00:00 let's just start like, you know, right at the top. Let's
00:03 start with the inflation outlook and has it already
00:07 gotten back to 2%? Oh, yeah. You can flip to that chart. So,
00:13 here's the deal. The reason we're not at 2% on all the
00:17 metrics. There we go. The reason we're not at 2% is
00:21 something called owner equivalent rent and we've
00:24 talked about that before. I mean, everybody OER. This is
00:29 where it's it's 25% of the headline inflation number.
00:33 It's huge and you know, it's a fiction. You rent your house
00:38 to yourself. You pay yourself the money and that money
00:41 actually gets counted in personal income statistics and
00:44 supposedly you can spend it. Give me a break. That's not
00:46 going to happen. So, you know, I don't like taking things out
00:50 of the CPI and stuff but you know, this one's a fiction. So,
00:53 if you take it out, we're at we're below 2%. We've been
00:58 below 2% for 3 months. We've already hit the feds targets.
01:02 You know, and I think the market over the last couple of
01:05 weeks has really come to realize that inflation is not
01:09 the issue. We're not going back to six, 7% inflation. You
01:14 know, we're we're in great shape on the inflation outlook.
01:18 Okay. So, go ahead. So, are we so is it like green light by
01:21 stocks then like if the feds done and we're in great shape
01:25 on inflation, doesn't that just mean the economy is going to
01:27 boom? What are your thoughts here on the overall economy
01:30 then? Well, I think you need a yellow light. A yellow light.
01:35 Okay. Yellow light. Um here's the the problem. Inflation, you
01:41 know, if I'm you know, if you take my view that inflation
01:44 really has come down to a very reasonable level, then what
01:49 you gotta worry now is about slow down in the economy and
01:52 you also have to worry about the fed staying higher longer.
01:55 The fed doesn't buy the story that I just gave you, okay?
01:59 They're looking at core inflation is still but little,
02:02 you know, between three and three and a half all because of
02:05 the shelter problem and so they could keep rates higher for
02:09 longer and and we're all going to see a slowdown in the labor
02:13 market in 2024. I mean, labor force isn't growing as fast as
02:16 it was. The the post pandemic recovery has really played out.
02:21 You know, we're we're going to be creating probably just
02:24 between fifty and 100 thousand jobs a month on average next
02:27 year. Much lower. Um so so you only get a yellow light for
02:32 equities because the green light is bond yields are are
02:36 lower so you can buy equities. Uh the yellow light is well,
02:40 wait a minute. Profit growth is slowing. The economy is
02:43 slowing. Let's let's at least be slightly cautious. So, we
02:47 shouldn't look for the the kind of, you know, market that we
02:51 had 2009 through 2021. Well, you know, we had zero interest
02:57 rates in QE and I think they had a huge effect on the market.
03:01 Uh so, I wouldn't uh I wouldn't go back there. This is an
03:04 interesting chart. The gray line is the nominal GDP. So,
03:10 that's real GDP plus inflation. The blue line is
03:13 corporate profits for the whole economy. This is an SMP. This
03:18 is GDP data for every company in the in the country and you
03:22 can see in the 80s and 90s, uh corporate profits didn't grow
03:26 all that fast and then after we got 1% rates from Greenspan and
03:30 0% rates for uh from Bernanke and Yellen and Powell, you
03:35 know, corporate profits took off. You know, when capital is
03:39 virtually free, companies go for growth and when they go for
03:43 growth, they get some. Uh by the way, that era is ended.
03:48 Okay, everyone talks about deficits, right? And uh the
03:52 huge deficit we have and growing as we speak. How much
03:57 do budget deficits matter for the economy and the markets? You
04:01 know, it's really an interesting question because a
04:04 lot of people do focus on budget deficits and the larger
04:07 the deficit, they think that's an easier, more expansionary
04:11 policy. Eventually, bond yields would have to rise. Maybe you
04:15 get inflation, things like that. I don't believe any of
04:18 that. I don't believe that budget deficits matter very
04:20 much for the economy and for inflation. What I do believe is
04:25 that expenditures matter. What the government spends. If the
04:29 government spends a lot of money like the $5 trillion
04:32 they spent during the pandemic, we're going to get inflation,
04:36 okay? But that's spending. It hasn't totally gone away
04:40 because we're spending more now but it's predominantly
04:43 military spending. Military spending is 90, 95% spent in
04:48 the United States. So, it's still been stimulated,
04:51 stimulative in 2023. Um but when I when I look at fiscal
04:56 policy, I think we're going to have a very tight fiscal
05:00 policy over the next 10 years but I define tight is virtually
05:05 no growth in discretionary expenditures by the government.
