00:00I am here with David Miracle. David thank you so much for joining. Great to see you this morning in
00:04a timely conversation. So we just got
00:06P.C.E. data month over month comes in a little bit weaker than expected but we're still dealing with
00:11the highest annual
00:12inflation since 2023. What was your just initial reaction on that. Yeah that's right. So over the last few months
00:18the headline numbers have
00:19started to look very different very quickly rather than falling as we would have expected at the beginning of the
00:23year from the mid twos down to
00:25something like two percent. Now we're in the high threes and we think we'll stay there for for quite a
00:30while. The core numbers I
00:32would say you know quite a bit firmer than I think it would have been had it not been for
00:36the big spike in oil prices. You're
00:37seeing for example in categories like airfares some pass through from all of that. But so far the effects of
00:44this still look
00:45pretty narrow. One way of seeing that is if you look at something like the trimmed measures that take out
00:50the more extreme
00:51price spikes. Those still look reasonably under control. Another interesting aspect of the report is that real income growth is
00:59now very low actually turning negative. And you know I think that's something that's going to weigh on consumer spending
01:05going
01:05forward. Suddenly people are grappling with this big increase in gasoline costs. You typically see people manage that in the
01:12short term by saving a little bit less. But the weakness in income is going to weigh on consumer spending.
01:18Are you surprised we haven't seen
01:19that yet. But still this is a consumer that's spending. Yeah. Not so much. I would say you have to
01:24be a little bit careful
01:25withdrawing big inferences from a couple of months of spending data. These numbers can be fairly volatile. A lot of
01:31the ups and
01:31downs in hindsight turn out to be a little bit misleading. So of course I would put some weight on
01:37what we're seeing in the latest monthly
01:38data. But I would also put some weight on the question of well what ought we to see going forward
01:43given where incomes are given that
01:45the saving rate is already very low. And I do think over the course of the year we will see
01:50not terrible but softer consumption growth
01:53than we would have without the big jump in energy price. So you still in your forecast have a cut
01:57for this year a cut for next year. What do we
01:59need to see for that to actually happen because at the moment it's a market that's pricing in a higher
02:03likelihood of hikes than a
02:04cut. Yeah that's right. I think you know the first thing obviously is the war needs to come to an
02:09end and Fed officials need to feel like this is
02:11behind us. I think right now they feel as many of us do in markets that we just don't know
02:16the full extent of the upside risk to
02:19inflation. And as long as that's true you know obviously they're going to be thinking more about hikes than about
02:24cuts. If we
02:25eventually get to that point where this is over and we start to see the sequential inflation numbers come down
02:31then I think you're going to
02:32have a range of views on the FOMC much as you had a range of views on tariffs. This would
02:38look more like a tariff in that it would be a
02:40one time price level increase. But if it's over then I actually think underlying inflation trends are fairly soft. Some
02:47people might be more willing to put some weight on those softer month to month numbers. Other people might say
02:53hold on a minute. The
02:54year on year rate is still too high. And because there's likely to be a range of views I think
02:59a decline in sequential inflation
03:01wouldn't be quite enough. You would also need some labor market softening this year. Now we're still penciling that in.
03:07I'm not certain about
03:08that. And hard to know the exact timing of when they might be comfortable cutting. But that's what you would
03:14need. Just in the past
03:15week I got to say we haven't had really a range of views. It's been a lot of Fed officials
03:19who have come out and said inflation
03:20is a problem and we're worried about it despite an FOMC that left an easing bias in their statement. What
03:27do you make of that. Has something
03:29changed in the intermediary. I think it's just the passage of time. I think what chair Powell said at the
03:35meeting was very
03:35sensible that this is making a change to the guidance is not something you do every day. You want to
03:42know that you're not going to
03:43regret it at the very next meeting. And I think it's perfectly reasonable that many of them are now feeling
03:48like this has been going on for a few
03:50months at this point. And we still don't know the end date. And so taking a more balanced outlook on
03:56where rates might be headed given
03:58those additional upside risk inflation which no longer look like a brief temporary phenomenon. That makes a lot of sense.
04:05And I imagine that
04:07they'll move in that direction. Do you think that to any degree we talked about the market pricing which again
04:11is pricing in at you know
04:13something like 15 basis points worth of hike. So not not a full one. But is a market that is
04:17almost pressuring worse as he comes in
04:19that this is almost a test to him to see how much he can rally the rest of the FOMC
04:24to get something closer to what seems to be
04:26his easing bias. I don't think that investors through market pricing are saying that they expect to cut a hike
04:32right away. I think people are
04:34saying look we don't know that the scale and the duration of the war and the consequences for inflation. And
04:41there is some risk if this were to
04:42drag on long enough that you might see bigger price spikes beyond just energy prices. If we start running out
04:49of things if
04:50energy price spikes push up things like airfares further that are very energy intensive if they create a little bit
04:57of contagion through
04:57inflation expectations which we perhaps saw a hint of in the Michigan numbers. And maybe in those circumstances down the
05:04line a hike might
05:06seem more reasonable. So I don't think that there's kind of immediate pressure on the Fed. No. So David today's
05:11one of the first days
05:11in some time that we haven't had a new high in equity markets. It has been record high after record
05:15high really driven by
05:17AI. The world has talked at nauseam about a K shaped economy. But how much of this American economy is
05:23a consumer that's
05:24spending because markets are healthy because investments are doing well. How reliant are we on an equity market that continues
05:31to
05:32gain. Sure. I think that the K shaped theme was a little bit overblown last year. But the kernel of
05:37truth in it was exactly what you
05:39say that we have had strong equity market gains. We've not seen house prices do very much. So to the
05:45extent that we have a wealth
05:46effect contributing to consumption growth that is a wealth effect coming from stocks and therefore a wealth effect coming from
05:53the top of the
05:54income and wealth distribution because stock market wealth is held much more unequally than say housing wealth. Now I do
06:00think there is a
06:01tendency to exaggerate a little bit just how critical the wealth effect is to consumption growth. Most consumption growth comes
06:08from
06:08income growth from people getting jobs from real wage increases. And I think last year was was no exception. This
06:16year I think the
06:16K shaped theme will make a little bit more sense because the loss of things like Medicaid and food stamps
06:22from last year's tax bill will hurt most at the
06:24bottom. And the increase in energy costs will also hurt most at the bottom. Whether the top outperforms I think
06:31very much a
06:32function of do we see the stock market go up further.
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