Motley Fool Money - Kyla Scanlon on Inflation, Economic Vibes, and Pizza

Episode Date: June 2, 2024

Almost half of the United States believes the S&P 500 is down for the year. The chart says otherwise. So, what can explain the disconnect? Kyla Scanlon is an economic commentator and educator. Her new book is “In This Economy? How Money & Markets Really Work.” Mary Long caught up with Scanlon for a conversation about:  - The challenges of measuring economic data. - What’s driving inflation. - How Domino’s turned around its business. Host: Mary Long Guest: Kyla Scanlon Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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You know, there's even research papers that are saying, like, we don't need to have a recession, right? Like, if we spend money the right way in a productive capacity, if the Federal Reserve comes in with their toolkit, like, it should be okay. But, like, we're kind of dealing with the consequences of that now, too, where the Fed's toolkit might not be the right toolkit to fight some of the inflation that we're experiencing. Like, raising rates in order to battle inflation, when a lot of inflation is caused by shelter costs is not maybe the best path. I'm Mary Long and that's Kyla Scanlan, an economic commentator, educator, and the author of the new book, in this economy, how money and markets really work. I cut up with Kyla in our Denver studio for a conversation about the disconnect between how people feel about the economy and real economic data, why inflation right now is kind of funky, and how bluey and Peppa Pig are disrupting the nostalgia cycle.

So you kind of like start your journey in this world learning about individual companies and the stock market. And now you comment most often on the macro. So how did you go from focusing on the micro to the macro? And what is it that now you find so compelling about that larger, broader picture? Yeah. I mean, I started the financial content creator, quote-unquote, journey when GameStop happened. And so even back then, I was more focused on companies. Like, I would write various pieces.

I remember I wrote this big piece on Roblox. And then the Federal Reserve started getting more attention because inflation was getting out of control. And I realized that there was maybe a gap in knowledge between what the Federal Reserve was doing and what people understood them to be doing. And so I started making videos about monetary policy. And I just really found it so fascinating. I get called a Fed Simp sometimes. But I think that the way that money works and how it moves throughout the world is almost like a beautiful thing. you know, if it didn't have such big impact on our lives, it'd be beautiful.

So that's how I switched over to macro is I felt like it was important for people to understand. Well, and I think the focus of so much of your work is like on people. And I think we typically think of economics as being a very like math-heavy statistics focused field. And honestly, this might sound trite, but before I started reading your book, I think I often kind of like waved it away. When I heard the economy as people, like there's something. about understanding like yes incentives, but understanding, no, there's this specific person and how they think about the world. That impacts how X, Y, and Z moves. So you do a really great job of illuminating that connection in the book and making that really clear. You kick the book off

with an analogy of sorts, and I'll let you describe it. Why do you think of the economy like a kingdom? Do you remember those rugs that you would play on when you were little like the city rugs with the street roads and you would like draw your fingers? Do you know what I'm talking about? I don't. Oh, no. You run with it. My analogy doesn't apply here. But that's, so it's like this rug that is just a cityscape. And that's kind of how I think about the economy is like an interconnectivity. And I think part of the reason that people feel overwhelmed by the economy is it's hard to see all the moving pieces, especially hard to imagine them altogether.

And so the economic kingdom is meant to demonstrate that interconnectivity. So showing how fiscal policy and monetary policy relate to inflation, relate to the U.S. dollar, commodities, etc. and it's just meant to be a visualization of the economy at large. And of course, it should be massive. It's like way bigger than just the book page, but I had to condense it down the best that I could. But that was, yeah, it's just meant to be a way to understand how all the moving parts click together.

And I'll just add here that the book is also illustrated. So you will get an illustration of what this economic kingdom looks like in the actual book. You're known for talking a lot about vibes. we're recording this May 23rd. What are the vibes? Yeah, I know the vibe session is back in the discourse again. We had a pretty brutal sentiment reading.

