Massive Debt & Rising Inflation: Is the Economic Downturn Just Beginning?

Andrew Brill  0:15  
Hello and welcome to Wealthion. I'm your host Andrew Brill now that the Fed decision to leave interest rates unchanged and quarter one earnings season is winding down. Where do we go from here? We'll answer that coming up right now.

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I'd like to welcome the Vice President and senior economist at Rosenberg research Dylan Smith to Wealthion. Dylan, welcome. How are you doing?

Dylan Smith  0:53  
Andrew, thanks very much. I'm doing great. It's very good to be here on the Wealthion and podcast very good to be here on the wealthy and podcast.

Andrew Brill  1:02  
Excellent. I know that. You know, last week was a bit of a roller coaster, we kind of took a deep breath and no economic news out this week, maybe some people, some people that are on the, you know, other exchanges like Chicago, I know that spoke a little bit over the weekend, but sort of a deep breath. What is your take on, you know, the economy at the present time? 

Dylan Smith  1:26  
Well, you know, I think Friday's non farm payrolls are gonna go down as an important kind of probably turning point in how the economic economic narrative has been playing out. We've been saying for some time that there is a lot of weakness beneath the surface that's not being effectively correctly priced in, we've had a series of surprisingly, surprisingly hot data coming out of ready to headline numbers, or three, if you count the two inflation prints over the last few months, I think that have put a bit of a pin in where we thought the year was going to go. So we've had inflation coming in a little firmer than expected. And we've had non farm payrolls coming in, actually much firmer than expected. Both of those two scenarios we've been saying have not been properly reflecting what we've been seeing in all of the other data points pretty much that that describe how the economy's doing. And yet those are the two kind of big Kahunas that everyone follows. And so that's been kind of driving some divergences, which have been difficult to interpret for the last little while. That's why I think this nonfarm number coming in a bit below expectations has actually been more important than the scale of the Miss would actually suggest. Right? I think everyone, although expectations were at a certain point, they were priced for another upside surprise. But just to get to kind of why we think it's been so difficult to interpret. Lately, you know, these, these headline inflation numbers we've been seeing have been driven by essentially, kind of genuinely quite firm labor markets are quite firm demand. But only in three segments, right, we've seen healthcare, we've seen education, and we've seen kind of hustled services and rents come in, you know, firmer than expected, that's really all that's been holding up the inflation numbers, goods, inflation has been flat to negative. Similarly, on the on the economic side, or rather, on the kind of labor side of the economy, we've we've been seeing, you know, numbers being driven by elements that are not, you know, typically reflective of a robust economy, a very high level of part time work, and a very high share of that driven by kind of economic need, rather than rather than genuine preference. Birth death model in the NFP driving a huge amount of the upside surprise, and yet we've seen vacancies going up, we're seeing quits rates right down, which tells you that people don't have much confidence in the strength of the labor market, despite what the headline numbers are telling you. And so we've actually been, you know, you know, the numbers have been flying in our face a bit. We've been saying, you know, you got to dig into these numbers a little bit, the firmness is not ready, they are that you'd be looking for on the breath is not that you'd be looking for. And that's, you know, I think that's slowly coming to that.

Andrew Brill  4:14  
Yeah, we got the numbers, fewer jobs were created in the last week. And what are we missing? Well, there's something under the surface that the Fed is looking at, because Jerome Powell made a reference to unemployment. Now, I know that this is one of the with consumer expenditures, they keep an eye a close eye on unemployment, and he wouldn't have said something or given a hint to that if he didn't see something under the surface. 

