nothing, nothing fancy. And so that I think is one potential explanation.

you know, another potential explanation, which I think is quite plausible, is that the market doesn't believe the Fed is committed to 2%. And, you know, the market thinks that, you know, I don't know what the magic number is, maybe it's 2.94% because that rounds down to 2.9. Right. Maybe maybe that's what, maybe the market thinks that's what the Fed is targeting. when I tinkered with my with my forecasting model and changed the target. I'd been using 2.25% as the target. When I changed it to 2.75, you know, now I'm down in the low threes. And, you know, that's, I think, that's, I think, another potential explanation.

You know, I think at the end of the day, you know, there are a number of members of the FOMC who who, you know, for very good reasons, and this is not a criticism of them, but they really want the unemployment rate in the threes. And they were very excited about how that was able to happen in the years prior to the pandemic. And, you know, I think they're less concerned about a 2.7% core PCE than previous FETs would have been. And, you know, and so it could be that investors are kind of reading the, reading the situation that way as well. That's a great point. I hadn't thought of that.

In fact, if I recall, if you look at the, in addition to the dot plots, the Fed releases their forecast for a number of different economic indicators, including inflation. And if you look at the core consumer expenditure inflator, which is what they target, that's the 2% inflation target. I don't think they get back to 2%. Correct me if I'm wrong someone, but I don't think they get back to 2% until like 2027, or it's 26 at the end of the forecast horizon between now and then it's it's well above two it's like you know two and a quarter or something like that you know even even higher than that so it

feels like even in their own forecast they're kind of relaxed about you know getting inflation back down to that target which is i completely get it i mean at the end of the day i think if you asked any of them if they could pick the target de novo right now what would it be it definitely wouldn't be two it would be something closer to three they've been be my guess. Yeah, or at least closer to to five, I think. Yeah, right. I mean, another, you know, another possibility.

I think there's a lot of, it is, it's good to debate whether there's going to be a recession. That's a helpful debate. But, you know, I think if the, you know, kind of couch this in terms of the labor market, if the, if the range of kind of plausible, you know, monthly payroll numbers is, you know, negative 100,000 to positive 100,000.

You know, that, and that seems plausible. So, you know, 40,000 net new jobs a month is a soft landing. Negative 40,000 net new jobs a month is a mild recession, right? This is kind of what we're debating. You know, and if you think that the neutral federal funds rate is 2.5%, which the Fed, I think, still thinks, you know, then if you're, if you're at 3.5%, you're an intent. entire point above the neutral rate. You're still restricting economic activity. And, you know, that, that I think could really be affecting investor behavior as well. Let me ask you one more question and then we'll move on. We'll talk about the inflation,

the CPI numbers, PPI numbers we got this week and, you know, in the context of what it means for monetary policy. But the election. So one thought, uh, thought I've had. is that all else being equal, the Federal Reserve would like not to change policy if they could, the closer we get to the election. And I think most forecasts, our forecast, is that they don't have enough evidence to start cutting interest rates. It can't be before March, probably more likely, you know, by summertime. But they, you know, now you're in the teeth of the election, you know, in November.

And I think that election is. going to be hotly contested, very hard to watch. And a good chance that the Fed is moving policy, certainly if they're cutting interest rates, good chance they're going to get caught up in the election and get politicized. Therefore, all else being equal. And I mean, kind of it's in the reaction function, so-called reaction function, what they look at when making policy, maybe one of the last variables they look at, but it's sitting there, you know, in their reaction function. Does that, does that resonate with you at all? Yeah, I think it's, I think it's a, uh, something that's barely being discussed. I, um, uh, had to, I read a column for Project Syndicate and they asked me to make a 2024

prediction and, and they asked me to do it at 200 words. And so this was my prediction. I emailed it a few days ago, but, but, uh, as far as I, as far as I know, you know, people aren't talking about it. And I think that's surprising because I do think it's going to be a big, big topic in the coming year. I don't quite know, you know, what you do if you're the Fed. I mean, on the one hand, you know, you want to preserve your political independence. You don't want to allow the election to affect you at all on, but kind of how do you, you know, how do you best preserve your political independence? If you refrain from cutting, then, you know, you're going to be, you know, accused of refraining from cutting to, you know, appear not to be helping. If you do cut, you're going to be accused of, you know, cutting in order to help President Biden.

If, if this were a kind of more politically normal contest where the candidates were more conventional politicians, you know, I think it would matter a lot less. but if President Trump is the Republican nominee, which which is I think the most likely point, you know, then you've got this whole other dynamic at play. And so I think it's, I think it's, I think it's, it's very difficult. And if President Trump is hammering the Fed for, you know, let's say markets are right and the Fed cuts in the first quarter, if President Trump is hammering the Fed for cutting, does the Fed want to show independent by doing more cuts than they otherwise would? Or does the Fed want to show independence by doing fewer cuts than they otherwise would?