And then there was a Harris Guardian poll that was released earlier this week that showed, you know, 55% of Americans think that we're in a recession, 49% of Americans think the stock market is down on the year, 49% of Americans think that unemployment is at a 50-year high. And it's almost like heartbreaking reading the statistic. It is heartbreaking because we're not in a recession. The stock market is up 12% on the year. Unemployment is at a 50 year low.

But all these people feel this way. And like there's a couple of reasons, right? Like number one is structural affordability. We have a housing crisis. We have child care is exorbitantly expensive so people aren't having kids. You know, it's up 32% since 2019. Elder care is $10,000 a month. We don't have a social safety net.

And so there's real reasons why people feel bad. But I think what the statistics showed, and I've been like thinking through this all of today, so you're getting like the fresh thoughts. We love fresh thoughts laying on us. Yeah, it's almost like a media literacy crisis, I think, with the economic data and how people are interpreting it because there's an objectivity to the S&P being up. Like you can't argue that. Like almost 50% of Americans think it's down.

And so I think, like, number one, to make it so clear, there's reasons why people feel bad, obviously. But there's something deeper going on where it's a media literacy crisis, whether that be from people's inability to interpret the information accurately or the media sources that they're getting it from, not allowing them to interpret it accurately. There's some issues. Yeah, this poll really stuck out to me. It's funny that you mention it because I've got it written on my notes as well. And I think you're right that part of this is a media literacy issue. But I also, I feel like part of it is also anecdotal. And anecdotes and what people see versus what they see in their life versus what they see in headlines sometimes.

And, you know, as we were saying earlier, I think it can be really hard for a lot of people to understand what these big macroeconomic metrics mean. And we'll get into some of the metrics because your book does a great job of outlining them and how they're big. So we can get into what they are, how we land on certain numbers and what they actually mean. But I think when someone sees a percentage come out each month that's supposed to indicate what inflation means, that feels really different and maybe not representative of the prices that a person sees when their grocery bill just goes up. And so I agree with everything that you said about that being the problem. But I also think there's a disconnect between the metrics that we use to gauge economic health, not capturing like the anecdotal experience of people.

I don't know what we do about that or how we capture that. But so much of your work talks about, again, the economy as people. Do misaligned vibes mean that we ought to kind of rethink how we gauge the health of the economy? Like what metrics would you pull from instead? Yeah. I mean, I think that like to your point about anecdotes, this is where it gets fuzzy because 70% of people feel great about their personal economic situation. but only 30% feel okay about the national level. And so there's all of these points of discrepancy.

You know, people's behavior, they're out there spending. And of course, going back to your point, they might be spending and not feeling great about it or not feeling like bad mobility. Upward mobility is on the decline in the United States. So I think there's an element of truth to the anecdotal stuff. And, like, of course, people are going to respond to a survey and be like, I don't really know what's happening.

So there's truth to that. And I do think, and I sort of talk about this in the book, I rag on GDP in the book quite a bit, because I don't think it does a good job sort of capturing how people should feel about the economy because it's a measurement that does capture consumer spending, and it does capture government spending, and does capture imports and exports and, you know,

how businesses are spending, but I don't think it does a good job at measuring consumer happiness. And this is something I've been, like, rolling around with for a while, because, you know, a lot of people ask me, like, well, will people ever feel happy about the economy? I don't know. But I do think there needs to be measurements out there. I mean, even if you look at the labor market metrics, right, like jolts the job openings and labor turnover survey, I talk about that in the book, too, you know, 30% response rate. And we're using that to gauge the success of the labor market.

Of course, we look at other metrics, too, and that, you know, the economic tapestry is a bunch of different metrics telling us a bunch of different stories and that, you know, converging. to a mean, but I would say that there are, the metrics are not doing a great job. And in terms of how we should measure it, I don't know if surveys are the best option. I think that data and data interpretation is a little bit fuzzy. I think there is going to be ways to capture a better, because like information moves so fast, like we should be able to capture data a little bit better than we are now. But it's easy to like sit here on a podcast and say we should be doing a better job and not be contributing to that. So I'm not sure.