Dylan Smith  4:41  
Yeah, I think you're right. I mean, you know, maybe he knew a little bit about the payrolls report that was coming, but yet, just just to go into the background there. He was asked in the press conference, you know, what would it take to push you guys into a cut, like what are the sort of thresholds now and they gave the sort of standard, you know, data dependent, blah, blah, blah, but he didn't actually outlined two scenarios that would do. And he said, firstly, which has been saying consistently for six plus months, further confidence on inflation, essentially, we need to see inflation resume its downward trend rather than having flattened out just above 3% annualized. But then he introduced a new one, which was, you know, a significant weakening in the labor market, which we hadn't really heard him flag explicitly as a cutting scenario before. Now, you know, we had been seeing mixed data kind of through the week, kind of around his press conference. But NFP was yet to happen. But I think what he might have been referring to, and this is, you know, Caveat emptor. This is sort of speculation, but we did have the week before the census data, which basically does the same thing as the non farms. But you know, whereas the non farm survey is under a million firms, the census data covers basically everything that's like 12 million firms. And that's very lagged, that do takes a long time to collect and process so that only goes back to q3 of 2023. My, if you remember q3, we kind of had this. We call it the late summer surge, where all the data which had been kind of trending down, suddenly picked back up, again, including the employment data, that's when rates hit 5%, soon after that. But what that data showed in q3 was the lightest and the divergence between non farm payrolls and the quarterly census data. Now, no one looks at the quarterly census data, because usually, it's just telling you with a lag, what the current employment data is already telling you. And the only discrepancies historically, we could really find around recessions were the kind of depth of the second was is different on the two, but the direction is kind of the same, right. But this is pointing I think, just some revisions coming coming down the line when they when they review the annual NFP data. And I think we're going to see a, a picture of the labor market, which is a bit different to what the first releases on the headlines have been telling us for a few months.

Andrew Brill  7:07  
Yeah, because there's a lot of firms that are saying, Oh, we're cutting back even even with these earnings that have just come out, there's companies saying, Oh, we're going to come back a little bit, we're going to lower our workforce. That doesn't seem to be in the numbers just yet. Maybe there'll be revisions down the road. 

Dylan Smith  7:24  
Yeah, there are a lot of professional services firms. And, you know, a lot of those industries that really struggled in COVID, to, to find the employment that they needed to match the sudden shifts and surge and in demand, they have been holding on to those employees, partly because, you know, it takes a little while to, to move people out of those types of roles. It's not as sort of flexible as industries as more temporary contracts. But also because, you know, once bitten, twice shy, they don't want to adjust labor force too quickly, everyone's been thinking demand might come back again, to justify it. But I think there's a realization setting in that, that post COVID shortage in the labor market was, you know, part of this just broad disruption, and not a base case. And I think we're starting to see some adjustment happening to that maybe there's articles all over the place, if you need anecdotal evidence, the consulting firms have started laying people off the big accounting firms are adjusting workforce. But you know, the the mother of all anecdotal data sources is the Feds Beige Book. The latest Beige Book was kind of up and down full of stories of firms saying they're either holding or or reducing kind of their labor on the extra ounce of margin. So, you know, I think that, again, is sort of all working in the same direction.

Andrew Brill  8:43  
So Chairman Powell said something and I want to read it, because I want to make sure I get it right. He said, inflation is still too high, further progress, and bringing it down is not assured in the path forward is not assured. What is your impression of that? It seems like he's, you know, trying to pump the brakes on people like the stock market going crazy again, and it did bring the market down a little bit. 

Dylan Smith  9:05  
Yeah and I think, you know, that comment was in the context of him essentially describing why they don't have the confidence yet to cut, right. And there's a bit of central banker ism in there, which is to say, nothing's ever show don't don't hold me to it. But he went on to say, a little bit after that, look, one thing that we're really expecting to come through in the next few months, which seems to be a little bit more lag than usual, but as you know, if you look at measures of real time rent, so if you want to go and rent a house now and switch apartments, those prices are flat to negative. And yet because of the survey methodology and the fact that they only roll up a fifth of the sample every year, that's still reflecting rents, basically, from the average two years ago, when the rental market was very hot. So that's one thing that should be pulling down inflation, but he actually explicitly pointed to goods prices have gone from a drag Back to sort of flattening out a bit, which was always going to happen. And it really is those few services categories where we're waiting to see a bit of softening for for them to gain confidence. 

Andrew Brill  10:11  
That 2% number that the Fed is looking for that last percent, because we're hovering right around three is being really, really stubborn. What do you attribute that to?