I mean, you could argue it in both directions, which is what makes it so, which is what makes it a challenging situation. Well, here's a McAvellian theory for you. You know, you're worried about the election next year and you really don't want to get caught up in the politics because the Fed doesn't want to get politicized. I mean, that's the number one priority. I do not want to get politicized. Because ultimately that would potentially wreck its independence. And that's a cornerstone of a well-functioning market economy. We've got to preserve that at all costs.

So a rate hike here or there, I mean, a rate cut here or there is almost inconsequential in the context of I can't get politicized. I can't do that. So here's a mac of the own theory for you. Do what you just did. Now the market says six rate cuts. So you give them three, you give them two, you give them one, you know, you're not going to, you may not get caught up in the, in the politics, you know, that might prevail. And you front load them, right?

You front load them. Yeah. Yeah. You do. You do early. Anyway, I want to come back to the election in the context of policy, fiscal policy. But before we do that, I want to play the game. We're going to play the statistics game.

And before I do, we do that, I want to talk about the inflation. numbers because obviously the inflation statistics are critical to what the Fed's doing here. And one reason why they are clearly more relaxed about interest rates and cutting rates and what's happening in financial markets. And to that end, Matt, maybe I can bring you back in. And maybe you can give us a rundown on the CPI. And the other thing I, you know, we generally don't pay much attention to the PPI, the producer price index.

But that was also pretty good that came out this week and has implications for the consumer expenditure deflator. Again, that's the measure of inflation that the Federal Reserve is using to accept policy. So maybe you can give us a rundown on CPI. And if you have any comments on DPI, I'm in the marketplace for that as well. Sure. Sure. So CPI. Wake up. Wake up, Matt. Come on. Wake up. I know you're tired over there. The baby's great. Let's go. Let's go. courtesy of Starbucks. The latest CPI report for November was large. I forgot. I forgot. We tell everyone that you're a father? We did, right?

We did. Yeah, yeah. Was that before the podcast started or was that during the podcast? That was true. Anyway, Matt's a new father. And so he's a little, he's usually three steps ahead of me. Right now he's only one step ahead of me. So, okay, go ahead, Matt.

Yeah, thank you. The November Consumer Price Index report came out earlier this week, largely a continuation of what we've seen, which is this graceful, relatively graceful come down disinflationary trend in the U.S. throughout 2023. So in November prices and what we're looking at, average change in prices, paid by consumers for a basket of goods and services that is designed to represent the stuff that they spend their money on. So those prices rose 0.1% from in November. That follows flat growth in October. So a mild increase, but certainly not alarming. On a year ago basis, the headline CPI was at 3.1%.

That's the lowest since June. Then you had some weird base effects from the year before. So outside of that, what we're looking at 3.1% is the lowest since early 2021. Everyone starts getting vaccinated. People are rushing back to the things they didn't do. Labor markets all out of balance. Inflation's on its way up. Now we're on the other side of that.

So major progress. But you would notice that headline inflation in November was the same as June, but as we've discussed, Pau Fed communication, much different. And that's because this is a much different situation. Then annual comparisons drifted up for a little bit, came back down. Now they seem to be pretty firmly on their way down. The last mile we'll see, and I'm sure we'll talk more about how much harder that will be. But nevertheless, good progress. So what's behind this lower growth, again in November, as was the case in October, energy prices on the way down negatively contribute to the CPI.

So the energy CPI fell 2.5% in October, 2.3% in November. Motor fuel prices. So prices at the pump, they've fallen meaningfully. recently. Average gallon retail gas prices about $3.3.25 per gallon last I checked, and that's fallen for 12 consecutive weeks. We're about halfway done December. We have information about futures contracts, so where prices are headed. And that reliably points to another negative contribution to CPI in December, probably a milder degree than what we've seen, but still subtracting from headline inflation. Food, another big component. Not a ton to say here the picture hasn't changed, relatively stable.

Can I stop you on the food, though? Can I stop on your food? And I want to bring Mike back into the conversation. You know, there's this debate, a raging debate as to why people don't think the economy's performing well. I mean, you got sub-4% unemployment for two years. You got lots of jobs. The stock market's at a record high.

Debt service is very low. there's a lot of cash sitting in obviously high income households. So they have a lot of cash sitting in their bank account because they saved. And the standard explanation, the one explanation that kind of sticks with me is it's not the inflation now. It's the fact that prices rose so quickly a year ago, two years ago, and people are still paying a lot more for, you know, whatever it is that they're buying now than two, three years ago. And in fact, you know, I was teaching a course at Wharton the other day to business school kids. By the way, I highly recommend doing that because when you do that, you feel like our future is in a really good place. You know, you look at all the turmoil in the world.

I get really anxious about that. And I go talk to these kids and I go, oh, my God, we're in good hands. These guys are really smart. Anyway, I'm talking to one of the kids and I'm saying, how do you feel about the economy? And he goes, not so good. I go, well, what's the problem? I'm paying more for stuff than I was a few years ago. And I go, well, what?