Yeah. Another disconnect is that not that long ago, many economists were predicting with 100% certainty of recession. I remember that headline. And we've avoided that, which maybe depending on who you ask or what you look at, that could speak to the Federal Reserve doing a good job of navigating the soft landing and actually making that happen. But recessions are also a natural part of an economic cycle.

So if we avoided one when it was supposed to come, and now we're at a point where the stock markets at all-time highs, it seems like there's a lot of misalignment going on. Is this a bad thing? Does the avoiding of this recession that was predicted not so long ago only delay one further down the road and make the repercussions of that worse and they might have been had we just dealt with it in the first place? I don't think so. I think that those headlines were misplaced. They were stating. things that weren't necessarily true. I think, if anything, this is the resiliency of the American consumers, but to your point of can it be okay for a while, you're starting to see credit card delinquency rates take up, which means that people were spending and maybe not having the income to spend or the savings to spend. Savings are dwindling. And so I don't know if it's going to be like worse down the road. I don't know if it's just like, oh, we circumnavigated it now,

and now we're going to have to deal with the consequences of that. Like, it's not like they come, well, they do come every seven to eight years. But, you know, we had a mini one in COVID. So I'm not sure. You know, there's even research papers that are saying, like, we don't need to have a recession, right? Like, if we spend money the right way in a productive capacity, if the Federal Reserve comes in with their toolkit, like, it should be okay. But, like, we're kind of dealing with the consequences of that now, too, where the Fed's toolkit might not be the right toolkit to fight. some of the inflation that we're experiencing, like raising rates in order to battle inflation,

when a lot of inflation is caused by shelter costs is not maybe the best path, because higher rates makes it more expensive to build homes, which is what we need to fight shelter inflation. And then you're seeing government spending, which saved us from the recession, like fiscal spending is what got us away from the recession that we could have experienced that those headlines were predicting, and now interest servicing costs are sky up. high because the pet has been raising rates soon to surpass defense spending, right? Which is not great.

And so I think that there are real-world constraints to what we can do to avoid a recession. I would love to never have a recession again. I think that would be great. But I do think they are a natural part of what we deal with. One of the things, again, that your book does really well is focus in on these different metrics and numbers that we use to gauge the health of the economy and actually explain what they mean where those numbers come from. So we'll focus on inflation for now because it's the name of the game and kind of what everybody's talking about. You talk about how inflation is calculated by looking

at a basket of goods. There was recently a misconception that kind of came out, not with your work, but with someone on Twitter pointing out that coffee was removed from this basket. So do you maybe want to give us an overview of how exactly this basket of this basket of is determined and what falls into that basket and what doesn't. Yeah, yeah. That coffee thing was funny. That goes back to the media stuff to what people say matters and, you know, screaming on Twitter that coffee is being removed from the CPI

and having the Bureau of Labor Statistics who calculates CPI, step in and be like, that's not true. That was a big deal in a very small section of the universe. But yeah, so Consumer Price Index, CPI, and personal consumption expenditures, PCE, The Fed looks at PCE in order to gauge inflation, but CPI is kind of like the commonplace metric that a lot of people use. It's a market basket of goods, and so you track the changes in the prices of the market basket of goods. All sorts of things go into it. So shelter being owner's equivalent rent as well as rent costs.

So owner's equivalent is a survey of homeowners, asking them how much they would pay to rent out their house. Rental costs are more measured from the market. Energy costs go into it. Food costs, a bunch of other things as well. They have a whole list on the website. And what's been driving it recently is auto insurance, shelter cost, and energy costs. Auto insurance has been just sky high. Like, I think it went up 20% over a certain time period, which is concerning.