05:10 Now, if you define tight or loose based on the budget
05:13 deficit, you're going to think, wow, the budget deficit is
05:16 getting huge. It's a trillion dollars a year already and
05:19 growing. Uh interest, excuse me, interest expense is a
05:23 trillion dollars a year and growing. Fastest growing item
05:25 in the budget but the budget deficit is just telling you
05:29 that the government has to issue more debt and yeah, maybe
05:32 that pushes bond yields a touch higher but I it's it's not a
05:36 big thing. It will be a, you know, maybe in 15 years, 10
05:40 years, I don't know. At some point, it's going to be too
05:43 large and we're going to have a huge problem but we're not at
05:46 that stage yet. Uh one thing that that markets need to
05:51 exhibit for for me is like lower, lower volatility. I
05:55 mean, these bonds are trading like, you know, bonds and
05:59 related equities to that or just there's a gap and it's
06:03 just all over the place. I like stability. I want to keep
06:07 rates right here. I don't want a recession. I don't want to
06:09 see 6%. I don't want to see 3%. Our large abrupt price
06:13 gaps increasingly, are they going to continue? Oh yeah, you
06:17 put up an interesting graphic I like to show here. This is a
06:20 pot of water boiling and you know, we understand what a
06:24 liquid is. So, we understood what the, you know, the economy
06:27 look like in 2010, 2015, whatever and we understand a
06:31 gas to some extent. We understand what a new state of
06:33 the economy might look like but man, when you go from one
06:37 state to the next, you're in transitions. We're going to
06:40 transition to higher rates. We just finished the transition
06:43 out of the pandemic. We got climate transitions. We got
06:46 geopolitical transitions. All of the chaos of the transition
06:51 is at the surface. The little bubbles, that's where the chaos
06:55 is and that's the hardest thing to predict. Uh and so, I don't
06:59 think you have a chance at consistently lower volatility
07:03 for a while. We got too many transitions going on. And then,
07:08 will that continue into the FX market? We're not FS experts
07:13 here but the entry rate differentials between you know,
07:18 across the globe here, is that going to, is that going to
07:21 wreak havoc on the markets? Well, I don't think what
07:25 happens in FX has too much to do with US equities. Um but I
07:30 do think we get a lot of FX volatility. You know, the the
07:33 Federal Reserve was first to raise rates. The ECB followed
07:39 but they're going to end up at a lower peak rate. Bank of
07:42 Japan hasn't even started. Um you know, they're still at their
07:46 policy rate is minus ten basis points and they will raise
07:49 rates in 2024 but very very slowly. So, we're going to end
07:53 up with some pretty solid wide interest rate differentials.
07:58 And that tells me that we'll have a lot of instability in
08:02 foreign exchange. Okay. In the last week or two, you know, the
08:06 the dollar's been just a touch weaker against the Euro and the
08:10 yen just in the last three or 4 days and that's because of you
08:13 know, the the more optimism about inflation and maybe the
08:16 Fed can cut uh but longer term, I think US rates are going to
08:21 end up higher than European rates and way higher than
08:23 Japanese rates. Yeah, let's get into China. Of course, their
08:27 demographics have been struggling and overall
08:30 struggling, right? Uh we've been seeing where's the demand?
08:34 When is it going to come back? Are we going to see it? Um so
08:40 these are interesting charts. They're called population
08:43 pyramids. The one on the left is 1990 for China. Uh the young
08:47 people are at the bottom working ages in the middle
08:50 retirees at the top. Nineteen ninety is the sweet spot for a
08:54 fast growing economy. A lot of young workers, no retirees.
08:57 Then you go to 2020. The growth in the young people is zero and
09:03 you got a lot of retirees. So, you know, that that sweet spot
09:06 is gone and then if you look at the future, they have even,
09:10 they actually have a shrinking population in China after about
09:14 twenty twenty-five and uh and a massive increase in uh the over
09:19 sixty-five cohort. It's going to be a slower, much much slower
09:24 growing economy and that's before I even talk to you about
09:27 property market, debt overhang, uh 20% youth unemployment, all
09:32 these headwinds for China. Uh but China had three decades
09:36 where it could grow at 10% and they built infrastructure. They
09:41 used all that labor. They moved people from the rural to the
09:45 urban. They did lots of things right. Um but now, it's not
09:49 really right or wrong anymore. They're just way older. Uh
09:53 nothing wrong with getting older except that uh you're a
09:55 little less productive. In fact, uh you tend to retire. So,
09:59 uh you know, that that economy is not going to be a 10%
10:04 economy. It'll in fact, it'll probably be lucky to be a 3%
10:07 over the next 10 years.
10:11 [BLANK_AUDIO]
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