He goes, ramen noodles. Really, that's really bugging me. It's really bugging me. And I think everybody out there has their ramen noodle, right? That's really bugging them. That's really bugging them. Mike, what do you think? How do you explain this?

I think that's exactly right. I mean, I think people, I think people care about the level of prices much more than they care about the rate at which prices are growing. There's been a lot of discussion about, you know, well, you know, inflation is falling. Why are people still upset? We haven't had deflation. We've just had prices growing at a slower rate than they were growing. And, you know, people aren't cracking the macroeconomic statistics, but they, you know, do, you know, this, you know, you know, the student buys ramen noodles every week.

And, you know, somebody else goes to, you know, every, you know, every Saturday, you know, takes his family to lunch at Denny's or whatever and sees that, you know, lunch is 40 bucks when it used to be 32 bucks. And, and that's, you know, that's not a good feeling. I mean, I, you know, I follow this stuff, you know, pretty closely, obviously. And I remember back when. and the inflation started a couple of years ago, you know,

I would take my family to the same restaurant. We'd go to a lot for lunch on a Saturday. And, you know, it was 20. I bet it wasn't a Denny's. I'm just saying, I bet it wasn't a Denny's. It was a, my,

by seven-year-old loves IHop. And so we have to, I love IHop too. I love I. We have to go, we have to do that relatively often. But, you know, it's 20 bucks more than it used to be.

I kind of felt like somebody pushed me in the face and took a $20 bill out of my wallet. And it didn't feel good to me. I mean, I really felt it felt unjust in a way that surprised me. I was surprised by my reaction to that. I think something else is happening too. I mean, in the kind of debate, Mark, you reference about, you know, is there a disconnect between consumer sentiment and actual economic performance? You know, you got to remember even in the worst economy,

nine out of ten workers can find a job. And so, you know, yeah, for sure. I mean, we have a great labor market. But, you know, that just means that there are two workers who can find a job that otherwise wouldn't have been able to, whereas these high prices affect everybody. And so if you're those two workers, you know, and you know that you know that you, that you, that you may otherwise not have been able to find a job. You're probably really happy.

But, you know, the other 98 people, the other 98% of people are unhappy about, about how expensive everything, everything is. I think there are other explanations as well, but, you know, those kind of strike me. That makes total sense to me. People just don't think it's fair. You know, it's, as you said, unjust. I mean, how could it possibly be the case? and I'm paying twice as much for the same thing than I was two, two, three years ago.

Someone's ripping me off. In fact, the one thing that I know polls really well politically is if you blame the high inflation on greed inflation, that it's the greedy corporations. Because it goes right to this, this is unfair and I'm getting ripped off, you know. I saw a poll. I don't know how representative this is of the kind of general state of polling, but I saw a poll with something like 75 or 80% of respondents reacted, Mark, just as you say. Yeah.

These greedy corporations, you know, they're not, they're not, you know, lower their prices. And that's, it's pretty tough to find these days to find three quarters or 80% of America. Ring on anything. Yeah. Except maybe that the Eagles should win the Super Bowl. I think in the Philadelphia, in the Philadelphia metropolitan area, I'm sure you can find. Exactly. But Matt, let's go back.

finish off the CPI. The one thing I want you to focus on, though, is if I'm going to ask this as a question, because I'm not sure I didn't look at this this month's data, but up until now, it's been the difference between the actual inflation rate and inflation at the Fed's target was the growth and the cost of housing services, shelter costs. And that had, that remains stubbornly high, stubbornly persistently high. And that's the gap. If that comes back into something that's more consistent with historical norm, then inflation is going to get back to target. Is that factually still correct based on the data we got for November? And what's going on there?

Do you have a view on that? And I know Chris might have view, and Maris may have view and Mike. I have view as well. But I'm just curious. Yeah. If you take shelter all the way out, you're at about one and a half percent. Oh, okay. But including shelter, I mean, shelter at its normal growth rate, kind of pre-pandemic,

two and a half, three percent. Then you're in that ballpark of. of target range. So shelter prices did rise again, 0.4% in November. And we're up 6.5% relative to a year earlier. So this is trending downward, trending in the right direction. I would say a little bit more slowly than anticipated using the oft-discussed rent indices that everyone looks at and says, you know, rent growth is kind of flattened out.

This will kind of filter its way through, through CPI. That's happening. But six months ago, we thought that shelter CPI would be closer to 6% than it is now at 6.5, but it's trending in the right direction. So, again, that's... Is it my seasonal adjustment issues or just some kind of measurement issues? But you feel like it's going to catch up. Yeah, and I think our forecasts, this point looking forward, what are we talking about

next year? Shelter prices growing at about 4%. So again, that's ever closer to that norm. You expect, given the same kind of compositional effects now that that leaves CPI at target it in ballpark or, you know, as we forecast it. So it is happening. But yeah, that's mostly grown, yeah. Marissa, because I've kind of locked you out of the conversation.