Part of that is because Americans aren't great drivers, and we keep petting each other. And then part of that is, you know, higher rates as well. And then shelter costs, not enough homes. Home prices just being exorbitantly high. And also, like, the weird way that we measure it through owners of course. equivalent rent, which is kind of probably outside of the scope for this podcast, but really interesting if anybody's interested. And then energy costs too, because we're switching to sweet summer crude blend for oil. And a lot of refineries are under maintenance. And so energy costs

are higher because of that as well. So it's kind of like this storm that's impacting inflation right now, but a lot of inflation was driven by a lot of pressure in core shelter X services, part of CPI, which is what the Federal Reserve was looking at as well. So yeah, inflation is just kind of funky and it is complicated to look at. Yeah. I want to transition kind of from this more macro picture to kind of talking about some more specific companies and business trends that we're seeing, you know, on the same topic of pricing and how our perception of that has kind of changed recently. My colleague Ricky Mulvey recently pointed out that a burger and regular fries at five guys is the same price as an eight-ounce sirloin with two sides at a Texas roadhouse.

And I feel like we're at this weird moment in like the food and inflation story where we're seeing fast food prices rise and kind of become the same price as fast casual. And we used to like scoff at the idea of spending $17 on a salad. And now that's, I mean, you could buy a meat. at McDonald's for not much less. And that just seems misaligned. I don't know that that's misaligned vibes, but misaligned prices that I wonder if you had any kind of take on that. Oh yeah, McDonald's made some massive mistakes. Yeah, it's really interesting to watch them walk that back. They raise prices and consumers were like, what are you doing? And now they're walking that back

as well as Wendy's. Like they're offering this $5 meal because they misunderstood their consumer. And, but yeah, I mean, there's even a chart that shows like how expensive McDonald's has gotten relative to a lot of other fast food chains. And so I think that's a big part of it. And also Americans love eating out. Like the amount of money that we spend on eating out relative to groceries, we spend a lot more. We love restaurants. And it's funny, like I'm working on this story, I think as literally everybody else in the world is the Red Lobster story. Oh, of course.

Yeah, I've been working on that a little bit. And red lobster was the first, essentially like fast casual restaurant. The reason that they were so popular in 1968 is because they were the first sit-down place that had seafood in middle America, which is like a huge red flag. And so I think that that's a big part of people's frustration is that that food is expensive. And, you know, Domino's and others have navigated it through loyalty programs and like Costco too. but yeah it's you know I feel it going to a restaurant or even my grocery bill it's brutal it's the same thing with gas prices like you have a neon sign on every street corner telling you how expensive it is to be alive and that you know it's not just vibes it's like actual reality like food has gotten

really expensive I think the exact number is is around 20% since 2020 or maybe it's 24% between 20 to 24% increase in the price of food since 2020 I want to talk about dominoes because you kind of tease that out. And I've heard you talk about this before. In 2009, they were ranked last in terms of customer taste preferences. They were tied with Chuckie Cheese, I believe. By 2019, that had radically changed, and they were the top pizza company in the country. How did that happen? Yeah. So I'm actually not allowed to talk about Domino's in my friend group anymore. I'm just like, anymore. We can take that off. But if it's a friend thing. Yeah, I get a slap on the wrist. if I talk about Domino's, because I was so obsessed with them for a few weeks.

But, yeah, Domino's is really fascinating. It's like a corporate turnaround story. So they started in the 1960s as well, and their founder was, like, this guy who was just obsessed with pizza and, you know, had questionable tendencies later in life, but just obsessed with pizza. And, but it got to the point where they became very much less obsessed with pizza. The pizza was basically cardboard. And so in 2008-ish, the CEO was like, we got it.

fix this. Like, everybody hates our pizza. This sucks, and then they got that ranking. And so they kind of turned things around in 2010. They added more garlic to the crust. They added provolone and Monticerella to the cheese. And it just made a whole new pizza based on consumer taste preferences and, like, asked people what they wanted in pizza. And they did this whole ad campaign where they apologized. They said, we're really sorry that we sucked so bad. And like, please try again with us and people did. That was like a really cool story because you don't really see corporations apologize a lot for bad behavior, but they did. And now, yeah. And I love that bad behavior in this case is making a bad pizza. Yeah, and like people would still eat it and they'd be like,