Dylan Smith  10:21  
Well, you know, I mean, taking a step a little further back, I remember the conversation, you know, when we started coming down from the peak, the 9%, peak, and inflation, everyone was saying, oh, you know what, it's going to be quite easy to get to 5%. But then it's going to be a lot of work. And it's actually proven that it was quite easy to get to 3%. And now maybe it's a little bit of work, I think always seeing is, you know, you're facing, you have to break down into into the kind of all the different component drivers. And when you're doing that what you're seeing is certain services industries, which actually do tally with the warm aside of the labor market as well, which are always the least cyclical. So the slowest to respond to interest rates, the slowest on the cycle, often actually driven by their own internal forces, especially things like health care, things like insurance, which are all kind of, you know, adjusting on one two year lacks to natural conditions. That's where all the inflation is. And I think old Powell saying for for the 2% target is, I just want it to be going down again, right? He's said before explicitly, it doesn't actually need to hit to, for them to cut, they just need to be pretty sure that it's not it's going that and because of this, the support that inflation is getting, what kind of the heat in these in these few sub sectors, which are really, really increasing fast. That's made it difficult for them to cut into that sort of environment. I mean, just for context, you know, you've seen auto insurance up, it's like, 80%. year on year, right? I mean, there's a lot of adjustment going to do like structural changes in the auto market, accident rates are way up. Insuring EVs is a very different proposition to insuring internal combustion engines, you know, you can have smaller accidents, which result in much larger damage if a battery goes. And so we, you know, that's nothing to do with interest rate and the Fed. That's, you know, that's an industry adjusting to fundamental changes in the landscape. Similarly, on household insurance, we're seeing a lot of climate change related adjustments that just needs to move its way through, I think, and we'll see things normalize again, but it's not typical. It's not policy related, it's not actually something that I should be responding to. And yet, they seem to be a little a little more focused on it than we would have expected.

Andrew Brill  12:39  
So we're getting we're towards the tail end of earnings season. There's a bunch of companies, the big ones that have come out with they have piles of cash, and they're either giving dividends or they're going to spend on AI, but there's a bunch of companies that are not doing as well, do you see the economy slowing at all?

Dylan Smith  12:57  
Well, I think what you're seeing in this earnings season, you know, somewhat a continuation of the trend around tech and AI, which I think was always going to be the case, we've seen a mix of, of signaling on that, which I think is starting to reflect the realities of the situation, which is that certain firms are doing extremely well, and reporting, you know, actual revenues coming through AI, you know, that's more on the sort of hardware side of the industry, with anybody on the likes of of those types of companies actually benefiting from it, you've also got places like metal saying, look, it's going to take longer for this to actually show up in the income statement, then you might like, or at least in the top line of the income statement, then you might like, but you know, we're putting a lot of money into it. And we're hoping to see a lot out of it. And investors, by and large, liking those types of stories. So we haven't seen the kind of come to Jesus moment yet on where the real winners and losers will be kind of long term. I think that's a very open question. But what we're seeing from the kind of old economy, side of the type of book is really a fairly traditional trading down consumers of the Simulate beginning there, as you know, places like McDonald's signaling, listen, we're about to enter an actual price war, we're going to adjust menu items, we're seeing people price discriminating, even on our own menu towards cheaper items. We've got, you know, some of the retailers doing quite well, although the more sort of high end, total consumer length retailers like Amazon showing, you know, slightly softer results on the retail side of the business. And then, of course, the Starbucks debacle, which, you know, China's signage is showing a slowdown generally in global demand. I mean, there's all sorts of issues in that business which you know, we're not ready position to comment on but what you are seeing I think, is people moving down from the very fancy Starbucks latte down to just a black coffee and get on with the day right I think there is some some trading down happening. And what that means for the consumer is ready, you know, okay, we know With the kind of bottom end of the market is the people who kind of spend that whole paycheck, the sign of the economy that is contribute to the savings rate already collapsing and high credit card spending. Like that's all a consistent story. I think the outlook on consumption is going to depend on okay, what's the upper echelon of the of the income spectrum doing this, because those are the people who have seen enormous gains from from the house price and their ability to withdraw equity that I'm missing a massive wealth effect from, from recent stock price moves. And so even though, you know, I think most of the economy is out of the kind of pandemic era, excess savings that's been spent down, that's been an additional tailwind for kind of the upper end of the income distribution from, from all the markets. So interesting to kind of see where, like, what we can tell about the consumer for those different forces at play.