Let me throw this question to you. I mean, have you been surprised by the persistence of the cost, the growth in the cost of housing shelter costs? And what's your, do you have a sense of what's going on there, just as any theories? Yeah, because I think if we went back a year, or earlier this year, we were thinking that by this time in the year, we would see a much more significant deceleration in rents, right?

We thought it would take maybe nine months, 12 months again, to see that, and it's much more persistent. And I would say back to your question to Michael about, you know, why do people feel so bad about the economy when the economy is good? I think food is one thing. I think the cost of housing is the... other big thing. I mean, certainly not everyone's out there trying to buy a home, but if you're not, then you're renting. You've seen, you know, you saw rents shoot up quite a lot during the pandemic.

Maybe now they're stabilizing, but again, I think people are more focused on the level of price that they're paying than the change in that price. And the home buying market, I mean, forget it, right? We've talked about this many times on the podcast, particularly for a first time, buyer, it's, it's almost impossible in parts of the country. So I think that's this other sense of it's unfair, right? It's unfair. This is a basic sort of good, sort of the cornerstone of the American dream and, you know, you're making it financially is your ability to purchase a home. So I think this is, goes to how people are feeling. And I think it's discouraging that it's not coming down faster too.

Yeah, you make a great point. In fact, I saw a morning consult, and I should thank them for sending me the survey results a little bit early. But if you look at, you know, what's bugging people when it comes to prices across age group, if you're in your late 30s and early 40s, this is the number one thing. That makes sense, yeah. Yeah. I mean, as you look at older age groups, housing falls to the bottom. The one thing that's constant is food. Food is kind of number one or two all the way across the port. But housing is for younger people, obviously, top of mind. Mike, did you want to weigh in?

I saw you shaking your head there on the growth and cost of housing service. You've been surprised, too, about the persistence of that. Yeah, I was shaking my head at a few points. I've been quite surprised. And, you know, my expectation is the same as Marissa's. I thought that, you know, kind of looking at the real-time rent indices, trying to figure out how that would, how the marginal rent, you know, would map into the average. The average, of course, is what shows up in the, in the CPI.

You know, I've been surprised kind of month after month for the last several months that we haven't seen more progress. The second reason I was not in my head is I was talking to a public opinion expert who told me that there's that if you kind of look into the polling data of young people, who are renters under age 35, let's say, that there's this kind of rule of thumb that you should be spending less than a third of your income on rent. And I hadn't thought about that in years, but that was something that when I first came out of college and got a job, that's what, you know, that's the advice I got too. And that is harder and harder and harder, especially in big cities

where more and more young people are living than they then then then then had been true in the past and that and that that that may be a under discussed aspect of what's driving consumer sentiment is this kind of threshold you know rent to income ratio for younger people and then and then the third reason I was I was I was on my head is is you know that that it's just harder to buy your first house for a lot of people and that seems to be a a big problem. I didn't realize you were nodding your head three times there. Yeah.

One big head nod. So there was not a word I disagreed with. I was feeling great. That was good. Hey, Matt, real quick, because I want to go to the game, is PPI and what PPI and CPI and CPI imply for the consumer expenditure deflator. Do you have a sense of, because again, that's what the Fed is predominantly focused on in setting policy.

Anything on the PPI and the PPI and the, in the uh what it means for pce uh so bodes well for pc being a little bit lower that the ppi for november came in flat expectations we were a little bit pessimistic we thought we would see a modest decline but but generally there was the expectation that the ppi would take up it was flat um that falls a 4.4 percent reduction in october uh those things as we await uh later in december the PC data, the core PC, the Fed's preferred inflationary measure are a good thing. We should expect to see it's a negative effect. Yeah, a smaller increase. Early forecast now, I think, are 0.1% for the core PC. Yeah. Yeah, that's good. Okay, good. Good. Good. Let's play the game.

The stats came. And as the listeners know that we all put forward a statistic, the rest of us trying to figure that out through questions, closed, deductive reasoning. The best stat is one that is not so easy. We get it quickly, one that's not so hard we never get it. And if it's apropos to the topic at hand, all the better. Marissa, you want to go first, as tradition has it? Sure. Okay.

My statistic is 19.4%. Okay. It came out this week. Mm-hmm. Government statistic? And the Fed is part of the government, just saying? It's not from the Fed or the government. Oh, okay.

Okay. Oh, I didn't even listen to the answer. It is or it isn't part of the government? It is not. It is not a government statistic. No. Okay. Okay.

So it's from a trade group? Yeah. Okay. NFIB came out? Is it from NFIB, National Federation of Independence? No, not the FIB. Is it from the Mortgage Bankers Association? Is it a housing statistic?