I hate my life. It's funny, there's another stat around Dominoes where if people thought it was dominoes, even if it wasn't, they would rank it last. Like even if it was like Papa John's, they'd be like, if they were told it was Domino's, they'd rank it last. which says maybe something about the survey metrics that we were talking about earlier. It's like how influence can happen. Yeah, yeah. But yeah, Domino's is a fascinating company.

And I think they, you know, some people say Domino's is an e-commerce company that sells pizza. And I think there's an element of truth to that too, because the founder, who he invented the corrugated, I think is how you say, corrugated pizza box, right? And he was a guy who used a dough grinder to grind up cheese and meat because it would take nine minutes off making a pizza. Like, he just was always innovating.

And even now, they have really focused on technology. They created a car to deliver the pizzas in that has like a 400 and something degree oven inside of it. Yeah. So they're impressive. You talk a bit in your book about the nostalgia cycle and how, and again, in other writings that you've had, and how Hollywood and so many media outlets are kind of leaning into never ending IP loops rather than creating original content. I kind of think that right now we're seeing that that IP loop leaning on that is not as foolproof

of formula as some media executives might have thought. Originality might be what sells. I've heard you talk about Bluey and Peppa Pig and like the economics of kids and family TV shows. Why are Bluey and Peppa Pig thriving right now? Yeah, I'm also not a lot of talking about. Yeah, they're like, this is getting. weird but um blueie it blueie is fascinating the creator joe brum he was never like you know

intending to create a tv show and then in 2015 he put together this small pilot uh meant to be the australian version of peppa pig and it was just a dad like hanging out with his daughters and like that's what the whole show is about is um it's meant to show all these components of life like you know sharing and playing but then also they talk about infertility and having adult friends and like the meaning of life. And so it's really, I think it really is for both parents and kids. And that's very special in a world of like cocoa melons, which are more data-driven, right?

Like, cocoa melon is owned by a media conglomerate, which is backed by Blackstone, right? So exposure to private equity versus Bluey is owned by BBC Studios, as well as the Australian Broadcasting Corporation. And so I think the way that I talk about Bluey is very similar to how I talk about Calvin and Hobbes, that comic from Bill Waterson, is just a very authentic comic versus maybe a cocoa melon,

which doesn't have the same level of authenticity. And I wonder if that's, this is, I'm smiling to myself as I say this, because I almost hate to turn this into a conversation about AI. But I wonder if exactly what you just hit on, like the originality and the authenticity of Bluey is something that kind of like we as creative people can like cling to in a world where oh you're kind of seeing so many people lean on this this focus on AI and wait we can just look back to content that's already been written to build

something that's similar to that and it's it's heartening to see examples of of authentic original content, like winning, yes, the hearts of people, but also being monetary successes as well. Oh, yeah. I mean, Bluey's a behemoth. It's worth about $2 billion, as Bloomberg Business Week reported, Peppa the Pig sold. So Peppa the Pig's kind of funny because they were bought up by this company called E1, Entertainment One, which was then sold to Hasbro for about $4 billion in 2019 and then Hasbro just sold off E1 from themselves and they sold E1 for 500 million but they kept Peppa meaning that Peppa's probably worth north of three and a half billion dollars which is where Blue is headed. Awesome. Well Kyla thanks so much for the long winded many many topic discussion.

It's been honestly such a real treat to talk with you. I've been reading your stuff for a really long time. So really great to see that you've put so much of your work into a book. So excited for you and wishing you the best of luck with this and whatever it comes next. Thanks for being here today. Thanks for having me. As always, people on the program may have interests in the stocks they talk about. And The Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear.

I'm Mary Long. Thanks for listening. We'll see you tomorrow.