Andrew Brill  15:47  
So one question I have about that, since the lower end of the income distribution is, I'd say they're readjusting, so to speak, whereas, you know, the, the higher end of the income distribution doesn't have to worry about that as much. But Dylan, we're still paying very high prices for food and essential items, when do we get relief from this stuff?

Dylan Smith  16:13  
Well, if you're asking, When am I gonna get out? Right? deflation? It's not gonna happen, right? We know that. Firms a very, very unwilling to, to actually reduce prices to Dan consumers. What we are seeing is that, you know, relative prices are kind of readjusting. So it was it was a few million, possibly one as we had this massive initial spike in goods, prices, inflation, right. And that was because of how demand had shifted off services onto goods. After COVID, we then saw a kind of bleed into more of the services side of the economy as things readjusted, and that was sort of where the shortages were relative to demand. And we put out a piece a few months ago, which basically showed, you know, these two things are much equalized back to the pre COVID model. So not really around some prices story, but I think when you hear in the media about, you know, things are expensive, you know, consumers online, the average sort of grocery bag at you know, has almost doubled from from pre COVID level. So although inflation is running low right now, I think the the sort of challenge that policymakers and economists face is to explain that, you know, this readjustment is not going to have him back down again, this is a fundamental kind of change in sticker prices. And the big question, I think, is how do incomes readjust to that. So we've seen, in many sectors, there has been real income catch up and real income adjustment, but not in all sectors. And I think that's what's part of the story, you know, behind things like how many part time jobs are currently being taken people who, you know, can't adjust from one job to the other without driving an Uber in between, you know, just to make ends meet. So I think I think that's a that's a big part of the story. And why demand is a little damping on on that side of the economy is the sort of budget shock is still kind of happening. And this is, interestingly happening at the same time that you have still, you know, package holidays demand very high. So there's still an element of, you know, while there's some anger about grocery prices, we're still gonna go to Disneyland. Because we couldn't do it three. So it's very interesting kind of crosscurrents happening that, but I think the the broader pattern, which we're seeing back to the earnings release question is that I think that force is fading and reality is setting in.

Andrew Brill  18:35  
In the latest wage report is that wages are up, but they're not up as much as they had been, like the wage growth is slowing. So if prices don't come down, and wage growth is slowing, at some point, there's going to be I wouldn't call it a price war, but perhaps prices could start to come down if people can't afford what, what staples they need. 

Dylan Smith  18:59  
Right. So we're seeing inflation, I mean, depending on the measure, there's lots out there, but running somewhere in the order of sort of 4%. And you have inflation running just over 3%. So we're still seeing a little bit of real income catch on happening, but it's, it's at a much slower pace notes than it has been for a while as wages moderate down. But you're absolutely right on, on sort of business's ability to pass through cost at the moment we're seeing in the Beige Book and in all sorts of regional fan Data and Reports. Everything is pointing to margin compression, at least for the sort of small and medium sized firms and the economy, larger firms. It kind of depends where they're playing but firms have lost the pricing power that they've enjoyed for for two, two and a half years. And yes, there are definitely sections of the economy where that will mean that prices do actively come down. You know, on average, we're not looking for a base case of deflation. But getting to 2% Against that background is not going to be that difficult.

Andrew Brill  20:00  
So with so getting down to the 2%, but we could hurt a little bit and struggle until we get there because prices aren't going to really come down. And unemployment is sort of creeping in the, the upper direction. So there's going to be people out of work that can't actually pay for what they need. So I would assume and it correct me if I'm wrong, at some point, things have to level off.

Dylan Smith  20:29  
I think that's right. And I think that's why Powell has explicitly said he doesn't have to say 2%. To cut right. I think, you know, and that's why he flagged the labor market, as you know, one of the potential scenarios that actually could lead them to cut kind of inflation aside, I think that's right.

Andrew Brill  20:46  
So talk about talk to me about the bond market a little bit, I know that the Fed has been pumping loads of bonds into the market, they've been I heard a trillion dollars worth of bonds by July. But now they've sort of put the brakes on that a little bit. So we're gonna slow that down. How does that affect the economy? And the Feds ability actually to pay its bills?