Yes. It is. Oh, so it's from the NBA. Yep. Okay, so it's from their weekly mortgage. Applications. Application. Oh, okay.

Purchase apps were up 19.4% in the week. No, the other one. Refire. Refire. Refile. Oh, ref. You guys really drilled that down. Okay, very good.

Yeah. Yeah. I think I get the cowbell. there. Just say, hold it. Wait, you get the cowbell? You said purchase. I said refi. Oh, geez. I let you down the golden path. All right. Go ahead. All right. Okay. So, okay, interesting. Interesting you pick that. Why? Well, I mean, this kind of, so my original statistic was going to be about the PPI, but, you know, we blew that because that would have been too easy. Yeah. But this kind of goes to like the Fed maybe not helping the situation here, right? So now mortgage rates are down to 6.8.

That feels good. 6.8, yeah. They've been coming in. We obviously saw a huge rally in the bond market yesterday, so they're falling even further. So this is still low, right? if you look at the whole history of mortgage activity, we're still very, very low in the grand scheme of things, given the level of rates. But people are reacting already to lower mortgage rates. I mean, even the purchase applications index was up. I mean, this is a volatile series that's

weekly. It had fallen in the previous week. But people are refinancing with rates at 6.8 percent, probably just because they have so much equity to withdraw, right, to work with, just given house prices over the past couple of years. I mean, I don't know that the Fed wants to be necessarily juicing housing market activity right now. So I'm just trying to tie this back to our original conversation about the Fed potentially loosening financial conditions at a time where it probably doesn't want to do that as much as it's doing it. Chris, what do you think of what Mercer just said? You know, housing's always this tough one, right?

The problem is not the demand side, it's the supply side, right? So the Fed actions, yeah, you're right. They might be contributing to even more demand, if you will, but the demand is already there. I don't know that that should be their guiding post here, right? I think there's going to be consequences on the housing market, but I don't know that that they should be adjusting their policy. just to keep the housing market tighter or to... I agree. I agree that that's not their... That shouldn't be their primary objective, for sure.

But it has big implications. Yeah, it has big implications. And given the discussion we just had about housing, you know, how important it is to the economy, to people's perception of the economy, to people's feelings about the economy, to the share of GDP that, you know, housing makes up, I mean, I think it's...

it's one to watch. I find this conversation fascinating. But this is also the refi index, right? I find this really fascinating. I mean, it wasn't but a few weeks ago. We're so worried about recession. You get this news, you go, this is great. We need to support it.

Now you're sitting here saying, oh, I know. We might be deusing up the economy again. This is not good. That's really, I know. It's bizarre. I think this, I think I agree with Michael. Like, I'm very, worried about this. I'm very worried that they've boxed themselves into a corner. Yeah. And they are

committing, although, you know, they're not committed, right? But essentially by broadcasting this, they're committing to a course of action that the market is taking as gospel. And like, what happens if in a couple months we get bad data on either the labor market side or the inflation's, what if, what if inflation re-excellar? rates and then they feel like no well now what do we do because we told people we're going to cut rates three times but now we really don't want to cut rates i just think they're in a they're in a bad situation right now mike you agree with all this huh i do i think i think they're in a bad situation i think i think that there is a real risk of a reacceleration uh we saw a reacceleration in the third quarter this isn't this isn't this isn't just fiction we saw it happen a few months ago and you know again uh you know

ending the year with a 25% increase in equity values and, you know, 10-year treasury note in the high threes or low fours is a way to get a reacceleration. You guys are worry words. Gee, Louise. Holy cow. You have to worry about something, Mark. I guess so. Jeez Louise.

Hey, Chris, you want to go next? Sure. What was it? 2.08%. That's pretty pretty. precise. 2.08. Is it a year-over-year PPI?

No. Is a government statistic? It is not. It's a market statistic. It's a what statistic? It is a market statistic. Oh, I thought so. So it's an interest rate?

It is an interest rate, yes. It's a low interest rate. What's a 2.0? Or maybe a difference in interest rates. Oh, it's a spread between something and something? It's the difference, yes. I was trying to make it a little more scientific. It's not the spread between the 10-year and the mortgage rate?

No, no, that's higher. Funds rate is five and a half, and the 10-year is below four. That's not it. It's not the spread between the fund rate and the 10-year. No. It's not two-year-tenure. three months, three months? What's our topic today?

Is it a yield curve? Is it a measure of the yield curve? Nope. No. Okay. Is it a credit spread? No, it's related to... Oh, is it the difference between the Fed funds rate and the...

No. No, more fundamental. It's related to our inflation discussion. Oh, I know. It's inflation expectation. It's the five-year... Thank you. Sorry, that was a great...

Four. Yeah, five-year-four. Yeah, five, was it five year, five year forward, two point zero eight? It's the five year break even. Oh, five year break even. Okay. Yeah. Okay.