Dylan Smith  21:11  
Yeah. So I mean, I think that was actually the big news out of out of the Fed meeting. Given that Powell managed to avoid banana skins at the presser foot in front of them, and the big news was qt is slowing down. The way it was presented, which I think is right, is it's essentially a risk management operation, right, we sold during the last balance sheet reduction. It was 2018. That, you know, as as you know, as the Fed allowed runoff, there was some some short term liquidity issues in the overnight markets, as a result, you get quite lumpy cash flows that are that they're apparently causing stress. And there's been some compensation for a while, among the FOMC members that, okay, we actually have the luxury of not running off as aggressively as we just started, it's been fine, you know, to sort of allow them to be pretty aggressive, actually some assets onto the market to hit the 60 billion a month on treasuries. But you know, now that we've done a big chunk of that, and we're sort of heading towards the balance sheet size we want we can slow it down. How big of an effect does that have on the bond markets? Well, you know, as we've seen before, Qt can have very large effects on kind of interest rates in funding markets when it's going a little bit wrong. But all the evidence and all the research on balance sheet reduction actually points to pretty small effects, like in the order of a few basis points already. And nearly all of that happening on announcement, because, you know, the schedule is extremely predictable markets are, at least in this case, forward looking. And they can price in the supply chain that was coming from the Fed in terms of how much they're putting on the market. So, you know, some small share of the of the decrease in yields that we saw around that Fed meeting is probably the most of the effect of slowing down QT. But there is a kind of broader picture that this feeds into, which is that, you know, given the amount of issuance that the Treasury has been doing new borrowing from from them to fund, not only all the kinds of large infrastructure spending programs that are happening, but just a very high level of general federal outlays. markets have been asked to absolve a lot of a lot of treasury supply, including, you know, in addition to what the Feds already putting on the market that 16 billion a month. And so I think that's what's keeping rates at the longer end of the yield curve line, or even though even though, you know, we're seeing expectations of an eventual cutting cycle happening. So you know, as as that kind of cycle happens, I think we're inevitably heading towards somewhat of a steeper yield curve as we break down the front end. But you have, you know, a highly indebted US government that will need to issue for a long time and no clear avenue toward a stabilization in those finances under either election outcome at the end of this year, and so long as they're gonna have to keep that in the back of their minds, that could keep short term rates very low. Actually, interestingly, as kind of, you know, other parts of the economy sort of crowded out, but it means that longer term rates tend to stay at a little higher. And so that's actually a kind of forceful yield curve normalization. Now, does that mean we think that there isn't great value in the tenure? 20 end of the curve? Of course, not because you have duration affects that. And we do think that the move through this year has been kind of overdone. The feds cutting cycle has certainly been delayed by you know, the inflation and unemployment stuff we were just talking about. But it hasn't been canceled. And so you can see an organization on that side of the yield curve, even with that kind of fiscal fiscal backdrop, which on a duration adjusted basis is actually fairly attractive we think.

Andrew Brill  24:59  
So Dylan, how do we deal with this massive amount of debt? We've gotten ourselves into 34 trillion. Now, it's 34 and a half trillion, it's going to be 35 trillion before the end of the year. You know, each time we issue bonds, it's more money. We're spending that along with all the spending that we're doing to keep the country safe and our ally safe and everything else we're spending money on. Obviously, stop spending money is one of the one answer but it's not exactly that easy, isn't it?