Wow. I didn't realize that. Yeah, that's amazing. Yeah. Okay. So why did you pick that? Why did you pick the break even? This is a measure of investor expectations of inflation, average expectations for inflation

over the next five years. It's the difference between the rate on a five-year treasury bond and the five-year treasury inflation-protected bond or the tips security. So this implies a 2.08 inflation rate, right? Very low. It's come in, right? So the expectations aspect of this seems to be off the table, at least for now. Yep, very good, very good. Hey, Mike, did you want to play or you want to take a pass? I'd be happy to play. Okay, far away. 24.8. 24.8. The stat that came out this week?

It is a stat that came out last week. Okay. Okay. Is it a percentage? 24.8%? 24.8%. This is obscure. It's an obscure one.

Okay. Is it a government statistic? It is. Is it related to the labor market? It is. So is it the jobs, something in the jobs report? It is. Oh, okay.

On the household side, the household service. It is. Okay. Is it a percentage increase? Nope. A share. It's a share. It's like a demographic.

Right. Okay. 24.8% percent. The labor force participation rate of teenagers? No, but close. Oh. Oh, African American teenagers? No, not teenagers.

Teenagers? Only over 65. Oh. Oh, over 65, no. Is it, it's a participation rate, though? It is. And is it African American? Black?

No, but they are included. They're included. It's not only for African American. Ooh. It's by a, some age cohort. 16 plus. Oh, 16 plus. Okay.

Oh, goodness. Gracious. What could that be? gender, ethnicity, are we going to kick ourselves when you tell us? Probably not. It's pretty obscure, but you might. Is it participation rates of Native Americans?

No. No. That's not published. People with multiple jobs. People who live in Guam. No. No, it's the participation rate for people with a disability. Oh.

And it is up by rough calculation about 20% relative to where it was before the pandemic. Wow. And I think that's a really important thing for welfare of society, for sure, really important development. Also, maybe some interesting economic content there. is it reflective of labor demand, labor supply, and balance, where businesses are willing to hire workers that they otherwise wouldn't? Is it reflective of a technological change where there's more work from home and it's easier for workers with disabilities to participate in the workforce that it used to be because work from home is more prevalent? And, you know, again, it speaks to, it speaks to, I think, the benefits to society of having a really tight labor market. High labor market, yeah, kind of a high-intensity labor market.

Yeah, get everyone involved. Yeah, that's a great, that was a great statistic. Very good. Hey, Matt, do you have a good one? I hope it's good. Because I know you really think about this. Is it good? Yeah, I think it's good.

Okay, far away. We'll do one more because we're running out of time, but we'll do one more. Go ahead. Price of divers. No. That's good. That would be quick. 0.4%.

Statistic that came out this week. Yes. Inflation. Government statistic? Government statistic. Inflation? No. Not related to inflation at all?

Indirectly, but not the main focus. Okay. It's a percent. You said 0.4%. Increase? Yes. Increase, yes. Um, okay.

Uh, is it an obscure statistic? No. No, no, okay. Um, Romer report that has not been discussed on this podcast yet. Ever? Like ever? This, this particular podcast, this one. That would be, that would be really obscure.

You guys have never heard of this report. The government releases in midnight. Retail sales. Okay. That's it. Yeah. Yeah? Yes.

The core retail sales, like X Auto, X gas. Very close. Oh, it's control. X auto, X gas, X building material. Yes. Yeah. Control retail sales. So, yeah, excluding gas, building materials, restaurants, non-auto retail sales.

That's a good one. Yeah. Yeah. Yeah. If you say yesterday, the Fed announces or projects 75 basis points in rate reduction in 2024, post-meeting Jerome Powell saying, he's reminding everybody about the other mandate, which we're really focused about employment. It just seems like, wow, something, there must be this really big dark cloud. It was kind of my takeaway that nobody else sees. And then you get

data pretty consistent with what we've had, which is really strong consumption. It's an economy that I don't think needed a jolt of exuberance, which is what happened yesterday. So I find interesting. I don't know how... That feels pretty good. Point four, you what, annualize it, it's four and a half to five. That feels right. Do you divide by inflation? It's still two. Yeah. That's what you want, right? No. Core retail a little closer to, it looks like an echo of, or a continuation of the third quarter, which was, what, point seven, right, point eight in July and September, kind of these

strong figures. So maybe not through the roof, but certainly not an economy that's teetering on the brink and needs financial conditions to loosen. Mike, you come on the podcast and you're like messing with people's minds. Like now they're all worried about we're growing too fast. Come on. I, uh, it's like, Mark, you wanted some upside risk. You know, you got into their minds. I got, I got a Mike strain hat on. I'm not allowing you win. jeez louise uh okay all right hey we're running out time but i do want to uh end the conversation with the election as you said mike this is a i think people aren't paying enough attention here in two respects and i want to get your reaction to both first how worried should we be

about this election being close and contested and that ending up in a very uncomfortable place in terms of, you know, what's going on socially, politically, social unrest, that kind of thing. Should we, this is one of those things that keeps me up. I mean, how worried should we be about that? Do you think that's a real issue? Yeah, I think it depends a lot on who the nominee is. And so, you know, my kind of current view is that if Governor Haley pulls it off, then it's not going to be that close. And she, you know, likely win pretty decisively.

but I think if President Trump is the nominee, you know, people come home to their respective parties. We're kind of the 50-50 nation. There are, I don't know, a dozen counties where the election will be decided. The amount of resources that will be spent in those 10 or 12 counties is astronomical. And it'll be close, and that'll be, you know, that'll be, that'll be, that'll be bad for basic social stability. I think that's a real possibility. Yeah. I mean, there's so many different scenarios here, but I mean, should we, do you think it would be prudent for businesses, financial institutions, governments, to be considering scenarios where things do go?

in a kind of a dark place? I mean, in terms of social unrest and what that might mean for financial markets and the economy is that, or is it so far out on the tail that that's not worth even considering? Or is it something that should be, people should be thinking about when they do their planning for 2024? I would, I would be thinking about it. Yeah. You would be thinking about it. Yeah. Okay. For sure. All right. Yeah, we have an election model. We just dusted it off. We're, We do it at the electoral college level. And you make a wonderful point that I think people that's really important to reemphasize. The president of the United States is determined by a few states and actually just a few counties in a few states.

And in many cases, it's not even whether the Republican County goes Republican or Democrat goes Democrat. It's really the turnout in that county. How many, like if I, you know, everyone expects Philadelphia County. to go Democrat, but how, what's the turnout in Philadelphia is what really matter? So I think this is going to be, you know, just incredibly close race. Here's the other thing I want to bring up, and that is policy. Okay, so one, on the other side of the election, whoever wins, they're going to be faced with some having to make some big decisions and choices pretty quickly.

right? I mean, we've got the debt limit that's going to come do again. That has to be increased about that time. You've got the Trump tax cuts. Remember all those tax cuts back in 2018? They, for individuals, they expire at the end of 2025. So something's got to be done about that, some decision around that. And I believe there's also a lot of tax subsidy for Obamacare or health subsidies that are come and do that needs to be thought about and done. done. And I'm sure I'm missing other things that have to be done. But those are pretty big things. How do you think this, this, and all of this in the context of we've got a very large deficit that isn't going to come in, even with an economy that's operating in full employment, you know, 3.7% unemployment rate. And if we don't change policy, if you look at CBO, congressional budget office forecast, something's going to break in the not too distant future. I mean, because, you know, our debt load is going to continue to rise. How do you process all that? What,

What's your thinking around that and how this may all play out? Well, this is not a good place for optimism. I think it's very troubling. I think one of the kind of big misnomer's in conventional wisdom is that there's a lot of disagreement between the parties on this issue. You know, both President Trump and President Biden are crystal clear on not wanting to. to cut spending on Medicare and Social Security. Those programs are the two biggest drivers of the structural deficit and the long-term fiscal imbalance.

Both President Trump and President Biden are crystal clear that they do not want to raise taxes one penny on the bottom 98% of households. So the fight is over what to do with the top 2% and there's just not enough revenue there to make a material difference to the long-term debt outlook. I don't think there's going to be a big fight over what to do with the expiring household provisions in the TCJAA and the Trump tax cuts. I think that's going to, I think allowing those provisions to expire on the bottom 98% of households will be interpreted as a tax increase on the bottom 98% of households.

And so you'll see President Biden wanting to extend those cuts. If President Trump wins, he'll want to extend those cuts. And so, you know, I think if Governor Haley ends up getting elected president, she'll likely be serious about at least attempting to address our fiscal imbalance. But I think if we see President Trump or President Biden winning the election, then they have not left themselves much ruined and maneuver. and I expect to see the can kick down the road even further. Right. Well, I guess that's going to be certainly not my problem. It might be these guys.

It might be definitely Matt's problem. For sure, I mean, Matt's problem. But that's a problem. That is the problem. I mean, my hope, and I'll just throw it out because I, as you can tell, I'm glass half full. You know, my hope is, it's pretty hard to do this, but I'm going to try. You know, that I don't think lawmakers, whomever the lawmakers are going to be able to make the hard choices necessary to put our fiscal situation in a more sustainable place without pressure.

And I do think that pressure will likely come from the bond market. And we got a whiff of that just a few months ago when long-term interest rates jumped, you know, for lots of different reasons. But we got the 5% 10-year treasury yield in part because I think there was a lot of bond issuance that we had large, we have a very large deficit, surprisingly large deficit this year. We had a lot of issuance because of the debt limit that stopped issuance. And then all of a sudden they'd turn on the spigot and there was a lot of bonds issued. And then it's kind of shown a light on this long-term fiscal issue that we have. Of course, the rating agency is either downgraded or they changed their position on stable versus negative rating. And so I do think we got a whiff of this.