Dylan Smith  25:28  
Well, that's exactly as far as this as this discussion tends to go. Right. You can ask any expert was around it was pretty easy, right? You got to reduce spending, you've got to try and do it in a way where you can balance it without adding too much the tax burden, because that, you know, reaches a point where it actually has kind of negative fi throughout the rest of the economy. You've got to keep the spending, the POTUS paying that's very productive. I use home investment spending that's going to have returns, and you probably have to spend on the military, given the standard, the kind of world situation. So then you say, Okay, well. So where do you find the cuts, and everyone shakes their hands and goes, tada, It's so terrible, Congress is dysfunctional, we'll have to do it. And that's not a great picture for anyone thinking about kind of the long term evolution of the US economy. We tried to put a bit of thought into this. And a few months ago, we published a report, we have the benefit of having quite a close connection to Canada, we're actually Toronto based in terms of our office, although we have a US and global outlook. But we know that Canada had a similar situation in the 90s. Right, there was a 1994 budget, which was the sort of culmination of years and years of fiscal slippage and showed more fiscal slippage, which bond markets actually just completely revolted against very similar to what we saw in the UK, a year and a bit ago, and under those trusts, which ultimately forced her from office. And that hasn't led to much reform on the public finances side in the UK, but it did in Canada. But I think the important thing to emphasize and some of the findings of our research there is that, you know, it wasn't just that there was some trimming around the edges and a few adjustments, right, the social contract was reimagined in Canada, and it took enormous effort to kind of bring that up, bring that program through and bring it under control. It was helped by the fact that the the governor at the time of the Liberal Party had a very large majority. And so it could force these things through. But we saw large changes to the pension system. Last changes to the sort of how the General Social Security system healthcare education sector was funded through the provinces. You know, small change in the contribution system that kept the pension schemes going, a broad reduction and program spending were all sacred cows were eliminated. There was a very strict means testing policy or, or efficiency testing policy around the different programs that were in place. Anything that didn't meet up was not trimmed, but wholesale count, with the promise that certain ones will be brought back later, which they were. And so it was an enormous effort. And it kind of dominated the political program of that party for the entire first term. In other words, they had to let go of other priorities that they actually ran on in the election. And I think the US is in a similar position, right? It is harder to do, given the institutional setup and the level of pessimism in the Congress. But I think to get off the 120% 223% debt to GDP ratio, which will only increase on the current trends. That's the level of effort. That's the level of focus. That's the level of kind of significance, I think that that would be required. And unfortunately, there's not a lot of hope of that under the current setup, but who knows what, what a new Congress might bring, but it will, it will take a serious refocusing, which is not currently being talked about.

Andrew Brill  29:18  
And probably won't be talked about, because this is an election year. And people want to know about their pocketbooks when they go to the polls. And it's it's one thing that I guess they couldn't talk about because they could talk about bringing that down and putting more money in people's pockets. But look, when you tell people that we need to pay down the debt, and we're going to tax you a little bit more. That's not going to be an easy way to win an election, I would assume.

Dylan Smith  29:43  
Yeah, we're gonna change Social Security. No one can say that. So this is off the table until the election for sure. And after that, we'll have to see now based on current record, you know, the Biden administration has been a very free Spending administration partly related to kind of COVID recovery and so on. But also, following the kind of COVID spending was a very large infrastructure investment program. You can argue and debate about the long term kind of ramifications of that whether it's going to be efficient public spending, whether it'll be big economic return. But until, you know, the evidence that shows up, all we know is that that has sustained very high deficit spending. And then the kind of wave after that has been just that current spending has been a lot higher than anyone expected, we saw the view assume a relatively small multiplier, you still find that last year. Direct and indirect effects of public spending accounted for like two thirds of GDP growth. Right. So it's been an enormous additional extra stimulus that almost you know, everyone was predicting a recession, it was almost like they did a pre emptive, Keynesian policy, right, by just massively stimulating or keeping stimulus going. So the point I'm trying to make here is that, you know, if the if the if Biden kind of remains in power, and it's a Biden administration, while he doesn't have a track record of fiscal prudence now, that's not to say he can't change his mind, but he's certainly not campaigning on changing his mind. And in focus groups and polls, this is, you know, public debt is not coming up as a as a key issue, there is no part of the electorate or no sizable part of their electorate that you're going to win over with us. That's not 1991. And meanwhile, you know, we know that Donald Trump kind of appear to assess his efficacy by the state of the s&p 500. And the easiest way to keep that up is to kind of, you know, just not tax cuts, probably, and which we know, you know, last acts of the Republican Congress are quite keen for. And but you know, as we saw last time, probably not too willing to offset offset that on the spending side. So you actually get additional fiscal stimulus probably. And that's an area too, so it's very hard to see a path to a real big reimagining upwards without something going a bit wrong first and bond markets basically throwing a tantrum and forcing them into it.