But going forward, at some point, it feels like rates are going to rise in that those bond market vigilantes that we used to talk about in the 90s, when the last time we had, you know, a very serious fiscal problem when interest expense, the government's interest expense was rising to very high levels of GDP and overall revenue, that that will be the catalyst, that at that point lawmakers have no choice. And also, they almost need it because it's very hard for lawmakers to convince the electorate, we got to do something if, well, why do we have to do something? You know, the interest rates are low. everything's fine.

You know, unemployment's low. Why do we have to do something here? So it will take that. But once that happens, once rates start to rise, once a lawmaker can say, look, we're spending more on interest expense than we are in the nation's defense. We're cutting a check that's greater to the Chinese, to Chinese investors than we are on defending our country. That's when the like bulb goes on and we say, oh, okay, this makes no sense.

we got to do something and that's when we'll do something. So am I just smoking marijuana? What, you know, what do you think? Oh, I mean, I think, I think an unsustainable situation can't be sustained. So I don't, you know, I don't think the situation will be sustained indefinitely. I think it certainly could come, the pressure certainly could come from the bond market. Another source of pressure are the kind of statutory requirements of benefit adjustments when trust funds run out. So in the relatively near future, the Social Security trust fund will be

exhausted. That will require a massive, immediate cut in Social Security benefits. That will force political action. That cut likely won't happen. I mean, it certainly won't happen to the degree it is required by law. And so Congress will have to pass a law that finds a new source of revenue to fund benefits at, you know, likely a little bit lower level, but, but, but not at the level required by current law. And in the process of doing that, that will create some political space to introduce longer term reforms. So, you know, whether or not, whether or not the forcing event comes from the bond market, whether or not the forcing event comes from, you know, trust fund exhaustion in social security or, or, or in certain parts of Medicaid.

I think there are forcing events that will happen and, you know, we'll then, you know, will then deal with this problem. The tragedy, of course, is that if we dealt with this problem 10 years ago, it would have been, we would have found a much better solution. And if we dealt with the problem today, we would find a much better solution. So what we end up doing will be very much subopt. But, you know, it will be better than, you know, ruining the nation's finances and, you know, destroying the global financial system. Right, right.

Okay, let's end this way. Very quickly. We haven't done this in a while, but I want to get you on the record. The probability of recession starting at some point in 2024, Chris, let me begin with you. What's your probability? 33%. Ooh, 33. So that's down from.

where you were down that was at 40 down down 40 Matt what's your probability recession in 2024 a little lower say 25 percent 25 okay marissa I'm still at 20 20 okay relative optimist Mike 60s oh wow really holy cow you're not just saying that okay I just say it you're okay oh that just say it okay I just say it okay Is that worth, what's the catalyst for that? Do you think? Anything in particular? I see a lot of kind of weakness under the surface.

The top line numbers look good. You look a little bit below that. And I see some kind of troubling signs, both in the labor market and for consumers. spending and also for business investment for all three. Reason number two, you know, things are a little too quiet. There's got to be a banana peel on the sidewalk somewhere. It's been a while since we've slipped on a banana peel. You know, reason number three, reason number three, you know, I think that there is a,

I know, there's a risk. I think there's a risk of energy price shock in 24. There are, you know, I think President Putin would like for that to happen. And, you know, that's an additional risk. So just kind of, and then, you know, and then I think by fourth reason. Yeah, generally angst. Yeah, yeah. I mean, there's a, there's a real psychological component to this.

And the kind of soft-edding narratives ignore that type of recessionary psychology that I think is pretty important. Yeah. Somehow we got to get the banana peel into the title of this podcast. Yeah. I like that. I like that. Well, hey, Mike, thanks. What's that, Chris?

What's your probability? Oh, that's right. I didn't tell you. Negative 10. I'm at 25%. No, no, no, I'm at 25. I think, you know, the unconditional probability. I know lots of different ways of measuring.

Simply, simple measurement, 15% unconditional probability. I'd say 25%. So elevated. I'm wary of the banana peel. You know, I think that's a, and sentiment is fragile. So, and at the end of the day, recession is a psychological event. And, you know, I don't think it takes much of a fall to undermine. that sentiment.

So I wouldn't dismiss it. I do think that that's a reasonable risk. So, but Mike, hey, Mike, thanks so much for coming on. Really appreciate it. That was a wonderful. Thanks for having me. Covered a lot of ground. I really, really appreciate that.

Always a turn to conversation. And I hope to have you back. Maybe a year from now, we'll get you back. Yes, for sure. Love to come back anytime. And again, you've won the battle. We'll see who wins the war. Write this down, everybody.

Write it down. Write it down. All right. I love a competition. I've lost my fair share of bets to Mike. He's a damn good forecaster. All right. With that, we're going to, dear listener, we're going to call this podcast.

Take care now.