Andrew Brill  32:12  
So in addition to the bond markets, conversely, I guess gold and Bitcoin have been on the rise. And talk to me a little bit about that, and how that's affecting everything. 

Dylan Smith  32:26  
Yeah, well, I mean, I'll deal with a Bitcoin piece of it. And we're not big believers fundamentally, in Bitcoin, we kind of signed closer to the Bank of England News says that its value is zero, then then the sort of crypto enthusiasts that said, I mean, I think the the recent moves, it's all about ETFs. Right? So there's just been enormous inflows. You know, even large institutions and kind of large funds, who were not so keen to invest in these crypto exchanges, which we've seen explode time after time. So Gao, I'll stick 1% in and call it diversification. And that's actually led to a pretty massive surge in demand for Bitcoin. So that's what's behind the price moves there. But gold, I think is a bit more fundamental and very, very interesting. It has not been a traditional gold bull run, right. So usually, gold is pretty closely tied to Well, for one things, supply dynamics, but also, on the demand side, it's really about the dollar and real interest rates, right? So if inflation was to go up, if interest rates, normal rates up to go up, that'll affect the gold price a lot. You know, if the value of holding cashes you hold cash and 5% Why would you hold gold at low yield? Somebody if inflation goes up, it's a defensive asset against that. And equally, a weak dollar kind of boosts the gold price. So that all is not a fan at all. At the moment, we've actually seen over the over the duration of the gold rally, all of those forces moving actually against the gold price. We've seen inflation coming down and then stabilizing over that period, long term inflation expectations have actually continued to stay the lines. We've seen rate cuts being delayed, so an effective sort of tightening there and we've seen the dollar extremely strong, right? So what's going on with gold? Well, it's everything else basically. So you do have you know, the the marginal cost of production has been steadily sort of rising. The whole sort of Costco has been shifting up over the past few years has become more and more expensive to find in mind gold. That's been sending a bit of a Florida price, but you're also seeing enormous demand sources coming out of basically kind of the East, right, so we have central bank buying, which has been a sustained trend largely related to kind of geopolitics and kind of shifting Hold on a different banks have different reasons for doing it. But all of them are seeing reasons to turn down dollar reserves a little bit more Colin's debt. So in central banks around Russia, that's a lot to do with just wanting the security of physical assets locally. In case you know, systems get disrupted. In places like Turkey, it's a lot to do with sort of domestic inflation. And in places who, you know, care about the Chinese us relationship, and what that means for kind of preserve bases as well, the dollar is losing a bit of its power as a global reserve, as the global influence on the USS rolling globalization kind of diminishes a little bit on this rift in motion with China. But equally random, Lee is not an excellent reserve asset either. And there's some concern as China just off on its own, that, you know, there's kind of two currency bubbles, or some people were thinking might start emerging, you know, 10 years ago, has been seriously rethought. And so it's just prudent for central bankers to to hold a bit more gold. And then kind of the biggest move has been China itself, wanting to reduce its dollar reserves and all of golden state which has been one neutral, geopolitically, so. And by the way, China has very small gold reserves as a share of total, it's still under 5%, which by global standards of banks who hold gold, it's, I think the medium is like 13%. So there's, that's not going to stop, it takes a long time to adjust central bank reserve holdings, you got to wait for some stuff to run off, you have to wait for gold to transit, you don't have it all at once. So that's going to put a big sort of demand base around gold for for some time as those trends play out. You've also had actual retail, retail demand for gold in various places be very strong. So everywhere with high inflation. So we're talking turkey, especially which is not very high inflation, and has a traditionally sort of gold bug. Kind of kind of attitude, very, very high retail demand that we've seen places like India, which also traditionally very attached to the metal. As India becomes wealthier, you know, a lot of savings get gets sold and gold. So that's a good tailwind. And we've also seen sort of segments of the Indian population that don't like where the country is going kind of politically, I've also been demanding a lot of gold and holding that selling property, in some cases in mind gold. So that's all there. And then Chinese speculation has been another tailwind. So the picture, we've kind of painted those that, you know, these are all quite structural forces of physical demand, they're not really going to disappear too soon. And they've been the sort of big impetus behind this, this launch gold rally. What happens when the US does cut rates and efficient gets to 2%, and the dollar weakens? Well, you should have even further gold demand. What happens when the conversation we've just had becomes more mainstream people get worried about US public finances, you should get gold demand? You know, what happens the next time there's another big geopolitical disruption? You know, I don't know North Korea or something strange or Taiwan. Right. There's lots of reasons to think the gold price and continue to go up. And so we said, you know, $3,000 an ounce on the cot, for sure.

Andrew Brill  38:03  
So, aside from gold, I guess, get this, you know, in this economy in with our viewers, how do we protect ourselves, you know, obviously, go go buy gold, it's about $23.50 an ounce. So you could get a nice return there, I guess if it does get to 3000. But how do we protect ourselves right now?

Dylan Smith  38:22  
Yes, like all if you're buying now you've missed the first leg of the rally, there's probably you know, it's it's gone sideways for a little bit. But encouraging that even kind of, with everyone sort of commenting on how strong the move has been, I think the momentum is, as we say, soulapp. So, you know, holding a sign overweight and gold is probably quite sensible. We still like bonds. And we like them, especially after this nonfarm panels report, which I think it's gonna start to shift the narrative. We've been wrong about bonds for some time, the cutting cycle has been much more delayed than we thought. But the fundamentals are kind of all still in place for a readjustment there. It's hard to look at the economy, you know, especially if you get inflation down another and a half percentage point and continue to sort of slackening in the job market, very hard to say you need to be, you know, two plus percentage points over your estimate of neutral. And so if neutral is around, you know, estimates vary wildly, but no estimates they might be a 5%, right, you gotta get down to 2.52%. So that that's very positive for bonds. And so, you know, I think kind of time to move along the yield curve a little bit, got to cash a little bit and such a good bet that equity is a little more challenging. But I think it's gonna get a little more sectoral. Anything that is much more specifically exposed, I think is going to start losing a bit of ground to the segments of the market, which are just kind of trading this this big AI bubble that can go on for a long time. Something I think will eventually bring it down to earth. We've seen with these types of sort of enthusiastic parents. And obviously the.com bubble is the most commonly cited reference point. Early on in a big new technology, it's very hard to tell where the long term value is going to pull. So at the moment, we're getting everyone buying the chip makers in the data center produce. And that's, I think, all correct. And that demand there is very, very high. But remember what happened to Cisco, right? They massively over supplied. And it turns out the real one is Google and Facebook hadn't even been thought of yet. Right. So hard to say we will pose a lot of enthusiasm, a lot of money going into it. Something will happen to to but we're not going to even try and call a timing on that.

Andrew Brill  40:51  
Ride the, wave ride the wave. And just when you're comfortable. Yes. So Dylan, you have a podcast, we kind of recaps recaps the week's events. Tell us about that. 

Dylan Smith  41:03  
Yeah, we I co host with with my colleague Jake have a podcast called The Rosenberg Roundup. We do two things on a bounce. So we do a short, very snappy, weekly round up every Friday. And it's the kind of conversation we've been having now, but in 15 minutes. So we we recap the week's events, kind of what it means how to think through the week that's coming. And we also sort of spotlight some recent research we've been doing that usually has been most thematic and a bit less tied to the kind of daily weekly Dataflow. We also do occasional guest interviews with interesting people, usually clients of ours or you know, prominent people in the markets. Those jump around once a month and more like half an hour in length. And we try to have a slightly more interesting specialized conversation with with those people.

Andrew Brill  41:54  
And to get more insight from you. Where can we find you on social media?

Dylan Smith  41:57  
You can look up Rosenberg research. And of course, David Rosenberg, our founder has probably been the biggest presence. We're on LinkedIn, we're on Twitter, and of course the podcast in your in your iTunes and Spotify.

Andrew Brill  42:13  
Don't thanks so much for joining me. This has been educational for sure for me, and I hope it will be as well for our listeners and our viewers. 

Dylan Smith  42:21  
Well It's been a lot  of fun, Andrew, thanks for having me on. 

Andrew Brill  42:23  
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